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Lloyds Bank plc
Annual Report and Accounts 2023
Member of Lloyds Banking Group
Contents
Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England No. 2065
Principal activities
Lloyds Bank plc (the Bank) and its subsidiary undertakings (the Group) provide a wide range of banking and financial services through
branches and offices in the UK and in certain locations overseas.
The Group’s revenue is earned through interest and fees on a broad range of financial services products including current accounts,
savings, mortgages, credit cards, motor finance and unsecured loans to personal and business banking customers; and lending,
transactional banking, working capital management, risk management and debt capital markets services to commercial customers.
Business review
Income statement
The Group’s profit before tax for the year was £7,056 million, with the increase materially driven by higher net income and a lower
impairment charge, partly offset by increased operating expenses. Profit for the year was £5,207 million (2022: £4,794 million).
Total income for the year was £18,367 million, an increase of 10 per cent on 2022, reflecting higher net interest income and higher other
income in the year.
Net interest income of £13,709 million was up 5 per cent on the prior year, driven by higher margins. Average interest-earning assets
decreased by £15,137 million to £579,354 million in 2023 compared to £594,491 million in 2022, primarily driven by a reduction in reverse
repurchase agreements in the year.
Other income was £1,018 million higher at £4,658 million in 2023 compared to £3,640 million in 2022. Net fee and commission income was
£101 million higher at £1,352 million, reflecting higher credit and debit card fees as a result of increased customer activity. Net trading
income was £204 million higher at £384 million in 2023, in part reflecting the effects of the higher rate environment. Other operating
income increased to £2,922 million compared to £2,209 million in 2022 including growth in Lex Autolease, the acquisition of Tusker and
increased recharges to fellow Lloyds Banking Group undertakings reflecting higher strategic investment and inflationary effects.
Total operating expenses of £10,968 million were 19 per cent higher than in the prior year. This reflects the higher planned strategic
investment (partly offset by the recharges within other income), severance charges, new business costs and inflationary effects. In
2023 the Group recognised remediation costs of £661 million (2022: £225 million) relating to pre-existing programmes and a provision
for the potential impact of the recently announced FCA review into historical motor finance commission arrangements. The higher
operating lease depreciation charge reflected the declines in used car prices (notably in the fourth quarter), impacting portfolio
valuations and gains on disposals, the depreciation cost of higher value vehicles and the Tusker acquisition in the first quarter and its
subsequent growth.
The impairment charge was £343 million compared to £1,452 million in 2022. The decrease reflects the impact of a significant write-
back following the repayment of debt from a single name client, as well as an impairment credit from modest revisions to the Group’s
economic outlook compared to the deterioration in economic outlook captured last year. Asset quality remains strong with credit
performance across portfolios broadly at, or favourable to pre-pandemic experience.
The Lloyds Bank Group’s post-tax return on average total assets increased to 0.85 per cent compared to 0.77 per cent in the year ended
31 December 2022.
Balance sheet
Total assets were £11,523 million lower at £605,405 million at 31 December 2023 compared to £616,928 million at 31 December 2022. Cash
and balances at central banks decreased by £14,096 million to £57,909 million reflecting decreased liquidity holdings. Financial assets at
amortised cost were £3,325 million lower at £488,071 million compared to £491,396 million at 31 December 2022 with increases in debt
securities of £5,215 million and loans and advances to banks of £447 million, more than offset by a reduction in reverse repurchase
agreements of £6,508 million and loans and advances to customers of £2,503 million.
The reduction in loans and advances to customers was primarily as a result of securitisations of £5.2 billion, including £2.5 billion of
legacy Retail mortgages (£2.1 billion in the closed mortgage book) and £2.7 billion of Retail unsecured loans.
Financial assets at fair value through other comprehensive income increased £4,491 million as a result of an increase in holdings of
government bonds and other debt securities. Goodwill and other intangible assets increased £713 million, including £143 million in
goodwill following the completion of the acquisition of Tusker during 2023 and higher capitalised software enhancements, in line with
the Group’s planned strategic investment. The increase in other assets of £1,816 million, primarily reflects higher operating lease assets
following the Tusker acquisition. Deferred tax assets were £1,221 million lower due to changes in the value of the cash flow hedge reserve
and utilisation of tax losses in the year.
Total liabilities were £12,895 million lower at £564,974 million compared to £577,869 million at 31 December 2022. Deposits from banks
decreased £1,101 million and customer deposits by £4,219 million since the end of 2022. This includes a decrease in Retail current account
balances of £11.3 billion as a result of higher spend and a more competitive savings market, including the Group’s own savings offers. In
Retail savings and Wealth, balances have increased by a combined £8.9 billion, partly from transfers from the Group’s current account
customer base. Commercial Banking deposits decreased £1.4 billion during 2023. In addition, there was a reduction in repurchase
agreements of £10,888 million and derivatives of £1,584 million. Partly offsetting these reductions, debt securities in issue at amortised
cost increased by £3,393 million following issuances of certificates of deposit and securitisation notes, and other liabilities increased
£673 million as a result of higher lease liabilities.
Total equity of £40,431 million at 31 December 2023 increased from £39,059 million at 31 December 2022. The movement reflected
attributable profit for the year, movements in the cash flow hedge reserve and the issuance of other equity instruments, partially offset
by market movements impacting pensions, alongside dividends paid in the year of £4.7 billion.
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Lloyds Bank plc Annual Report and Accounts 2023
Capital
The Group’s common equity tier 1 (CET1) capital ratio decreased to 14.4 per cent at 31 December 2023 compared to 14.8 per cent at
31 December 2022. Profit for the year was more than offset by pension deficit contributions made to the defined benefit pension
schemes, an increased deduction for goodwill and other intangible assets, the ordinary dividends paid in the second half of the year,
the accrual for foreseeable ordinary dividends, distributions on other equity instruments and an increase in risk-weighted assets.
Risk-weighted assets increased by £7,658 million, or 4 per cent, from £174,902 million at 31 December 2022 to £182,560 million at
31 December 2023. This includes the impact of Retail secured CRD IV model updates of £5 billion. Excluding this, lending and operational
risk increases, a modest uplift from credit and model calibrations and other movements were partly offset by optimisation, including
capital efficient securitisation activity within the balance sheet.
The total capital ratio remained at 20.5 per cent at 31 December 2023. The increase in CET1 capital resources and the issuance of new
AT1 and Tier 2 capital instruments were broadly offset by the increase in risk-weighted assets and other movements in Tier 2 capital
instruments, which included the impact of sterling appreciation and regulatory amortisation.
The UK leverage ratio increased to 5.6 per cent at 31 December 2023 compared to 5.4 per cent at 31 December 2022, reflecting the
increase in the total tier 1 capital position. This was partially offset by the increase in the leverage exposure measure following increases
in financial and other assets (excluding central bank claims), net of reductions in off-balance sheet items and the measure for
securities financing transactions.
Future developments
Information about future developments is provided within the Principal risks and uncertainties section below.
Section 172(1) Statement
This section (pages 2 to 4) is our Section 172(1) statement for the purposes of the Companies Act 2006 (the Act), describing how the
directors have had regard to the matters set out in section 172(1) (a) to (f) of the Act when performing their duty to promote the success
of the Bank under section 172. Further detail on key stakeholder interaction is also contained within the directors’ report on pages 12 to
16.
The directors remain mindful in all their deliberations of the long-term consequences of their decisions, as well as the importance of
maintaining a reputation for high standards of business conduct and the Board engaging with, and taking account of the views of, key
stakeholders.
Key Stakeholder Engagement
The non-executive directors undertook tailored engagement via the Closer to Customers, Clients and Colleagues Programme allowing
them to hear directly from key stakeholders, including customers, clients and colleagues.
The programme was designed to help the directors better understand the important issues for our customers, clients and colleagues,
the role the Bank plays in supporting them and how the Bank is performing in that regard, helping to inform the directors’ decision
making.
A number of activities took place under the programme, which included meetings with customers and clients and conversations with
colleagues. The non-executive directors continue to find these sessions beneficial, providing valuable insight which helps in their
consideration of the proposals reviewed by the Board during the year.
Further engagement by the Board with its stakeholders is described below, and examples of decision making by the Board which had
particular stakeholder relevance can be found on pages 3 to 4.
Our Stakeholders
Customers and clients
The Bank’s customer centric approach means the Board has an ongoing commitment to understanding and addressing customer and
client needs, which remains central to achieving strategic ambitions.
Relevant engagement included:
• Non-executive directors attended events to provide deeper insight into the issues which customers and clients have faced during
the year. These events included sessions on, amongst others, the challenges of running a small business, the issues faced by
vulnerable customers, the pressures for customers dealing with financial difficulties, and the challenges of managing finances in
retirement
• The Board also took the opportunity to meet with clients when visiting Group sites in Glasgow, Chester and Bristol
• Dedicated updates to the Board from across the organisation, which identified areas of customer and client concern and covered a
range of internal and external performance measures; in addition, concerns relevant to customers and clients were identified for
consideration in wider proposals put to the Board
• Regular updates to the Board giving insight into performance in delivering on customer and client related objectives and
commitments, which assisted in determining where further action was required to meet these objectives
• The Chair and the Group Chief Executive attended customer and client engagement events across various regions of the UK,
providing an important opportunity for customers and clients to raise their concerns directly with these Board members
Shareholders
The Bank is a wholly owned subsidiary within the Lloyds Banking Group group of companies. The directors ensure that the strategy,
priorities, processes and practices of the Bank are fully aligned where required to those of Lloyds Banking Group, ensuring that the
interests of Lloyds Banking Group plc as the Bank’s sole shareholder are duly acknowledged. Further information in respect of the
relationship of Lloyds Banking Group plc with its shareholders is included within the strategic report within the Lloyds Banking Group plc
Annual Report and Accounts for 2023, available on the Lloyds Banking Group website.
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Lloyds Bank plc Annual Report and Accounts 2023
Colleagues
Colleagues remain central to the delivery of the Bank’s strategic ambitions and the Board continues to recognise this in its
engagement with them. Engagement this year included a variety of sessions, to discuss topical issues relating to challenges both at
and outside of work. As in 2022, the Board’s Responsible Business Committee has been the designated body for workforce engagement,
providing focus, but with the Board retaining a commitment for individual Board members to engage with colleagues directly
throughout the year. The Board considers these arrangements to be effective, as they enable a broader range of colleague
engagement activities, as described in this section. The Responsible Business Committee reports regularly to the Board on all of its
activities, including on its colleague engagement agenda. The Board will continue to consider its arrangements for engaging with the
workforce to ensure they remain effective, and to encourage meaningful dialogue between the Board and colleagues.
Relevant engagement included:
• Review by the Responsible Business Committee of the findings of surveys of colleague sentiment, including annual and ad hoc
surveys, and review of the progress being made in addressing the matters colleagues have previously raised
• Regular review by the Responsible Business Committee of other workforce engagement reports, covering key issues raised, trends
on people matters and updates on colleague sentiment
• An annual report, summarising all colleague engagement activity, including key themes and issues which colleagues have raised
during the year
• Non-executive directors attended a number of colleague focus groups, allowing colleagues to share their perspective on matters
on the Board’s agenda, and discuss progress against strategic objectives
• Members of the Board also visited a number of the Group’s sites where they met with colleagues, including Glasgow, Chester, Bristol
and Halifax and a visit to the Halifax branch on Commercial Street, Leeds
• Sessions were hosted by both the Chair and the Group Chief Executive, complemented by engagement sessions led by other senior
leaders with feedback shared with the wider Board. The Group Chief Executive also held sessions with colleagues from a number of
specific business areas
• Board members attended a range of other events held for senior leaders and other colleague network events
During the year Lloyds Banking Group communicated directly with colleagues detailing Bank performance, changes in the economic
and financial environment and updates on key strategic initiatives. Meetings were held throughout the year with our recognised unions.
For 2023, the Remuneration Committee approved Group Performance Share awards for colleagues, and colleagues are eligible to
participate in HMRC approved share plans which promote share ownership by giving employees an opportunity to invest in Lloyds
Banking Group plc shares. The vast majority of colleagues hold shares in Lloyds Banking Group plc.
Communities and environment
The Board places great importance on engagement and action to help the communities in which the Bank operates 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 Bank’s business, where the Board reviewed
progress made against its stated ambitions in these areas and agreed any further action it considered was required
• The Board continues to be supported in environmental matters by its Responsible Business Committee. The Committee considers
stakeholder views on all matters relating to ambition to be a trusted, sustainable, inclusive and responsible business
Regulators and government
The Board continues to maintain strong and open relationships with the Bank’s regulators and with government authorities, including
key stakeholders such as the Financial Conduct Authority (FCA) the Prudential Regulation Authority (PRA), HM Treasury and HMRC.
Relevant engagement included:
• The Chair and individual directors, including Chairs of the Board’s Committees, held continuing discussions with the FCA and PRA on
a number of aspects relevant to the evolving regulatory agenda
• The Board reviewed updates on wider 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
• The Chair and individual directors had a number of Continuous Assessment meetings with the PRA to discuss the Board’s oversight
of the Group, key risks and strategic priorities
Suppliers
The Bank 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 Bank’s wider ambitions.
Relevant engagement included:
• The Board’s Audit Committee considered reports from Sourcing and Finance teams on the efficiency of supplier payment practices,
including those relating to the Bank’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 considered matters relating to ensuring continuity in the Bank’s customer related print communication, throughout
turbulence within the supply chain in the second half of the year
Key Decisions
Effective stakeholder engagement is fundamental to good governance. Stakeholder engagement takes place at all levels within the
Bank and is an important part of how we are delivering on our purpose of Helping Britain Prosper. The Board continues to engage both
directly and indirectly with many of its stakeholders. This engagement helps to provide a better understanding of stakeholders’ points
of view, and the impact the Bank has on their day-to-day lives. Read more about the engagement of Board members with stakeholders
on pages 2 and 3.
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Lloyds Bank plc Annual Report and Accounts 2023
The Board requires stakeholder implications to be considered by senior management in all proposals submitted to the Board, both
within the papers and as part of the accompanying presentations. Senior management routinely provides the Board with details of
stakeholder interaction and feedback through their regular business updates and in their interactions both inside and outside of the
board room. Managing stakeholder interests also forms a key part of the Board’s delegation of the day-to-day management of the
business to senior management.
Throughout 2023 the Board’s key stakeholders remained the same as they were in 2022. The directors remain mindful in all their
deliberations of the long-term consequences of their decisions, as well as the importance of the Bank maintaining a reputation for high
standards of business conduct and the Board engaging with, and taking account of the views of, key stakeholders.
The three key Board decisions outlined in this section (Cost of Living, Consumer Duty and Environmental Sustainability) evidence how
the Board is engaged in key decisions.
Cost of Living
Customers & Clients, Communities & Environment, Colleagues
The rising cost of living, including high levels of inflation and higher interest rates, was a key area of concern for many customers,
clients and colleagues during 2023. The Board continued to consider the impacts upon these stakeholders, including the impacts on
mortgage customers and clients with lending facilities and the action being taken to provide them with the necessary support.
Support to customers and clients has been driven by our purpose of Helping Britain Prosper and has evolved as the Board and the Bank
have sought to better understand the varying impacts of the rise in the cost of living. The support provided included the offer of interest
free overdraft facilities in certain circumstances, facilitating specialist third party support, and forbearance options.
The Board was keen that particular support be provided to our mortgage, business and corporate clients. There has been a number of
tailored means of assistance developed accordingly, with the understanding that the right support will help these customers become
more financially resilient in the long-term, which is good for the business. This included Lloyds Banking Group’s participation in the
Government-led Mortgage Charter, a sector-wide initiative to support those struggling with mortgage repayments.
The Board was also very aware of the feedback from colleagues on the impact of the current cost of living pressures on their personal
finances. In order to provide colleagues with greater certainty while the economic environment remains uncertain, the Board was
pleased to support Lloyds Banking Group’s commitment to a two year pay deal. This provided guaranteed minimum pay awards in
2024 and 2025 for the majority of our colleagues. In addition, we had a particular focus on colleagues in more junior roles who also
received a further ad hoc cash award in December 2023.
The Board will continue to monitor the challenges which the rising cost of living causes our stakeholders as we continue to work with
our regulators and our peers to ensure the most appropriate support can be provided to customers, clients and colleagues.
Consumer Duty
Customers & Clients, Shareholder, Regulators & Government
The Board and its Board Risk Committee supported the Bank in working towards the introduction in July 2023 of the FCA’s new
Consumer Duty requirements. In doing so, the Board acknowledged the strong alignment between the Bank’s purpose, values and
existing customer-centric approach and the regulator’s ambition to assist customers in achieving their financial objectives, while
preventing customer harm.
The Board received several updates during the year on progress with meeting the regulator’s requirements. This included reviewing the
regulator’s feedback and the steps taken by senior management in fully embedding the approach and ensuring improved customer
outcomes.
The Board was mindful of the scale of the programme of work and the resulting risks to delivery and considered the approach to
potential actions to mitigate those risks. The Board was pleased with the successful delivery of the initial stages of the programme. The
Board also considered the approach which would be taken as the programme moves into its second implementation period ending in
July 2024 and also the approach which would be taken to ensure that focus remains strong in this area as it transitions into ‘business
as usual’, which will be supported by the Bank’s strong focus on purpose. The Board will continue to be updated on progress prior to July
2024.
Environmental Sustainability
Communities & Environment, Colleagues, Customers & Clients, Shareholder
Building a more sustainable future is a core part of our purpose driven strategy and how we are Helping Britain Prosper. It is a key
source of opportunity for the Bank as well as risk management.
As such, the Board has considered the importance of Lloyds Banking Group’s commitments to net zero, including both our emissions
reduction targets and Lloyds Banking Group’s role as a member of the Net Zero Banking Alliance. The Board received regular updates
on the progress made in all areas related to sustainability ambitions and has provided valuable challenge as we work towards
meeting our commitments. The Board is keenly aware of the importance of our own release ambitions as we support our customers
and our clients through their transitions to net zero and the vital link this represents to delivering on Lloyds Banking Group’s climate
ambitions. The Board has therefore encouraged further action to fully embed climate considerations into all of the Bank’s decision
making, recognising the breadth of the action which needs to be taken and the importance of moving from target setting to action at
scale. This recognises that there are many growth opportunities in helping our customers and clients transition to a net zero economy,
while future-proofing our balance sheet.
The Board has encouraged clarity in the role that all areas of the Group will take as we transition to net zero. This has included ensuring
cross-Group capabilities are fully utilised and emphasising the importance which bold decision making will play. In doing so the Board
recognises the particularly important role which financial services organisations will take in supporting low carbon ambitions, including
in key areas such as the housing and transport markets.
The Board is very aware of the challenges and risks to delivering on our commitments and has considered these throughout the course
of the year.
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Lloyds Bank plc Annual Report and Accounts 2023
Risk overview
Effective risk management and control
Risk management is a key element in shaping our business model
and delivering the Group’s strategy to enable sustainable growth.
A strong risk management culture is crucial to keep the Group, our
colleagues and our customers safe and secure from existing and
emerging risks.
Our approach to risk
The Group’s business model is based on a prudent approach to
risk, which guides participation decisions while safeguarding our
colleagues, customers and the Group. An overview of risk
management is included in this section, with the detailed risk
management section from pages 17 to 63, which provides:
• A detailed overview of how risk is managed within the Group,
including the approach to risk appetite
• The framework by which these risks are identified, managed,
mitigated and monitored
Risk profile and performance
The Group has remained committed to maintaining support for its
customers despite challenges with the rising cost of living and
economic uncertainties in the global and domestic markets.
The Group’s loans and advances continue to be well positioned
and heightened monitoring is in place to identify signs of
affordability stress. The mortgage book remains resilient with
arrears below 2019, with the new Mortgage Charter providing
additional enhanced support to customers during 2023.
Unsecured and Commercial Banking portfolios continue to exhibit
stable new to arrears and default trends broadly at, or below, pre-
pandemic levels. Commercial Real Estate is demonstrating
resilience and is well diversified with no speculative commercial
development lending.
As part of the Group’s strategy, there will be continuing
investments in technology and infrastructure. The Group’s
operational resilience risks remain a key area of focus, particularly
relating to cyber risk and supply chain management.
The Group has overseen the embedding of its operational risk and
control framework during 2023 and its oversight of management
of financial crime risks and consumer fraud.
Climate risk remains a key priority for the Group, with positive
progress in 2023 and a commitment to continued focus in 2024.
The Group has enhanced the monitoring of progress against its
strategic ambitions, alongside ongoing development of
capabilities for measuring and managing key risks.
Our enterprise risk management framework
The enterprise risk management framework (ERMF) is the
foundation for the delivery of effective and consistent risk control
across Lloyds Banking Group. It enables proactive identification,
active management and monitoring of the Group’s risks, which is
supported by our risk and control self-assessment approach.
The ERMF is regularly updated to ensure it remains in line with
regulation, law, corporate governance and industry good
practice. The Board and senior management are responsible for
the approval of the ERMF, together with Group-wide risk principles
and policies. The effectiveness of the ERMF is assessed annually
with the results reported directly to the Board.
The Board and senior management set and embed a positive
culture of diversity, equity and inclusion. Lloyds Banking Group’s
Code of Ethics and Responsibility and our established values,
reinforce colleagues’ accountability for the risks they take, their
responsibility to explore customers’ needs and consistently deliver
good customer outcomes.
Risk appetite is defined within the Group as the amount and type
of risk that the Group is prepared to seek, accept or tolerate in
delivering its strategy. The Board is responsible for approving the
Group’s Board risk appetite statement annually. Board level risk
appetite metrics are augmented further by executive-level
metrics and cascaded into more detailed business metrics and
limits.
The Group adopts a continuous risk management approach, from
identifying the risks through risk and control self-assessment,
and managing the risks through to producing appropriate,
accurate and focused risk reporting. The Group ensures that the
appropriate risk resources and capabilities are in place, with
colleagues provided with the necessary training to give them the
skills they need.
Governance is maintained through delegation of authority from
the Board down to individuals. Senior executives are supported by
a committee-based structure which is designed to ensure open
challenge and enable effective Board engagement and decision
making.
The three lines of defence model defines the responsibilities and
accountabilities for risk management, with effective independent
oversight and assurance. Business lines have primary
responsibility for the identification and management of risks, Risk
division provides oversight and challenge, and Group Internal
Audit provide independent assurance to the Board and Audit
Committee.
More information on our executive and Risk committees can be
found on pages 20 to 21.
1.7 RiskManagementFramework (2).jpg
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Lloyds Bank plc Annual Report and Accounts 2023
Principal risks
The principal risks outlined in this section are used to monitor and
report the risk exposures posing the greatest potential impact to
the Group.
All of the principal risks are Board-approved enterprise-wide risk
categories which are reported to the Board Risk Committee and
the Board regularly.
Lloyds Banking Group is in the process of conducting a detailed
review of the enterprise risk management framework to ensure it
remains in line with regulatory expectations, corporate
governance and industry good practice, which will result in a
reclassification of our principal risks in 2024.
In the risk management section, a summary of the Group’s
principal and secondary risks is on page 24, with further
information on how each principal risk is managed from pages 25
to 63.
Risk trends: 4  Stable risk  5  Elevated risk  6  Reduced risk
Capital risk 4
Link to strategy: Focus
The Group maintained its strong capital position in 2023 with a CET1 capital ratio of 14.4 per cent, after absorbing regulatory headwinds
and the acquisition of Tusker.
This remains significantly ahead of minimum capital requirements. Downside risks from economic and regulatory headwinds, including
the impact of further Retail secured CRD IV model updates, are being closely monitored. This is in addition to the potential impact from
the FCA review of historical motor finance commission arrangements.
Risk appetite: The Group maintains capital levels commensurate with a prudent level of solvency to achieve financial resilience and
market confidence.
Key mitigating actions:
• Capital management framework that includes the setting of capital risk appetite, capital planning and stress testing activities
• Regular refresh and monitoring of a suite of early warning indicators and maintenance of a Capital Contingency Framework,
designed to identify and act on emerging capital concerns at an early stage
Change and execution risk 5
Link to strategy: Focus, Change
The Group’s change and execution risk has remained elevated in 2023. Whilst change continues to be carried out safely and the new
platform operating model has enhanced the change controls, the scale and complexity of the Group’s strategic change agenda is
significant. Further development of the model, change framework and the associated controls is expected in 2024.
Risk appetite: The Group has limited appetite for negative impacts on customers, colleagues, or the Group as a result of change
activity.
Key mitigating actions:
• Measurement and reporting of change and execution risk, including critical elements of the change portfolio through appropriate
governance
• Providing sufficient skilled resources to safely deliver and embed change and support future transformation plans
• Continued evolution and enhancement of the Group’s change operating model including the underpinning policy, method and
associated controls
Climate risk 4
Link to strategy: Focus
The Group is continuing to develop its capabilities for measuring and managing key climate risks including monitoring progress against
its net zero ambitions.
However, the external landscape presents further challenges, both in relation to the policy changes required to support the transition to
net zero, as well as increasing regulatory expectations.
Risk appetite: The Group takes action to support the Group and its customers’ transition to net zero, and maintain its resilience against
the risks relating to climate change.
Key mitigating actions:
• Further embedding of climate risk policy, providing a framework for consideration of climate-related risks across Lloyds Banking
Group
• Established targets to reduce emissions across key areas of activity, as well as developing appropriate plans and strategies to
support our transition to net zero
• Enhancing consideration of physical and transition risks within the credit risk process, including assessment of clients’ credible
transition plans
• Continuing to build an understanding of how greenwashing could impact the Group, including training for all colleagues to ensure it
is avoided
Strategic report continued
6
Lloyds Bank plc Annual Report and Accounts 2023
Conduct risk 4
Link to strategy: Grow, Focus
Conduct risk has remained stable in 2023, however there are several areas of emerging risks due to regulatory changes and areas of
focus. The Group’s focus is on supporting customers impacted by the rising cost of living, culture and diversity, mindset shift to embed
the FCA’s Consumer Duty requirements and ensuring good customer outcomes, amid the transformation of its business and
technology. We are also continuing to liaise closely with the FCA and FOS on historical motor commission arrangements.
Risk appetite: The Group delivers good outcomes for its customers.
Key mitigating actions:
• Robust policies in place to support good customer outcomes
• Active engagement with regulatory bodies and key stakeholders to ensure that the Group’s strategic conduct focus continues to
meet evolving stakeholder expectations
Credit risk 4
Link to strategy: Grow
The Group’s credit portfolio continued to be resilient with only modest evidence of deterioration to date. UK Mortgages new to arrears
were relatively stable throughout 2023, having increased slightly at the start of the year, with other unsecured portfolios performing
broadly at or favourable to pre-pandemic levels. Impairment was a net charge of £343 million, compared to £1,452 million for 2022 and
includes a significant write-back following the full repayment of debt from a single name client in the fourth quarter and improvements
in the Group’s macroeconomic outlook. The Group’s expected credit loss allowances have decreased to £4,007 million (2022:
£4,779 million).
Risk appetite: The Group has a conservative and well-balanced credit portfolio through the economic cycle in line with the Group’s
target return on equity in aggregate. The Group’s approach focuses on origination quality and levers at Board level while dynamically
adapting to the risk environment, business growth strategy, industry practices and regulatory expectations.
Key mitigating actions:
• Extensive and thorough credit processes, strategies and controls to ensure effective risk identification, management and oversight
• Significant monitoring in place, including early warning indicators
• Selective credit tightening reflective of forecast changes in the macroeconomic environment, including updates to affordability
lending controls for forward-looking costs
Data risk 4
Link to strategy: Focus
Data risk remained stable in 2023 with investment in end-to-end data risk management and capabilities. The Group’s data strategy will
support managing data risk and remediation to achieve the Group’s growth objectives.
Risk appetite: The Group has zero appetite for data-related regulatory fines or enforcement actions.
Key mitigating actions:
• Delivering against the data strategy and uplifting capability in data management and privacy
• Embedding data by design and ethics principles into the data science lifecycle
• Oversight of the data supply chain, emerging technologies, and data controls and processes
Funding and liquidity risk 4
Link to strategy: Focus
The Group maintained its strong funding and liquidity position in 2023. The loan to deposit ratio remained stable at 98 per cent (2022: 98
per cent). The Group’s liquid assets continue to exceed the regulatory minimum and internal risk appetite, with a monthly rolling 12
month average liquidity coverage ratio (LCR) of 133 per cent (2022: 136 per cent). The Group maintains its access to diverse sources and
tenors of funding.
Risk appetite: The Group maintains a prudent liquidity profile and a balance sheet structure that limits its reliance on potentially volatile
sources of funding.
Key mitigating actions:
• Management and monitoring of liquidity risks and ensuring that management systems and arrangements are adequate with
regard to the internal risk appetite, Group strategy and regulatory requirements
• Significant customer deposit base, driven by inflows to trusted brands
• Participation in term issuance programmes
Strategic report continued
7
Lloyds Bank plc Annual Report and Accounts 2023
Market risk 4
Link to strategy: Focus
Market conditions in 2023 remained volatile creating an uncertain environment for the management of market risk. However, the Group
remains well hedged ensuring near-term interest rate exposure is appropriately managed.
The Group’s structural hedge decreased to £242 billion (2022: £250 billion) mostly due to the changing mix of customer deposits, from
current accounts into fixed savings products. In 2023 the pensions triennial valuation completed and following final contributions of
£250 million in December, the pension schemes funding deficit was cleared. The IAS 19 accounting surplus remained broadly
unchanged at £3.5 billion (2022: £3.7 billion).
Risk appetite: The Group has effective controls in place to identify and manage the market risk inherent in our customer and client-
focused activities
Key mitigating actions:
• Structural hedge programmes implemented to stabilise earnings
• Close monitoring of market risks and, where appropriate, undertaking of asset and liability matching and hedging
• Monitoring of the credit allocation in the defined benefit pension schemes, as well as the hedges in place against adverse
movements in nominal rates, inflation and longevity
Model risk 5
Link to strategy: Focus, Change
Model risk remained elevated in 2023, following the pandemic-related government-led support schemes weakening the relationships
between model inputs and outputs in 2022. The economy has steadied somewhat compared to 2022, now being more typical of the
environment used to build the models, reducing need for judgemental overlays to account for this, but many of the effects of the
pandemic and other stresses to the economy are still working their way through. The control environment for model risk continues to
be strengthened to meet revised internal and regulatory requirements.
Risk appetite: Material models perform in line with expectations.
Key mitigating actions:
• Robust model risk management framework for managing and mitigating model risk within the Group
Operational risk 5
Link to strategy: Grow, Focus, Change
Operational risk has elevated in 2023. Overall, operational loss event volumes have slightly increased due to fraud instances, but
financial losses have reduced compared with 2022.
Key operational risk areas for the Group are security, technology, and fraud, with an uplift in supplier issues over the last 12 months,
although these have not been material in impact.
Risk appetite: The Group has robust controls in place to manage operational losses, reputational events and regulatory breaches. It
identifies and assesses emerging risks and acts to mitigate these.
Key mitigating actions:
• Review and investment in the Group’s control environment, with a particular focus on automation, to ensure the Group addresses
the inherent risks faced
• Deployment of a range of risk management strategies, including avoidance, mitigation, transfer (including insurance) and
acceptance
Operational resilience risk 4
Link to strategy: Focus, Change
Operational resilience remained stable in 2023. Enhancing the Group’s resilience for serving customers has been a key focus. The Group
has used operational resilience scenario testing to shape a programme to deliver enhanced resilience of important business services
by 2025.
The Group recognises the prominence of cyber security protection and the role that resilience of our suppliers plays in delivering
resilient customer experiences. Technology resilience remains a focus area, with dedicated programmes to address key risks.
Risk appetite: The Group has limited appetite for disruption to services to customers and stakeholders from significant unexpected
events.
Key mitigating actions:
• Operational resilience programme in place to deliver against new regulation and improve the Group’s ability to respond to incidents
while delivering key services to customers
• Investment in technology improvements, including enhancements to the resilience of systems that support important business
services
Strategic report continued
8
Lloyds Bank plc Annual Report and Accounts 2023
People risk 5
Link to strategy: Grow, Focus, Change
People risk remains a key focus for the Group given the scale and pace of the transformation underway. The strategic focus of the
leadership team continues to focus on colleague wellbeing and resilience, driving an inclusive, diverse and customer-centric culture,
recruiting the required skills of the future and enabling colleague performance through enhancing their skills and capabilities. This is
together with the Group’s revised pay offering which aims to support colleagues facing cost of living pressures.
Risk appetite: The Group leads responsibly and proficiently, manages people resource effectively, supports and develops colleague
skills and talent, creates and nurtures the right culture and meets legal and regulatory obligations related to its people.
Key mitigating actions:
• Delivery of strategies to attract, retain and develop high-calibre people with the required capabilities, together with a focus on
creating a strong and resilient talent pipeline
• Continued focus on the Group’s culture by developing and delivering initiatives that reinforce inclusivity and appropriate behaviours
• Focus on providing a working environment which promotes colleague safety and enhances their wellbeing and resilience
Regulatory and legal risk 4
Link to strategy: Focus
The regulatory and legal risk profile has remained stable although we are conscious of upcoming regulatory changes and the ongoing
implementation of Consumer Duty. Legal risk continued to be impacted by the evolving legal and regulatory landscape, changing
regulatory and other standards and uncertainty arising from the current and future litigation landscape.
Risk appetite: The Group interprets and complies with all relevant regulation and all applicable laws (including codes of conduct which
could have legal implications) and/or legal obligations.
Key mitigating actions:
• Policies and procedures setting out the principles and key controls that should apply across the business which are aligned to the
Group risk appetite
• Identification, assessment and implementation of policy and regulatory requirements by business units and the establishment of
local controls, processes, procedures and resources to ensure appropriate governance and compliance
Strategic risk 4
Link to strategy: Grow, Focus, Change
Strategic risk is stable, with further evolution of the Group’s methodology for assessing and prioritising emerging risks. Further
information on emerging risks can be found on pages 10 and 23.
Risk Appetite: From 2024 strategic risk has been incorporated into emerging and horizon risk, and risk appetite is not set.
Key mitigating actions:
• Considering and addressing the strategic implications of emerging trends
• Embedding of strategic risk into business planning process and day-to-day risk management
Strategic report continued
9
Lloyds Bank plc Annual Report and Accounts 2023
Emerging and horizon risks
Emerging risks are a key component of Lloyds Banking Group’s
strategic risk framework, adopted by Lloyds Bank Group.
The Group continues to focus on horizon scanning activity to
inform and support identification of the most pertinent internal
and external trends and developments.
Evolution of the Group’s methodology for assessing and
prioritising emerging risks
A series of deep dives on the 2022 emerging risk themes have
taken place during the year. In addition, individual emerging risks
themes have been taken to key executive level committees
throughout 2023, including the Board Risk Committee, with actions
assigned to monitor more closely their future manifestation and
potential opportunities.
The emerging risk themes were also considered as part of the
annual financial planning cycle. Geopolitical risks, and how these
may generate second order impacts for the Group, have been a
focus.
Many emerging and horizon risk topics are reviewed on a
recurring basis, alongside ongoing activity addressing their
impacts. However, it is acknowledged that the nature of the
emerging risks will evolve and could drive future trends in the long
term which the Group will need to prepare for.
The 2023 emerging risk landscape has been simplified, combining
emerging and strategic risks into a single view (see below),
enabling greater management concentration on developing the
appropriate responses.
The Group will continue to monitor emerging and horizon risks,
exploring how they may impact its future strategy, and how it can
continue to best protect its customers, colleagues and
shareholders.
For further information on how the Group is managing key
emerging risks through its strategy, see page 23.
Customer propositions and societal expectations
Concerns for the Group and key considerations: The potential
impacts of a failure to adapt our propositions to the continually
evolving expectations and demographic of consumers, the
evolution of and expectations relating to cybercrime, the threats
posed by technology-enabled players and the risk of market
disintermediation.
Digital currencies and tokenisation
Concerns for the Group and key considerations: Failure to keep
pace with the potential expansion of decentralised financial
systems, launch of private sector or government-backed digital
currencies, growth of blockchain technologies and asset
tokenisation and adoption of technologies which support the
mainstream utilisation of blockchain technologies.
Environmental, social and governance expectations
Concerns for the Group and key considerations: Investor,
shareholder and public perception of the Group’s; i) awareness
of the ecological and environmental impacts associated with its
operations and investments, ii) ability to offer sustainable
financing options and services at pace, against a continuously
evolving environmental and regulatory backdrop, and iii) role in
supporting the UK to transition to a low carbon economy.
Generative AI and ethical data practices
Concerns for the Group and key considerations: Failure to keep
pace with technological advancements relating to Generative AI
and machine learning whilst balancing the competing
requirements to; i) maximise customer opportunities through
adoption, ii) maintain trust and confidence in customer data
privacy, iii) protect our customers from fraud and economic
crime, iv) ensure transparency on data ethics practices,
v) adhere to evolving data protection regulations, and
vi) prepare for potential business model disruptions caused by
adoption of the technology
Global macroeconomic and geopolitical environment
Concerns for the Group and key considerations: Inability to
navigate changing international regulations, including sanction
and trade compliance, economic fragmentation,
deglobalisation, and geopolitical events that may impact
operations, customers and suppliers.
Operational elasticity
Concerns for the Group and key considerations: Failure to
adequately prepare for the aggregate threat posed by cyber-
attacks, disruption of service, third- or fourth-party supplier
failure, technology outages or severe data loss.
Strategic workforce vision
Concerns for the Group and key considerations: Failure to evolve
the structure and skill set of a dynamic workforce in line with the
Group’s strategy, whilst maintaining pace with the industry and
delivering strong customer outcomes.
UK political and macroeconomic environment
Concerns for the Group and key considerations: Failure to
anticipate the longer-term impacts of a weak UK economy,
quantitative tightening, change in government and the resulting
policy and regulatory shifts (a bank levy, for example) and the
potential consequences of the UK becoming less attractive to
external investors.
Strategic report continued
10
Lloyds Bank plc Annual Report and Accounts 2023
Financial risk management objectives and policies
Information regarding the financial risk management objectives and policies of the Group, in relation to the use of financial
instruments, is given in notes 15 and 38 to the accounts. The Group’s approach to risk management including risk policies, risk appetite,
measurement bases and sensitivities, in particular for credit risk, market risk and liquidity risk, is aligned to those of Lloyds Banking Group
plc, the Bank’s ultimate parent. Further information can be found in the Lloyds Banking Group plc Annual Report and Accounts.
The Group maintains risk management systems and internal controls relating to the financial reporting processes designed to:
• ensure that accounting policies are appropriately and consistently applied;
• enable the calculation, preparation and reporting of financial outcomes in line with applicable standards; and
• ensure that disclosures are made on a timely basis in accordance with statutory and regulatory requirements.
The 2023 Strategic report has been approved by the Board of Directors.
On behalf of the Board
Sir Robin Budenberg
Chair
Lloyds Bank plc
29 February 2024
Strategic report continued
11
Lloyds Bank plc Annual Report and Accounts 2023
Results
The consolidated income statement on page 76 shows a statutory profit before tax for the year ended 31 December 2023 of
£7,056 million (year ended 31 December 2022: £6,094 million).
Dividends
During the year the Bank paid interim dividends of £1,900 million, £2,200 million and £600 million, a cumulative total of £4,700 million
(2022: £nil). The directors have not recommended a final dividend for the year ended 31 December 2023 (2022: £nil). In February 2024,
the directors approved the payment of an interim dividend of £490 million, which was paid on 23 February 2024.
Post balance sheet events
There were no material post balance sheet events.
Going concern
The going concern of the Bank 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 Bank and the Group have adequate resources to continue to operate for the foreseeable future,
the directors have reviewed the Bank and 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.
Accordingly, the directors conclude that the Bank 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.
Corporate Governance Statement
In accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended by
the Companies (Miscellaneous Reporting) Regulations 2018) (the Regulations), for the year ended 31 December 2023, the Bank has in its
corporate governance arrangements applied the Wates Corporate Governance Principles for Large Private Companies (the Principles),
which are available at www.frc.org.uk. The following section explains the Bank’s approach to corporate governance, and its
application of the Principles.
High standards of corporate governance are central to achieving the strategy which has been set for the Bank. To this end a Corporate
Governance Framework is in place for Lloyds Banking Group plc, the Bank, HBOS plc and Bank of Scotland plc, with all four companies
sharing a common approach to governance. The framework is designed to meet the specific needs of each company, setting the
approach and standards in respect of the Bank’s corporate governance practices, including addressing the matters set out in the
Principles and the governance requirements of the operation of the Bank as part of Lloyds Banking Group’s Ring-Fenced Bank.
This includes the matters reserved to the Board, and the matters the Board has chosen to delegate to management. Governance
arrangements, including the Corporate Governance Framework, are reviewed at least annually to ensure they remain fit for purpose.
The Board delegates further responsibilities to the Group Chief Executive, who is supported by the Group Executive Committee, the
composition of which is detailed on page 77 of the Lloyds Banking Group plc Annual Report and Accounts for 2023. The Corporate
Governance Framework of the Bank further addresses the requirements of the Principles as discussed on pages 12 to 13.
Principle One – Purpose and Leadership
The Board is collectively responsible for the long-term success of the Bank. It achieves this by agreeing the Bank’s strategy, within the
wider strategy of Lloyds Banking Group, and overseeing delivery against it. The Bank’s strategy is discussed further in the Strategic
Report. The Board also assumes responsibility for the management of the culture, values and wider standards of the Bank, within the
equivalent standards set by Lloyds Banking Group. The Board’s understanding of stakeholders’ interests is central to these
responsibilities and informs key aspects of Board decision making, as discussed within the statement on pages 3 to 4.
Acknowledging the needs of all stakeholders is fundamental to the way the Bank operates, as is maintaining the highest standards of
business conduct, which is a vital part of the corporate culture. The Bank’s approach is further influenced by our ambition to provide
not only outstanding service to our customers, but also responding to the UK’s social and economic issues. To this end, the Board plays
a lead role in establishing, promoting, and monitoring the Bank’s corporate culture and values, with the Corporate Governance
Framework ensuring such matters receive the level of prominence in Board and Executive decision making which they require. The
Bank’s corporate culture and values align to those of Lloyds Banking Group, which are discussed in more detail within the Strategic and
Directors’ Reports of the Lloyds Banking Group plc Annual Report and Accounts for 2023.
Principle Two – Board Composition
The Bank is led by a Board comprising a non-executive Chair, independent non-executive directors and executive directors, further
details of the directors can be found on page 16. The Board reviews its size and composition regularly and is committed to ensuring it
has the right balance of skills and experience. The Board considers its current size and composition is appropriate to the Bank’s
circumstances. 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 diversity benefits each candidate can bring overall.
The Board is supported by its committees, the operation of which are discussed below, which make recommendations to the Board on
matters delegated to them. Each committee has written terms of reference setting out its delegated responsibilities. Each committee
comprises non-executive directors with appropriate skills and experience and is chaired by an experienced chair. The committee
Chairs report to the Board at the next Board meeting. The Board undertakes an annual review of its effectiveness, which provides an
opportunity to consider ways of identifying greater efficiencies, ways to maximise strengths and highlights areas of further
development. An internally facilitated evaluation of the Board’s effectiveness was undertaken during the course of the year, which
concluded that the Board is continuing to operate effectively. Further information on conclusions of the evaluation can be found on
pages 90 to 91 of the Lloyds Banking Group plc Annual Report and Accounts for 2023.
Directors’ report
12
Lloyds Bank plc Annual Report and Accounts 2023
Principle Three – Director Responsibilities
The directors assume ultimate responsibility for all matters, and along with senior management are committed to maintaining a robust
control framework as the foundation for the delivery of good governance, including the effective management of delegation through
the Corporate Governance Framework. Policies are also in place in relation to potential conflicts of interest which may arise. All
directors have access to the services of the Company Secretary, and independent professional advice is available to the directors at
the expense of Lloyds Banking Group, where they judge it necessary to discharge their duties as directors.
The Board is supported by its committees which make recommendations on matters delegated to them under the Corporate
Governance Framework. The management of all committees is in keeping with the basis on which meetings of the Board are managed,
with open debate, and adequate time for members to consider proposals which are put forward. The Chair of the Board and each
Board committee assumes responsibility with support from the Company Secretary for the provision to each meeting of accurate and
timely information.
Principle Four – Opportunity and Risk
The Board oversees the development and implementation of the Bank’s strategy, within the context of the wider strategy of Lloyds
Banking Group, which includes consideration of all strategic opportunities. The Board is also responsible for the long term sustainable
success of the Bank, generating value for its shareholder and ensuring a positive contribution to society. The Board agrees the Bank’s
culture, purpose, values and strategy, within that of Lloyds Banking Group, and agrees the related standards of the Bank, again within
the relevant standards of Lloyds Banking Group. Further specific aims and objectives of the Board are formalised within the Corporate
Governance Framework, which also sets out the matters reserved for the Board.
Strong risk management is central to the strategy of the Bank, which along with a robust risk control framework acts as the foundation
for the delivery of effective management of risk. The Board agrees the Bank’s risk appetite and ensures the Bank manages risk
effectively, delegating related authorities to individuals through the Corporate Governance Framework and the further management
hierarchy. Board level engagement coupled with the direct involvement of senior management in risk issues ensures that escalated
issues are promptly addressed, and remediation plans are initiated where required. The Bank’s risk appetite, principles, policies,
procedures, controls and reporting are managed in conjunction with those of Lloyds Banking Group, and as such are regularly reviewed
to ensure they remain fully in line with regulations, law, corporate governance and industry best practice. The Bank’s principal risks are
discussed further on pages 6 to 9.
Principle Five – Remuneration
The Remuneration Committee of the Board, in conjunction with the Remuneration Committee of Lloyds Banking Group (the
Remuneration Committees), assume responsibility for the Bank’s approach to remuneration. This includes reviewing and making
recommendations on remuneration policy as relevant to the Bank, ranging from the remuneration of directors and members of the
Executive to that of all other colleagues employed by the Bank. This includes colleagues where the regulators require the Bank to
implement a specific approach to their remuneration, such as Senior Managers and other material risk takers. The activities of the
Remuneration Committees extend to matters of remuneration relevant to subsidiaries of the Bank, where such subsidiary does not
have its own remuneration committee.
Principle Six – Stakeholders
The Bank as part of Lloyds Banking Group operates under Lloyds Banking Group’s wider approach to responsible business, which
acknowledges that the Bank has a responsibility to help address the economic, social and environmental challenges which the UK
faces, and as part of this understand the needs of the Bank’s external stakeholders, including in the development and implementation
of strategy.
Central to this is Lloyds Banking Group’s and the Bank’s purpose of Helping Britain Prosper. During the year the directors took a number
of decisions with the Bank’s purpose and specific stakeholder interest in mind, which are discussed further on pages 3 to 4.
In 2023 the Responsible Business Committee provided further oversight and support of Lloyds Banking Group’s and the Bank’s plans for
embedding responsible business in the Bank’s core purpose. The approach of the Board in respect of its key stakeholders is described
further in a separate statement made in compliance with the Regulations on pages 2 to 4.
Directors
The names of the current directors are shown on page 16. There were no changes to the composition of the Board since 1 January 2023
up to the date of this report. Alan Dickinson and Lord Lupton have notified the Board that they do not intend to seek re-election at the
2024 annual general meeting of Lloyds Banking Group plc, and therefore will at this date retire as non-executive directors of the Bank.
Nathan Bostock will be appointed as a non-executive director of the Bank with effect from 1 August 2024.
Directors’ indemnities
The directors of the Bank have entered into individual deeds of indemnity with Lloyds Banking Group which constitute ‘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. In addition, Lloyds Banking Group
had appropriate Directors’ and Officers’ liability insurance cover in place throughout 2023. Deeds for existing directors are available for
inspection at the Bank’s registered office.
Lloyds Banking Group 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 former directors who retired
during the year, and to colleagues subject to the provisions of the Senior Managers and Certification Regime. Such deeds were in force
during the financial year ended 31 December 2023 and remain in force as at the date of this report. Qualifying pension scheme
indemnities have also been granted to the Trustees of Lloyds Banking Group’s Pension Schemes, including those schemes relevant to
the Bank, which were in force for the whole of the financial year and remain in force as at the date of this report.
Directors’ report continued
13
Lloyds Bank plc Annual Report and Accounts 2023
Information required under DTR 7.2
Certain information is incorporated into this report by reference. Information about internal control and risk management systems
relating to the financial reporting process can be found on page 11.
Information about share capital is shown in note 28 on page 142. The Bank is a wholly owned subsidiary of Lloyds Banking Group plc,
which holds all of the Bank’s issued ordinary share capital.
The directors manage the business of the Bank under the powers set out in the Companies Act 2006 and the Bank’s articles of
association, these powers include those in relation to the issue or buy back of the Bank’s shares.
The appointment and retirement of directors is governed by the Bank’s articles of association and the Companies Act 2006. The Bank’s
articles of association may only be amended by a special resolution of the shareholders in a general meeting.
Conflicts of interest
The Board has a comprehensive procedure for reviewing, and as permitted by the Companies Act 2006 and the Bank’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. Changes to commitments of all directors are reported to 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.
Branches, future developments and financial risk management objectives and policies
The Bank provides a wide range of banking and financial services through branches and offices in the UK and overseas. Information
regarding future developments and financial risk management objectives and policies of the Group in relation to the use of financial
instruments that would otherwise be required to be disclosed in the directors’ report, and which is incorporated into this report by
reference, can be found in the strategic report.
Share capital
Information about share capital is shown in note 28 on page 142. This information is incorporated into this report by reference. The Bank
did not repurchase any of its shares during 2023 (2022: none). There are no restrictions on the transfer of shares in the Bank 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.
Change of control
The Bank is not party to any significant agreements which take effect, alter or terminate upon a change of control of the Bank following
a takeover bid. There are no agreements between the Bank and its directors or employees providing compensation for loss of office or
employment that occurs because of a takeover bid.
Research and development activities
During the ordinary course of business the Bank develops new products and services within the business units.
Supporting disability
As part of Lloyds Banking Group, the Bank is proud to be recognised as an inclusive employer for people with disabilities. Lloyds Banking
Group continues to hold the Business Disability Forum Gold Standard, in addition to being recognised as a Disability Confident Leader
by the Department for Work and Pensions. We offer specific career development opportunities, and workplace adjustments for
colleagues with disabilities, in addition to opportunities to join our colleague network, Access.
Information incorporated by reference
The following additional information forms part of the directors’ report, and is incorporated by reference.
Content
Pages
Disclosures required under the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008
Statement of employee engagement
2 to 4
Statement of other stakeholder engagement
2 to 4
Significant contracts
Details of related party transactions are set out in note 33 on pages 145 to 146.
Streamlined Energy and Carbon Reporting
The Bank has taken advantage of the exemption from Streamlined Energy and Carbon Reporting (SECR) reporting requirements in its
own directors’ report as it is covered by the Lloyds Banking Group SECR report given in the Lloyds Banking Group plc 2023 Annual Report
and Accounts, available at www.lloydsbankinggroup.com/investors/financial-downloads.html.
Directors’ report continued
14
Lloyds Bank plc Annual Report and Accounts 2023
Statement of directors’ responsibilities
The directors are responsible for preparing the Annual 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 Bank’s and the Group’s 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 Bank and the Group, and of the
profit or loss of the Bank and the 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 Bank’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 Bank’s transactions
and disclose with reasonable accuracy at any time the financial position of the Bank and the Group, and enable them to ensure that
the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Bank 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 the website www.lloydsbankinggroup.com/investors/financial-downloads.html. The directors are
responsible for the maintenance and integrity of all information relating to the Bank on that 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 page 16 of this
annual report, confirm that, to the best of his or her knowledge:
• The Bank’s and the Group’s 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 Bank and the Group
• 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 Bank and the Group 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 Bank’s and the Group’s position, performance, business model and strategy. The directors have also
separately reviewed and approved the strategic report
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 Bank’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 Bank’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.
On behalf of the Board
image.png
Kate Cheetham
Company Secretary
29 February 2024
Lloyds Bank plc
Registered in England & Wales
Company Number 2065
Directors’ report continued
15
Lloyds Bank plc Annual Report and Accounts 2023
Executive directors:
Charlie Nunn Group Chief Executive
William Chalmers Chief Financial Officer
Non-executive directors:
Sir Robin Budenberg CBE Chair
Alan Dickinson Deputy Chair
Sarah Bentley
Brendan Gilligan
Nigel Hinshelwood Senior Independent Director
Sarah Legg
Lord Lupton CBE
Amanda Mackenzie LVO OBE
Harmeen Mehta
Cathy Turner
Scott Wheway
Catherine Woods
Current directors
16
Lloyds Bank plc Annual Report and Accounts 2023
All narrative and quantitative tables are unaudited unless otherwise
stated. The audited information is required to comply with the
requirements of relevant International Financial Reporting Standards.
Risk management is at the heart of
Helping Britain Prosper and creating a
more sustainable and inclusive future for
people and businesses.
Our mission is to protect our customers,
shareholders, colleagues and the Group, while
enabling sustainable growth. This is achieved
through informed risk decisions and robust risk
management, supported by a consistent risk-
focused culture.
The risk overview (pages 5 to 10 ) provides a summary of risk
management within the Group and the key focus areas for 2023,
including maintaining support for customers. The risk overview
also highlights the importance of the connectivity of principal,
emerging and strategic risks and how they are embedded into
the Group’s strategic risk management framework.
This full risk management section provides a more in-depth
picture of how risk is managed within the Group, detailing the
Group’s emerging risks, approach to stress testing, risk
governance, committee structure, appetite for risk and a full
analysis of the principal risk categories (pages 24 to 63), the
framework by which risks are identified, managed, mitigated and
monitored.
Lloyds Bank Group’s approach to risk
The Group operates a prudent approach to risk with rigorous
management controls to support sustainable business growth
and minimise losses. Through a strong and independent risk
function (Risk division), a robust control framework is maintained
to identify and escalate current and emerging risks, support
sustainable growth within the Group’s risk appetite, and to drive
and inform good risk reward decision making.
To comply with UK specific ring-fencing requirements, core
banking services are ring-fenced from other activities within the
overall Lloyds Banking Group. The Group has adopted the
enterprise risk management framework (ERMF) of Lloyds Banking
Group and supplemented with additional tailored practices to
address the ring-fencing requirements.
The Group’s ERMF is structured to align with the industry-accepted
internal control framework standards.
The ERMF applies to every area of the business and covers all
types of risk. It is reviewed, updated and approved by the Board to
reflect any changes in the nature of the Group’s business and
external regulations, law, corporate governance and industry
good practice. Lloyds Banking Group is in the process of
conducting a more detailed review of the ERMF which will result in
a reclassification of our principal risks in 2024.
The ERMF provides the Group with an effective mechanism for
developing and embedding risk policies and risk management
strategies which are aligned with the risks faced by its businesses.
It also seeks to facilitate effective communication on these
matters across the Group.
Role of the Lloyds Bank Group Board and senior management
Key responsibilities of the Board and senior management include:
• 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
Risk appetite
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 appetite is defined within the Group as the amount and type
of risk that the Group is prepared to seek, accept or tolerate in
delivering its strategy.
Business planning aims to optimise value within the Group’s risk
appetite parameters and deliver on its promise of Helping Britain
Prosper.
The Group’s risk appetite statement details the risk parameters
within which the Group operates. The statement forms part of the
Group’s control framework and is embedded into its policies,
authorities and limits, to guide decision making and risk
management. Group risk appetite is regularly reviewed and
refreshed to ensure appropriate coverage across our principal
risks and any emerging risks, and to align with internal or external
change.
The Board is responsible for approving the Group’s Board risk
appetite statement annually. Group Board level metrics are
augmented by further executive-level metrics and cascaded into
more detailed business appetite metrics and limits.
The following areas are currently included in the Group Board risk
appetite:
• Capital: the Group maintains capital levels commensurate
with a prudent level of solvency to achieve financial resilience
and market confidence
• Change and execution: the Group has limited appetite for
negative impacts on customers, colleagues, or the Group as a
result of change activity
• Climate: the Group takes action to support the Group and its
customers’ transition to net zero, and maintain its resilience
against the risks relating to climate change
• Conduct: the Group delivers good outcomes for its customers
• Credit: the Group has a conservative and well-balanced credit
portfolio through the economic cycle in line with the Group’s
target return on equity in aggregate. The Group’s approach
focuses on origination quality and levers at Board level while
dynamically adapting to the risk environment, business growth
strategy, industry practices and regulatory expectations
• Data: the Group has zero appetite for data-related regulatory
fines or enforcement actions
• Funding and liquidity: the Group maintains a prudent liquidity
profile and a balance sheet structure that limits its reliance on
potentially volatile sources of funding
• Market: the Group has effective controls in place to identify
and manage the market risk inherent in our customer and
client-focused activities
• Model: material models perform in line with expectations
• Operational: the Group has robust controls in place to
manage operational losses, reputational events and regulatory
breaches. It identifies and assesses emerging risks and acts to
mitigate these
• Operational resilience: the Group has limited appetite for
disruption to services to customers and stakeholders from
significant unexpected events
• People: the Group leads responsibly and proficiently, manages
people resource effectively, supports and develops colleague
skills and talent, creates and nurtures the right culture and
meets legal and regulatory obligations related to its people
• Regulatory and legal: the Group interprets and complies with
all relevant regulation and all applicable laws (including codes
of conduct which could have legal implications) and/or legal
obligations
Risk management
17
Lloyds Bank plc Annual Report and Accounts 2023
Governance frameworks
The Group’s approach to risk is based on a robust control
framework and a strong risk management culture which are the
foundation for the delivery of effective risk management and
guide the way all employees approach their work, behave and
make decisions.
Governance is maintained through delegation of authority from
the Board to individuals through the management hierarchy.
Senior executives are supported where required by a committee-
based structure which is designed to ensure open challenge and
support effective decision making.
The Group’s risk appetite, principles, policies, procedures, controls
and reporting are regularly reviewed and updated where needed
to ensure they remain fully in line with regulation, law, corporate
governance and industry good practice.
The interaction of the executive and non-executive governance
structures relies upon a culture of transparency and openness
that is encouraged by both the Board and senior management.
Board level engagement, coupled with the direct involvement of
senior management in Group-wide risk issues at Group Executive
Committee level, ensures that escalated issues are promptly
addressed and remediation plans are initiated where required.
Line managers are directly accountable for identifying and
managing risks in their individual businesses, ensuring that
business decisions strike an appropriate balance between risk
and reward and are consistent with the Group’s risk appetite.
Clear responsibilities and accountabilities for risk are defined
across the Group through a three lines of defence model which
ensures effective independent oversight and assurance in
respect of key decisions.
The Risk Committee governance framework is outlined on page
20.
Three lines of defence model
The ERMF is implemented through a ‘three lines of defence’ model
which defines clear responsibilities and accountabilities and
ensures effective independent oversight and assurance activities
take place covering key decisions.
Business lines (first line) have primary responsibility for risk
decisions, identifying, measuring, monitoring and controlling risks
within their areas of accountability. They are required to establish
effective governance and control frameworks for their business to
be compliant with Group policy requirements, to maintain
appropriate risk management skills, mechanisms and toolkits, and
to act within Group risk appetite parameters set and approved by
the Board.
Risk division (second line) is centralised, headed by the Chief Risk
Officer, providing oversight and constructive challenge to the
effectiveness of risk decisions taken by business management,
providing proactive advice and guidance, reviewing, challenging
and reporting on the risk profile of the Group and ensuring that
mitigating actions are appropriate.
It also has a key role in promoting the implementation of a
strategic approach to risk management reflecting the risk
appetite and ERMF agreed by the Board that encompasses:
• Overseeing embedding of effective risk management
processes
• Transparent, focused risk monitoring and reporting
• Provision of expert and high-quality advice and guidance to
the Board, executives and management on strategic issues
and horizon scanning, including pending regulatory changes
• 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
The primary role of Group Internal Audit (third line) is to help the
Board and executive management protect the assets, reputation
and sustainability of the Group. Group Internal Audit is led by the
Group Chief Internal Auditor. Group Internal Audit provides
independent assurance to the Audit Committee and the Board
through performing reviews and engaging with committees and
executive management, providing opinion, challenge and
informal advice on risk and the state of the control environment.
Group Internal Audit is a single independent internal audit
function, reporting to the Group Audit Committee, and the Board
or Board Audit Committees of the sub-groups, subsidiaries and
legal entities where applicable.
Risk and control cycle from identification to reporting
To allow senior management to make informed risk decisions, the
business follows a continuous risk management approach. This
risk and control cycle, from identification to reporting, ensures that
there is consistency in the approach to managing and mitigating
risks impacting the Group.
The risk and control self-assessment (RCSA) process is used to
identify, measure and manage operational risk across the Group.
Risks, including emerging risks, are identified and measured on an
inherent basis, using a consistent quantification methodology.
All key controls are recorded against material inherent risks, and
assessed on a regular basis, in response to triggers or as a
minimum annually. Where a control is not effective, the root cause
is established and action plans implemented to improve control
design or performance. The assessment of control effectiveness
combined with a view of the inherent risk assessment is used to
determine the residual risk that the Group is exposed to.
Risks are reviewed and independently challenged by the Risk
division and then reported on a regular basis to management
and the Board through the risk governance structure. Risk
exposure is compared to overall risk appetite as well as specific
limits or triggers. When thresholds are breached, committee
minutes are clear on the actions and time frames required to
address the risk and bring the exposure back within tolerance.
Risk identification is also conducted through the use of scenario
analysis which considers the most material risks the Group faces
and identifies and assesses extreme, but plausible instances
which may occur.
Risk culture
The Group operates a prudent business model and a balanced
approach to risk management. This provides a solid foundation to
deliver good customer outcomes and drive forward the Group’s
strategic transformation to ensure we continue Helping Britain
Prosper. Guided by the Board, the senior management articulates
and role models the core risk values to which the Group aspires.
Lloyds Banking Group’s Senior management establishes a strong
focus on building and sustaining long-term relationships with
customers, through the economic cycle. The Group’s Code of
Ethics and Responsibility, reinforce colleagues’ accountability for
the risks they take, and supports better decision making to meet
their customers’ needs.
Risk management continued
18
Lloyds Bank plc Annual Report and Accounts 2023
Risk skills and capabilities
To support a strong risk culture across the Group, all colleagues
complete risk training as part of their annual mandatory training.
A library of risk management learning resources is available,
which all colleagues who have specific risk management roles
can access to build their skills and capabilities.
There is ongoing investment in risk systems and models alongside
the Group’s investment in customer and product systems and
processes. This drives improvements in risk data quality,
aggregation and reporting leading to effective and efficient risk
decisions.
Risk decision making and reporting
Risk analysis and reporting enables better understanding of risks
and returns, supporting the identification of opportunities as well
as better management of risks.
An aggregate view of the Group’s overall risk profile, key risks and
management actions, and performance against risk appetite,
including the Key Risk Insights Report and Consolidated Risk Report
(CRR), is reported to and discussed monthly at the Group Risk
Committee with regular reporting to the Board Risk Committee
and the Board.
Financial reporting risk management systems and internal
controls
The Group maintains risk management systems and internal
controls relating to the financial reporting process which are
designed to:
• Ensure that accounting policies are appropriately and
consistently applied, transactions are recorded accurately,
and undertaken in accordance with delegated authorities, that
assets are safeguarded and liabilities are properly stated
• Enable the calculation, preparation and reporting of financial,
prudential regulatory and tax outcomes in accordance with
applicable International Financial Reporting Standards,
statutory and regulatory requirements
• Enable certifications by the Senior Accounting Officer relating
to maintenance of appropriate tax accounting and in
accordance with the 2009 Finance Act
• Ensure that disclosures are made on a timely basis in
accordance with statutory and regulatory requirements (for
example, UK Finance Code for Financial Reporting Disclosure
and the US Sarbanes-Oxley Act)
• Ensure ongoing monitoring to assess the impact of emerging
regulation and legislation on financial, prudential regulatory
and tax reporting
• Ensure an accurate view of the Group’s performance to allow
the Board and senior management to appropriately manage
the affairs and strategy of the business as a whole
The Audit Committee reviews the quality and acceptability of
Lloyds Bank Group’s financial disclosures. In addition, the Lloyds
Banking Group Disclosure Committee assists the Lloyds Bank
Group Chief Executive and Chief Financial Officer in fulfilling their
disclosure responsibilities under relevant listing and other
regulatory and legal requirements.
Risk management continued
19
Lloyds Bank plc Annual Report and Accounts 2023
Risk governance
The risk governance structure below is integral to effective risk management across Lloyds Banking Group, including Lloyds Bank Group.
To meet ring-fencing requirements the Boards and Board Committees of Lloyds Banking Group and the Ring-Fenced Banks (Lloyds Bank
plc and Bank of Scotland plc) as well as relevant Committees of Lloyds Banking Group and the Ring-Fenced Banks will sit concurrently
and we refer to this as the Aligned Board Model. 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
20210305b LB Risk Governance diagram.jpg
Lloyds Bank Group Chief Executive Committees
• Lloyds Banking Group and Ring-Fenced Banks Executive Committee (GEC)
• Lloyds Banking Group and Ring-Fenced Banks Risk Committees (GRC)
• Lloyds Banking Group and Ring-Fenced Banks Asset and Liability
Committees (GALCO)
• Lloyds Banking Group and Ring-Fenced Banks Cost Management
Committees
• Lloyds Banking Group and Ring-Fenced Banks Contentious Regulatory
Committees
• Lloyds Banking Group and Ring-Fenced Banks Strategic Delivery
Committees
• Lloyds Banking Group and Ring-Fenced Banks Net Zero Committees
• Lloyds Banking Group and Ring-Fenced Banks Conduct Investigations
Committees
Risk Division Committees and Governance
• Lloyds Banking Group and Ring-Fenced Banks
Market Risk Committee
• Lloyds Banking Group and Ring-Fenced Banks
Economic Crime Prevention Committee
• Lloyds Banking Group and Ring-Fenced Banks
Financial Risk Committee (GFRC)
• Lloyds Banking Group and Ring-Fenced Banks
Capital Risk Committee
• Lloyds Banking Group and Ring-Fenced Banks
Model Governance Committee
• Lloyds Banking Group and Ring-Fenced Banks
Liquidity Risk Committee
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 12 to 15, 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.
Risk management continued
20
Lloyds Bank plc Annual Report and Accounts 2023
Executive and Risk Committees
Lloyds Bank Group Chief Executive is supported by the following:
Committees
Risk focus
Lloyds Banking Group and Ring-Fenced
Banks Executive Committee (GEC)
Assists the Group Chief Executive in exercising their authority in relation to material matters having
strategic, cross-business unit, cross-function or Group-wide implications.
Lloyds Banking Group and Ring-Fenced
Banks Risk Committees (GRC)
Responsible for the development, implementation and effectiveness of Lloyds Banking Group’s
enterprise risk 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.
Lloyds Banking Group and Ring-Fenced
Banks Asset and Liability Committees
(GALCO)
Responsible for the strategic direction of the Group’s assets and liabilities and the profit and loss
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.
Lloyds Banking Group and Ring-Fenced
Banks Cost Management Committees
Leads and shapes the Group’s approach to cost management, ensuring appropriate governance and
process over Group-wide cost management activities and effective control of the Group’s cost base.
Lloyds Banking Group and Ring-Fenced
Banks Contentious Regulatory
Committees
Responsible for providing senior management oversight, challenge and accountability in connection
with the Group’s engagement with contentious regulatory matters as agreed by the Group Chief
Executive.
Lloyds Banking Group and Ring-Fenced
Banks Strategic Delivery Committees
Responsible for driving execution of the Group’s investment portfolio and strategic transformation
agenda as agreed by the Group Chief Executive, and monitoring execution performance and progress
against strategic objectives. Act as a clearing house to resolve issues on individual project areas and
prioritisation across divisional and legal entity issues. Engage in resolution of challenges that require
cross-Group support to resolve, ensuring funding and project performance provides value for money
for the Group, and ensuring autonomy is maintained alongside accountability for projects and
platforms.
Lloyds Banking Group and Ring-Fenced
Banks Net Zero Committees
Responsible for providing direction and oversight of the Group’s environmental sustainability strategy,
including particular focus on the net zero transition and nature 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). Recommend all
external material commitments and targets in relation to environmental sustainability.
Lloyds Banking Group and Ring-Fenced
Banks Conduct Investigations
Committee
Responsible for protecting and promoting the Group’s conduct, values and behaviours by taking action
to rectify the most serious cases of misconduct within the Group, identifying themes and lessons to
share 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 and overseeing regular reviews of thematic outcomes and lessons learned.
The Lloyds Banking Group and Ring-Fenced Banks Risk Committee is supported through escalation and ongoing reporting by
divisional risk committees, cross-divisional committees addressing specific matters of Group-wide significance and the following
second line of defence Risk committees which ensure effective oversight of risk management:
Lloyds Banking Group and Ring-Fenced
Banks 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.
Lloyds Banking Group and Ring-Fenced
Banks 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.
Lloyds Banking Group and Ring-Fenced
Banks Financial Risk Committee (GFRC)
Responsible for overseeing, reviewing, challenging and recommending, as required, to GEC/Board Risk
Committee/Board for Lloyds Banking Group and Ring-Fenced Bank (i) annual internal stress tests, (ii) all
Prudential Regulation Authority (PRA) and any other regulatory stress tests, (iii) reverse stress tests, (iv)
Internal Capital Adequacy Assessment Process (ICAAP), (v) Pillar 3, (vi) recovery/resolution plans, and
(vii) relevant ad hoc stress tests or other analysis as and when required by the Committee.
Lloyds Banking Group and Ring-Fenced
Banks Capital Risk Committee
Responsible for providing oversight of relevant capital matters within the Lloyds Banking 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.
Lloyds Banking Group and Ring-Fenced
Banks Model Governance Committee
Responsible for supporting the Model Risk and Validation Director in fulfilling their responsibilities, from a
Group-wide perspective, under the Lloyds Banking 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.
Lloyds Banking Group and Ring-Fenced
Banks Liquidity Risk Committee
Responsible for providing monitoring, oversight, challenge, and approval for funding and liquidity risks
across the Ring-Fenced Bank (RFB) and Lloyds Banking Group. Reviews and proposes changes to the
funding and liquidity risk management framework, including the ILAAP and internal liquidity stress
testing. It is also responsible for escalating issues of Ring-Fenced Bank and Lloyds Banking Group-level
significance to GEC (usually via GALCO) relating to the management of the Group’s funding and
liquidity risk.
Risk management continued
21
Lloyds Bank plc Annual Report and Accounts 2023
Stress testing
Overview
Stress testing is recognised as a key risk management tool by the
Boards, senior management, the businesses and the Risk and
Finance functions of all parts of the Group and its legal entities. It
is fully embedded in the planning process of the Group and its key
legal entities as a key activity in medium-term planning, and
senior management is actively involved in stress testing activities
via the governance process.
Scenario stress testing is used to support:
Risk identification:
• Understanding key vulnerabilities of the Group and its key legal
entities under adverse economic conditions
Risk appetite:
• Assessing the results of the stress test against the risk appetite
of all parts of the Group to ensure the Group and its legal
entities are managed within their risk parameters
• Setting of risk appetite by assessing the underlying risks under
stress conditions
Strategic and capital planning:
• Senior management and the Boards of the Group and its
applicable legal entities to adjust strategies if the plan does not
meet risk appetite in a stressed scenario
• The ICAAP, by demonstrating capital adequacy and meet the
requirements of regulatory stress tests that are used to inform
the setting of the PRA and management buffers (see capital
risk on pages 25 to 29) of the Group and its separately
regulated legal entities
• The capital allocation process which feeds into business unit
performance management
Risk mitigation:
• The development of potential actions and contingency plans
to mitigate the impact of adverse scenarios. Stress testing also
links directly to the recovery and resolution planning process of
the Group and its legal entities
Internal stress tests
On at least an annual basis, the Group conducts macroeconomic
stress tests to highlight and understand the key vulnerabilities of
the Group’s and its legal entities’ business plans to adverse
changes in the economic environment, and to ensure that there
are adequate financial resources in the event of a downturn.
Reverse stress testing
Reverse stress testing is used to explore the vulnerabilities of the
Group’s and its key legal entities’ strategies and plans for extreme
adverse events that would cause the businesses to fail. Where this
identifies plausible scenarios with an unacceptably high risk, the
Group or its entities will adopt measures to prevent or mitigate
that and reflect these in strategic plans.
Other stress testing activity
The Group’s stress testing programme also involves undertaking
assessments of liquidity scenarios, market risk sensitivities and
scenarios, and business-specific scenarios (see the principal risk
categories on pages 24 to 63 for further information on risk-
specific stress testing). If required, ad hoc stress testing exercises
are also undertaken to assess emerging risks, as well as in
response to regulatory requests. This wide-ranging programme
provides a comprehensive view of the potential impacts arising
from the risks to which the Group is exposed and reflects the
nature, scale and complexity of the Group. Lloyds Banking Group is
currently participating in the Bank of England’s System-wide
exploratory scenario (SWES), which aims to improve
understanding of the behaviours of banks and non-bank financial
institutions during stressed financial market conditions. Results of
this exercise will be published in late 2024.
Methodology
The stress tests process must comply with all regulatory
requirements, which is achieved through comprehensive
macroeconomic scenarios and a rigorous divisional, functional,
risk and executive review and challenge process, supported by
analysis and insight into impacts on customers and business
drivers.
All relevant business, Risk and Finance teams are involved in the
delivery of analysis, and ensure the sensitivity of the business plan
to each risk is well understood. The methodologies and modelling
approach used for stress testing embed direct links between the
macroeconomic scenarios and the drivers for each business area
to give appropriate stress sensitivities. All material assumptions
used in modelling are documented and justified, with a clearly
communicated review and sign-off process. Modelling is
supported by expert judgement and is subject to Lloyds Banking
Group model governance policy.
Governance
Clear accountabilities and responsibilities for stress testing are
assigned to senior management and the Risk and Finance
functions throughout the Group and its key legal entities. This is
formalised through the Lloyds Banking Group business planning
and stress testing policy and procedure, which are reviewed at
least annually.
The GFRC, chaired by the Chief Risk Officer and attended by the
Chief Financial Officer and other senior Risk and Finance
colleagues, has primary responsibility for overseeing the
development and execution of the Group’s stress tests.
The review and challenge of the Group’s detailed stress forecasts,
the key assumptions behind these, and the methodology used to
translate the economic assumptions into stressed outputs
conclude with the appropriate Finance and Risk sign-off. The
outputs are then presented to the GFRC and the Board Risk
Committee for review and challenge. With all regulatory exercises
being approved by the Board.
Risk management continued
22
Lloyds Bank plc Annual Report and Accounts 2023
Emerging risks
Background and framework
Understanding emerging risks is an essential component of the
Group’s risk management approach. It enables the Group to
identify the most pertinent risks and opportunities, and to
proactively respond through strategic planning and appropriate
risk mitigation.
Whilst emerging risk is not a principal risk, if left undetected
emerging risks have the potential to adversely impact the Group
or result in missed opportunities.
Impacts from emerging risks on the Group’s principal risks can
materialise in two ways:
• Emerging risks can impact the Group’s principal risks directly in
the absence of an appropriate strategic response
• Emerging risks can be a source of new risks, dependent on our
chosen response and the underlying assumptions on how
given emerging risks may manifest
Where an emerging risk is considered material enough in its own
right, the Group may choose to recognise the risk as a principal
risk, with a recent example being climate risk. Such elevations are
considered and approved through the Board Risk Committee as
part of the annual refresh of Lloyds Banking Group’s enterprise risk
management framework.
Risk identification
The basis for risk identification is underpinned by our horizon
scanning approach, supported by collaboration between
functions across the Group. 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. In addition, the Group engages with
external experts to gain external insight and context. This activity
complements and builds upon the annual strategic planning
cycle and is used to identify key external trends, risks and
opportunities for the Group.
The Group continues to evolve its approach for the identification
and prioritisation of emerging risks. During 2023, the Group
continued to evolve its emerging risk methodology, refining and
enhancing the process, placing greater focus on existing controls,
to reflect the Group’s position in its strategic transformation
journey and the level of planned investment outlined in the
Group’s business plans.
The emerging risk methodology is centred around several key
factors:
• The threat presented by a risk
• The Group’s specific vulnerability to the risk
• The preparation and protection the Group has in place to
manage or mitigate impacts
• The existing control environment and planned investment (new
for 2023)
Our evolved approach has further streamlined the list of
emerging risk themes from 10 to eight, enabling greater
management concentration on developing the appropriate
responses.
The emerging risk themes detailed in the risk overview section on
page 10, align to the current primary risks the Group is managing
and many of which (for example, operational elasticity and
political and macroeconomic environment) are continuous areas
of focus. The nature of emerging risks is expected to evolve and
may require different ways to mitigate from the measures used
today. The risks also correlate, for example customer propositions
and societal expectations will be influenced by the UK political
and macroeconomic environment.
Risk mitigation and monitoring
Emerging risks are currently managed through the Group’s
strategic risk framework, detailed on page 63.
Emerging risk themes have been discussed at executive-level
committees throughout 2023, with key actions assigned to closely
monitor their manifestation and potential opportunities, and in
some cases, also forming part of the business planning process.
Deep dives on selected emerging risk themes are also planned for
2024.
As part of the 2023 analysis, it has been identified that there is
significant overlap with the previous strategic risk themes (climate
change, customer proposition, organisational purpose, talent
attraction and retention, and technology advances) and the
emerging risk themes. This further supports our recommendation
to merge these into a combined category of horizon and
emerging risks from 2024 onwards. The graphic below indicates
the mapping of the strategic risk themes to the emerging risk
themes.
Strategic_Emerging_Risks_ 20Feb24 7.15pm.jpg
Risk management continued
23
Lloyds Bank plc Annual Report and Accounts 2023
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 25 to 63.
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 2023.
Risk categories
6
Principal risk categories
Secondary risk categories
Capital risk
– Capital
Page 25
Change and execution risk
– Change and execution
Page 30
Climate risk
– Climate
Page 31
Conduct risk
– Conduct
Page 33
Credit risk
– Retail credit
– Commercial credit
Page 35
Data risk
– Data
Page 49
Funding and liquidity risk
– Funding and liquidity
Page 49
Market risk
– Trading book
– Pensions
Page 54
– Banking book
Model risk
– Model
Page 58
Operational risk
– Business process
– Financial reporting
– Security
Page 59
– Economic crime financial
– Governance
– Sourcing and supply chain management
– Economic crime fraud
– Internal service provision
– External service provision
– IT systems
Operational resilience risk
– Operational resilience
Page 61
People risk
– People
– Health and safety
Page 62
Regulatory and legal risk
– Regulatory compliance
– Legal
Page 63
Strategic risk
– Strategic
Page 63
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.
Risk management continued
24
Lloyds Bank plc Annual Report and Accounts 2023
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 and
leverage or the minimum requirement for own funds and eligible
liabilities (MREL) either at Group level 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.
Measurement
In accordance with UK ring-fencing legislation, the Group was
appointed as the Ring-Fenced Bank sub-group (‘RFB sub-group’)
under Lloyds Banking Group plc. As a result the Group is subject to
separate supervision by the UK Prudential Regulation Authority
(PRA) on a sub-consolidated basis (as the RFB sub-group) in
addition to the supervision applied to Lloyds Bank plc on an
individual basis.
The Group maintains capital levels on a consolidated and
individual basis commensurate with a prudent level of solvency to
achieve financial resilience and market confidence. To support
this, capital risk appetite on both a consolidated and individual
basis 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 in accordance with the relevant provisions of
the Capital Requirements Directive (CRD V) and Capital
Requirements Regulation (UK CRR). This is supplemented through
additional regulation set out under the PRA Rulebook and through
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 both 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 by 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).
This is set as 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 is
currently the equivalent of around 3.0 per cent of risk-weighted
assets, of which the minimum amount to be met by CET1 capital is
the equivalent of around 1.7 per cent of risk-weighted assets.
A range of additional regulatory capital buffers apply under the
capital rules, which are required to be met with CET1 capital. These
include a capital conservation buffer (2.5 per cent of risk-
weighted assets) and a time-varying countercyclical capital
buffer (CCyB) which is currently around 1.9 per cent of risk-
weighted assets following the increase in the UK CCyB rate (which
is set by the Bank of England’s Financial Policy Committee) to 2 per
cent in July 2023.
In addition, the Group in its capacity as the RFB sub-group is
subject to an other systemically important institution (O-SII) buffer
of 2.0 per cent of risk-weighted assets which is designed to hold
systemically important banks to higher capital standards so that
they can withstand a greater level of stress before requiring
resolution. The FPC amended the O-SII buffer framework in 2022,
changing the metric for determining the buffer rate from total
assets to the UK leverage exposure measure. The first review point
under the revised framework occurred during December 2023
(based upon the RFB sub-group’s UK leverage exposure measure
as at 31 December 2022) which resulted in no change to the
current buffer.
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 Pillar 2A requirement. The PRA
considers outputs from both the Group’s internal stress tests and
Bank of England (BoE) 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.
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 currently 0.7 per cent of the leverage
exposure measure following the increase in the UK CCyB rate in
July 2023 and an additional leverage ratio buffer (ALRB)
requirement of 0.7 per cent of the leverage exposure measure
which reflects the application of the Group’s O-SII buffer.
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 CET1 capital.
The leverage ratio framework does not currently give rise to
higher regulatory capital requirements for the Group than the
risk-based capital framework.
Risk management continued
25
Lloyds Bank plc Annual Report and Accounts 2023
Mitigation
The Group’s capital management framework is part of a
comprehensive framework within Lloyds Banking Group that
includes the setting of capital risk appetite and capital planning
and stress testing activities. Close monitoring of capital, leverage
and MREL ratios is undertaken to ensure the Group meets
regulatory requirements and risk appetite levels and deploys its
capital resources efficiently.
The Group regularly refreshes and monitors its suite of early
warning indicators and maintains a Capital Contingency
Framework as part of the Lloyds Banking Group Recovery Plan
which are designed to identify and escalate 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 the Group could take in response to a
stress, including as part of the wider Lloyds Banking Group
response. 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 dividend payments
upstreamed to its parent (Lloyds Banking Group plc), by raising
new equity via an injection of capital from its parent and by
issuing additional tier 1 or tier 2 capital securities to its parent. The
cost and availability of additional capital from its parent 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,
business disposals and through the efficient use of securitisations
and other optimisation activity.
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 and stress
testing. 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 capital plan whilst shorter term
forecasts are 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 for the Group and its
key regulated entities is undertaken by a range of Lloyds Banking
Group and Ring-Fenced Banks committees, including the Group
Capital Risk Committee (GCRC), Group Financial Risk Committee
(GFRC), Group Asset and Liability Committees (GALCO) and Group
Risk Committees (GRC), in addition to the 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 these
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.
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).
The Bank of England’s MREL statement of policy (MREL SoP) sets out
its approach to setting external MREL and the distribution of MREL
resources internally within groups. Internal MREL resources are
intended to enable a material subsidiary to be recapitalised as
part of a group resolution strategy without the need for the Bank
of England to apply its resolution powers directly to the subsidiary
itself.
The Group’s parent, Lloyds Banking Group plc, is subject to the
Bank of England’s MREL SoP and must therefore maintain a
minimum level of external MREL resources. Lloyds Banking Group
plc operates a single point of entry (SPE) resolution strategy, with
Lloyds Banking Group plc as the designated resolution entity.
Under this strategy, the Group has been identified as a material
subsidiary of Lloyds Banking Group plc and must therefore
maintain a minimum level of internal MREL resources. As at 31
December 2023, the Group’s internal MREL resources exceeded the
minimum required.
Analysis of CET1 capital position
The Group’s common equity tier 1 (CET1) capital ratio decreased to
14.4 per cent at 31 December 2023 compared to 14.8 per cent at
31 December 2022. Profit for the year was more than offset by
pension deficit contributions made to the defined benefit pension
schemes, an increased deduction for goodwill and other
intangible assets, the ordinary dividends paid in the second half of
the year, the accrual for foreseeable ordinary dividends,
distributions on other equity instruments and an increase in risk-
weighted assets.
On 1 January 2024, the transitional factor applied to IFRS 9
dynamic relief reduced by a further 25 per cent.
Total capital requirement
The Group’s total capital requirement (TCR) as at 31 December
2023, being the aggregate of the Group’s Pillar 1 and current Pillar
2A capital requirements, was £20,004 million (31 December 2022:
£19,297 million).
Capital resources
An analysis of the Group’s capital position as at 31 December 2023
is presented in the following section. This reflects the application
of the transitional arrangements for IFRS 9.
Risk management continued
26
Lloyds Bank plc Annual Report and Accounts 2023
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
2023
£m
At 31 Dec
2022
£m
Common equity tier 1
Shareholders’ equity per balance sheet
35,355
34,709
Adjustment to retained earnings for foreseeable dividends
(490)
(1,900)
Cash flow hedging reserve
3,554
5,168
Other adjustments1
73
131
38,492
38,108
less: deductions from common equity tier 1
Goodwill and other intangible assets
(5,531)
(4,783)
Prudent valuation adjustment
(117)
(132)
Removal of defined benefit pension surplus
(2,653)
(2,804)
Deferred tax assets
(3,971)
(4,463)
Common equity tier 1 capital
26,220
25,926
Additional tier 1
Additional tier 1 instruments
5,018
4,268
Total tier 1 capital
31,238
30,194
Tier 2
Tier 2 instruments
5,747
5,318
Other adjustments
417
303
Total tier 2 capital
6,164
5,621
Total capital resources
37,402
35,815
Risk-weighted assets (unaudited)
182,560
174,902
Common equity tier 1 capital ratio (unaudited)
14.4%
14.8%
Tier 1 capital ratio (unaudited)
17.1%
17.3%
Total capital ratio (unaudited)
20.5%
20.5%
1 Includes an adjustment applied to reserves to reflect the application of the IFRS 9 transitional arrangements for capital.
Risk management continued
27
Lloyds Bank plc Annual Report and Accounts 2023
Movements in CET1 capital resources
The key movements are set out in the table below.
Common
equity
tier 1
£m
At 31 December 2022
25,926
Profit for the year
5,207
Movement in foreseeable dividends1
1,410
Dividends paid out on ordinary shares during the year
(4,700)
IFRS 9 transitional adjustment to retained earnings
(242)
Pension deficit contributions
(768)
Fair value through other comprehensive income reserve
71
Deferred tax asset
492
Goodwill and other intangible assets
(748)
Distributions on other equity instruments
(334)
Other movements
(94)
At 31 December 2023
26,220
1Reflects the reversal of the brought forward accrual from 31 December 2022, net of the accrual recognised at 31 December 2023.
CET1 capital resources have increased by £294 million during the year, primarily reflecting profit for the year, largely offset by:
• Pension deficit contributions (fixed and variable) paid during the year into the Group's three main defined benefit pension scheme
• The increase in goodwill and other intangible assets, which included the acquisition of Tusker in February 2023
• The payment of ordinary dividends during the second half of the year, the accrual for foreseeable ordinary dividends and
distributions on other equity instruments
The IFRS 9 transitional arrangements for static relief ended on 1 January 2023 and therefore no static relief exists at 31 December 2023
(31 December 2022: £133 million). Dynamic relief amounted to £155 million (31 December 2022: £278 million) through CET1 capital. On
1 January 2024, IFRS 9 dynamic relief reduced by a further 25 per cent.
Movements in total capital
Total capital resources have increased by £1,587 million during the year, reflecting the increase in CET1 capital resources and increases
in both AT1 and Tier 2 capital resources of £750 million and £543 million respectively, following the issuance of new AT1 and Tier 2 capital
instruments. This was partially offset by other movements in Tier 2 capital instruments, which included the impact of sterling
appreciation and regulatory amortisation.
Risk-weighted assets
At 31 Dec
2023
£m
At 31 Dec
2022
£m
Foundation Internal Ratings Based (IRB) Approach
36,478
37,907
Retail IRB Approach
85,436
81,066
Other IRB Approach
6,126
5,834
IRB Approach
128,040
124,807
Standardised (STA) Approach1
19,021
19,795
Credit risk
147,061
144,602
Securitisation
8,246
5,899
Counterparty credit risk
875
773
Credit valuation adjustment risk
454
342
Operational risk
25,605
23,204
Market risk
319
82
Risk-weighted assets
182,560
174,902
Of which threshold risk-weighted assets2
1,424
1,864
1 Threshold risk-weighted assets are included within the Standardised (STA) Approach.
2 Threshold risk-weighted assets reflect the element of deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.
Risk-weighted assets increased by £7,658 million, or 4 per cent, from £174,902 million at 31 December 2022 to £182,560 million at
31 December 2023. This includes the impact of Retail secured CRD IV model updates of £5 billion. Excluding this, lending and operational
risk increases, a modest uplift from credit and model calibrations and other movements were partly offset by optimisation, including
capital efficient securitisation activity within the balance sheet.
Risk management continued
28
Lloyds Bank plc Annual Report and Accounts 2023
Leverage ratio
The table below summarises the component parts of the Group’s leverage ratio.
At 31 Dec
2023
£m
At 31 Dec
2022
£m
Total tier 1 capital
31,238
30,194
Exposure measure
Statutory balance sheet assets
Derivative financial instruments
3,165
3,857
Securities financing transactions
32,796
39,261
Loans and advances and other assets
569,444
573,810
Total assets
605,405
616,928
Qualifying central bank claims
(57,430)
(71,747)
Derivatives adjustments
(1,737)
(2,960)
Securities financing transactions adjustments
1,431
1,939
Off-balance sheet items
31,494
33,863
Amounts already deducted from Tier 1 capital
(12,060)
(11,724)
Other regulatory adjustments1
(4,950)
(6,714)
Total exposure measure
562,153
559,585
Average exposure measure2
568,917
UK leverage ratio
5.6%
5.4%
Average UK leverage ratio2
5.5%
Leverage exposure measure (including central bank claims)
619,583
631,332
Leverage ratio (including central bank claims)
5.0%
4.8%
1 Includes deconsolidation adjustments that relate to the deconsolidation of certain Group entities that fall outside the scope of the Group’s regulatory capital
consolidation and adjustments to exclude lending under the UK Government’s Bounce Back Loan Scheme (BBLS).
2 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 2023 to 31
December 2023). The average of 5.5 per cent compares to 5.5 per cent at the start and 5.6 per cent at the end of the quarter.
Analysis of leverage movements
The UK leverage ratio increased to 5.6 per cent at 31 December 2023 compared to 5.4 per cent at 31 December 2022, reflecting the
increase in the total tier 1 capital position. This was partially offset by the increase in the leverage exposure measure following increases
in financial and other assets (excluding central bank claims), net of reductions in off-balance sheet items and the measure for
securities financing transactions.
Risk management continued
29
Lloyds Bank plc Annual Report and Accounts 2023
Change and execution risk
Definition
Change and execution risk is defined as the risk that, in delivering
its change agenda, the Group fails to ensure compliance with
laws and regulation, maintain available and effective customer
and colleague services, and/or operate within the Group’s risk
appetite.
Exposures
Change and 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 and 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 form part of
the Board risk appetite metrics, and are under ongoing evolution
and enhancement to ensure they support the Group’s change
and transformation agenda.
Mitigation
The Group takes a range of mitigating actions with respect to
change and execution risk. These include the following:
• The Board establishes a Group-wide risk appetite and metric
for change and 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 and
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 and execution risks are monitored and reported through
to the Board and Group Governance Committees in accordance
with Lloyds Banking Group’s enterprise risk management
framework. Risk exposures are assessed monthly through
established governance in the Group’s functions and business
unit risk committees with escalation to executive committees
where required. Material change and 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 within Risk function to support
overall management of risks and ongoing effectiveness of
controls.
Risk management continued
30
Lloyds Bank plc Annual Report and Accounts 2023
Climate risk
Definition
The Group defines climate risk as the risk that the Group
experiences losses and/or reputational damage, either from the
impacts of climate change and the transition to net zero
(inbound) or as a result of the Group’s response to tackling
climate change (outbound).
Embedding
Climate risk is considered as a principal risk within Lloyds Banking
Group’s ERMF, reflecting the importance of the topic and the focus
required to manage these risks. This ensures a consistent
approach to embedding the consideration of climate risk in
activities across the Group, while also enhancing Board level
insight.
Lloyds Banking Group’s climate risk policy provides an overarching
framework for managing climate risks. This policy continues to be
refined, to ensure awareness of key climate-related risks across
different areas of the Group and appropriate processes and
controls are in place to mitigate these risks. This includes
requirements in relation to governance, scenario analysis and
management for climate risks, as well as governance
requirements for different aspects of Lloyds Banking Group’s net
zero strategy. Activity across the Group to meet these
requirements is actively monitored, including through the
development of the Group’s climate risk profile.
Lloyds Banking Group continues to consider climate risk through
an evolving view of ‘Double Materiality’. This reflects the concept
that climate risks can materialise through inbound risk, outbound
risk or potentially both.
• Inbound risk: impacts of a risk on the Group’s balance sheet,
which can lead to a financial loss. Managing inbound risks is
critical to mitigate this potential impact, including supporting
customers to be aware of potential risks. Examples include
property devaluation from physical and transition risks
• Outbound risk: impacts of the Group’s balance sheet or
activity on the environment driven by our strategy or purpose.
Examples include insufficient consideration of climate risk in
external disclosure or external perception of the Group’s
actions, claims and disclosures
Understanding of ‘Double Materiality’ is continuing to develop, as
well as reflecting how it applies across broader ESG risks. This
approach allows an assessment of the impact of risks to the
Group in addition to identification of the impact of the Group’s
balance sheet on society and the planet.
Within the Group’s risk and control self-assessment (RCSA) system
for risk management, key climate-related risks have been
prioritised into five broad themes in line with this view of inbound
and outbound risks:
3.4 43795_climate_risk.jpg
The impacts from climate risk largely manifest through other
principal risks. Therefore, in order to ensure these impacts are
appropriately managed, the Group is embedding consideration of
climate risk into its approach for managing other principal risks.
New and existing controls have also been mapped to key climate-
related regulatory obligations to support identification,
measurement, management and reporting of the impacts of
climate change.
Exposures
Climate risks can arise through two channels, physical or
transition risks:
• Physical risks from changes in climate or weather patterns.
These can either be acute (event driven such as floods or
storms) or chronic (longer-term shifts such as rising sea levels
or droughts)
• Transition risks due to changes associated with moving
towards a low carbon economy, including changes to policy,
legislation and regulation, technology and market, or legal risks
from failing to manage the transition
As part of Lloyds Banking Group’s ERMF, risks are proactively
identified considering various internal and external sources,
including environmental factors such as climate change. Lloyds
Banking Group has identified the sectors at increased risk from
the impacts of climate change and continues to monitor its loans
and advances to customers in these sectors.
This has informed identification of the key climate-related risks.
The table above provides a high-level overview of Lloyds Banking
Group’s key climate risks, across the five main inbound and
outbound themes highlighted in the climate risk diagram. This has
also included consideration of the cross-cutting impacts across
other principal risks in Lloyds Banking Group’s ERMF.
The materiality of Lloyds Banking Group’s key climate risks reflects
their potential impact, considering key impacts across a range of
factors including: customer; reputation; financial losses;
colleagues; and business objectives. These impacts are
considered on an ongoing basis through Lloyds Banking Group’s
continuous risk management approach, with formal assessment
at least annually. This assessment is supported by horizon
scanning of climate-related developments and additional
quantitative and qualitative analysis, including scenario analysis
results.
Measurement
There are a number of different ways to measure the relative size
of the key climate risks facing the Group. However, in order to
quantify the impact, scenario analysis is required to understand
their effects, particularly given the different potential outcomes
and time horizons over which the risks may manifest.
From an outbound perspective, the Group measures its emissions
relating to activities across bank finance, supply chain and own
operations. This helps to provide a view on the impact of the
Group’s activities, as well as identifying the areas where the Group
can most effectively reduce emissions to support the transition to
net zero. These calculations follow the relevant industry standards
and guidelines, noting that such methodologies will continue to
evolve.
For inbound risks, the levels of climate risk impacting different
areas of the Group are assessed through a variety of metrics and
approaches:
• For Commercial lending, an ESG tool helps to identify and
assess the impact of climate risk for individual Commercial
customers as part of the credit decisioning process
• For Retail lending, levels of flood risk and energy efficiency, via
energy performance certificates (EPC), are measured for the
Homes portfolio to inform the physical and transition risk we
face. For the motor portfolio, the transition from internal
combustion engines (ICE) to electric vehicles (EVs) is a key
consideration in measuring residual value risk
Risk management continued
31
Lloyds Bank plc Annual Report and Accounts 2023
Key climate risks facing the Group
6
Impact
Risks
Drivers
Time horizons1
Risk types impacted
Inbound
Property devaluation from physical and
transition risks
Transition (Policy and Legal,
Technology, Market)
Short (Acute), Medium and
Long (Chronic)
Credit
Physical (Acute, Chronic)
Adverse impact on residual value of
motor vehicles
Transition (Policy and Legal,
Technology, Market)
Short, Medium, Long
Credit
Reduction in clients’ creditworthiness or
collateral valuation
Transition (Policy and Legal,
Technology, Market, Reputation)
Medium, Long
Credit
Physical (Acute, Chronic)
Disruption to the Group’s services from
extreme weather, for example damage
to Group properties
Physical (Acute, Chronic)
Short (Acute), Long (Chronic)
Operational resilience
Meeting relevant expectations/
requirements, e.g. Prudential Regulation
Authority (PRA) Supervisory Statement
(SS3/19) and ISSB
Transition (Policy and Legal)
Short, Medium, Long
Regulatory compliance
Outbound
Failure to adequately support the
transition to net zero
Transition (Reputation)
Short, Medium, Long
Climate
Insufficient consideration of climate risk
in external disclosures
Transition (Policy and Legal,
Reputation)
Short, Medium
Operational (financial
reporting)
External perception of greenwashing in
the Group’s disclosures, marketing or
product communications
Transition (Policy and Legal,
Reputation)
Short, Medium, Long
Conduct
1Time horizon categories: Short term: 0-1 year, Medium term: 1-5 years, Long term: 5+ years.
Scenario analysis
Given the range of outcomes over which climate risks and
opportunities may materialise, scenario analysis is a key tool for
understanding the potential impacts on the Group. Lloyds Banking
Group continues to develop its climate scenario analysis
capabilities to inform analysis of climate risks, as well as to help
shape its strategy to reflect climate opportunities and assess its
resilience, building on lessons learned from the Bank of England’s
2021 Climate Biennial Exploratory Scenario (CBES). The subsequent
analysis has focused on understanding the areas most impacted
by climate change, as well as assessing the impact from key
climate-related risks.
An assessment has been undertaken for Lloyds Banking Group’s
Commercial lending portfolios to identify the sectors most
exposed to climate risks. For Commercial lending clients, this has
been based on estimated financial impacts from physical and
transition risk. The relative difference between this climate
estimate and a baseline provides an indicative foresight view of
discounted cash flow and hence net present value (NPV) of the
entity from present day to 2050.
This assessment has been modelled across two climate scenarios
consistent with the Network for Greening the Financial System
(NGFS), Net Zero 2050 (Orderly) and Divergent Net Zero (Divergent).
The Net Zero 2050 scenario was chosen as it describes the ideal
outcome that the Group’s net zero targets are aiming for. The
Divergent Net Zero scenario provides a useful comparison, given it
reaches the same end goal although at higher overall cost.
The results highlight that high emitting sectors, such as coal
mining and oil and gas, are expected to face a substantial
adverse impact, with considerable effects in other sectors, such
as automotive and transport. However, these impacts will vary
significantly by company and will be most notably observed in the
power sector.
The Group has a relatively low commercial lending exposure to
the sectors which experience the most significant negative
impacts, based on this assessment. Note 38 on page 151 provides
further detail of the Group’s lending by sector.
The above assessment also supports the view of the sectors with
the greatest potential climate-related impact for the Group.
Alongside the Group’s exposure, this analysis validates the focus
for Lloyds Banking Group’s environmental sustainability strategy,
including the banking sectors for which NZBA targets have been
set.
Impact assessment
This scenario analysis is intended to inform Lloyds Banking Group’s
view of the financial impacts from the risks relating to change,
which would principally arise through asset impairments or credit
losses. Building on this assessment of the sectors at increased risk
from climate change, consideration of some climate risks has
been incorporated into Lloyds Banking Group’s calculation of ECL.
For Commercial Banking clients in these sectors most materially
impacted, a top-down sector level approach has been used to
estimate impacts in a disorderly scenario, resulting an estimated
impact on ECL of less than £15 million. This uses a combination of
sector level NPV impact estimates, NGFS Gross Domestic Product
(GDP) pathways, historic impairment data and other inputs to
assess the impact of physical and transition risks.
Furthermore, the UK Mortgages portfolio has been assessed for
physical and transition risk. This assessment considered the
impact of the UK introducing minimum EPC requirements and the
estimated retrofitting costs to meet these. These additional costs
then translated into Probability of Default (PD) uplifts, resulting in
an estimated increase in ECL of less than £5 million for Lloyds
Banking Group’s buy-to-let portfolio. A similar exercise was
undertaken for flood risk, also with an estimated impact of less
than £5 million. Measurement of the physical and transition risk
impacts continues to progress, with ongoing development of a
Residential Real Estate Climate Impact model to estimate
potential impacts. Further detail on this is provided on page 153 of
Lloyds Banking Group’s sustainability report 2023.
These estimated impacts are below Lloyds Banking Group’s
materiality thresholds, therefore, no adjustments have been made
to the expected credit losses measured as at 31 December 2023.
Mitigation
The Group manages climate-related risk in different ways across
the five key inbound and outbound themes identified. The
following sections provide an overview of the Group’s mitigation
approach, including the relevant cross-cutting impacts, across
each of these themes.
Risk management continued
32
Lloyds Bank plc Annual Report and Accounts 2023
Net Zero
The Group considers how its different areas are supporting the
transition to net zero. The Group has set ambitions to reduce
emissions across four key areas of activity. This is supported
through development of appropriate plans and strategies, as well
as sector specific targets for bank financed emissions. We aim to
monitor progress against these targets through the Group Net
Zero Committee on a quarterly basis.
The 2023 Lloyds Banking Group climate transition plan sets out the
steps it will take to reduce emissions to net zero for its own
operations and supply chain, as well as specific activities
happening in relation to the Group’s lending.
Disclosures
Lloyds Banking Group’s external disclosures are subject to a robust
governance process, including appropriate legal review. This
includes an assessment of the relevant regulatory requirements,
particularly to ensure alignment with CFD requirements and Task
Force on Climate-related Financial Disclosures (TCFD)
recommendations. External disclosures will continue to progress in
line with the changing regulatory landscape, and the Group will
look to ensure suitable controls remain in place as these develop.
Greenwashing
The Group’s understanding of greenwashing continues to evolve,
with adoption of various methods across the Group to continue to
build this understanding, including development of training
materials to avoid greenwashing for all colleagues. Current
priorities relate to any sustainability related claims in external
disclosures and development of consideration of ESG criteria
(including climate-related factors) for relevant products across
the Group.
The Group will look to ensure that its disclosures outline a clear
and accurate message of what it is doing to support the
transition to net zero. An external legal review provides assurance
on the suitability of content in disclosures. The Group expects its
controls and processes will continue to evolve, reflecting
increasing understanding of greenwashing, as well as the
changing regulatory landscape, such as the FCA’s Sustainability
Disclosure Requirements anti-greenwashing rule.
In 2023, Lloyds Banking Group product policy was redesigned to
ensure compliance with Consumer Duty and focus on customer
outcomes. As part of this, initial guidance in relation to climate
considerations was strengthened to introduce more
comprehensive ESG considerations for all products in line with
Lloyds Banking Group’s updated values. Dedicated ESG guidance
has been introduced to support product governance processes,
ensuring climate-related factors and wider ESG risks are
appropriately considered and managed throughout the product
life cycle. In 2024, further support will be provided to upskill
colleagues and ensure the guidance is enhanced in line with the
ESG risks landscape.
Inbound physical and transition risks
The impacts from physical and transition risks cut across other
principal risks in different ways for different areas of the Group, as
outlined below.
Commercial and Retail lending
The Group continues to integrate climate risk and broader ESG
considerations in its credit process, with continued progress in
2023. This is through a credit risk integration strategy, which
includes development of an ESG credit risk framework and
policies, as well as portfolio and case management.
Operations and supply chain
Climate risk is embedded in the Group approach for managing
operational resilience, as one of the key drivers within the Group
strategy, considering the impact on and from climate as part of
ensuring its operations remain resilient. Climate-related impacts
could affect operational resilience through properties, IT systems,
people and third party suppliers. The Group approach primarily
focuses on the potential impact from physical risks, although
transition risk impacts may require further consideration as the
approach evolves.
The Group has processes in place to consider the resilience of its
property in relation to physical risks, particularly focused on its
offices, data centres and branch network, to minimise the risk of
service disruption. Insurers periodically highlight Lloyds Banking
Group’s buildings that are subject to high flood risk. These sites are
then surveyed in detail to quantify that risk and determine
appropriate flood defence mitigation. The Group proactively
monitors the temperature and humidity in its data centres, with
root cause analysis undertaken for any incidents to identify any
local climate issues and remediate. Additionally, resilient tech
rooms have been created where power, temperature and
humidity are robustly controlled.
The Group expects its third party suppliers to review their business
continuity plans and recovery strategies, ensuring these are
appropriately updated to mitigate potential risks posed by
climate change, to ensure continued provision of service. Lloyds
Banking Group’s Code of Supplier Responsibility also outlines
expectations for the third parties in relation to environmental
sustainability. This includes expectations for the Group’s suppliers
to proactively identify, manage and reduce their environmental
impact, as well as adopting the principles of the Emerald
Standard which the Group launched in 2022.
Regulatory compliance
The Group’s monitoring of regulatory expectations includes
understanding the current relevant requirements, and its activity
and progress towards these, as well as horizon scanning for new
developments. Monitoring progress against current expectations,
for example Dear CEO and CFO letters, supports regular
engagement with regulators on respective plans and priorities. In
addition, the Group maintains a view of how its disclosures
support the relevant regulatory requirements, as outlined above.
The Group also maintains an awareness of regulatory
developments and seeks to include and map regulatory
obligations within its risk and control profile in support of
compliance traceability.
Monitoring
The Group ensures visibility and awareness of climate risks
wherever they present themselves across its risk profile, with
regular reporting and tracking of any identified risks.
Management Information (MI) across a range of themes is
regularly assessed to provide insight into and oversight of
management of climate risk, together with tracking of associated
action plans and identification of triggers for reassessment. This is
reported through appropriate Risk governance, across the
relevant business units.
Climate risk is also considered through Risk governance on a
monthly basis through the Consolidated Risk Report, supported by
assessment of identified climate risks across the Group and
appropriate analysis of Group Board risk appetite metrics. This
provides insight into any changes to the risk profile together with
their rationale for awareness and scrutiny by senior leaders. In
addition, climate risk MI is reported through this process, with
standalone deep dive discussions on climate risk at Board Risk
Committee on a half-yearly basis.
Conduct risk
Definition
Conduct risk is defined as the risk of customer detriment across
the customer lifecycle including: failures in product management,
distribution and servicing activities; from other risks materialising,
or other activities which could undermine the integrity of the
market or distort competition, leading to unfair customer
outcomes, regulatory censure, reputational damage or financial
loss.
Harm or detriment is defined as loss, distress or inconvenience to
customers due to breaches of regulatory or internal requirements
or our wider duty to act fairly and reasonably.
Exposures
The Group faces significant conduct risks, which affect all aspects
of the Group’s operations and all types of customers. The
introduction of Consumer Duty has increased regulatory
expectations in relation to customer outcomes, including how the
Group demonstrates and measures them.
Risk management continued
33
Lloyds Bank plc Annual Report and Accounts 2023
Conduct risks can impact directly or indirectly on the Group’s
customers and could materialise from a number of areas across
the Group, including:
• Business and strategic planning that does not sufficiently
consider customer needs
• Ineffective development, management and monitoring of
products, their distribution (including the sales process, fair
value assessment and responsible lending criteria) and post-
sales service (including the management of customers in
financial difficulties)
• Unclear, unfair, misleading or untimely customer
communications
• A culture that is not sufficiently customer-centric
• Poor governance of colleagues’ incentives and rewards and
approval of schemes which lead to behaviours that drive
unfair customer outcomes
• Ineffective identification, management and oversight of legacy
conduct issues
• Ineffective management and resolution of customers’
complaints or claims
• Outsourcing of customer service and product delivery to third
parties that do not have the same level of control, oversight
and culture as the Group
The Group is also exposed to the risk of engaging in activities or
failing to manage conduct which could constitute market abuse,
undermine the integrity of a market in which it is active, distort
competition or create conflicts of interest.
There is a high level of scrutiny from regulatory bodies, the media,
politicians, and consumer groups regarding financial institutions’
treatment of customers, especially those with characteristics of
vulnerability. The Group continues to apply significant focus to its
treatment of all customers, in particular those in financial
difficulties and those with characteristics of vulnerability, to
ensure good outcomes.
The Group is continuing to liaise closely with the FCA and Financial
Ombudsman Service on the historical motor commission
arrangements.
The Group continuously adapts to market developments that
could pose heightened conduct risk, and actively monitors for
early signs of financial difficulties driven by pressures from a rising
cost of living and rising interest rates.
Other key areas of focus include transparency and fairness of
pricing communications; ensuring victims of Authorised Push
Payment Fraud receive good outcomes; and a mindset shift
regarding customer outcomes in line with the FCA’s Consumer
Duty Regulation.
Measurement
To articulate its conduct risk appetite, the Group has Conduct Risk
Appetite Metrics (CRAMs) and tolerances that aim to indicate
where it may be operating outside its conduct risk appetite.
CRAMs have been designed for services and products offered by
the Group and are measured by a set of common metrics. These
contain a range of product design, sales and process metrics
(including outcome testing results) to provide a more holistic view
of conduct risks; some products also have a suite of additional
bespoke metrics.
Each of the tolerances for the metrics are agreed for the
individual product or service and are regularly tracked. At a
consolidated level these metrics are part of the Board risk
appetite. The Group has, and continues to, evolve its approach to
conduct risk measurements, to include emerging conduct
themes.
Mitigation
The Group takes a range of mitigating actions with respect to
conduct risk and remains focused on delivering a leading
customer experience.
The Group’s ongoing commitment to good customer outcomes
sets the tone from the top and supports the development our
values-led culture with customers at the heart, strengthening links
between actions to support conduct, culture and customer and
enabling more effective control management. Actions to
encourage good conduct include:
• Conduct risk appetite established at Group and divisional level,
with metrics included in the Group risk appetite to ensure
ongoing focus
• Simplified and enhanced conduct policies and procedures in
place to ensure appropriate controls and processes that
deliver good customer outcomes, and support market integrity
and competition requirements
• Customer needs considered through divisional customer plans,
with integral conduct lens
• Achieving a values-led culture that delivers great customer
outcomes, by focusing on aligning our systems, symbols,
behaviours and storytelling
• Development and continued oversight of the implementation
of the vulnerability strategy continues through the Lloyds
Banking Group Customer Inclusion Forum to monitor
vulnerable outcomes, provide strategic direction and ensure
consistency across the Group
• Robust product governance framework to ensure products
continue to offer customers fair value, and consistently meet
their needs throughout their product lifecycle
• Complaints management through responding to, and learning
from, root causes of complaint volumes and Financial
Ombudsman Service (FOS) change rates
• Review and oversight of thematic conduct agenda items at
senior committees, ensuring holistic consideration of key Lloyds
Banking Group-wide conduct risks
• Robust recruitment and training, with a continued focus on
how the Group manages colleagues’ performance with clear
customer accountabilities
• Ongoing engagement with third parties involved in serving the
Group’s customers to ensure consistent delivery
• Monitoring and testing of customer outcomes to ensure the
Group delivers good outcomes for customers throughout the
product and service lifecycle, and make continuous
improvements to products, services and processes
• Continued focus on market conduct; member of the Fixed
Income, Currencies and Commodities Markets Standard Board;
and committed to conducting its market activities consistent
with the principles of the UK Money Markets Code, the Global
Precious Metals Code and the FX Global Code
• Adoption of robust change delivery methodology to enable
prioritisation and delivery of initiatives to address conduct
challenges
• Continued focus on proactive identification and mitigation of
conduct risk in the Lloyds Banking Group’s strategy
• Active engagement with regulatory bodies and other
stakeholders to develop understanding of concerns related to
customer treatment, effective competition and market
integrity, to ensure that the Group’s strategic conduct focus
continues to meet evolving stakeholder expectations
• Creation of tools and additional support for customers
impacted by the rising cost of living, including Cost-of-Living
Hub and interest-free overdraft buffer
• A programme of work in place to deliver the enhanced
expectations of Consumer Duty
Monitoring
Conduct risk is governed through divisional risk committees and
significant issues are escalated to the Lloyds Banking Group Risk
Committee, in accordance with the Lloyds Banking Group’s ERMF,
as well as through the monthly Risk Reporting. The risk exposures
are reported, discussed and challenged at divisional risk
committees. Remedial action is recommended, if required. All
material conduct risk events are escalated in accordance with
the Lloyds Banking Group operational risk policy.
A number of activities support the close monitoring of conduct
risk including:
• The use of CRAMs across the Group, with an escalation route to
Board
• Oversight and assurance activities across the three lines of
defence
• Horizon scanning
Risk management continued
34
Lloyds Bank plc Annual Report and Accounts 2023
Credit risk
Definition
Credit risk is defined as the risk that parties with whom the Group
has contracted fail to meet their financial obligations (both on
and off-balance sheet).
Exposures
The principal sources of credit risk within the Group arise from
loans and advances, contingent liabilities, commitments and debt
securities to customers, financial institutions and sovereigns. The
credit risk exposures of the Group are set out in note 38 on page
151.
In terms of loans and advances (for example, mortgages, term
loans and overdrafts) and contingent liabilities (for example,
credit instruments such as guarantees and documentary letters
of credit), credit risk arises both from amounts advanced and
commitments to extend credit to a customer or bank. With
respect to commitments to extend credit, the Group is also
potentially exposed to an additional loss up to an amount equal
to the total unutilised commitments. However, the likely amount of
loss may be less than the total unutilised commitments, as most
retail and certain commercial lending commitments may be
cancelled based on regular assessment of the prevailing
creditworthiness of customers. Commercial term commitments
are also contingent upon customers maintaining specific credit
standards.
Credit risk also arises from debt securities and derivatives. Credit
risk exposure for derivatives is limited to the current cost of
replacing contracts with a positive value to the Group. Such
amounts are reflected in note 38 on page 151.
Additionally, credit risk arises from leasing arrangements where
the Group is the lessor. Note 2(J) on page 88 provides details on
the Group’s approach to the treatment of leases.
The investments held in the Group’s defined benefit pension
schemes also expose the Group to credit risk. Note 11 on page 99
provides further information on the defined benefit pension
schemes’ assets and liabilities.
Loans and advances, contingent liabilities, commitments, debt
securities and derivatives also expose the Group to refinance risk.
Refinance risk is the possibility that an outstanding exposure
cannot be repaid at its contractual maturity date. If the Group
does not wish to refinance the exposure then there is refinance
risk if the obligor is unable to repay by securing alternative
finance. This may occur for a number of reasons which may
include: the borrower is in financial difficulty, because the terms
required to refinance are outside acceptable appetite at the time
or the customer is unable to refinance externally due to a lack of
market liquidity. Refinance risk exposures are managed in
accordance with the Group’s existing credit risk policies,
processes and controls, and are not considered to be material
given the Group’s prudent credit risk appetite. Where heightened
refinance risk exists exposures are minimised through intensive
account management and, where appropriate, are classed as
impaired and/or forborne.
Measurement
The process for credit risk identification, measurement and
control is integrated into the Board-approved framework for
credit risk appetite and governance.
Credit risk is measured from different perspectives using a range
of appropriate modelling and scoring techniques at a number of
levels of granularity, including total balance sheet, individual
portfolio, pertinent concentrations and individual customer – for
both new business and existing exposure. Key metrics, which may
include but are not limited to, total exposure, ECL, risk-weighted
assets, new business quality, concentration risk and portfolio
performance, are reported monthly to risk committees and
forums.
Measures such as ECL, risk-weighted assets, observed credit
performance, predicted credit quality (usually from predictive
credit scoring models), collateral cover and quality, and other
credit drivers (such as cash flow, affordability, leverage and
indebtedness) have been incorporated into the Group’s credit risk
management practices to enable effective risk measurement
across the Group.
The Group has also continued to strengthen its capabilities and
abilities for identifying, assessing and managing climate-related
risks and opportunities, recognising that climate change is likely to
result in changes in the risk profile and outlook for the Group’s
customers, the sectors the Group operates in and collateral/asset
valuations.
In addition, stress testing and scenario analysis, including
preparation of credit playbooks to analyse and forward plan for
specific events and/or emerging issues, are used to estimate
impairment losses and capital demand forecasts for both
regulatory and internal purposes and to assist in the formulation
and calibration of credit risk appetite, where appropriate.
As part of the ‘three lines of defence’ model, the Risk division is the
second line of defence providing oversight and independent
challenge to key risk decisions taken by business management.
The Risk division also tests the effectiveness of credit risk
management and internal credit risk controls. This includes
ensuring that the control and monitoring of higher risk and
vulnerable portfolios and sectors is appropriate and confirming
that appropriate loss allowances for impairment are in place.
Output from these reviews helps to inform credit risk appetite,
credit policy and portfolio mandates.
As the third line of defence, Group Internal Audit undertakes
regular risk-based reviews to assess the effectiveness of credit
risk management and controls.
Mitigation
The Group uses a range of approaches to mitigate credit risk.
Prudent credit principles, risk policies and appetite statements:
the independent Risk division sets out the credit principles, credit
risk policies and credit risk appetite statements. These are subject
to regular review and governance, with any changes subject to
an approval process. Risk teams monitor credit performance
trends and the outlook. Risk teams also test the adequacy of and
adherence to credit risk policies and processes throughout the
Group. This includes tracking portfolio performance against an
agreed set of credit risk appetite tolerances.
Robust models and controls: see model risk on page 58.
Limitations on concentration risk: there are portfolio controls on
certain industries, sectors and products to reflect risk appetite as
well as individual, customer and bank limit risk tolerances. Credit
policies, appetite statements and mandates are aligned to the
Group’s risk appetite and restrict exposure to higher risk countries
and potentially vulnerable sectors and asset classes. Note 38 on
page 151 provides an analysis of loans and advances to
customers by industry (for commercial customers) and product
(for retail customers). Exposures are monitored to prevent both an
excessive concentration of risk and single name concentrations.
These concentration risk controls are not necessarily in the form
of a maximum limit on exposure, but may instead require new
business in concentrated sectors to fulfil additional minimum
policy and/or guideline requirements. The Group’s largest credit
limits are regularly monitored by the Board Risk Committee and
reported in accordance with regulatory requirements.
Risk management continued
35
Lloyds Bank plc Annual Report and Accounts 2023
Defined country risk management framework: the Group sets a
broad maximum country risk appetite. Risk-based appetite for all
countries is set within the independent Risk division, taking into
account economic, financial, political and social factors as well as
the approved business and strategic plans of the Group.
Specialist expertise: credit quality is managed and controlled by
a number of specialist units within the business and Risk division,
which provide for example: intensive management and control;
security perfection; maintenance of customer and facility records;
expertise in documentation for lending and associated products;
sector-specific expertise; and legal services applicable to the
particular market segments and product ranges offered by the
Group.
Stress testing: the Group’s credit portfolios are subject to regular
stress testing. In addition to the Group-led, PRA and other
regulatory stress tests, exercises focused on individual divisions
and portfolios are also performed. For further information on the
Group wide stress testing process, methodology and governance
see page 22.
Frequent and robust credit risk assurance: assurance of credit
risk is undertaken by an independent function operating within the
Risk division which is part of the Group’s second line of defence. Its
primary objective is to provide reasonable and independent
assurance and confidence that credit risk is being effectively
managed and to ensure that appropriate controls are in place
and being adhered to. Group Internal Audit also provides
assurance to the Audit Committee on the effectiveness of credit
risk management controls across the Group’s activities.
Collateral
The principal types of acceptable collateral include:
• Residential and commercial properties
• Charges over business assets such as inventory and accounts
receivable
• Financial instruments such as debt securities
• Vehicles
• Cash
• Guarantees received from third parties
The Group maintains appetite parameters on the acceptability of
specific classes of collateral.
For non-mortgage retail lending to small businesses, collateral
may include second charges over residential property and the
assignment of life cover.
Collateral held as security for financial assets other than loans
and advances is determined by the nature of the underlying
exposure. Debt securities, including treasury and other bills, are
generally unsecured, with the exception of asset-backed
securities and similar instruments such as covered bonds, which
are secured by portfolios of financial assets. Collateral is generally
not held against loans and advances to financial institutions.
However, securities are held as part of reverse repurchase or
securities borrowing transactions or where a collateral
agreement has been entered into under a master netting
agreement. Derivative transactions with financial counterparties
are typically collateralised under a Credit Support Annex (CSA) in
conjunction with the International Swaps and Derivatives
Association (ISDA) Master Agreement. Derivative transactions with
non-financial customers are not usually supported by a CSA.
The requirement for collateral and the type to be taken at
origination will be based upon the nature of the transaction and
the credit quality, size and structure of the borrower. For non-retail
exposures, if required, the Group will often seek that any collateral
includes a first charge over land and buildings owned and
occupied by the business, a debenture over the assets of a
company or limited liability partnership, personal guarantees,
limited in amount, from the directors of a company or limited
liability partnership and key man insurance. The Group maintains
policies setting out which types of collateral valuation are
acceptable, maximum loan to value (LTV) ratios and other criteria
that are to be considered when reviewing an application. The
fundamental business proposition must evidence the ability of the
business to generate funds from normal business sources to
repay a customer or counterparty’s financial commitment, rather
than reliance on the disposal of any security provided.
Although lending decisions are primarily based on expected cash
flows, any collateral provided may impact the pricing and other
terms of a loan or facility granted. This will have a financial impact
on the amount of net interest income recognised and on internal
loss given default estimates that contribute to the determination
of asset quality and returns.
The Group requires collateral to be realistically valued by an
appropriately qualified source, independent of both the credit
decision process and the customer, at the time of borrowing. In
certain circumstances, for Retail residential mortgages this may
include the use of automated valuation models based on market
data, subject to accuracy criteria and LTV limits. Where third
parties are used for collateral valuations, they are subject to
regular monitoring and review. Collateral values are subject to
review, which will vary according to the type of lending, collateral
involved and account performance. Such reviews are undertaken
to confirm that the value recorded remains appropriate and
whether revaluation is required, considering, for example, account
performance, market conditions and any information available
that may indicate that the value of the collateral has materially
declined. In such instances, the Group may seek additional
collateral and/or other amendments to the terms of the facility.
The Group adjusts estimated market values to take account of the
costs of realisation and any discount associated with the
realisation of the collateral when estimating credit losses.
The Group considers risk concentrations by collateral providers
and collateral type with a view to ensuring that any potential
undue concentrations of risk are identified and suitably managed
by changes to strategy, policy and/or business plans.
The Group seeks to avoid correlation or wrong-way risk where
possible. Under the Group’s repurchase (repo) policy, the issuer of
the collateral and the repo counterparty should be neither the
same nor connected. The same rule applies for derivatives. The
Risk division has the necessary discretion to extend this rule to
other cases where there is significant correlation. Countries with a
rating equivalent to AA- or better may be considered to have no
adverse correlation between the counterparty domiciled in that
country and the country of risk (issuer of securities).
Refer to note 38 on page 151 for further information on collateral.
Risk management continued
36
Lloyds Bank plc Annual Report and Accounts 2023
Additional mitigation for Retail customers
The Group uses a variety of lending criteria when assessing
applications for mortgages and unsecured lending. The general
approval process uses credit acceptance scorecards and
involves a review of an applicant’s previous credit history using
internal data and information held by Credit Reference Agencies
(CRA).
The Group also assesses the affordability and sustainability of
lending for each borrower. For secured lending this includes use of
an appropriate stressed interest rate scenario. Affordability
assessments for all lending are compliant with relevant regulatory
and conduct guidelines. The Group takes reasonable steps to
validate information used in the assessment of a customer’s
income and expenditure.
In addition, the Group has in place quantitative limits such as
maximum limits for individual customer products, the level of
borrowing to income and the ratio of borrowing to collateral.
Some of these limits relate to internal approval levels and others
are policy limits above which the Group will typically reject
borrowing applications. The Group also applies certain criteria
that are applicable to specific products, for example applications
for buy-to-let mortgages.
For UK mortgages, the Group’s policy permits owner occupier
applications with a maximum LTV of 95 per cent. This can increase
to 100 per cent for specific products where additional security is
provided by a supporter of the applicant and held on deposit by
the Group. Applications with an LTV above 90 per cent are subject
to enhanced underwriting criteria, including higher scorecard cut-
offs and loan size restrictions.
Buy-to-let mortgages within Retail are limited to a maximum loan
size of £2,000,000 and 75 per cent LTV for a single property. Buy-to-
let applications must pass a minimum rental cover ratio of 125 per
cent under stressed interest rates, after applicable tax liabilities.
Portfolio landlords (customers with four or more mortgaged buy-
to-let properties) are subject to additional controls including
evaluation of overall portfolio resilience.
The Group’s policy is to reject any application for a lending
product where a customer is registered as bankrupt or insolvent,
or has a recent County Court Judgment or financial default
registered at a CRA used by the Group above de minimis
thresholds. In addition, the Group typically rejects applicants
where total unsecured debt, debt-to-income ratios, or other
indicators of financial difficulty exceed policy limits.
Where credit acceptance scorecards are used, new models,
model changes and monitoring of model effectiveness are
independently reviewed and approved in accordance with the
governance framework set by the Group Model Governance
Committee.
Additional mitigation for Commercial customers
Individual credit assessment and independent sanction of
customer and bank limits: with the exception of small exposures
to small to medium-sized enterprises (SME) customers where
certain relationship managers have limited delegated credit
approval authority, credit risk in commercial customer portfolios is
subject to approval by the independent Risk division, which
considers the strengths and weaknesses of individual
transactions, the balance of risk and reward, and how credit risk
aligns to the Group and divisional risk appetite. Exposure to
individual counterparties, groups of counterparties or customer
risk segments is controlled through a tiered hierarchy of credit
authority delegations and risk-based credit limit guidances per
client group for larger exposures. Approval requirements for each
decision are based on a number of factors including, but not
limited to, the transaction amount, the customer’s aggregate
facilities, any risk mitigation in place, credit policy, risk appetite,
credit risk ratings and the nature and term of the risk. The Group’s
credit risk appetite criteria for counterparty and customer loan
underwriting is generally the same as that for loans intended to
be held to maturity. All hard loan/bond underwriting must be
approved by the Risk division. A pre-approved credit matrix may
be used for ‘best efforts’ underwriting.
Counterparty credit limits: limits are set against all types of
exposure in a counterparty name, in accordance with an agreed
methodology for each exposure type. This includes credit risk
exposure on individual derivatives and securities financing
transactions, which incorporates potential future exposures from
market movements against agreed confidence intervals.
Aggregate facility levels by counterparty are set and limit
breaches are subject to escalation procedures.
Daily settlement limits: settlement risk arises in any situation
where a payment in cash, securities or equities is made in the
expectation of a corresponding receipt in cash, securities or
equities. Daily settlement limits are established for each relevant
counterparty to cover the aggregate of all settlement risk arising
from the Group’s market transactions on any single day. Where
possible, the Group uses Continuous Linked Settlement in order to
reduce foreign exchange (FX) settlement risk.
Master netting agreements
It is credit policy that a Group-approved master netting
agreement must be used for all derivative and traded product
transactions and must be in place prior to trading, with separate
documentation required for each Group entity providing facilities.
This requirement extends to trades with clients and the
counterparties used for the Group’s own hedging activities, which
may also include clearing trades with Central Counterparties
(CCPs).
Any exceptions must be approved by the appropriate credit
approver. Master netting agreements do not generally result in an
offset of balance sheet assets and liabilities for accounting
purposes, as transactions are usually settled on a gross basis.
However, within relevant jurisdictions and for appropriate
counterparty types, master netting agreements do reduce the
credit risk to the extent that, if an event of default occurs, all
trades with the counterparty may be terminated and settled on a
net basis. The Group’s overall exposure to credit risk on derivative
instruments subject to master netting agreements can change
substantially within a short period, since this is the net position of
all trades under the master netting agreement.
Other credit risk transfers
The Group also undertakes asset sales, credit derivative based
transactions, securitisations (including significant risk transfer
transactions), purchases of credit default swaps and purchase of
credit insurance as a means of mitigating or reducing credit risk
and/or risk concentration, taking into account the nature of assets
and the prevailing market conditions.
Monitoring
In conjunction with the Risk division, businesses identify and define
portfolios of credit and related risk exposures and the key
behaviours and characteristics by which those portfolios are
managed and monitored. This entails the production and analysis
of regular portfolio monitoring reports for review by senior
management. The Risk division in turn produces an aggregated
view of credit risk across the Group, including reports on material
credit exposures, concentrations, concerns and other
management information, which is presented to senior officers,
divisional credit risk forums, business unit committees and forums,
Group Risk Committee and the Board Risk Committee.
Models
The performance of all models used in credit risk is monitored in
line with the Group’s model governance framework – see model
risk on page 58.
Intensive care of customers in financial difficulty
The Group operates a number of solutions to assist borrowers
who are experiencing financial stress. The material elements of
these solutions through which the Group has granted a
concession, whether temporarily or permanently, are set out
below.
Forbearance
The Group’s aim in offering forbearance and other assistance to
customers in financial distress is to benefit both the customer and
the Group by supporting its customers and acting in their best
interests by, where possible, bringing customer facilities back into
a sustainable position.
Risk management continued
37
Lloyds Bank plc Annual Report and Accounts 2023
The Group offers a range of tools and assistance to support
customers who are encountering financial difficulties. Cases are
managed on an individual basis, with the circumstances of each
customer considered separately and the action taken judged as
being appropriate and sustainable for both the customer and the
Group.
Forbearance measures consist of concessions towards a debtor
that is experiencing or about to experience difficulties in meeting
its financial commitments. This can include modification of the
previous terms and conditions of a contract or a total or partial
refinancing of a troubled debt contract, either of which would not
have been required had the debtor not been experiencing
financial difficulties.
The provision and review of such assistance is controlled through
the application of an appropriate policy framework and
associated controls. Regular review of the assistance offered to
customers is undertaken to confirm that it remains appropriate,
alongside monitoring of customers’ performance and the level of
payments received.
The Group classifies accounts as forborne at the time a customer
in financial difficulty is granted a concession.
Balances in default or classified as Stage 3 are always considered
to be non-performing. Balances may be non-performing but not
in default or Stage 3, where for example they are within their non-
performing forbearance cure period.
Non-performing exposures can be reclassified as performing
forborne after a minimum 12-month cure period, providing there
are no past due amounts or concerns regarding the full
repayment of the exposure. A minimum of a further 24 months
must pass from the date the forborne exposure was reclassified
as performing forborne before the account can exit forbearance.
If conditions to exit forbearance are not met at the end of this
probation period, the exposure shall continue to be identified as
forborne until all the conditions are met.
The Group’s treatment of loan renegotiations is included in the
impairment policy in note 2(H) on page 87.
Customers receiving support from UK Government sponsored
programmes
To assist customers in financial distress, the Group participates in
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.
Lloyds Bank Group credit risk portfolio in 2023
Overview
The Group’s portfolios are well-positioned for the current
macroeconomic environment. 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 resilient, despite the
continued economic uncertainty with only modest evidence of
deterioration to date. In UK mortgages, new to arrears were
relatively stable throughout 2023, having increased slightly at the
start of the year, largely driven by legacy vintages (mortgages
originated in the period 2006 to 2008). Flows to default increased
during the year for the same reason with trends stabilising in the
second half. Unsecured portfolios continue to exhibit stable new
to arrears and flow to default trends, broadly at or below pre-
pandemic levels. The Group continues to monitor the impacts of
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 impairment charge in 2023 was £343 million, down from a
charge of £1,452 million in 2022. This is as a result of a significant
write-back following the full repayment of debt from a single
name client in the fourth quarter and improvements in the
Group’s macroeconomic outlook.
The Group’s ECL allowance on loans and advances to customers
decreased in the year to £4,007 million (31 December 2022:
£ 4,779 million).
Group Stage 2 loans and advances to customers reduced to
£52,973 million (31 December 2022: £60,103 million) and as a
percentage of total lending to 12.1 per cent (31 December 2022:
13.7 per cent). This is due to improvements in the macroeconomic
outlook transferring assets to Stage 1, along with impacts from
securitisations of legacy Retail mortgages in the first quarter and
Retail unsecured loans in the fourth quarter. Of the total Group
Stage 2 loans and advances to customers, 92.5 per cent are up to
date (31 December 2022: 94.1 per cent). Stage 2 coverage reduced
slightly to 3.1 per cent (31 December 2022: 3.3 per cent).
Stage 3 loans and advances to customers reduced to £7,131 million
(31 December 2022: £7,611 million), and as a percentage of total
lending decreased slightly to 1.6 per cent (31 December 2022: 1.7
per cent). This reduction is largely following the full repayment of
debt from a single name client in Commercial Banking and
securitisation activity, partially offset by flow to default increases
in the UK mortgages portfolio. Stage 3 coverage decreased by
7.2 percentage points to 15.9 per cent (31 December 2022: 23.1 per
cent).
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, in line with the Group’s strategy, supporting clients to
grow, as well as working closely with customers to help them
through cost of living pressures and the impacts of higher
interest rates 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,
embracing the standards outlined in the Mortgage Charter
and including where customers are leveraging Pay As You
Grow options under the UK Government Coronavirus scheme
Risk management continued
38
Lloyds Bank plc Annual Report and Accounts 2023
Impairment charge (credit) by division
Loans and
advances to
customers
£m
Loans and
advances to
banks
£m
Debt
securities
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
Undrawn
balances
£m
2023
£m
2022
£m
UK mortgages
(61)
–
–
–
10
(51)
295
Credit cards
438
–
–
–
19
457
571
Loans and overdrafts
271
–
–
–
(20)
251
499
UK Motor Finance
169
–
–
–
–
169
(2)
Other
5
–
–
–
–
5
10
Retail
822
–
–
–
9
831
1,373
Small and Medium Businesses
114
–
–
–
–
114
188
Corporate and Institutional
(598)
(3)
–
3
1
(597)
283
Commercial Banking
(484)
(3)
–
3
1
(483)
471
Other
–
–
–
(5)
–
(5)
(392)
Total impairment charge (credit)
338
(3)
–
(2)
10
343
1,452
Risk management continued
39
Lloyds Bank plc Annual Report and Accounts 2023
Group loans and advances to customers
The following pages contain analysis of the Group’s loans and
advances to customers by sub-portfolio. Loans and advances to
customers are categorised into the following stages:
• Stage 1 assets comprise of newly originated assets (unless
purchased or originated credit-impaired), as well as those
which have not experienced a significant increase in credit risk.
These assets carry an expected credit loss allowance
equivalent to the expected credit losses that result from those
default events that are possible within 12 months of the
reporting date (12 month expected credit losses)
• Stage 2 assets are those which have experienced a significant
increase in credit risk since origination. These assets carry an
expected credit loss allowance equivalent to the expected
credit losses arising over the lifetime of the asset (lifetime
expected credit losses)
• Stage 3 assets have either defaulted or are otherwise
considered to be credit-impaired. These assets carry a lifetime
expected credit loss
• Purchased or originated credit-impaired assets (POCI) are
those that have been originated or acquired in a credit-
impaired state. This includes within the definition of credit-
impaired the purchase of a financial asset at a deep discount
that reflects impaired credit losses
Total expected credit loss allowance
At 31 Dec
2023
£m
At 31 Dec
2022
£m
Customer related balances
Drawn
3,693
4,475
Undrawn
314
304
4,007
4,779
Loans and advances to banks
6
9
Debt securities
8
8
Total expected credit loss allowance
4,021
4,796
Movements in total expected credit loss allowance
Opening ECL at
31 Dec 2022
£m
Write-offs
and other1
£m
Income
statement
charge
(credit)
£m
Net ECL
increase
(decrease)
£m
Closing ECL at
31 Dec 2023
£m
UK mortgages2
1,209
(43)
(51)
(94)
1,115
Credit cards
763
(410)
457
47
810
Loans and overdrafts3
678
(414)
251
(163)
515
UK Motor Finance
252
(79)
169
90
342
Other
86
(3)
5
2
88
Retail
2,988
(949)
831
(118)
2,870
Small and Medium Businesses
549
(126)
114
(12)
537
Corporate and Institutional Banking
1,258
(48)
(597)
(645)
613
Commercial Banking
1,807
(174)
(483)
(657)
1,150
Other
1
5
(5)
–
1
Total4
4,796
(1,118)
343
(775)
4,021
1 Contains adjustments in respect of purchased or originated credit-impaired financial assets.
2 Includes £60 million within write-offs and other relating to the £2.5 billion UK mortgages securitisation in the first quarter of 2023.
3 Includes £112 million within write-offs and other relating to the £2.7 billion unsecured loans securitisation in the fourth quarter of 2023.
4 Total ECL includes £14 million relating to other non customer-related assets (31 December 2022: £17 million).
Risk management continued
40
Lloyds Bank plc Annual Report and Accounts 2023
Loans and advances to customers and expected credit loss allowance
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
At 31 December 2023
Loans and advances to customers
UK mortgages
256,596
38,533
4,337
7,854
307,320
12.5
1.4
Credit cards
12,625
2,908
284
–
15,817
18.4
1.8
Loans and overdrafts
7,103
1,187
196
–
8,486
14.0
2.3
UK Motor Finance
13,541
2,027
112
–
15,680
12.9
0.7
Other
15,898
525
144
–
16,567
3.2
0.9
Retail
305,763
45,180
5,073
7,854
363,870
12.4
1.4
Small and Medium Businesses
27,525
4,458
1,530
–
33,513
13.3
4.6
Corporate and Institutional Banking
35,872
3,335
528
–
39,735
8.4
1.3
Commercial Banking
63,397
7,793
2,058
–
73,248
10.6
2.8
Other1
(301)
–
–
–
(301)
–
–
Total gross lending
368,859
52,973
7,131
7,854
436,817
12.1
1.6
ECL allowance on drawn balances
(885)
(1,462)
(1,133)
(213)
(3,693)
Net balance sheet carrying value
367,974
51,511
5,998
7,641
433,124
Customer related ECL allowance (drawn and undrawn)
UK mortgages
169
376
357
213
1,115
Credit cards
234
446
130
–
810
Loans and overdrafts
153
244
118
–
515
UK Motor Finance2
188
91
63
–
342
Other
20
21
47
–
88
Retail
764
1,178
715
213
2,870
Small and Medium Businesses
139
231
167
–
537
Corporate and Institutional Banking
135
212
253
–
600
Commercial Banking
274
443
420
–
1,137
Other
–
–
–
–
–
Total
1,038
1,621
1,135
213
4,007
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers3
UK mortgages
0.1
1.0
8.2
2.7
0.4
Credit cards
1.9
15.3
45.8
–
5.1
Loans and overdrafts
2.2
20.6
60.2
–
6.1
UK Motor Finance
1.4
4.5
56.3
–
2.2
Other
0.1
4.0
32.6
–
0.5
Retail
0.2
2.6
14.1
2.7
0.8
Small and Medium Businesses
0.5
5.2
10.9
–
1.6
Corporate and Institutional Banking
0.4
6.4
47.9
–
1.5
Commercial Banking
0.4
5.7
20.4
–
1.6
Other
–
–
–
–
–
Total
0.3
3.1
15.9
2.7
0.9
1 Contains centralised fair value hedge accounting adjustments.
2 UK Motor Finance for Stages 1 and 2 include £187 million relating to provisions against residual values of vehicles subject to finance leasing agreements for Black Horse.
These provisions are included within the calculation of coverage ratios.
3 Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers including loans in recoveries.
Risk management continued
41
Lloyds Bank plc Annual Report and Accounts 2023
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
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
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
31,729
4,778
1,588
–
38,095
12.5
4.2
Commercial Banking
62,510
10,432
3,348
–
76,290
13.7
4.4
Other1
(3,198)
–
–
–
(3,198)
–
Total gross lending
362,766
60,103
7,611
9,622
440,102
13.7
1.7
ECL allowance on drawn balances
(678)
(1,792)
(1,752)
(253)
(4,475)
Net balance sheet carrying value
362,088
58,311
5,859
9,369
435,627
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
UK Motor Finance2
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
110
208
924
–
1,242
Commercial Banking
239
479
1,073
–
1,791
Other
–
–
–
–
–
Total
800
1,970
1,756
253
4,779
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers3
UK mortgages
–
1.3
9.1
2.6
0.4
Credit cards
1.5
14.5
39.1
–
5.1
Loans and overdrafts
2.2
21.4
51.0
–
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
16.0
2.6
0.8
Small and Medium Businesses
0.4
4.8
8.5
–
1.4
Corporate and Institutional Banking
0.3
4.4
58.2
–
3.3
Commercial Banking
0.4
4.6
32.0
–
2.3
Other
–
–
–
–
–
Total
0.2
3.3
23.1
2.6
1.1
1Contains centralised fair value hedge accounting adjustments.
2UK Motor Finance for Stages 1 and 2 include £92 million relating to provisions against residual values of vehicles subject to finance leasing agreements for Black Horse.
These provisions are included within the calculation of coverage ratios.
3Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers including loans in recoveries.
Risk management continued
42
Lloyds Bank plc Annual Report and Accounts 2023
Stage 2 loans and advances to customers and expected credit loss allowance
Up to date
1 to 30 days past due2
Over 30 days past due
PD movements
Other1
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
At 31 December 2023
UK mortgages
26,665
146
0.5
9,024
133
1.5
1,771
52
2.9
1,073
45
4.2
Credit cards
2,612
345
13.2
145
49
33.8
115
34
29.6
36
18
50.0
Loans and
overdrafts
756
148
19.6
279
46
16.5
112
34
30.4
40
16
40.0
UK Motor Finance
735
30
4.1
1,120
30
2.7
138
21
15.2
34
10
29.4
Other
125
5
4.0
295
7
2.4
52
5
9.6
53
4
7.5
Retail
30,893
674
2.2
10,863
265
2.4
2,188
146
6.7
1,236
93
7.5
Small and Medium
Businesses
3,455
202
5.8
590
17
2.9
253
8
3.2
160
4
2.5
Corporate and
Institutional Banking
3,175
208
6.6
2
–
–
27
3
11.1
131
1
0.8
Commercial Banking
6,630
410
6.2
592
17
2.9
280
11
3.9
291
5
1.7
Total
37,523
1,084
2.9
11,455
282
2.5
2,468
157
6.4
1,527
98
6.4
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
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
4,706
207
4.4
24
1
4.2
5
–
–
43
–
–
Commercial Banking
8,787
430
4.9
1,084
28
2.6
344
13
3.8
217
8
3.7
Total
44,046
1,361
3.1
12,496
317
2.5
2,376
177
7.4
1,185
115
9.7
1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.
2Includes assets that have triggered PD movements, or other rules, given that being 1 to 29 days in arrears in and of itself is not a Stage 2 trigger.
3Expected credit loss allowance on loans and advances to customers (drawn and undrawn).
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.
Risk management continued
43
Lloyds Bank plc Annual Report and Accounts 2023
Retail
• The Retail portfolio has remained resilient and well-positioned,
despite pressure on consumer finances and affordability from
a higher cost of living, inflationary pressures and rising interest
rates. Robust risk management remains in place, with strong
affordability and indebtedness controls for both new and
existing lending and a prudent risk appetite approach
• The Retail lending book is concentrated in lower risk segments
which are better able to withstand the cost of living challenge
and higher interest rates
• In UK mortgages, new to arrears were relatively stable
throughout 2023, having increased slightly at the start of the
year, largely driven by legacy vintages (mortgages originated
in the period 2006 to 2008). Flows to default increased during
the year for the same reason with trends stabilising in the
second half
• Unsecured portfolios continue to exhibit stable new to arrears
and flow to default trends, broadly at, or below pre-pandemic
levels
• The Group is closely monitoring the impacts of a higher cost of
living on consumers to ensure it remains vigilant for any signs
of deterioration. Lending strategies are under continuous
review and have been proactively managed and calibrated to
the latest macroeconomic outlook, with actions taken to
enhance both living and housing cost assumptions in
affordability assessments
• The Retail impairment charge in 2023 was £831 million and is
materially lower than the charge of £1,373 million for 2022,
largely due to favourable updates to the Group’s
macroeconomic outlook
• All existing IFRS 9 staging rules and triggers have been
maintained across Retail from the 2022 year end. Retail
customer related ECL allowance as a percentage of drawn
loans and advances (coverage) is stable at 0.8 per cent
(31 December 2022: 0.8 per cent)
• Favourable updates to the Group’s macroeconomic outlook
have reduced Stage 2 loans and advances to 12.4 per cent of
the Retail portfolio (31 December 2022: 13.5 per cent), of which
92.4 per cent are up to date loans (31 December 2022: 94.0 per
cent). Stage 2 ECL coverage also reduces slightly to 2.6 per
cent (31 December 2022: 3.0 per cent)
• Increased flows to default within UK mortgages result in an
increase in Stage 3 loans and advances to 1.4 per cent of total
loans and advances (31 December 2022: 1.2 per cent). Retail
Stage 3 ECL coverage decreases to 14.1 per cent (31 December
2022: 16.0 per cent) due to portfolio mix changes; notably
because UK mortgages hold comparatively lower coverage in
comparison to other Retail products due to security. Underlying
Stage 3 loans and advances, and Stage 3 coverage for all
other Retail products excluding UK mortgages remain broadly
stable
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 legacy vintages have continued to reduce
• New to arrears in the UK mortgages portfolio were relatively
stable throughout 2023, having increased slightly at the start of
the year, largely driven by legacy vintages, where there is a
high concentration of variable rate customers. The Group is
proactively monitoring existing mortgage customers as they
reach the end of fixed rate deals with customers’ immediate
behaviour remaining stable
• Total loans and advances decreased to £307.3 billion
(31 December 2022: £312.3 billion), with an increase in average
LTV. The proportion of balances with a LTV greater than 90 per
cent increased. The average LTV of new business remained
stable
• Updated macroeconomic assumptions within the ECL model,
most notably to account for more resilient house price
performance than previously anticipated, resulted in a net
impairment release of £51 million for 2023 compared to a
charge of £295 million for 2022. Total ECL coverage remained
stable at 0.4 per cent (31 December 2022: 0.4 per cent)
• Favourable macroeconomic updates also result in reductions
to Stage 2 loans and advances to 12.5 per cent of the portfolio
(31 December 2022: 13.4 per cent), largely from up to date loans,
and Stage 2 ECL coverage falling slightly to 1.0 per cent
(31 December 2022: 1.3 per cent)
• Stage 3 loans and advances increased to 1.4 per cent of the
portfolio (31 December 2022: 1.1 per cent) due to increases in
legacy variable rate customers triggering 90 days past due.
Stage 3 ECL coverage decreased to 8.2 per cent (31 December
2022: 9.1 per cent) due to the favourable macroeconomic
outlook
Credit cards
• Credit cards balances increased to £15.8 billion (31 December
2022: £15.0 billion) due to continued recovery in customer
spend
• The credit card portfolio is a prime book, arrears rates are
broadly similar to pre-pandemic levels with continued strong
repayment rates
• Impairment charge of £457 million for 2023, is lower than the
charge of £571 million in 2022 as increased arrears and default
flows as a result of high inflation and cost of living pressures
have not emerged as previously anticipated. Total ECL
coverage remains stable at 5.1 per cent (31 December 2022:
5.1 per cent)
• Favourable updates to the macroeconomic outlook result in a
reduction in Stage 2 loans and advances to 18.4 per cent of the
portfolio (31 December 2022: 21.9 per cent), with Stage 2 ECL
coverage broadly stable at 15.3 per cent (31 December 2022:
14.5 per cent)
• Resilient underlying arrears and default performance has also
resulted in stable Stage 3 loans and advances at 1.8 per cent of
the portfolio (31 December 2022: 1.9 per cent) and Stage 3 ECL
coverage increased to 45.8 per cent (31 December 2022: 39.1
per cent)
Loans and overdrafts
• Loans and advances for personal current account and the
personal loans portfolios reduced to £8.5 billion (31 December
2022: £10.3 billion) driven by a £2.7 billion securitisation in the
loans portfolio
• Impairment charge of £251 million for 2023 is lower than the
charge of £499 million for 2022 again due to favourable
macroeconomic updates
• ECL coverage levels at a total level and by individual stage all
remain broadly stable
UK Motor Finance
• The UK Motor Finance portfolio increased to £15.7 billion
(31 December 2022: £14.6 billion), with lower new car supply
versus pre-COVID being offset by used vehicle sales
• Updates to Residual Value (RV) and Voluntary Termination (VT)
risk held against Personal Contract Purchase (PCP) and Hire
Purchase (HP) lending are included within the impairment
charge. Recent falls in used car prices have resulted in a
notable increase in this item to £187 million as at 31 December
2023 (31 December 2022: £92 million)
• Updates to account for adverse used car price performance,
including RV/VT risk, result in an impairment charge of
£169 million for 2023 that is materially higher than a credit of
£2 million for 2022, which benefited from more stable used car
prices, partially driven by global supply issues following the
pandemic
• ECL coverage levels at a total level and by individual stage all
increased. Total ECL coverage to 2.2 per cent (31 December
2022: 1.7 per cent), Stage 2 ECL coverage to 4.5 per cent
(31 December 2022:3.4 per cent) and Stage 3 ECL to 56.3 per
cent (31 December 2022: 52.6 per cent)
Other
• Other loans and advances increased slightly to £16.6 billion
(31 December 2022: £14.8 billion)
• Stage 3 loans and advances remain stable at 0.9 per cent
(31 December 2022: 1.1 per cent) and Stage 3 coverage at
32.6 per cent (31 December 2022: 33.1 per cent)
• There was a net impairment charge of £5 million for 2023
compared to a charge of £10 million for 2022
Risk management continued
44
Lloyds Bank plc Annual Report and Accounts 2023
Retail UK mortgages loans and advances to customers1
At 31 Dec
2023
£m
At 31 Dec
2022
£m
Mainstream
254,416
253,283
Buy-to-let
47,549
51,529
Specialist
5,355
7,526
Total
307,320
312,338
1Balances include the impact of HBOS-related 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 2023, owner occupier interest-only balances as a proportion of total owner occupier balances had reduced to 14.4 per cent
( 31 December 2022:16.4 per cent). The average indexed loan to value remained low at 36.9 per cent (31 December 2022:35.5 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
At 31 Dec
2023
At 31 Dec
2022
Interest-only balances (£m)
37,278
42,697
Stage 1 (%)
54.7
58.5
Stage 2 (%)
27.6
25.3
Stage 3 (%)
5.6
3.7
Purchased or originated credit-impaired (%)
12.1
12.5
Average loan to value (%)
36.9
35.5
Maturity profile (£m)
Due
1,982
1,931
Within 1 year
1,129
1,453
2 to 5 years
8,803
8,832
6 to 10 years
13,918
16,726
Greater than 10 years
11,446
13,755
Past term interest-only balances1 (£m)
1,925
1,906
Stage 1 (%)
0.2
0.2
Stage 2 (%)
9.3
11.9
Stage 3 (%)
52.2
45.6
Purchased or originated credit-impaired (%)
38.4
42.3
Average loan to value (%)
35.2
33.2
Negative equity (%)
2.6
2.0
1Balances where all interest-only elements have moved past term. Some may subsequently have had a term extension, so are no longer classed as due.
Risk management continued
45
Lloyds Bank plc Annual Report and Accounts 2023
Retail forbearance
The basis of disclosure for forbearance is aligned to definitions used in the European Banking Authority’s FINREP reporting. Total
forbearance for the major retail portfolios has reduced by £0.4 billion to £3.9 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.
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 remain broadly static at 1.1 per cent at 31 December 2023 (31 December
2022: 1.2 per cent).
Total expected credit losses (ECL) as a proportion of loans and advances which are forborne has remained stable at 8.8 per cent
(31 December 2022: 8.8 per cent).
Retail forborne loans and advances (audited)
Total
£m
Of which
Stage 2
£m
Of which
Stage 3
£m
Of which POCI
£m
Expected
credit losses
as a % of
total loans
and advances
which are
forborne1
%
At 31 December 2023
UK mortgages
3,269
695
1,008
1,552
4.1
Credit cards
268
89
141
–
32.5
Loans and overdrafts
275
107
108
–
35.5
UK Motor Finance
70
36
32
–
30.7
Total
3,882
927
1,289
1,552
8.8
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
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 and Loans
and overdrafts (31 December 2023: £55 million; 31 December 2022: £80 million).
Risk management continued
46
Lloyds Bank plc Annual Report and Accounts 2023
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 limited deterioration, especially in consumer-
led sectors, these are not considered to be material
• The Group is cognisant of a number of risks and headwinds
associated with a heightened inflationary and interest rate
environment especially in, but not limited to, sectors reliant
upon consumer discretionary spend. Risks include, but are not
limited to, reduced asset valuation and refinancing risk, a
reduction in market liquidity impacting credit supply and
pressure on both household discretionary spending and
business margins
• 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 clients
continue to be supported in the right way and the Group is
protected
• The Group continues to provide early support to its more
vulnerable customers through focused risk management via
its Watchlist and Business Support framework, within which
volumes have increased marginally in 2023. The Group
continues to balance prudent risk appetite with ensuring
support for financially viable clients
Impairments
• There was a net impairment release of £483 million in 2023,
compared to a net impairment charge of £471 million in 2022.
This largely reflects the full repayment of debt from a single
name client in the fourth quarter offset by additional charges
on existing Stage 3 clients
• ECL allowances decreased in the year to £1,137 million at
31 December 2023 (31 December 2022: £1,791 million). The ECL
provision at 31 December 2023 includes the capture of the
impact of inflationary pressures and heightened interest rates
and assumes additional losses will emerge as a result of these
and other emerging risks, through the multiple economic
scenarios
• Stage 2 loans and advances decreased to £7,793 million
(31 December 2022: £10,432 million), largely as a result of
improvements in the Group’s forward-looking modelled
macroeconomic assumptions, with 92.7 per cent of Stage 2
balances up to date (31 December 2022:94.6 per cent). Stage 2
as a proportion of total loans and advances to customers
decreased to 10.6 per cent (31 December 2022: 13.7 per cent).
Stage 2 ECL coverage was higher at 5.7 per cent (31 December
2022: 4.6 per cent) with the increase in coverage largely a
result of the change in the forward-looking multiple economic
scenarios
• Stage 3 loans and advances reduced to £2,058 million
(31 December 2022: £3,348 million) and as a proportion of total
loans and advances to customers, reduced to 2.8 per cent
(31 December 2022: 4.4 per cent). Stage 3 ECL coverage
reduced to 20.4 per cent (31 December 2022: 32.0 per cent).
These reductions are largely driven by the full repayment of
debt from a single name client
Commercial Banking UK Real Estate
• Commercial Banking UK Real Estate committed drawn lending
stood at £9.7 billion at 31 December 2023 (net of £3.6 billion
exposures subject to protection through Significant Risk
Transfer (SRT) securitisations). In addition there are undrawn
lending facilities of £2.8 billion to predominantly investment
grade rated corporate customers
• 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 £6.7 billion to social housing
providers are also excluded
• Despite some headwinds, including the inflationary
environment and the impact of heightened interest rates, the
portfolio continues to remain well-positioned and proactively
managed with conservative LTVs, good levels of interest cover
and appropriate risk mitigants in place
• Overall performance of the portfolio has remained resilient. The
Group has seen an increase in cases in its more closely
monitored Watchlist category, however this has only translated
into a modest flow into Business Support. Rent collection has
largely stabilised, although challenges remain in some sectors
• Lending continues to be heavily weighted towards investment
real estate (c.91 per cent) rather than development. Of these
investment exposures, c.90 per cent have an LTV of less than
70 per cent, with an average LTV of 46 per cent. The average
interest cover ratio was 3.3 times, with 78 per cent having
interest cover of above 2 times. In SME, LTV at origination has
been typically limited to c.55 per cent, given prudent
repayment cover criteria (including notional base rate stress)
• The portfolio is well diversified with no speculative commercial
development lending (defined as property not pre-sold or pre-
let at a level to fully repay the debt or generate sufficient
income to meet the minimum interest cover requirements).
Approximately 49 per cent of exposures relate to commercial
real estate, including c.14 per cent secured by office assets, c.10
per cent by retail assets and c.12 per cent by industrial assets.
Approximately 49 per cent of the portfolio relates to residential
• Recognising this is a cyclical sector, total (gross and net) and
asset type quantum caps are in place to control origination
and exposure, including several asset type categories. Focus
remains on the UK market and new business has been written
in line with a prudent risk appetite criteria including
conservative LTVs, strong quality of income and proven
management teams. Development lending criteria also
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
• Use of SRT securitisations also acts as a risk mitigant in this
portfolio, with run-off of these carefully managed
and sequenced
Risk management continued
47
Lloyds Bank plc Annual Report and Accounts 2023
LTV – UK Real Estate
At 31 December 20231,2
At 31 December 20221,2
Stage 1 and 2
£m
Stage 3
£m
Total
£m
Total
%
Stage 1 and 2
£m
Stage 3
£m
Total
£m
Total
%
Investment exposures
Less than 60 per cent
6,043
39
6,082
77.8
7,721
47
7,768
91.0
60 per cent to 70 per cent
955
9
964
12.3
452
9
461
5.4
70 per cent to 80 per cent
175
13
188
2.4
58
–
58
0.7
80 per cent to 100 per cent
96
45
141
1.8
17
13
30
0.4
100 per cent to 120 per cent
19
64
83
1.1
8
23
31
0.4
120 per cent to 140 per cent
11
38
49
0.6
1
–
1
–
Greater than 140 per cent
20
20
40
0.5
13
54
67
0.8
Unsecured3
269
–
269
3.4
115
–
115
1.3
Subtotal
7,588
228
7,816
100.0
8,385
146
8,531
100.0
Other 4
369
19
388
346
13
359
Total investment
7,957
247
8,204
8,731
159
8,890
Development
776
71
847
900
7
907
UK Government Supported Lending5
158
3
161
278
5
283
Total
8,891
321
9,212
9,909
171
10,080
1 Excludes Commercial Banking UK Real Estate exposures subject to protection through Significant Risk Transfer transactions.
2 Excludes £0.5 billion in Business Banking (31 December 2022: £0.6 billion).
3 Predominantly Investment grade corporate CRE lending where the Group is relying on the corporate covenant.
4 Mainly lower value transactions where LTV not recorded on Commercial Banking UK Real Estate monitoring system.
5 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 2023
At 31 December 2022
Total
£m
Of which
Stage 3
£m
Total
£m
Of which
Stage 3
£m
Type of forbearance
Refinancing
40
40
13
11
Modification
2,339
1,896
3,460
2,884
Total
2,379
1,936
3,473
2,895
Risk management continued
48
Lloyds Bank plc Annual Report and Accounts 2023
Data risk
Definition
Data risk is defined as the risk of the Group failing to effectively
govern, manage and protect its data throughout its lifecycle,
including data processed by third parties, or failure to drive value
from data; leading to unethical decision making, poor customer
outcomes, loss of value to the Group and mistrust.
Exposures
Data risk is present in all aspects of the business where data is
processed, both within the Group and by third parties including
colleague and contractor, and prospective and existing
customers. Data risk manifests:
• When data policies, standards and governance are not
adhered to
• When data is processed and fails to meet compliance
requirements, for example the General Data Protection
Regulations (GDPR) and other data regulatory obligations
• When data-related issues such as quality are not identified,
assessed and managed appropriately
• When data is not created, retained, protected, destroyed or
retrieved appropriately
Measurement
Data risk covers data governance, data management and data
privacy and ethics and is measured through a series of
quantitative and qualitative metrics.
Mitigation
The Group continues to invest to reduce data risk exposure to
within appetite. Examples include:
• Delivering a data strategy
• Enhancing data quality and capability
• Embedding data by design and ethics
Monitoring
The Group continues to monitor and respond to data-related
regulatory initiatives, such as the new Digital Protection and Digital
Information Bill expected in 2024, and other legal regimes, for
example, the European Commission’s Artificial Intelligence Act.
Data risk is governed through Group and sub-group committees.
Significant issues are escalated to Group Risk Committee, in
accordance with the Lloyds Banking Group’s enterprise risk
management framework, and RCSA frameworks.
A number of activities support the close monitoring of data risk
including:
• Design and monitoring of data risk appetite metrics, including
key risk and performance indicators
• Monitoring of significant data-related issues, complaints,
events and breaches in accordance with Group Operational
Risk and Data policies
• Identification and mitigation of data risk when planning and
implementing transformation or business change
Funding and liquidity risk
Definition
Funding risk is defined as the risk that the Group does not have
sufficiently stable and diverse sources of funding or the funding
structure is inefficient . 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.
Exposure
Liquidity exposure represents the potential stressed outflows in
any future period less expected inflows. The Group considers
liquidity exposure from both an internal and a regulatory
perspective.
Measurement
Liquidity risk is managed through a series of measures, tests and
reports that are primarily based on contractual maturities with
behavioural overlays as appropriate. The Group undertakes
quantitative and qualitative analysis of the behavioural aspects of
its assets and liabilities in order to reflect their expected
behaviour.
Mitigation
The Group manages and monitors liquidity risks and ensures that
liquidity risk management systems and arrangements are
adequate with regard to the internal risk appetite, Group strategy
and regulatory requirements. Liquidity policies and procedures
are subject to independent internal oversight by Risk. Overseas
branches and subsidiaries of the Group may also be required to
meet the liquidity requirements of the entity’s domestic country.
Management of liquidity requirements is performed by the
overseas branch or subsidiary in line with Group policy. The Group
plans funding requirements over its planning period, combining
business as usual and stressed conditions. The Group manages its
liquidity position paying regard to its internal risk appetite, Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as
required by the PRA, the Capital Requirements Directive (CRD IV)
and the Capital Requirements Regulation (CRR) liquidity
requirements.
The Group’s funding and liquidity position is underpinned by its
significant customer deposit base and is supported by strong
relationships across customer segments. The Group has
consistently observed that, in aggregate, the retail deposit base
provides a stable source of funding. Funding concentration by
counterparty, currency and tenor is monitored on an ongoing
basis and, where concentrations do exist, these are managed as
part of the planning process and limited by the internal funding
and liquidity risk monitoring framework, with analysis regularly
provided to senior management.
To assist in managing the balance sheet, the Group operates a
Liquidity Transfer Pricing (LTP) process which: allocates relevant
interest expenses from the centre to the Group’s banking
businesses within the internal management accounts; helps drive
the correct inputs to customer pricing; and is consistent with
regulatory requirements. LTP makes extensive use of behavioural
maturity profiles, taking account of expected customer loan
prepayments and stability of customer deposits, modelled on
historic data.
The Group can monetise liquid assets quickly, either through the
repurchase agreements (repo) market or through outright sale. 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.
Risk management continued
49
Lloyds Bank plc Annual Report and Accounts 2023
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 2023 liquidity stress testing
results refer to page 53.
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 2023
The Group has maintained its strong funding and liquidity position
with a loan to deposit ratio of 98 per cent as at 31 December 2023
(98 per cent as at 31 December 2022) .
The Group’s liquid assets continue to exceed the regulatory
minimum and internal risk appetite, with a liquidity coverage ratio
(LCR) of 133 per cent (based on a monthly rolling average over the
previous 12 months) as at 31 December 2023.
Overall, wholesale funding totalled £70.4 billion as at 31 December
2023 (31 December 2022: £69.0 billion). 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 2023 (31 December 2022: £30.0 billion),
with maturities in 2025, 2027 and beyond.
The Group’s credit ratings continue to reflect the strength of its
business model and balance sheet. The rating agencies continue
to monitor the impact of economic conditions and elevated rates
for the UK banking sector. The strength of the Group’s
management and franchise, along with its robust financial
performance, capital and funding position, are reflected in the
Group’s strong ratings.
Risk management continued
50
Lloyds Bank plc Annual Report and Accounts 2023
Lloyds Bank Group funding requirements and sources
At 31 Dec
2023
£bn
At 31 Dec
2022
£bn
Lloyds Bank Group funding position
Cash and balances at central banks
57.9
72.0
Loans and advances to banks
8.8
8.4
Loans and advances to customers
433.1
435.6
Reverse repurchase agreements – non-trading
32.8
39.3
Debt securities at amortised cost
12.5
7.3
Financial assets at fair value through other comprehensive income
27.3
22.8
Other assets1
33.0
31.5
Total Lloyds Bank Group assets
605.4
616.9
Less other liabilities1
(12.6)
(11.7)
Funding requirements
592.8
605.2
Wholesale funding2
70.4
69.0
Customer deposits
442.0
446.2
Repurchase agreements – non-trading
7.7
18.6
Term Funding Scheme with additional incentives for SMEs (TFSME)
30.0
30.0
Deposits from fellow Lloyds Banking Group undertakings
2.3
2.3
Total equity
40.4
39.1
Funding sources
592.8
605.2
1Other assets and other liabilities primarily include the fair value of derivative assets and liabilities.
2The 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 £0.6 billion (31 December 2022: £0.7 billion).
Reconciliation of Lloyds Bank Group funding to the balance sheet (audited)
Included
in funding
analysis
£bn
Cash
collateral
received1
£bn
Fair value
and other
accounting
methods2
£bn
Balance
sheet
£bn
At 31 December 2023
Deposits from banks
2.8
0.6
0.2
3.6
Debt securities in issue at amortised cost
59.3
–
(6.9)
52.4
Subordinated liabilities
8.3
–
(1.4)
6.9
Total wholesale funding
70.4
0.6
Customer deposits
442.0
–
–
442.0
Total
512.4
0.6
At 31 December 2022
Deposits from banks
4.0
0.7
–
4.7
Debt securities in issue at amortised cost
56.8
–
(7.7)
49.1
Subordinated liabilities
8.2
–
(1.6)
6.6
Total wholesale funding
69.0
0.7
Customer deposits
446.2
–
–
446.2
Total
515.2
0.7
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.
Risk management continued
51
Lloyds Bank plc Annual Report and Accounts 2023
Analysis of 2023 total wholesale funding by residual maturity
Up to 1
month
£bn
1 to 3
months
£bn
3 to 6
months
£bn
6 to 9
months
£bn
9 to 12
months
£bn
1 to 2
years
£bn
2 to 5
years
£bn
Over
five years
£bn
Total
at 31 Dec
2023
£bn
Total
at 31 Dec
2022
£bn
Deposits from banks
1.7
0.9
0.1
–
0.1
–
–
–
2.8
4.0
Debt securities in issue:
Certificates of deposit
0.1
1.0
1.3
0.5
0.2
–
–
–
3.1
1.6
Commercial paper
1.2
4.1
1.7
1.3
0.1
–
–
–
8.4
9.0
Medium-term notes
0.1
–
3.0
1.6
1.9
5.8
7.2
9.9
29.5
29.1
Covered bonds
–
1.1
1.1
–
0.5
2.2
7.0
2.2
14.1
14.2
Securitisation
–
–
–
0.1
–
0.1
3.4
0.6
4.2
2.9
1.4
6.2
7.1
3.5
2.7
8.1
17.6
12.7
59.3
56.8
Subordinated liabilities
–
–
–
–
–
0.9
2.8
4.6
8.3
8.2
Total wholesale funding1
3.1
7.1
7.2
3.5
2.8
9.0
20.4
17.3
70.4
69.0
1The 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 £0.6 billion (31 December 2022: £0.7 billion).
Total wholesale funding by currency (audited)
Sterling
£bn
US Dollar
£bn
Euro
£bn
Other
currencies
£bn
Total
£bn
At 31 December 2023
19.8
25.7
17.8
7.1
70.4
At 31 December 2022
17.0
28.0
18.1
5.9
69.0
Analysis of 2023 term issuance (audited)
Sterling
£bn
US Dollar
£bn
Euro
£bn
Other
currencies
£bn
Total
£bn
Securitisation1
2.1
–
–
–
2.1
Covered bonds
2.2
–
0.9
0.4
3.5
Senior unsecured notes
–
3.2
1.9
1.3
6.4
Subordinated liabilities
–
–
–
0.7
0.7
Additional tier 1
0.8
–
–
–
0.8
Total issuance
5.1
3.2
2.8
2.4
13.5
1 Includes significant risk transfer securitisations.
Risk management continued
52
Lloyds Bank plc Annual Report and Accounts 2023
Liquidity portfolio
At 31 December 2023, the Group had £108.7 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 2022: £120.8 billion), of which £104.4 billion is LCR level 1 eligible (31
December 2022: £117.0 billion) and £4.3 billion is LCR level 2 eligible (31 December 2022: £3.8 billion). These assets are available to meet
cash and collateral outflows and regulatory requirements.
LCR eligible assets
Average
20231
£bn
20221
£bn
Cash and central bank reserves
63.3
66.0
High quality government/MDB/agency bonds2
38.4
48.9
High quality covered bonds
2.7
2.1
Level 1
104.4
117.0
Level 23
4.3
3.8
Total LCR eligible assets
108.7
120.8
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 banks (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 2023
Level 1
76.1
8.9
19.4
–
104.4
Level 2
1.7
1.9
0.5
0.2
4.3
Total1
77.8
10.8
19.9
0.2
108.7
At 31 December 2022
Level 1
91.4
8.4
17.1
0.1
117.0
Level 2
0.9
1.4
0.4
1.1
3.8
Total1
92.3
9.8
17.5
1.2
120.8
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 to
external market conditions.
Stress testing results
Internal liquidity stress testing results at 31 December 2023 (calculated as an average of month end observations over the previous 12
months) showed that the Group had liquidity resources representing 127 per cent of modelled outflows under the Group’s most severe
liquidity stress scenario (31 December 2022: 141 per cent). The decrease in ratio is explained primarily by an increase in modelled stress
outflows.
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.
Risk management continued
53
Lloyds Bank plc Annual Report and Accounts 2023
Market risk
Definition
Market risk is defined as the risk that the Group’s capital or
earnings profile is adversely affected by changes in market rates
or prices, including, but not limited to, interest rates, foreign
exchange and credit spreads.
Measurement
Group risk appetite is calibrated primarily to a number of multi-
risk Group economic scenarios, and is supplemented with
sensitivity-based measures. The scenarios assess the impact of
unlikely, but plausible, adverse stresses on income with the worst
case for banking activities, defined benefit pensions and trading
portfolios reported against independently, and across the Group
as a whole.
The Group risk appetite is cascaded first to the Group Asset and
Liability Committee (GALCO), chaired by the Chief Financial Officer,
where risk appetite is approved and monitored by risk type, and
then to the Group Market Risk Committee (GMRC) where risk
appetite is sub-allocated by business unit. These metrics are
reviewed regularly by senior management to inform effective
decision making.
Mitigation
GALCO is responsible for approving and monitoring market risk
management techniques, market risk measures, behavioural
assumptions, and the market risk policy. Various mitigation
activities are assessed and undertaken across the Group to
manage portfolios and seek to ensure they remain within
approved limits. The mitigation actions will vary dependent on
exposure but will, in general, look to reduce risk in a cost effective
manner by offsetting balance sheet exposures and externalising
to the financial markets dependent on market liquidity. The
market risk policy is owned by Group Corporate Treasury (GCT)
and refreshed annually. The policy is underpinned by
supplementary market risk procedures, which define specific
market risk management and oversight requirements.
Monitoring
GALCO and GMRC regularly review high level market risk exposures
as part of the wider risk management framework. They also make
recommendations to the Board concerning overall market risk
appetite and market risk policy. Exposures at lower levels of
delegation are monitored at various intervals according to their
volatility, from daily in the case of trading portfolios to monthly or
quarterly in the case of less volatile portfolios. Levels of exposures
compared to approved limits and triggers are monitored by Risk
and appropriate escalation procedures are in place.
How market risks arise and are managed across the Group’s
activities is considered in more detail below.
Banking activities
Exposures
The Group’s banking activities expose it to the risk of adverse
movements in market rates or prices, predominantly interest
rates, credit spreads, exchange rates and equity prices. The
volatility of market rates or prices can be affected by both the
transparency of prices and the amount of liquidity in the market
for the relevant asset, liability or instrument.
Interest rate risk
Yield curve risk in the Group’s divisional portfolios, and in the
Group’s capital and funding activities, arises from the different
repricing characteristics of the Group’s non-trading assets,
liabilities and off-balance sheet positions.
Basis risk arises from the potential changes in spreads between
indices, for example where the bank lends with reference to a
central bank rate but funds with reference to a market rate, for
example, SONIA, and the spread between these two rates widens
or tightens.
Optionality risk arises predominantly from embedded optionality
within assets, liabilities or off-balance sheet items where either
the Group or the customer can affect the size or timing of cash
flows. One example of this is mortgage prepayment risk where the
customer owns an option allowing them to prepay when it is
economical to do so. This can result in customer balances
amortising more quickly or slowly than anticipated due to
customers’ response to changes in economic conditions.
Foreign exchange risk
Economic foreign exchange exposure arises from the Group’s
investment in its overseas operations (net investment exposures
are disclosed in note 38 on page 151). In addition, the Group incurs
foreign exchange risk through non-functional currency flows from
services provided by customer-facing divisions, the Group’s debt
and capital management programmes and is exposed to
volatility in its CET1 ratio, due to the impact of changes in foreign
exchange rates on the retranslation of non-Sterling-denominated
risk-weighted assets.
Equity risk
Equity risk arises primarily from exposure to the Lloyds Banking
Group share price through deferred shares and deferred options
granted to employees as part of their benefits package.
Credit spread risk
Credit spread risk arises largely from: (i) the liquid asset portfolio
held in the management of Group liquidity, comprising
government, supranational and other eligible assets; (ii) the Credit
Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA)
sensitivity to credit spreads; (iii) a number of the Group’s
structured medium-term notes where the Group has elected to
fair value the notes through the profit and loss account; and (iv)
banking book assets in Commercial Banking held at fair value
under IFRS 9.
Measurement
Interest rate risk exposure is monitored monthly using, primarily:
Market value sensitivity: this methodology considers all repricing
mismatches (behaviourally adjusted where appropriate) in the
current balance sheet and calculates the change in market value
that would result from an instantaneous 25, 100 and 200 basis
points parallel rise or fall in the yield curve. Sterling interest rates
are modelled with a floor below zero per cent, with negative rate
floors also modelled for non-Sterling currencies where
appropriate (product-specific floors apply). The market value
sensitivities are calculated on a static balance sheet using
principal cash flows excluding interest, commercial margins and
other spread components and are therefore discounted at the
risk-free rate.
Interest income sensitivity: this measures the impact on future net
interest income arising from various economic scenarios. These
include instantaneous 25, 100 and 200 basis point parallel shifts in
all yield curves and the Group economic scenarios. Sterling
interest rates are modelled with a floor below zero per cent, with
negative rate floors also modelled for non-Sterling currencies
where appropriate (product-specific floors apply). These
scenarios are reviewed every year and are designed to replicate
severe but plausible economic events, capturing risks that would
not be evident through the use of parallel shocks alone such as
basis risk and steepening or flattening of the yield curve.
Unlike the market value sensitivities, the interest income
sensitivities incorporate additional behavioural assumptions as to
how and when individual products would reprice in response to
changing rates.
Reported sensitivities are not necessarily predictive of future
performance as they do not capture additional management
actions that would likely be taken in response to an immediate,
large, movement in interest rates. These actions could reduce the
net interest income sensitivity, help mitigate any adverse impacts
or they may result in changes to total income that are not
captured in the net interest income.
Structural hedge: the structural hedging programme managing
interest rate risk in the banking book relies on assumptions made
around customer behaviour. A number of metrics are in place to
monitor the risks within the portfolio.
Risk management continued
54
Lloyds Bank plc Annual Report and Accounts 2023
The Group has an integrated Asset and Liability Management (ALM) system which supports non-traded asset and liability management
of the Group. This provides a single consolidated tool to measure and manage interest rate repricing profiles (including behavioural
assumptions), perform stress testing and produce forecast outputs. The Group is aware that any assumptions-based model is open to
challenge.
A full behavioural review is performed annually, or in response to changing market conditions, to ensure the assumptions remain
appropriate and the model itself is subject to annual re-validation, as required under Lloyds Banking Group’s 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.
Lloyds Bank Group Banking activities: market value sensitivity (audited)
2023
2022
Up
25bps
£m
Down
25bps
£m
Up
100bps
£m
Down
100bps
£m
Up
25bps
£m
Down
25bps
£m
Up
100bps
£m
Down
100bps
£m
Sterling
7.2
(7.6)
26.9
(33.2)
0.4
(1.1)
(2.2)
(9.1)
US Dollar
(1.3)
1.3
(5.0)
5.6
(0.1)
0.2
(0.3)
0.9
Euro
(2.6)
0.6
(9.9)
2.4
(2.0)
–
(7.6)
0.1
Other
(0.2)
0.2
(0.9)
0.9
–
–
(0.1)
0.1
Total
3.1
(5.5)
11.1
(24.3)
(1.7)
(0.9)
(10.2)
(8.0)
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 has increased year-on-year as a result of small differences in the hedging profile of fixed mortgages.
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.
Lloyds Bank Group Banking activities: market value sensitivity to a steepening and flattening of the yield curve (audited)
2023
2022
Steepener
£m
Flattener
£m
Steepener
£m
Flattener
£m
Sterling
19.7
(23.6)
67.8
(78.2)
US Dollar
(3.8)
3.9
(7.6)
7.8
Euro
(4.1)
(0.9)
(7.7)
2.9
Other
0.5
(0.5)
0.1
(0.1)
Total
12.3
(21.1)
52.6
(67.6)
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, up 50 and down 50 basis points change to all interest rates.
Lloyds Bank Group Banking activities: three year net interest income sensitivity (audited)
2023
2022
Year 1
£m
Year 2
£m
Year 3
£m
Year 1
£m
Year 2
£m
Year 3
£m
Up 50bps
252
403
577
287
505
724
Up 25 bps
126
202
288
143
252
361
Down 25bps
(155)
(198)
(283)
(174)
(253)
(361)
Down 50bps
(309)
(395)
(565)
(348)
(505)
(721)
Risk management continued
55
Lloyds Bank plc Annual Report and Accounts 2023
Year 1 net interest income sensitivity, to both up and down shocks,
has decreased slightly year-on-year mostly as a result of
changing customer deposit behaviour and structural hedge
activity.
The three year net interest income sensitivity to an up 25 basis
points and 50 basis points shock is largely due to reinvestment of
structural hedge maturities in years two and three.
The sensitivities are illustrative and do not reflect new business
margin implications and/or pricing actions, other than as outlined.
The following assumptions have been applied:
• Instantaneous parallel shift in interest rate curve, including
bank base rate
• Balance sheet remains constant
• Illustrative 50 per cent pass-through on deposits and 100 per
cent pass-through on assets, which could be different in
practice
Basis risk, foreign exchange, equity and credit spread risks are
measured primarily through scenario analysis by assessing the
impact on profit before tax over a 12-month horizon arising from a
change in market rates, and reported within the Board risk
appetite on a monthly basis. Supplementary measures such as
sensitivity and exposure limits are applied where they provide
greater insight into risk positions. Frequency of reporting
supplementary measures varies from daily to quarterly
appropriate to each risk type.
Mitigation
The Group’s policy is to optimise reward while managing its
market risk exposures within the risk appetite defined by the
Board. Lloyds Banking Group’s market risk policy and procedures
outlines the hedging process, and the centralisation of risk from
divisions into Group Corporate Treasury (GCT), for example via the
transfer pricing framework. GCT is responsible for managing the
centralised risk and does this through natural offsets of matching
assets and liabilities, and appropriate hedging activity of the
residual exposures, subject to the authorisation and mandate of
GALCO within the Board risk appetite. The hedges are externalised
to the market by derivative desks within GCT and the Commercial
Bank. The Group mitigates income statement volatility through
hedge accounting. This reduces the accounting volatility arising
from the Group’s economic hedging activities and any hedge
accounting ineffectiveness is continuously monitored.
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. Consistent with the Group’s strategy to deliver stable
returns, GALCO seeks to minimise large reinvestment risk, and to
smooth earnings over a range of investment tenors. 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 GALCO.
While the Group faces uncertainty in customer behaviour due to a
higher rate environment, its exposure to increased pipeline and
prepayment risks are managed through hedging in line with
expected customer behaviour. These are appropriately monitored
and controlled through divisional Asset and Liability Committees
(ALCOs).
Net investment foreign exchange exposures are managed
centrally by GCT, by hedging non-Sterling asset values with
currency borrowing. Economic foreign exchange exposures
arising from non-functional currency flows are identified by
divisions and transferred and managed centrally. The Group also
has a policy of forward hedging its forecasted currency profit and
loss to year end.
The Group makes use of both accounting and economic foreign
exchange exposures, as an offset against 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.
Monitoring
The appropriate limits and triggers are monitored by senior
executive committees within the Banking divisions. Banking assets,
liabilities and associated hedging are actively monitored and if
necessary rebalanced to be within agreed tolerances.
Defined benefit pension schemes
Exposures
The Group’s defined benefit pension schemes are exposed to
significant risks from their assets and liabilities. The liability
discount rate exposes the Group to interest rate risk and credit
spread risk, which are partially offset by fixed interest assets (such
as gilts and corporate bonds) and swaps. Equity and alternative
asset risk arises from direct asset holdings. Scheme membership
exposes the Group to longevity risk. Increases to pensions in
deferment and in payment expose the Group to inflation risk.
For further information on defined benefit pension scheme assets
and liabilities please refer to note 11 on page 99.
Measurement
The Group’s management of the schemes’ assets is the
responsibility of the Trustees of the schemes who are responsible
for setting the investment strategy and for agreeing funding
requirements with the Group. The Group will be liable for meeting
any funding deficit that may arise. As part of the triennial
valuation process, the Group will agree with the Trustees a
funding strategy to eliminate the deficit over an appropriate
period.
Longevity risk is measured using both 1-in-20 year stresses (risk
appetite) and 1-in-200 year stresses (regulatory capital).
Mitigation
The Group takes an active involvement in agreeing mitigation
strategies with the schemes’ Trustees. An interest rate and
inflation hedging programme is in place to reduce liability risk. The
schemes have also reduced equity allocation and invested the
proceeds in credit assets. The Trustees have put in place longevity
swaps to mitigate longevity risk. The merits of longevity risk
transfer and hedging solutions are reviewed regularly.
Monitoring
In addition to the wider risk management framework, governance
of the schemes includes a specialist pension committee.
The surplus, or deficit, in the schemes is tracked monthly along
with various single factor and scenario stresses which consider
the assets and liabilities holistically. Key metrics are monitored
monthly including the Group’s capital resources of the scheme,
the performance against risk appetite triggers, and the
performance of the hedged asset and liability matching positions.
Risk management continued
56
Lloyds Bank plc Annual Report and Accounts 2023
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 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 £0.07 million for 31 December 2023 compared to
£0.06 million for 31 December 2022.
Trading market risk measures are applied to all of the Group’s
regulatory trading books and they include daily VaR, sensitivity-
based measures, and stress testing calculations.
Measurement
The Group internally uses VaR as the primary risk measure for all
trading book positions.
The risk of loss measured by the VaR model is the loss in earnings
which is not expected to be exceeded with 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. 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.
The Group’s closing VaR, allowing for diversification, on 31
December 2023 across interest rate risk, foreign exchange risk,
equity risk, credit spread risk and inflation risk was less than £0.05
million. During the year ended 31 December 2023, the Group’s
minimum diversified VaR was less than £0.04 million, its average
VaR was £0.07 million and maximum VaR was £0.12 million.
For the year ended 31 December 2023, excluding the effects of
diversification, the maximum total VaR for all of the above risks
was £0.13 million, the average total VaR was £0.08 million and
minimum VaR was less than £0.04 million. The closing VaR on 31
December 2023, excluding the effects of diversification, was less
than £0.05 million.
For the year ended 31 December 2023, the average interest rate
risk VaR was £0.07 million, the maximum interest rate risk VaR was
£0.12 million and the minimum interest rate risk VaR was less than
£0.04 million. The minimum, maximum and average VaR for all
other risk types was less than £0.04 million. As at 31 December
2023, the closing VaR for all risk types was less than £0.05 million.
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.
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 is monitored daily against 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.
Risk management continued
57
Lloyds Bank plc Annual Report and Accounts 2023
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 and 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 remained elevated in 2023, following the pandemic
related government-led support schemes weakening the
relationships between model inputs and outputs in 2022. The
economy has steadied somewhat compared to 2022, now being
more typical of the environment used to build the models,
reducing need for judgemental overlays to account for this, but
many of the effects of the pandemic and other stresses to the
economy are still working their way through.
The control environment for model risk continues to be
strengthened to meet revised internal and regulatory
requirements. In addition, in common with the rest of the industry,
changes required to capital models following new regulations
have created 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
25 to 29 .
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 Lloyds Banking Group’s model
governance policy, which defines the mandatory requirements for
models across Lloyds Bank 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 Lloyds Banking 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.
Risk management continued
58
Lloyds Bank plc Annual Report and Accounts 2023
Operational risk
Definition
Operational risk is defined as the risk of loss 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 include:
• IT systems: including cyber-attacks, or the failure of IT systems
due to volume of change and/or aged infrastructure
• Fraud: including intentional acts of deception or omission by
external or internal parties
• Financial crime: including failures relating to anti-money
laundering, anti-bribery, counter-terrorist financing and
financial sanctions and prohibitions laws and regulations
• Security: including the confidentiality, integrity and/or
availability of the Group’s assets (such as physical, data and
information) being compromised
• Business process: including failed transaction processing or
process management
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 policies. This 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. This
is supplemented by Group level and local management
information and reporting across a suite of governed metrics.
The operational risk events by risk category table below shows
high level loss and event trends for the Group using Basel II
categories. Based on data captured on the Group’s RCSA, in 2023
the highest frequency of events occurred in external fraud with
91.08 per cent of the total volume. Clients, products and business
practices accounted for 52.54 per cent of losses by value.
Operational risk losses and scenario analysis is used to inform the
Internal Capital Adequacy Assessment Process (ICAAP). The Group
calculates its minimum (Pillar I) operational risk capital
requirements using The Standardised Approach (TSA). Pillar II is
calculated using internal and external loss data and extreme but
plausible scenarios that may occur in the next 12 months.
Mitigation
The Group continues to focus on risk management requirements
and developing the processes, systems and people skills and
capabilities needed to mitigate risks. Risks, including IT systems
and security-related risks, are reported and discussed at local
governance forums and escalated to executive management
and the Board as appropriate to ensure the correct level of
visibility and engagement. The Group employs a range of risk
management strategies, including: avoidance, mitigation, transfer
(including insurance) and acceptance within appetite or
tolerance. Where there is a reliance on third party suppliers to
provide services, including the areas of IT systems and
information security, Lloyds Banking Group’s sourcing policy
ensures that outsourcing initiatives follow a defined process
including due diligence, risk evaluation and ongoing assurance.
The Board has overall oversight responsibility for the Group’s IT
systems and information security risk management and
delegates this oversight to the Group Risk Committee (GRC). GRC
is responsible for ensuring that management has processes in
place designed to identify and evaluate IT systems and
information security risks that the Group is exposed to and
implementing processes and programmes to manage these risks
and mitigate related incidents within appetite. GRC also reports
material IT systems and information security risks to the Board via
the Board Risk Committee. Management is responsible for
identifying, considering and assessing material IT systems and
information security risks on an ongoing basis, establishing
processes to ensure that such potential risk exposures are
monitored, putting in place appropriate mitigation measures and
maintaining control improvement programmes.
The Group classifies the potential IT systems and information
security risk of its suppliers based on the nature and criticality of
the information accessed or processed. These assessments are
completed at initial service onboarding and periodically
throughout the supplier lifecycle. These assessments drive the
level of ongoing supplier governance, assurance and monitoring.
The Group provides training and other resources to its suppliers to
support IT systems and information security resiliency in its supply
chain. The Group also requires its suppliers to comply with its
standard information security terms and conditions as a
condition of doing business with it. Suppliers are required to
provide management information to review and assess any
potential information security related risks depending on the
nature of the services being provided.
Operational risk events by risk category (losses greater than or equal to £10,000)1
% of total volume
% of total losses
2023
2022
2023
2022
Business disruption and system failures
0.31
0.37
0.60
0.42
Clients, products and business practices
1.24
4.95
52.54
73.68
Damage to physical assets
0.07
0.15
0.09
0.03
Employee practices and workplace safety
0.31
0.49
0.43
0.09
Execution, delivery and process management
6.75
9.03
21.54
15.09
External fraud
91.08
84.75
24.77
10.64
Internal fraud
0.24
0.26
0.03
0.05
Total
100.00
100.00
100.00
100.00
1Excludes losses related to PPI and provisions; the latter are outlined in note 26 to the consolidated financial statements. 2022 breakdowns have been restated due to the
nature of the risk events which can evolve over time, such as the lag in operational losses.
Risk management continued
59
Lloyds Bank plc Annual Report and Accounts 2023
Mitigating actions to the principal operational risks include the
following:
• The Group has set out key controls, aligned to the Group’s risk
appetite, via its policies, procedures and enterprise risk
management framework, ensuring businesses assess the
potential impacts of activity on customers, markets, colleagues
and business risk profiles
• The Group adopts a risk-based approach to mitigate the
internal and external fraud risks it faces, reflecting the current
and emerging fraud risks within the market. Fraud risk appetite
metrics holistically cover the impacts of fraud in terms of
losses to the Group, costs of fraud systems and operations,
and customer experience of actual and attempted fraud.
Oversight of the appropriateness and performance of these
metrics is undertaken regularly through business area and
Group-level committees. This approach drives a continual
programme of prioritised enhancements to the Group’s
technology and process and people-related controls; with an
emphasis on preventative controls supported by real time
detective controls wherever feasible. Group-wide policies and
operational control frameworks are maintained and designed
to provide customer confidence, protect the Group’s
commercial interests and reputation, comply with legal
requirements and meet regulatory requirements. The Group’s
fraud awareness programme remains a key component of its
fraud control environment, and awareness of fraud risk is
supported by mandatory training for all colleagues. This is
further strengthened by material annual investment into both
technology and the personal development needs of
colleagues. The Group also plays an active role with other
financial institutions, industry bodies and law enforcement
agencies in identifying and combatting fraud
• The Group adopts a risk-based approach to mitigate cyber
threats it faces. The effective operation of the Group’s estate is
supported by an IT and Cyber Security Governance framework,
guided by a threat-based strategy which underpins
investment decisions. The ongoing protection of the estate and
confidentiality of material information is ensured through
adherence to the Lloyds Banking Group Security Policy which
has been aligned to industry good practice including the NIST
Cyber Security Framework; and material laws and regulations.
The Group’s IT systems and information security risk
management processes, which includes assessment,
documentation and treatment have been integrated into its
overall enterprise risk management framework. The Group
engages a specialist third party consultancy on a periodic
basis, to assess the maturity of its cyber security programme,
in assessing, identifying and managing material risks from
cybersecurity threats. During the handling of an incident, the
Cyber Security team will continuously monitor and assess the
impact to the Group. Thresholds have been set that, once
triggered, will bring the information security risk owning
business representatives, legal and compliance teams
together as a subcommittee. The subcommittee will own the
invocation of crisis management, Board notification and the
drafting of any regulatory notifications. In the event of a major
information security incident, including those with a material
impact on the Group, the Chief Security Officer (CSO)
maintains engagement with the executive, supported by the
Group incident management teams
• The Group has adopted policies and procedures designed to
detect and prevent the use of its banking network for money
laundering, terrorist financing, bribery, tax evasion, human
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 Integrated
Intelligence and Investigations team and external agencies
and other financial institutions. The Group economic crime
prevention policy prohibits the payment, offer, acceptance or
request of a bribe, including ‘facilitation payments’ by any
employee or agent and provides a confidential reporting
service for anonymous reporting of suspected or actual
bribery activity. The Group economic crime prevention policy
also sets out a framework of controls for compliance with legal
and regulatory sanctions
• In addition to its efforts internally, the Group also contributes to
economic crime prevention by supporting and championing
industry-level activity, including:
– Representing large retail banks at the National Economic
Crime Centre (NECC) led Public Private Operating Board
(PPOB); co-chairing the Public Private Threat Group leading
the UK’s response to money laundering; chairing the Joint
Money Laundering Intelligence Taskforce (JMLIT) senior
management team and providing expert resource to the
NECC’s operational threat cells
– Collaborating with peer bank to take forward the second
phase of data fusion (large-scale information sharing and
analysis) with the National Crime Agency (NCA)
– Holding bilateral discussions with the Home Office on using
suspected criminal funds to fund economic crime initiatives,
in advance of the provisions being included in the Criminal
Justice Bill
– In conjunction with UK Finance and peer banks, developing
a pilot to use the newly acquired information sharing
provisions contained within the Economic Crime and
Corporate Transparency Act
– Being an active member of UK Finance where the Group has
representation on every economic crime committee and
panel. This includes attending the Sanctions and Fraud
Committees, which are the industries’ primary forums for
considering and responding to issues of mutual interest
– Helping fund the Dedicated Card and Payment Crime Unit
to investigate fraud cases, target and where appropriate
arrest and gain prosecution of offenders
– Being a member of Cifas, the largest cross-sector fraud
sharing organisation, where the Group shares and receives
internal and first party fraud data to detect, deter and
prevent criminals exploiting our banking facilities
– Engagement with Europol and International Law
Enforcement to share fraud and financial crime intelligence
– In partnership with the City of London Police, a pilot scheme
was launched to use the proceeds of crime to fund fraud-
fighting and victim support programmes: Cyber Detectives:
a primary school education programme on fraud and cyber
protection and Crooks on Campus: a fraud education
programme on money mules which brings to life the reality
of organised financial crime for university students
– The Group is an active supporter of Stop Scams UK. Working
in partnership with other banks, telecoms and technology
companies, the telephone hotline number - 159 - has been
rolled out across the UK with excellent results
Operational resilience risk on pages 61 to 62 , provides further
information on the mitigating actions for cyber and IT resilience.
Risk management continued
60
Lloyds Bank plc Annual Report and Accounts 2023
Monitoring
Monitoring and reporting of operational risk is undertaken at
Board, Group, legal entity and business unit and functional
committees. Each committee monitors key risks, control
effectiveness, indicators, events, operational losses, risk appetite
metrics and the results of independent testing conducted by Risk
division and/or Group Internal Audit. Additionally, the Group’s IT
and information security processes are validated and audited by
internal experts within the Risk function and Group Internal Audit.
The Group maintains a formal approach to operational risk event
escalation, whereby events are identified, captured and
escalated, where appropriate based on materiality. Root causes
of events are determined, and action plans put in place to ensure
an optimum level of control to keep customers and the business
safe, reduce costs, and improve efficiency.
The insurance policies are monitored and reviewed regularly, with
recommendations being made to the Group’s senior
management annually prior to each renewal. Insurers are
monitored on an ongoing basis, to ensure counterparty risk is
minimised. A process is in place to manage any insurer rating
changes or insolvencies.
Operational resilience risk
Definition
Operational resilience risk is defined as the risk that the Group fails
to design resilience into business operations including those that
are outsourced, underlying infrastructure and controls (people,
property, process, technology) so that it is able to withstand
external or internal events which could impact the continuation of
operations, and fails to respond in a way which meets customer
and stakeholder expectations and needs when the continuity of
operations is compromised.
Exposures
Ineffective operational resilience risk management could lead to
important services not being available to customers, and in
extreme circumstances, bank failure could result. The Group has in
place a transparent and effective operating model to identify,
monitor and test important business services and critical business
processes from a customer, Group and systemic perspective. The
failure to adequately build resilience into an important business
service or critical business process may occur in a variety of ways,
including:
• The Group being overly reliant on one location to deliver a
critical business process
• The Group not having an adequate succession plan in place
for designated subject matter experts
• The Group being overly reliant on a supplier which fails to
provide a service
• A shortcoming in the Group’s ability to respond and/or recover
in a timely manner following a cyber incident
• The Group failing to upgrade its IT systems and leaving them
vulnerable to failure
Effective operational resilience ensures the Group designs
resilience into its systems, is able to withstand and/or recover
from a significant unexpected event occurring and can continue
to provide services to its customers. A significant outage could
result in customers being unable to access accounts or conduct
transactions, which as well as presenting significant reputational
risk for the Group would negatively impact the Group’s purpose.
Operational resilience is also an area of continued regulatory and
industry focus, similar in importance to financial resilience.
Failure to manage operational resilience effectively could impact
the following other risk categories:
• Regulatory compliance: non-compliance with new/existing
operational resilience regulations, for example, through failure
to identify emerging regulation or not embedding regulatory
requirements within the Group’s policies, processes and
procedures or identify further future emerging regulation
• Operational risk: being unable to safely provide customers with
business services
• Conduct risk: an operational resilience failure may render the
Group liable to fines from the FCA for poor conduct
• Market risk: the Group being unable to provide key services
could have ramifications for the wider market and could
impact share price
Measurement
Operational resilience risk is managed across the Group through
Lloyds Banking Group’s enterprise risk management framework
and operational risk policy and associated standards. Board risk
appetite metrics for operational resilience are in place and are
well understood. These specific measures are subject to ongoing
monitoring and reporting, including a mandatory review of
metrics and thresholds on at least an annual basis. To strengthen
the management of operational resilience risk, the Group
mobilised an operational resilience enhancement programme
which is designed to focus on end-to-end resilience and the
management of key risks to important processes.
Mitigation
The Group has increased its focus on operational resilience and
has updated its operational resilience strategy to reflect
changing priorities of both customers and regulators.
Furthermore, the Group is in the process of responding to the
publication of regulatory policy statements. Focus has been given
to ensure compliance, and existing frameworks have been
adapted to consider important business services and impact
tolerances. At the core of its approach to operational resilience
are the Group’s important business services and critical business
processes which drive activity, including scenario testing to
identify and drive remediation of vulnerabilities that could impact
delivery of an important business service. The Group continues to
maintain and develop playbooks that guide its response to a
range of interruptions from internal and external threats and tests
these through scenario-based testing and exercising.
Lloyds Banking Group’s strategy considers the evolving risk
management requirements, adapting the change delivery model
to be more agile and develop the people skills and capabilities
needed. The Group continues to review and invest in its control
environment to ensure it addresses the risks it faces. Risks are
reported and discussed at local governance forums and
escalated to executive management and the Board as
appropriate. The Group employs a range of risk management
strategies, including: avoidance, mitigation, transfer (including
insurance) and acceptance. Where there is a reliance on third
party suppliers to provide services, Lloyds Banking Group’s
sourcing policy ensures that outsourcing initiatives follow a
defined process including due diligence, risk evaluation and
ongoing assurance.
Mitigating actions to the principal operational resilience risk are:
Cyber: Whilst the Group did not identify any cyber threats that
materially affected its business strategy, results of operations or
financial condition in 2023, the Group remains exposed to the risk
of cyber threats and future interruptions that could potentially
disrupt business operations and materially adversely affect the
Group’s performance. The Board continues to invest heavily to
protect the Group from cyber-attacks. Investment continues to
focus on improving the Group’s approach to identity and access
management, data loss prevention, improving capability to
detect, respond and recover from cyber-attacks and improved
ability to manage vulnerabilities across the estate.
Risk management continued
61
Lloyds Bank plc Annual Report and Accounts 2023
To deal with cybersecurity threats, Lloyds Banking Group has a
dedicated Cyber Security function led by a certified CSO with over
12 years of experience in this field. The CSO actively participates in
Audit Committee and Board meetings and is responsible for
offering updates on information security risks and mitigation
strategies to the Board and its subcommittees. GRC is responsible
for the oversight of all risk policies, including the IT system and
information security policy and commissions regular reviews and
compliance updates to this policy. Additionally, the CSO chairs a
subcommittee comprised of stakeholders including, but not
limited to security representatives, risk management, compliance
and Group Internal Audit. This subcommittee is focused on
information security, to review major policy changes, strategies
and key risk mitigations to enhance the governance of the
information security strategies and policies.
IT resilience: the Group continues to optimise its approach to IT
and operational resilience by investing in technology
improvements and enhancing the resilience of systems that
support the Group’s critical business processes and important
business services, primarily through a portfolio of Technology
Resilience and Security Change programmes. The Board
optimises the role that resilient technology plays in maintaining
banking services across the wider industry. As such, the Board
dedicates considerable time and focus to this subject at both the
Board and the Board Risk Committee, and continues to sponsor
key investment programmes that enhance resilience.
People: the Group acknowledges the risks associated to the
failure to maintain appropriately skilled and available colleagues.
The Group continues to optimise its approach to ensure that, for
example, the right number of colleagues are capable of
supporting critical technology components. Key controls and
processes are regularly reported to committee(s) and alignment
with Lloyds Banking Group’s strategy is closely monitored.
Property: the Group’s property portfolio remains a key focus in
ensuring targeted resilience requirements are appropriately
maintained, including energy resilience. Processes are in place to
identify key buildings where an important business service or
critical business process is performed. Depending on criticality, a
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.
Sourcing: the threat landscape associated with third party
suppliers and the critical services they provide continues to
receive a significant amount of regulatory attention. The Group
acknowledges the importance of demonstrating control and
responsibility for those important business services and critical
business processes which could cause significant harm to the
Group’s customers. The Group segments its suppliers by criticality
and has processes in place to support ongoing supplier
management.
Monitoring
Monitoring and reporting of operational resilience risk is
undertaken at Board, Group, entity and divisional committees.
Each committee monitors key risks, control effectiveness, key risk
and control indicators, events, operational losses, risk appetite
metrics and the results of independent testing conducted by Risk
division and/or Group Internal Audit.
The Group maintains a formal approach to operational resilience
risk event escalation, whereby material events are identified,
captured and escalated. Root causes are determined, and action
plans put in place to ensure an optimum level of control to keep
customers and the business safe, reduce costs, and improve
efficiency.
People risk
Definition
People risk is defined as the risk that the Group fails to provide an
appropriate colleague and customer-centric culture, supported
by robust reward and wellbeing policies and processes; effective
leadership to manage colleague resources; effective talent and
succession management; and robust control to ensure all
colleague-related requirements are met.
Exposures
The Group’s management of material people risks is critical to its
capacity to deliver against its strategic objectives, particularly in
the context of organisational, political and external market
change and increasing digitisation. The Group is exposed to the
following key people risks:
• Failure to recruit, develop and retain a diverse workforce, with
the appropriate mix and required level of skills and capabilities
to meet the current and future needs of the Group
• Non-inclusive culture, ineffective leadership, poor
communication, weak performance, inappropriate
remuneration policies and poor colleague conduct
• 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 and sentiment may be challenged by
a number of factors including changes to ways of working,
dissatisfaction with the colleague proposition, cost of living
pressures, and purpose of the business including changes to
culture and ethical considerations
Measurement
People risk is measured through a series of quantitative and
qualitative indicators, aligned to key sources of people risk for the
Group such as succession, diversity, retention, colleague
engagement and wellbeing. In addition to risk appetite measures
and limits, people risks and controls are monitored on a monthly
basis via the Group’s risk governance framework and reporting
structures.
Mitigation
The Group takes many mitigating actions with respect to people
risk. Key areas of focus include:
• Focusing on leadership and colleague engagement, through
delivery of strategies to attract, retain and develop high calibre
people together with a focus on creating a strong and resilient
talent pipeline
• Continued focus on the Group’s culture and inclusivity strategy
by developing and delivering initiatives that reinforce the
appropriate behaviours which generate the best possible
long-term outcomes for customers and colleagues
• Managing organisational capability and capacity through
divisional people strategies to ensure there are the right skills
and resources to meet customers’ needs and deliver the
Group’s strategic plan
• Maintaining an attractive colleague proposition to promote an
appropriate culture and colleague behaviours that meet
customer needs and regulatory expectations
• Ensuring colleague wellbeing strategies and support are in
place to meet colleague needs, alongside skills and capability
growth required to maximise the potential of our people
• Ensuring compliance with legal and regulatory requirements,
embedding compliant and appropriate colleague behaviours
in line with Group policies, values and its people risk priorities
• Ongoing consultation with the Group’s recognised unions on
changes which impact their members
• Reviewing and enhancing people processes to ensure they are
fit for purpose and operationally resilient
Risk management continued
62
Lloyds Bank plc Annual Report and Accounts 2023
Monitoring
People risk appetite metrics and business risk indicators are
reported at the People and Places Group and Business Risk
Committee, Group and Ring-fenced Bank Risk Committee and
Board Risk Committee, on a regular basis.
All material people risk events are escalated in accordance with
Lloyds Banking Group’s operational risk policy.
Regulatory and legal risk
Definition
Regulatory and legal risk is defined as the risk of financial
penalties, regulatory censure, criminal or civil enforcement action
or customer detriment as a result of failure to identify, assess,
correctly interpret, comply with, or manage regulatory and/or
legal requirements.
Exposures
The Group has a zero risk appetite for material legal or regulatory
breaches. The Group remains exposed to the evolving legal and
regulatory landscape, such as changes to the regulatory
framework, changing regulatory and other standards as well as
uncertainty arising from the current and future litigation
landscape.
Measurement
Regulatory and legal risks are measured against a defined risk
appetite metric, which is an assessment of material regulatory
breaches and material legal incidents.
Mitigation
The Group undertakes a range of key mitigating actions to
manage regulatory and legal risk. These include the following:
• The Board has established a Group-wide risk appetite and
metric for regulatory and legal risk
• Lloyds Banking Group policies and procedures set out the
principles that should apply across Lloyds Bank Group which
are aligned to the Lloyds Bank Group risk appetite. Mandated
policies and processes require appropriate control
frameworks, management information, standards and
colleague training to be implemented to identify and manage
regulatory and legal risk
• Business units identify, assess and implement policy and
regulatory requirements and establish local controls,
processes, procedures and resources to ensure appropriate
governance and compliance
• Business units regularly produce management information to
assist in the identification of issues and test management
controls are working effectively
• The Legal function provides legal advice and together, the Risk
and Legal functions provide oversight, proactive support and
constructive challenge to the business in identifying and
managing regulatory and legal issues
• Risk division conducts thematic reviews to provide oversight of
regulatory compliance
• Horizon scanning is conducted to identify and address
changes in regulatory and legal requirements
• The Group engages with regulatory authorities and industry
bodies on forthcoming regulatory changes, market reviews
and investigations, ensuring programmes are established to
deliver new regulation and legislation
• The Group has adapted quickly to evolving regulatory
expectations due to cost of living pressures and continues to
engage with regulatory authorities
Monitoring
Material risks are managed through the relevant business
committees, with review and escalation through Group-level
committees where appropriate, including the escalation of any
material regulatory breaches or material legal incidents.
Strategic risk
Definition
Strategic risk is defined as the risk which results from:
• Incorrect assumptions about internal or external operating
environments
• Failure to understand the potential impact of strategic
responses and business plans on existing risk types
• Failure to respond or the inappropriate strategic response to
material changes in the external or internal operating
environments
Exposures
The Group faces significant risks due to the evolving external
environment, changing regulatory and competitive environments
in the financial services sector, with increased pace, scale and
complexity of change. Customer, shareholder and employee
expectations continue to evolve, together with societal trends and
cost of living pressures.
Similar to emerging risks, strategic risks can manifest themselves
in existing principal risks or as new exposures which could
adversely impact the Group and its businesses. In considering
strategic risks, a key focus is the interconnectivity of individual
risks and the cumulative effect of different risks on the Group’s
overall risk profile.
Measurement
The Group assesses and monitors strategic risk implications as
part of business planning and in its day-to-day activities, ensuring
it responds appropriately to internal and external factors
including changes to regulatory, macroeconomic and
competitive environments. An assessment is made of the key
strategic risks that are considered to impact the Group,
leveraging internal and external information and the key mitigants
or actions that could be taken in response.
Mitigation
The range of mitigating actions includes the following:
• Horizon scanning is conducted across the Group to identify
potential threats, risks, emerging issues and opportunities and
to explore future trends
• The Group’s business planning processes include an
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 at least an
annual basis and the findings are reported to the Group and
Board Risk Committees. During 2023, the process and analysis for
strategic risks and emerging risks has highlighted the alignment
and overlap between these risks. As a result, from 2024 onwards,
we will iterate our reporting further and combine both into horizon
and emerging risks. Further information on emerging risks can be
found on pages 10 and 23.
Risk management continued
63
Lloyds Bank plc Annual Report and Accounts 2023
This document contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934,
as amended, and section 27A of the US Securities Act of 1933, as amended, with respect to the business, strategy, plans and/or results of
Lloyds Bank plc together with its subsidiaries (the Lloyds Bank Group) and its current goals and expectations. Statements that are not
historical or current facts, including statements about the Lloyds Bank Group’s or its directors’ and/or management’s beliefs and
expectations, are forward-looking statements. Words such as, without limitation, ‘believes’, ‘achieves’, ‘anticipates’, ‘estimates’, ‘expects’,
‘targets’, ‘should’, ‘intends’, ‘aims’, ‘projects’, ‘plans’, ‘potential’, ‘will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘may’, ‘seek’, ‘estimate’, ‘probability’,
‘goal’, ‘objective’, ‘deliver’, ‘endeavour’, ‘prospects’, ‘optimistic’ and similar expressions or variations on these expressions are intended to
identify forward-looking statements. These statements concern or may affect future matters, including but not limited to: projections or
expectations of the Lloyds Bank Group’s future financial position, including profit attributable to shareholders, provisions, economic
profit, dividends, capital structure, portfolios, net interest margin, capital ratios, liquidity, risk-weighted assets (RWAs), expenditures or any
other financial items or ratios; litigation, regulatory and governmental investigations; the Lloyds Bank Group’s future financial
performance; the level and extent of future impairments and write-downs; the Lloyds Bank Group’s ESG targets and/or commitments;
statements of plans, objectives or goals of the Lloyds Bank Group or its management and other statements that are not historical fact
and statements of assumptions underlying such statements. By their nature, forward-looking statements involve risk and uncertainty
because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual
business, strategy, targets, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward-
looking statements include, but are not limited to: general economic and business conditions in the UK and internationally; acts of
hostility or terrorism and responses to those acts, or other such events; geopolitical unpredictability; the war between Russia and
Ukraine; the conflicts in the Middle East; the tensions between China and Taiwan; political instability including as a result of any UK
general election; market related risks, trends and developments; changes in client and consumer behaviour and demand; exposure to
counterparty risk; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Lloyds Bank
Group’s or Lloyds Banking Group plc’s credit ratings; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies;
volatility in credit markets; volatility in the price of the Lloyds Bank Group’s securities; tightening of monetary policy in jurisdictions in
which the Lloyds Bank Group operates; natural pandemic and other disasters; risks concerning borrower and counterparty credit
quality; longevity risks affecting defined benefit pension schemes; changes in laws, regulations, practices and accounting standards or
taxation; changes to regulatory capital or liquidity requirements and similar contingencies; the policies and actions of governmental or
regulatory authorities or courts together with any resulting impact on the future structure of the Lloyds Bank Group; risks associated with
the Lloyds Bank Group’s compliance with a wide range of laws and regulations; assessment related to resolution planning requirements;
risks related to regulatory actions which may be taken in the event of a bank or Lloyds Bank Group or Lloyds Banking Group failure;
exposure to legal, regulatory or competition proceedings, investigations or complaints; failure to comply with anti-money laundering,
counter terrorist financing, anti-bribery and sanctions regulations; failure to prevent or detect any illegal or improper activities;
operational risks including risks as a result of the failure of third party suppliers; conduct risk; technological changes and risks to the
security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks;
technological failure; inadequate or failed internal or external processes or systems; risks relating to ESG matters, such as climate
change (and achieving climate change ambitions) and decarbonisation, including the Lloyds Bank Group’s or the Lloyds Banking
Group’s ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change
effectively, and human rights issues; the impact of competitive conditions; failure to attract, retain and develop high calibre talent; the
ability to achieve strategic objectives; the ability to derive cost savings and other benefits including, but without limitation, as a result of
any acquisitions, disposals and other strategic transactions; inability to capture accurately the expected value from acquisitions; and
assumptions and estimates that form the basis of the Lloyds Bank Group’s financial statements. A number of these influences and
factors are beyond the Lloyds Bank Group’s control. Please refer to the latest Annual Report on Form 20-F filed by Lloyds Bank plc with the
US Securities and Exchange Commission (the SEC), which is available on the SEC’s website at www.sec.gov, for a discussion of certain
factors and risks. Lloyds Bank plc may also make or disclose written and/or oral forward-looking statements in other written materials
and in oral statements made by the directors, officers or employees of Lloyds Bank plc to third parties, including financial analysts.
Except as required by any applicable law or regulation, the forward-looking statements contained in this document are made as of
today’s date, and the Lloyds Bank Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained in this document whether as a result of new information, future 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.
Forward looking statements
64
Lloyds Bank plc Annual Report and Accounts 2023
Independent auditors’ report to the members of Lloyds Bank plc
Report on the audit of the financial statements
1.Opinion
In our opinion:
• the financial statements of Lloyds Bank plc (the ‘Bank’) and its subsidiaries (the ‘Group’ or ‘LB’) give a true and fair view of the state of
the Group’s and of the Bank’s affairs as at 31 December 2023 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 Board (IASB);
• the Bank 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
Bank
• Consolidated balance sheet as at 31 December 2023 ;
• Consolidated income statement for the year then ended;
• Consolidated statement of comprehensive income for the
year then ended;
• Consolidated statement of changes in equity for the year then
ended;
• Consolidated cash flow statement for the year then ended;
and
• Notes 1 to 39 to the financial statements, which include the
accounting principles and policies
• Risk management section identified as ‘audited’.
• Balance sheet as at 31 December 2023;
• Statement of changes in equity for the year then ended;
• Cash flow statement for the year then ended; and
• Notes 1 to 26 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 Bank 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 Bank 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 the Bank 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 Bank.
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 (‘ECL’) (Group and Bank)
• Regulatory and litigation matters (Group and Bank)
• IT systems that impact financial reporting (Group and Bank)
• Defined benefit obligations (Group and Bank)
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 £321 million, which was determined
on the basis of pre-tax profits and net assets.
Overall materiality used for the Bank financial statements was £321 million, which was determined on the basis of
net assets and capped at Group materiality.
Scoping
Our audit scope covers 77 per cent of the Group’s revenue, 73 per cent of the Group’s profit before tax, 95 per
cent of the Group’s total assets and 93 per cent of the Group’s total liabilities.
Our audit approach
We structured our approach to the audit to reflect how the Group is organised as well as ensuring it was both effective and risk
focused. 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 the Bank’s financial statements:
• Audit planning and risk assessment
Our audit planning procedures considered the impact of internal and external factors affecting the Group’s profitability and operations,
key audit matters most relevant to the users of the financial statements, the appropriate scope of audit work performed as well as the
expectations and requirements of the Group’s investors and regulators.
In performing our audit risk assessments, we considered the impact of macroeconomic factors on the Group’s key accounting
judgements and sources of estimation uncertainty. The key factors considered in our risk assessments were:
– the impact of high interest rates, high inflation and cost of living pressures on the Group’s ECL; and
– changes to the regulatory and litigation environment affecting the Group’s financial reporting.
We obtained the knowledge and information required to inform our audit planning and risk assessment decision making through
regular meetings with Group and divisional finance management and the extensive use of data and technology.
Independent auditors’ report
65
Lloyds Bank plc Annual Report and Accounts 2023
• Audit procedures undertaken at both Group and Bank level
We performed audit procedures over the Group and Bank financial statements including the consolidation of the Group’s results, the
preparation of the financial statements, regulatory and litigation environment as well as the Group’s entity level and oversight controls
relevant to financial reporting. The areas 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 31 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 the 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.
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.
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 the Bank’s ability to continue to adopt the going concern basis of
accounting included:
• using our knowledge of the Group and the Bank, 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 enquiries 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
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 the Bank’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.
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.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
Expected credit losses (Group and Bank)
Key audit matter description
How the scope of our audit responded to the key audit matter
Refer to notes 2, 13, 18, 19 and 38 in the financial statements
The Group has recognised £4.0 billion of expected credit
losses (‘ECL’) as at 31 December 2023. The determination of
ECL consists of a number of assumptions that are inherently
uncertain and require a high degree of complex and
subjective auditor judgement, specialised skills and
knowledge, and complex impairment modelling.
Specifically, the impact of high interest rates and inflation,
as well as the economic impact of the rising cost of living
on the ECL have been particularly judgemental 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’);
• Collectively assessed ECL.;
• Individually assessed ECL; and
• ECL model adjustments.
Multiple economic scenarios
The measurement of expected credit losses is required to
reflect an unbiased probability-weighted range of possible
future outcomes.
The Group’s economics team develops the future economic
scenarios. Firstly, a base case forecast is produced based
on a set of conditioning assumptions, which are designed
to reflect the Group’s best view of future events. A full
distribution of economic scenarios around this base case is
produced using a Monte Carlo simulation and scenarios
within that distribution are ranked using estimated
relationships with industrywide historical loss data.
In addition to the base case, three scenarios are derived
from the distribution as averages of constituent modelled
scenarios around the 15th, 75th and 95th percentiles of the
distribution corresponding to an upside, a downside and a
severe downside, respectively. The severe downside is then
adjusted to incorporate non-modelled paths for inflation
and interest rate assumptions. The upside, the base case
and the downside scenarios are weighted at 30 per cent
and the severe downside at 10 per cent.
These four scenarios are then used as key assumptions in
the determination of the ECL allowance.
The development of these multiple economic scenarios is
inherently uncertain, highly complex, and requires
significant judgement.
The principal consideration for our determination that the
multiple economic scenarios is a key 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.
We performed the following procedures:
• Tested the controls over the generation of the multiple economic
scenarios including those over the Group’s governance processes
to determine the base case, different scenarios and the weightings
applied to each scenario;
• Working with our internal economic specialists:
– Challenged and evaluated economic forecasts in the base
scenario such as the unemployment rate, House Price Index,
inflation and forecasted interest rates, and Gross Domestic
Product through comparison to independent economic outlooks,
other external analyses and market data;
– Challenged and evaluated the appropriateness of
management’s change in both the assumptions and the model;
– Challenged and evaluated the appropriateness of the
methodology applied to generate alternative macroeconomic
scenarios, including associated weightings and assumptions
within;
– Independently replicated the multiple economic scenario model
and compared the outputs of our independent model to the
Group’s output to test scenario generation;
• Tested the completeness and accuracy of the data used by the
model;
• Performed a stand back assessment of the appropriateness of the
weightings applied to each of the scenarios based on publicly
available data; and
• Evaluated the appropriateness of disclosures in respect of
significant judgements and sources of estimation uncertainty
including macroeconomic scenarios.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
Key audit matter description
How the scope of our audit responded to the key audit matter
Collectively assessed ECL
The ECL for the Retail and Commercial Banking divisions,
except for individually assessed stage 3 commercial loans,
is determined on a collective basis using impairment
models. These models use a number of significant
judgements to calculate a probability weighted estimate by
applying a probability of default, exposure at default and a
loss given default, taking account of collateral held or other
loss mitigants, discounted using the effective interest rate.
The key judgements and estimates in determining the ECL
include:
• modelling approach, modelling simplifications and
judgements, and selection of modelling data;
• behavioural lives for the Retail division;
• credit risk ratings for the Commercial Banking division,
which are performed on a counterparty basis for larger
exposures by a credit officer; and
• the appropriate allocation of assets into the correct
staging taking into account any significant deterioration
in credit risk since inception of the loan.
We tested controls across the process to determine the ECL provisions
including:
• Model governance including model validation and monitoring;
• Model assumptions;
• The allocation of assets into stages, including those to determine
the Credit Risk Rating in the Commercial Banking division; and
• Data accuracy and completeness.
Working with our internal modelling specialists, our audit procedures
over the key areas of estimation covered the following:
• Model estimations, where we:
– evaluated the appropriateness of the modelling approach and
assumptions used;
– independently replicated the models for all material portfolios
and compared the outputs of our independent models to the
Group’s outputs;
– assessed model performance by evaluating variations between
observed data and model predictions;
– developed an understanding and assessed model limitations
and remedial actions; and
– tested the completeness and accuracy of the data used in
model execution and calibration.
• Allocation of assets into stages, where we:
– evaluated the appropriateness of quantitative and qualitative
criteria used for allocation into IFRS 9 stages, including
independently assessing the credit rating of loans in the
Commercial Banking division;
– tested the appropriateness of the stage allocation for a sample
of exposures; and
– tested the data used by models in assigning IFRS 9 stages and
evaluated the appropriateness of the model logic used.
Individually assessed ECL
For individual provision assessments of larger exposures in
stage 3 in the Commercial Banking division, complex and
subjective auditor judgement including specialised
knowledge is required in evaluating the methodology,
models and inputs that are inherently uncertain. The
significant judgements in determining provisions are the:
• completeness and appropriateness of the potential
workout scenarios identified;
• probability of default assigned to each identified
potential workout scenarios; and
• valuation assumptions used in determining the expected
recovery strategies.
• For expected credit losses assessed individually we have:
– selected senior team members with extensive IFRS 9 knowledge
and expertise to design and lead the execution of ECL
recognised in respect of these exposures;
– tested the controls over the determination of individually
assessed exposures including assumptions and inputs into
workout and recovery scenarios, as well as valuation
assumptions used; and
– evaluated the appropriateness of workout and recovery
scenarios including associated cash flows and consideration of
climate risk.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
Key audit matter description
How the scope of our audit responded to the key audit matter
ECL model adjustments
Adjustments are made to models to address known model
and data limitations, and emerging or non-modelled risks.
The current economic environment, characterised by
elevated cost of living pressures on borrowers and high
inflation, has increased the uncertainty of credit losses. As a
result, the amount and timing of adjustments recognised in
the model to account for the impacts of the current
economic environment are highly judgemental and
inherently uncertain. These adjustments require specialist
auditor judgement when evaluating the:
• completeness of adjustments; and
• methodology, models and inputs used in determining
the relevant adjustments.
Where impairment models do not incorporate all factors
relevant to estimating the ECL, adjustments are made to
address known model limitations and data limitations,
emerging or non-modelled risks and the impact of
economic uncertainty on different industry sectors. The
measurement of judgements around model adjustments to
evaluate the completeness of adjustments, methodology
and model inputs for these adjustments is highly
judgemental and inherently uncertain.
• In respect of the adjustment to models, we performed the
following procedures in conjunction with our specialists:
– tested the controls over the valuation of in-model and post-
model adjustments;
– 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 in
formulating the judgements;
– performed a recalculation of adjustments;
– evaluated the completeness of adjustments based on our
understanding of both model and data limitations, including
those related to cost of living and high inflation pressures; and
– assessed the appropriateness of the disclosures and whether
the disclosures appropriately address the uncertainty which
exists in determining the ECL.
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. Appropriate
methodologies using reasonable modelled assumptions were used in the calculations of the multiple economic scenarios,
collectively assessed and in-model adjustments and post-model adjustments where they address model shortcomings. Overall ECL
levels are reasonable compared to peer benchmarking information.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
Regulatory and litigation matters (Group and Bank)
Key audit matter description
How the scope of our audit responded to the key audit matter
Refer to notes 2 and 26 in the financial statements.
The Group operates in an environment where it is subject to
regulatory investigations, litigation and customer
remediation, including allegations of fraud and misconduct.
The Group is currently exposed to a number of regulatory
and litigation matters. The Group’s provision for these
matters is £1.0 billion as at 31 December 2023. In the current
year, the Group recognised a provision of £450 million
relating to motor finance commission arrangements.
Significant judgement is required by the Group in
determining whether, under IAS 37 ‘Provisions, Contingent
Liabilities and Contingent Assets’:
• the amount recorded is representative of the Group’s
best estimate to settle the obligation based on the
information available to the Group, including in respect
of motor finance commission arrangements where there
is significant uncertainty around the final outcome of the
on-going review by the FCA; and
• any contingent liabilities and underlying significant
estimation uncertainties are adequately disclosed.
We performed the following audit procedures:
• Tested the Group’s controls over the completeness of provisions,
the review of the assessment of the provision against the
requirements of IAS 37, the review of the appropriateness of
judgements used to determine a ‘best estimate’ and the
completeness and accuracy of data used in the process;
• Evaluated the assessment of the provisions, associated
probabilities, and potential outcomes in accordance with IAS 37;
• Verified and evaluated whether the methodology, data and
significant judgements and assumptions used in the valuation of
the provisions are appropriate in the context of the applicable
financial reporting framework;
• In respect of motor finance commission arrangements, we
inspected information available for the historical complaints, both
supportive and contradictory, and the limited number of decisions
made by the Financial Ombudsman Service. We tested the
methodology and assumptions applied to determine the provision;
• Inspected correspondence and, where appropriate, made direct
inquiry with the Group’s regulators and internal and external legal
counsel;
• Where no provision was made, we critically evaluated the
conclusion in the context of the requirements of IAS 37; and
• Evaluated whether the disclosures made in the financial
statements appropriately reflect the facts and key sources of
estimation uncertainty, including in respect of motor finance
commission arrangements.
Key observations communicated to the Audit Committee
While there is significant judgement required in estimating the timing and value of future settlements, we are satisfied that the
approach to the recognition, estimation and disclosures of these provisions and contingent liabilities is consistent with the
requirements of IFRS.
Independent auditors’ report continued
70
Lloyds Bank plc Annual Report and Accounts 2023
IT systems that impact financial reporting (Group and Bank)
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
number of systems it operates and its reliance on
automated and IT dependent manual controls. Together,
these support a broad range of banking and insurance
products as well as the processing of the Group’s significant
volume of transactions, which impact all account balances.
As such, IT systems within the Group form a critical
component of the Group’s financial reporting activities. Due
to the significant reliance on IT systems, effective General IT
Controls (‘GITCs’) are critical to allow reliance to be placed
on the completeness and accuracy of financial data and
the integrity of automated system functionality, such as
system calculations.
We identified the IT systems that impact financial reporting
as a key audit matter because of the:
• Pervasive reliance on complex technology that is
integral to the operation of key business processes and
financial reporting;
• Reliance on technology which continues to develop in
line with the business strategy, such as the increase in
the use of automation across the Group and increasing
reliance on third parties; and
• Importance of the IT controls in maintaining an effective
control environment. A key interdependency exists
between the ability to rely on IT controls and the ability to
rely on 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.
Our IT audit scope covered the Group’s IT controls over information
systems deemed relevant to the audit based on the financial data,
system configured automated controls and/or key financial reports
that reside within it.
We used IT specialists to support our evaluation of the risks associated
with IT in the following areas:
• General IT Controls, including user access and change
management controls;
• Key financial reports and system configured automated controls;
and
• Cyber security risk assessment.
Where deficiencies in the IT control environment were identified, our
risk assessment procedures included an assessment of those
deficiencies to determine the impact on our audit plan. Where
relevant, the audit plan was adjusted to mitigate the unaddressed IT
risk.
Where we were able to identify and test appropriate mitigating
controls over affected financial statement line items, our testing
approach remained unchanged.
In a limited number of areas, we adopted a non-controls reliance
approach and we therefore performed additional substantive
procedures.
Key observations communicated to the Audit Committee
We are satisfied that the Group’s overall IT control environment appropriately supports the financial reporting process and control
deficiencies identified in respect of privileged user access to IT infrastructure and in application user access management were
mitigated by compensating business controls.
Defined benefit obligations (Group and Bank)
Key audit matter description
How the scope of our audit responded to the key audit matter
Refer to notes 2 and 11 in the financial statements
The Group operates a number of defined benefit retirement
schemes, the obligations for which totalled £30.2 billion as
at 31 December 2023. Their valuation is determined with
reference to key actuarial assumptions including mortality
assumptions, discount rates and inflation rates. Due to the
size of these schemes, small changes in these assumptions
can have a material impact on the value of the defined
benefit obligation and therefore, the determination of these
assumptions requires significant auditor judgement.
We performed the following audit procedures:
• Tested the Group’s controls over the valuation of the defined
benefit obligations, including controls over the assumptions setting
process; and
• Challenged the key actuarial assumptions used by comparing
these against ranges and expectations determined by our internal
actuarial experts, which are calculated with reference to the
central assumptions adopted by the actuarial firms for whom we
have reviewed and accepted their methodologies.
Key observations communicated to the Audit Committee
We are satisfied that the Group's judgements in relation to the actuarial assumptions are reasonable.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
6.Our application of materiality
6.1Materiality
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
Bank financial statements
Materiality
£321 million (2022: £290 million)
£321 million (2022: £290 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 profits, adjusted for non-recurring items;
and
• Net assets.
The determined materiality represents 5 per cent of
pre-tax profit and 0.8 per cent of net assets.
The Bank materiality represents 0.6 per cent 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.
As the Bank does not disclose a standalone income
statement we do not consider an income based
metric to be an appropriate benchmark for the
purposes of setting materiality when considering the
expectations of the users of the Bank financial
statements. As such we have determined that a net
assets benchmark is appropriate. However, given the
size of the entity’s balance sheet, we have capped
materiality at Group’s materiality.
6.2Performance 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
Bank financial statements
Performance
materiality
70 per cent of Group materiality – £224 million
( 2022 : 70 per cent at £185 million)
70 per cent of Bank materiality – £224 million
( 2022 : 70 per cent at £185 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.
6.3Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £16 million (2022:
£15 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.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
7.Other information
The other information comprises the information included in the Annual Report, other than the financial
statements and our auditors’ report thereon. The Directors are responsible for the other information
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,
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 have nothing to
report in this regard.
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
Strategic report and
directors’ report
Report whether they are consistent with the audited
financial statements and are prepared in
accordance with applicable legal requirements.
Report if we have identified any material
misstatements in either report in the light of the
knowledge and understanding of the Group and of
the Bank and their environment obtained in the
course of the audit.
As set out in the section ‘Opinions on other matters
prescribed by the Companies Act 2006’, in our
opinion, based on the work undertaken in the course
of the audit, the information in these reports is
consistent with the audited financial statements
and has been prepared in accordance with
applicable legal requirements.
Principal risks (within
the strategic report)
Review the confirmation and description in the light
of the knowledge gathered during the audit, such as
through considering the directors’ processes to
support the statements made, challenging the
Group’s key judgements and estimates,
consideration of historical forecasting accuracy and
evaluating macro-economic assumptions.
We have nothing material to report, add or draw
attention to in respect of these matters.
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 Bank’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 Bank 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.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
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 2024;
• 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 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 and Bank’s determination of ‘Expected credit losses’ as a key audit matter
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;
• 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 remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
Independent auditors’ report continued
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Lloyds Bank plc Annual Report and Accounts 2023
Report on other legal and regulatory requirements
11.Opinions on other matters prescribed by 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 Bank 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.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 Bank, or returns adequate for our audit
have not been received from branches not visited by us; or
• The Bank’s 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.
We have nothing to report in
respect of this matter.
13.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
18 May 2023 to audit the financial statements of Lloyds Banking Group plc, including Lloyds Bank plc for the year ended 31 December
2023 and subsequent financial periods. The period of total uninterrupted engagement of the firm is accordingly three 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).
14.Use of our report
This report is made solely to the Bank’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 Bank’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 Bank and the Bank’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) 4.1.15R – DTR 4.1.18R, these
financial statements will form part of the Electronic Format Annual Financial Report filed on the National Storage Mechanism of the FCA
in accordance with DTR 4.1.15R – DTR 4.1.18R. This auditors’ report provides no assurance over whether the Electronic Format Annual
Financial Report has been prepared in compliance with DTR 4.1.15R – DTR 4.1.18R.
image.png
Michael Lloyd (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
29 February 2024
Independent auditors’ report continued
75
Lloyds Bank plc Annual Report and Accounts 2023
Note
2023
£m
2022
£m
2021
£m
Interest income
25,300
16,562
12,920
Interest expense
(11,591)
(3,457)
(1,884)
Net interest income
5
13,709
13,105
11,036
Fee and commission income
2,456
2,352
2,195
Fee and commission expense
(1,104)
(1,101)
(942)
Net fee and commission income
6
1,352
1,251
1,253
Net trading income
7
384
180
385
Other operating income
8
2,922
2,209
1,999
Other income
4,658
3,640
3,637
Total income
18,367
16,745
14,673
Operating expenses
9
(10,968)
(9,199)
(10,206)
Impairment (charge) credit
13
(343)
(1,452)
1,318
Profit before tax
7,056
6,094
5,785
Tax expense
14
(1,849)
(1,300)
(583)
Profit for the year
5,207
4,794
5,202
Profit attributable to ordinary shareholders
4,858
4,528
4,826
Profit attributable to other equity holders
334
241
344
Profit attributable to equity holders
5,192
4,769
5,170
Profit attributable to non-controlling interests
15
25
32
Profit for the year
5,207
4,794
5,202
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated income statement
for the year ended 31 December
76
Lloyds Bank plc Annual Report and Accounts 2023
2023
£m
2022
£m
2021
£m
Profit for the year
5,207
4,794
5,202
Other comprehensive income
Items that will not subsequently be reclassified to profit or loss:
Post-retirement defined benefit scheme remeasurements:
Remeasurements before tax
(1,633)
(3,012)
1,720
Tax
428
860
(658)
(1,205)
(2,152)
1,062
Movements in revaluation reserve in respect of equity shares held at fair value through other
comprehensive income:
Change in fair value
–
–
–
Tax
–
(1)
1
–
(1)
1
Gains and losses attributable to own credit risk:
(Losses) gains before tax
(234)
519
(86)
Tax
66
(155)
34
(168)
364
(52)
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
(41)
(132)
137
Income statement transfers in respect of disposals
140
76
116
Income statement transfers in respect of impairment
(2)
6
(2)
Tax
(26)
19
(55)
71
(31)
196
Movements in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income
725
(6,520)
(2,138)
Net income statement transfers
1,517
(1)
(584)
Tax
(628)
1,804
764
1,614
(4,717)
(1,958)
Movements in foreign currency translation reserve:
Currency translation differences (tax: £nil)
(33)
91
(19)
Total other comprehensive income (loss) for the year, net of tax
279
(6,446)
(770)
Total comprehensive income (loss) for the year
5,486
(1,652)
4,432
Total comprehensive income (loss) attributable to ordinary shareholders
5,137
(1,918)
4,056
Total comprehensive income attributable to other equity holders
334
241
344
Total comprehensive income (loss) attributable to equity holders
5,471
(1,677)
4,400
Total comprehensive income attributable to non-controlling interests
15
25
32
Total comprehensive income (loss) for the year
5,486
(1,652)
4,432
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated statement of comprehensive income
for the year ended 31 December
77
Lloyds Bank plc Annual Report and Accounts 2023
Note
2023
£m
2022
£m
Assets
Cash and balances at central banks
57,909
72,005
Financial assets at fair value through profit or loss
16
1,862
1,371
Derivative financial instruments
17
3,165
3,857
Loans and advances to banks
8,810
8,363
Loans and advances to customers
18
433,124
435,627
Reverse repurchase agreements
32,751
39,259
Debt securities
12,546
7,331
Due from fellow Lloyds Banking Group undertakings
840
816
Financial assets at amortised cost
488,071
491,396
Financial assets at fair value through other comprehensive income
16
27,337
22,846
Goodwill and other intangible assets 1
21
5,837
5,124
Current tax recoverable
1,026
527
Deferred tax assets
14
4,636
5,857
Retirement benefit assets
11
3,624
3,823
Other assets1
22
11,938
10,122
Total assets
605,405
616,928
Liabilities
Deposits from banks
3,557
4,658
Customer deposits
441,953
446,172
Repurchase agreements
37,702
48,590
Due to fellow Lloyds Banking Group undertakings
2,932
2,539
Financial liabilities at fair value through profit or loss
16
5,255
5,159
Derivative financial instruments
17
4,307
5,891
Notes in circulation
1,392
1,280
Debt securities in issue at amortised cost
24
52,449
49,056
Other liabilities 1
25
6,260
6,003
Retirement benefit obligations
11
136
126
Current tax liabilities
23
3
Deferred tax liabilities
14
157
208
Provisions
26
1,916
1,591
Subordinated liabilities
27
6,935
6,593
Total liabilities
564,974
577,869
Equity
Share capital
28
1,574
1,574
Share premium account
600
600
Other reserves
29
2,395
743
Retained profits
30
30,786
31,792
Ordinary shareholders’ equity
35,355
34,709
Other equity instruments
31
5,018
4,268
Total equity excluding non-controlling interests
40,373
38,977
Non-controlling interests
58
82
Total equity
40,431
39,059
Total equity and liabilities
605,405
616,928
1See note 1 regarding changes to presentation.
The accompanying notes are an integral part of the consolidated financial statements.
The directors approved the consolidated financial statements on 29 February 2024.
1.8.3 43795_Signature_RobinBudenberg-2.jpg
1.8.1 41326_Signature_CharlieNunn_v2-2.jpg
1.8.2 41326_Signature_WilliamChalmers-2.jpg
Sir Robin Budenberg
Chair
Charlie Nunn
Group Chief Executive
William Chalmers
Chief Financial Officer
Consolidated balance sheet
at 31 December
78
Lloyds Bank plc Annual Report and Accounts 2023
Attributable to ordinary shareholders
Share
capital and
premium
£m
Other
reserves
£m
Retained
profits
£m
Total
£m
Other
equity
instruments
£m
Non-
controlling
interests
£m
Total
£m
At 1 January 2023
2,174
743
31,792
34,709
4,268
82
39,059
Comprehensive income
Profit for the year
–
–
4,858
4,858
334
15
5,207
Other comprehensive income
Post-retirement defined benefit scheme
remeasurements, net of tax
–
–
(1,205)
(1,205)
–
–
(1,205)
Movements in revaluation reserve in respect
of financial assets held at fair value through
other comprehensive income, net of tax:
Debt securities
–
71
–
71
–
–
71
Gains and losses attributable to own credit
risk, net of tax
–
–
(168)
(168)
–
–
(168)
Movements in cash flow hedging reserve, net
of tax
–
1,614
–
1,614
–
–
1,614
Movements in foreign currency translation
reserve, net of tax
–
(33)
–
(33)
–
–
(33)
Total other comprehensive income (loss)
–
1,652
(1,373)
279
–
–
279
Total comprehensive income1
–
1,652
3,485
5,137
334
15
5,486
Transactions with owners
Dividends (note 32)
–
–
(4,700)
(4,700)
–
(39)
(4,739)
Distributions on other equity instruments
–
–
–
–
(334)
–
(334)
Issue of other equity instruments (note 31)
–
–
(5)
(5)
750
–
745
Capital contributions received
–
–
215
215
–
–
215
Return of capital contributions
–
–
(1)
(1)
–
–
(1)
Total transactions with owners
–
–
(4,491)
(4,491)
416
(39)
(4,114)
Realised gains and losses on equity shares
held at fair value through other
comprehensive income
–
–
–
–
–
–
–
At 31 December 2023
2,174
2,395
30,786
35,355
5,018
58
40,431
1Total comprehensive income attributable to owners of the parent was a surplus of £5,471 million ( 2022 : loss of £1,677 million ; 2021: surplus of £4,400 million).
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 28 to 31.
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated statement of changes in equity
for the year ended 31 December
79
Lloyds Bank plc Annual Report and Accounts 2023
Attributable to ordinary shareholders
Share
capital and
premium
£m
Other
reserves
£m
Retained
profits
£m
Total
£m
Other
equity
instruments
£m
Non-
controlling
interests
£m
Total
£m
At 1 January 2022
2,174
5,400
28,836
36,410
4,268
94
40,772
Comprehensive income
Profit for the year
–
–
4,528
4,528
241
25
4,794
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
–
(31)
–
(31)
–
–
(31)
Equity shares
–
(1)
–
(1)
–
–
(1)
Gains and losses attributable to own credit
risk, net of tax
–
–
364
364
–
–
364
Movements in cash flow hedging reserve,
net of tax
–
(4,717)
–
(4,717)
–
–
(4,717)
Movements in foreign currency translation
reserve, net of tax
–
91
–
91
–
–
91
Total other comprehensive income
–
(4,658)
(1,788)
(6,446)
–
–
(6,446)
Total comprehensive income
–
(4,658)
2,740
(1,918)
241
25
(1,652)
Transactions with owners
Dividends (note 32)
–
–
–
–
–
(37)
(37)
Distributions on other equity instruments
–
–
–
–
(241)
–
(241)
Capital contributions received
–
–
221
221
–
–
221
Return of capital contributions
–
–
(4)
(4)
–
–
(4)
Total transactions with owners
–
–
217
217
(241)
(37)
(61)
Realised gains and losses on equity shares
held at fair value through other
comprehensive income
–
1
(1)
–
–
–
–
At 31 December 2022
2,174
743
31,792
34,709
4,268
82
39,059
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated statement of changes in equity continued
for the year ended 31 December
80
Lloyds Bank plc Annual Report and Accounts 2023
Attributable to ordinary shareholders
Share
capital and
premium
£m
Other
reserves
£m
Retained
profits
£m
Total
£m
Other
equity
instruments
£m
Non-
controlling
interests
£m
Total
£m
At 1 January 2021
2,174
7,181
25,750
35,105
5,935
78
41,118
Comprehensive income
Profit for the year
–
–
4,826
4,826
344
32
5,202
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
–
196
–
196
–
–
196
Equity shares
–
1
–
1
–
–
1
Gains and losses attributable to own credit
risk, net of tax
–
–
(52)
(52)
–
–
(52)
Movements in cash flow hedging reserve,
net of tax
–
(1,958)
–
(1,958)
–
–
(1,958)
Movements in foreign currency translation
reserve, net of tax
–
(19)
–
(19)
–
–
(19)
Total other comprehensive income
–
(1,780)
1,010
(770)
–
–
(770)
Total comprehensive income
–
(1,780)
5,836
4,056
344
32
4,432
Transactions with owners
Dividends (note 32)
–
–
(2,900)
(2,900)
–
(14)
(2,914)
Distributions on other equity instruments
–
–
–
–
(344)
–
(344)
Issue of other equity instruments (note 31)
–
–
(1)
(1)
1,550
–
1,549
Repurchases and redemptions of other
equity instruments (note 31)
–
–
(9)
(9)
(3,217)
–
(3,226)
Capital contributions received
–
–
164
164
–
–
164
Return of capital contributions
–
–
(4)
(4)
–
–
(4)
Changes in non-controlling interests
–
–
(1)
(1)
–
(2)
(3)
Total transactions with owners
–
–
(2,751)
(2,751)
(2,011)
(16)
(4,778)
Realised gains and losses on equity shares
held at fair value through other
comprehensive income
–
(1)
1
–
–
–
–
At 31 December 2021
2,174
5,400
28,836
36,410
4,268
94
40,772
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated statement of changes in equity continued
for the year ended 31 December
81
Lloyds Bank plc Annual Report and Accounts 2023
Note
2023
£m
2022
£m
2021
£m
Cash flows from operating activities
Profit before tax
7,056
6,094
5,785
Adjustments for:
Change in operating assets
39(A)
8,923
(2,900)
5,174
Change in operating liabilities
39(B)
(15,325)
16,894
8,110
Non-cash and other items
39(C)
4,818
(129)
(661)
Net tax paid
(1,357)
(649)
(715)
Net cash provided by operating activities
4,115
19,310
17,693
Cash flows from investing activities
Purchase of financial assets
(10,303)
(7,953)
(8,885)
Proceeds from sale and maturity of financial assets
5,289
11,041
8,134
Purchase of fixed assets
(4,962)
(3,704)
(3,102)
Proceeds from sale of fixed assets
979
871
1,028
Acquisition of businesses, net of cash acquired
39(D)
(293)
–
(3)
Net cash (used in) provided by investing activities
(9,290)
255
(2,828)
Cash flows from financing activities
Dividends paid to ordinary shareholders
32
(4,700)
–
(2,900)
Distributions on other equity instruments
(334)
(241)
(344)
Dividends paid to non-controlling interests
(39)
(37)
(14)
Return of capital contributions
(1)
(4)
(4)
Interest paid on subordinated liabilities
(335)
(397)
(525)
Proceeds from issue of subordinated liabilities
670
837
3,262
Proceeds from issue of other equity instruments
745
–
1,549
Repayment of subordinated liabilities
(251)
(2,216)
(3,745)
Repurchases and redemptions of other equity instruments
–
–
(3,226)
Borrowings from parent company
1,942
1,852
543
Repayments of borrowings to parent company
(931)
–
(4,896)
Interest paid on borrowings from parent company
(210)
(200)
(226)
Net cash used in financing activities
(3,444)
(406)
(10,526)
Effects of exchange rate changes on cash and cash equivalents
(44)
82
(1)
Change in cash and cash equivalents
(8,663)
19,241
4,338
Cash and cash equivalents at beginning of year
75,201
55,960
51,622
Cash and cash equivalents at end of year
39(E)
66,538
75,201
55,960
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated cash flow statement
at 31 December
82
Lloyds Bank plc Annual Report and Accounts 2023
Note 1: Basis of preparation
The consolidated financial statements of Lloyds Bank 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.
Except for accounting policies and methods of computation affected by the IAS 12 exception relating to the recognition and disclosure
of the implication of certain potential deferred tax consequences, the Group’s accounting policies are consistent with those applied by
the Group in its financial statements for the year ended 31 December 2022 and there have been no changes in the Group’s methods of
computation. Following amendments to IAS 12 by the IASB (International Tax Reform – Pillar Two Model Rules, issued in May 2023) entities
are not permitted to disclose information about deferred tax assets and liabilities related to the Organisation for Economic, Co-
operation and Development’s Pillar Two Model Rules, including any qualified domestic minimum top-up taxes. No changes arise to the
Group’s deferred tax assets or liabilities as a result of the Group having applied the relevant exception.
Presentational changes
The following changes have been made to the presentation of the Group’s balance sheet to provide a more relevant analysis of the
Group’s financial position:
• Items in the course of collection from banks are reported within other assets rather than separately on the face of the balance
sheet
• Goodwill and other intangible assets are aggregated on the face of the balance sheet
• Items in the course of transmission to banks are reported within other liabilities rather than separately on the face of the balance
sheet
There has been no change in the basis of accounting for any of the underlying transactions. Comparatives for 2022 have been
restated.
Future accounting developments
The IASB has issued a number of minor amendments to IFRSs effective 1 January 2024, including IFRS 16 Lease Liability in a Sale and
Leaseback, IAS 1 Non-current Liabilities with Covenants, and IAS 1 Classification of Liabilities as Current or Non-current. These
amendments are not expected to have a significant impact on the Group and have been endorsed for use in the UK.
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 202 to 205.
(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.
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.
Notes to the consolidated financial statements
for the year ended 31 December
83
Lloyds Bank plc Annual Report and Accounts 2023
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 ( O )
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 business 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; 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
84
Lloyds Bank plc Annual Report and Accounts 2023
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, other than in respect of equity shares, the
cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement. The cumulative
revaluation amount in respect of equity shares 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 16(2) (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 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.
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
85
Lloyds Bank plc Annual Report and Accounts 2023
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
86
Lloyds Bank plc Annual Report and Accounts 2023
Note 2: Accounting policies continued
(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.
(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, and 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
87
Lloyds Bank plc Annual Report and Accounts 2023
Note 2: Accounting policies continued
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.
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. 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 12 months or less. Low-value assets comprise IT equipment and small
items of office furniture.
Notes to the consolidated financial statements continued
for the year ended 31 December
88
Lloyds Bank plc Annual Report and Accounts 2023
Note 2: Accounting policies continued
(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.
(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
Lloyds Banking 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.
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
89
Lloyds Bank plc Annual Report and Accounts 2023
Note 2: Accounting policies continued
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.
(M)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.
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.
(N)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).
(O)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.
(P)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.
Notes to the consolidated financial statements continued
for the year ended 31 December
90
Lloyds Bank plc Annual Report and Accounts 2023
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:
• Retirement benefit obligations (note 11)
• Uncertain tax positions (note 14)
• Fair value of financial instruments (note 16)
• Allowance for expected credit losses (note 19 )
• Regulatory and legal provisions (note 26 )
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 judgements 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
• Initial assessments on expected credit loss, focussing on specific climate-related macroeconomic, physical and transition risk
impacts on credit quality at a sector and segment level
• 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 pages 31 to 33.
Note 4: Segmental analysis
The Group provides a wide range of banking and financial services in the UK and in certain locations overseas. The Group Executive
Committee (GEC) of the Lloyds Banking Group 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 Group has two operating and reportable segments: Retail and Commercial Banking:
• 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 and corporate and institutional clients, providing lending, transactional
banking, working capital management, debt financing and risk management services
Other comprises income and expenditure not attributed to the Group’s operating segments. These amounts include the costs of
certain central and head office functions.
Inter-segment services are generally recharged at cost, although some attract a margin. 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
91
Lloyds Bank plc Annual Report and Accounts 2023
Note 4: Segmental analysis continued
Year ended 31 December 2023
Retail
£m
Commercial
Banking
£m
Other
£m
Group
£m
Net interest income
9,651
3,675
383
13,709
Other income
2,157
1,054
1,447
4,658
Total income
11,808
4,729
1,830
18,367
Operating expenses
(7,031)
(2,278)
(1,659)
(10,968)
Impairment (charge) credit
(831)
483
5
(343)
Profit before tax
3,946
2,934
176
7,056
External income
12,805
5,788
(226)
18,367
Inter-segment (expense) income
(997)
(1,059)
2,056
–
Total income
11,808
4,729
1,830
18,367
External assets
376,589
90,301
138,515
605,405
External liabilities
313,232
138,835
112,907
564,974
Analysis of other income:
Net fee and commission income
618
822
(88)
1,352
Operating lease rental income
1,373
10
–
1,383
Gains less losses on disposal of financial assets at fair value through other
comprehensive income
–
–
(140)
(140)
Other income
166
222
1,675
2,063
Other income
2,157
1,054
1,447
4,658
Other items reflected in income statement above:
Depreciation and amortisation
1,927
408
516
2,851
Defined benefit scheme credit
–
–
(79)
(79)
Non-income statement items:
Additions to fixed assets
3,294
86
1,583
4,963
Notes to the consolidated financial statements continued
for the year ended 31 December
92
Lloyds Bank plc Annual Report and Accounts 2023
Note 4: Segmental analysis continued
Year ended 31 December 2022
Retail
£m
Commercial
Banking
£m
Other
£m
Group
£m
Net interest income
9,746
3,227
132
13,105
Other income
1,684
947
1,009
3,640
Total income
11,430
4,174
1,141
16,745
Operating expenses
(5,696)
(2,207)
(1,296)
(9,199)
Impairment (charge) credit
(1,373)
(471)
392
(1,452)
Profit before tax
4,361
1,496
237
6,094
External income
11,996
3,375
1,374
16,745
Inter-segment (expense) income
(566)
799
(233)
–
Total income
11,430
4,174
1,141
16,745
External assets
372,585
89,536
154,807
616,928
External liabilities
314,051
140,923
122,895
577,869
Analysis of other income:
Net fee and commission income
555
822
(126)
1,251
Operating lease rental income
1,065
12
–
1,077
Gains less losses on disposal of financial assets at fair value through other
comprehensive income
–
–
(76)
(76)
Other income
64
113
1,211
1,388
Other income
1,684
947
1,009
3,640
Other items reflected in income statement above:
Depreciation and amortisation
1,216
195
937
2,348
Defined benefit scheme charge
72
28
25
125
Non-income statement items:
Additions to fixed assets
2,146
94
1,464
3,704
Notes to the consolidated financial statements continued
for the year ended 31 December
93
Lloyds Bank plc Annual Report and Accounts 2023
Note 4: Segmental analysis continued
Year ended 31 December 2021
Retail
£m
Commercial
Banking
£m
Other
£m
Group
£m
Net interest income
8,515
2,479
42
11,036
Other income
1,596
918
1,123
3,637
Total income
10,111
3,397
1,165
14,673
Operating expenses
(5,878)
(2,732)
(1,596)
(10,206)
Impairment credit
447
869
2
1,318
Profit (loss) before tax
4,680
1,534
(429)
5,785
External income
11,200
3,172
301
14,673
Inter-segment (expense) income
(1,089)
225
864
–
Total income
10,111
3,397
1,165
14,673
External assets
364,375
85,806
152,668
602,849
External liabilities
312,578
145,273
104,226
562,077
Analysis of other income:
Net fee and commission income
452
801
–
1,253
Operating lease rental income
1,046
13
–
1,059
Gains less losses on disposal of financial assets at fair value through other
comprehensive income
–
–
(116)
(116)
Other income
98
104
1,239
1,441
Other income
1,596
918
1,123
3,637
Other items reflected in income statement above:
Depreciation and amortisation
1,525
273
979
2,777
Defined benefit scheme charge
89
29
118
236
Non-income statement items:
Additions to fixed assets
1,922
168
1,012
3,102
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.
Note 5: Net interest income
2023
£m
2022
£m
2021
£m
Interest income:
Loans and advances to banks
3,096
846
70
Loans and advances to customers
18,992
13,789
12,241
Reverse repurchase agreements
1,866
835
93
Debt securities
495
145
74
Financial assets held at amortised cost
24,449
15,615
12,478
Financial assets at fair value through other comprehensive income
851
947
442
Total interest income 1
25,300
16,562
12,920
Interest expense:
Deposits from banks
(131)
(78)
(66)
Customer deposits
(6,045)
(1,083)
(386)
Repurchase agreements
(2,397)
(827)
(22)
Debt securities in issue at amortised cost2
(2,595)
(1,075)
(746)
Lease liabilities
(28)
(27)
(30)
Subordinated liabilities
(395)
(367)
(634)
Total interest expense
(11,591)
(3,457)
(1,884)
Net interest income
13,709
13,105
11,036
1 Includes £885 million (2022: £711 million; 2021: £733 million) in respect of finance lease receivables.
2 The impact of the Group’s hedging arrangements is included on this line.
Net interest income also includes a debit of £1,517 million (2022: credit of £1 million; 2021: credit of £584 million) transferred from the cash
flow hedging reserve (see note 29).
Notes to the consolidated financial statements continued
for the year ended 31 December
94
Lloyds Bank plc Annual Report and Accounts 2023
Note 6: Net fee and commission income
Year ended 31 December 2023
Retail
£m
Commercial
Banking
£m
Other
£m
Total
£m
Fee and commission income:
Current accounts
406
214
–
620
Credit and debit card fees
800
459
–
1,259
Commercial banking fees
–
191
–
191
Factoring
–
75
–
75
Other fees and commissions
85
171
55
311
Total fee and commission income
1,291
1,110
55
2,456
Fee and commission expense
(673)
(288)
(143)
(1,104)
Net fee and commission income
618
822
(88)
1,352
Year ended 31 December 2022
Retail
£m
Commercial
Banking
£m
Other
£m
Total
£m
Fee and commission income:
Current accounts
420
222
–
642
Credit and debit card fees
734
456
–
1,190
Commercial banking fees
–
196
–
196
Factoring
–
79
–
79
Other fees and commissions
66
149
30
245
Total fee and commission income
1,220
1,102
30
2,352
Fee and commission expense
(665)
(280)
(156)
(1,101)
Net fee and commission income
555
822
(126)
1,251
Year ended 31 December 2021
Retail
£m
Commercial
Banking
£m
Other
£m
Total
£m
Fee and commission income:
Current accounts
425
209
–
634
Credit and debit card fees
533
345
–
878
Commercial banking fees
–
247
37
284
Factoring
–
76
–
76
Other fees and commissions
65
171
87
323
Total fee and commission income
1,023
1,048
124
2,195
Fee and commission expense
(571)
(247)
(124)
(942)
Net fee and commission income
452
801
–
1,253
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.
At 31 December 2023 , the Group held on its balance sheet £ 100 million (31 December 2022: £99 million) in respect of services provided to
customers and £62 million (31 December 2022 : £63 million) in respect of amounts received from customers for services to be provided
after the balance sheet date. Current unsatisfied performance obligations amount to £165 million (31 December 2022: £138 million); the
Group expects to receive substantially all of this revenue by 2025.
Income recognised during the year included £30 million (2022: £5 million) in respect of amounts included in the contract liability
balance at the start of the year and £nil (2022: £nil) 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
95
Lloyds Bank plc Annual Report and Accounts 2023
Note 7: Net trading income
2023
£m
2022
£m
2021
£m
Net gains (losses) on financial assets and liabilities at fair value through profit or loss:
Net gains (losses) on financial instruments held for trading
295
(24)
94
Net gains on other financial instruments mandatorily held at fair value through profit or loss
64
10
17
Net losses on financial liabilities designated at fair value through profit or loss
(342)
(153)
(65)
17
(167)
46
Foreign exchange
368
347
339
Investment property losses
(1)
–
–
Net trading income
384
180
385
1Includes hedge ineffectiveness in respect of fair value hedges (2023: loss of £264 million; 2022: loss of £21 million; 2021 : gain of £195 million ) and cash flow hedges ( 2023 :
gain of £ 17  million; 2022: loss of £6 million ; 2021: loss of £58 million ).
Note 8: Other operating income
2023
£m
2022
£m
2021
£m
Operating lease rental income
1,383
1,077
1,059
Net gains (losses) on disposal of financial assets at fair value through other comprehensive income
(note 29)
(140)
(76)
(116)
Liability management
–
(21)
(39)
Gain on disposal of business 1
191
–
–
Intercompany recharges and other
1,488
1,229
1,095
Total other operating income
2,922
2,209
1,999
1On 1 November 2023 the Group sold Halifax Share Dealing Limited to a fellow Lloyds Banking Group undertaking.
Note 9: Operating expenses
2023
£m
2022
£m
2021
£m
Staff costs:
Salaries and social security costs 1
3,389
3,081
2,832
Pensions and other retirement benefit schemes (note 11)
335
439
523
Restructuring and other staff costs
538
333
337
4,262
3,853
3,692
Premises and equipment costs 2
411
292
215
Depreciation and amortisation 3
2,851
2,348
2,777
Other expenses:
Regulatory and legal provisions (note 26)
661
225
1,177
Other
2,783
2,481
2,345
3,444
2,706
3,522
Total operating expenses
10,968
9,199
10,206
1Including social security costs of £347 million (2022: £322 million; 2021: 290 million).
2Net of profits on disposal of operating lease assets of £93 million ( 2022: £197 million ; 2021 : £249 million).
3Comprising depreciation in respect of premises £107 million (2022 : £112 million; 2021: £121 million), equipment £385 million (2022: £558 million; 2021: £777 million), operating
lease assets £1,070 million (2022 : £570 million; 2021: £709 million ) and right-of-use assets £ 203 million (2022: £213 million; 2021 : £216 million ).
Average headcount
The average number of persons on a headcount basis employed by the Group during the year was as follows:
2023
2022
2021
UK
64,844
62,062
63,649
Overseas
555
487
512
Total
65,399
62,549
64,161
Note 10: Share-based payments
During the year ended 31 December 2023 Lloyds Banking Group plc operated a number of share-based payment schemes for which
employees of the Lloyds Bank Group were eligible and all of which are mainly equity settled. Details of all schemes operated by Lloyds
Banking Group are set out below; these are managed and operated on a Lloyds Banking Group-wide basis. The amount charged to the
Group’s income statement in respect of Lloyds Banking Group share-based payment schemes, and which is included within staff costs
(note 9), was £302 million (2022: £351 million; 2021: £229 million ).
During the year ended 31 December 2023 the Lloyds Banking Group operated the following share-based payment schemes, all of which
are mainly equity settled.
Notes to the consolidated financial statements continued
for the year ended 31 December
96
Lloyds Bank plc Annual Report and Accounts 2023
Note 10: Share-based payments continued
Lloyds Banking Group Performance Share plan
The Lloyds Banking Group operates a Group Performance Share plan that is part equity settled. Bonuses in respect of employee service
in 2023 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 Lloyds Banking 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:
2023
2022
Number
of options
Weighted
average
exercise price
(pence)
Number
of options
Weighted
average
exercise price
(pence)
Outstanding at 1 January
1,256,918,075
31.30
1,180,563,291
30.63
Granted
287,984,574
38.55
217,611,519
39.38
Exercised
(164,709,399)
38.55
(23,359,526)
37.75
Forfeited
(12,862,726)
31.78
(20,961,259)
29.20
Cancelled
(45,807,000)
37.65
(47,687,607)
33.88
Expired
(10,318,376)
38.25
(49,248,343)
46.29
Outstanding at 31 December
1,311,205,148
31.70
1,256,918,075
31.30
Exercisable at 31 December
410,368
39.87
263,302
47.92
The weighted average share price at the time that the options were exercised during 2023 was £ 0.48 (2022 : £0.49). The weighted
average remaining contractual life of options outstanding at the end of the year was 1.58 years (2022 : 1.88 years).
The weighted average fair value of SAYE options granted during 2023 was £0.09 (2022: £0.07). The fair values of the SAYE options have
been determined using a standard Black-Scholes model.
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 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.
2023
2022
Number
of options
Weighted
average
exercise price
(pence)
Number
of options
Weighted
average
exercise price
(pence)
Outstanding at 1 January
20,466,471
Nil
14,032,762
Nil
Granted
15,198,717
Nil
10,278,224
Nil
Exercised
(8,739,497)
Nil
(3,333,322)
Nil
Vested
(765,247)
Nil
–
Nil
Forfeited
(8,216)
Nil
(33,409)
Nil
Lapsed
(20,973)
Nil
(477,784)
Nil
Outstanding at 31 December
26,131,255
Nil
20,466,471
Nil
Exercisable at 31 December
1,148,770
Nil
1,638,202
Nil
The weighted average fair value of options granted in the year was £0.41 (2022: £0.44 ). 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 2023 was £ 0.46 (2022: £0.46). The weighted average remaining contractual life of options outstanding at the end of the year was
6.3 years (2022: 6.0 years).
Included in the above are awards to 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 Lloyds Banking Group. The final tranche was exercised in 2022 and no options were outstanding
for 2023.
2023
Number
of shares
2022
Number
of shares
Outstanding at 1 January
–
686,085
Exercised
–
(686,085)
Outstanding at 31 December
–
–
Notes to the consolidated financial statements continued
for the year ended 31 December
97
Lloyds Bank plc Annual Report and Accounts 2023
Note 10: Share-based payments continued
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 Lloyds Banking Group.
2023
Number
of shares
2022
Number
of shares
Outstanding at 1 January
6,585,447
7,444,787
Exercised
(1,247,548)
(859,340)
Outstanding at 31 December
5,337,899
6,585,447
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 Lloyds Banking 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 2021 grant, the targets had not been fully met and therefore these awards vested in 2023
at a rate of 43.70 per cent.
The Executive Group Ownership awards were replaced by Long Term Share Plan awards in 2021.
2023
Number
of shares
2022
Number
of shares
Outstanding at 1 January
202,394,509
350,873,627
Vested
(66,555,435)
(50,703,778)
Forfeited
(96,034,781)
(98,741,356)
Dividend award
–
966,016
Outstanding at 31 December
39,804,293
202,394,509
Lloyds Banking Group Long Term Share Plan
The plan, introduced in 2021, replaced the Lloyds Banking 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.
The awards in respect of the 2021 grant are due to vest in 2024 at a rate of 100 per cent.
2023
Number
of shares
2022
Number
of shares
Outstanding at 1 January
171,947,743
77,883,068
Granted
108,551,439
108,513,202
Forfeited
(18,089,793)
(14,448,527)
Outstanding at 31 December
262,409,389
171,947,743
The weighted average fair value of awards granted in the year was £0.42 (2022: £0.36).
Assumptions at 31 December 2023
The fair value calculations at 31 December 2023 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
4.52%
4.36%
3.71%
Weighted average expected life
3.3 years
1.9 years
3.6 years
Weighted average expected volatility
28%
30%
34%
Weighted average expected dividend yield
6.0%
6.0%
6.0%
Weighted average share price
£0.44
£0.46
£0.52
Weighted average exercise price
£0.39
Nil
Nil
Expected volatility is a measure of the amount by which the Lloyds Banking 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 Lloyds Banking Group’s shares to assess the reasonableness of the historical volatility and
adjustments made where appropriate.
Notes to the consolidated financial statements continued
for the year ended 31 December
98
Lloyds Bank plc Annual Report and Accounts 2023
Note 10: Share-based payments continued
Share Incentive Plans
Matching shares
The Lloyds Banking 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 2023 was 43,945,238 (2022: 43,378,504), with an average fair value of
£0.46 (2022: £0.45), 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 2023 was 1,790,243 (2022: 7,261,080) with an average fair value of £0.46 (2022: £0.47) 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 Lloyds Banking Group, there is no change to the timeline for which shares will become unrestricted.
Since the beginning of 2023 the number of recipients of these awards has been reduced to the executive directors only.
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 Lloyds Banking Group within this three-year
period for other than a ‘good’ reason, all of the shares awarded will be forfeited.
There have not been any awards made since 2021.
Note 11: Retirement benefit obligations
Critical accounting judgements and key sources of estimation uncertainty
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 2023 in respect of the Group’s defined benefit pension scheme
obligations was £3,532 million, comprising an asset of £3,624 million and a liability of £92 million (2022: a net asset of £3,732 million
comprising an asset of £3,823 million and a liability of £91 million). The Group’s accounting policy for its defined benefit pension scheme
obligations is set out in note 2 (K).
Income statement and balance sheet sensitivities to changes in the key sources of estimation uncertainty and other actuarial
assumptions are provided in part (v).
2023
£m
2022
£m
2021
£m
(Credit) charge to the income statement
Defined benefit pension schemes
(80)
123
234
Other retirement benefit schemes
1
2
2
Total defined benefit schemes
(79)
125
236
Defined contribution pension schemes
414
314
287
Total charge to the income statement (note 9)
335
439
523
2023
£m
2022
£m
Amounts recognised in the balance sheet
Retirement benefit assets
3,624
3,823
Retirement benefit obligations
(136)
(126)
Total amounts recognised in the balance sheet
3,488
3,697
The total amounts recognised in the balance sheet relate to:
2023
£m
2022
£m
Defined benefit pension schemes
3,532
3,732
Other retirement benefit schemes
(44)
(35)
Total amounts recognised in the balance sheet
3,488
3,697
Notes to the consolidated financial statements continued
for the year ended 31 December
99
Lloyds Bank plc Annual Report and Accounts 2023
Note 11: 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 2023 , these schemes represented 94 per cent of the Group’s total
gross defined benefit pension assets (2022 : 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 2023 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 does
not provide 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 Group has completed the triennial valuation of its main defined benefit pension schemes as at 31 December 2022. Following a fixed
contribution of £800 million in the first half of 2023, a residual aggregate deficit of £250 million was agreed with the Trustee which the
Group paid in December 2023. There will be no further deficit contributions, fixed or variable, for this triennial period (to 31 December
2025).
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 £ 0.1 billion to its defined benefit schemes in 2024.
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 2023, the limited liability partnerships held assets of £6.2 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 2023 these held assets of £4.1 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 2023.
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 2023, 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 not considered likely to be material.
The Group is aware of the High Court ruling in the case of Virgin Media Ltd v NTL Pension Trustees II Ltd & Ors and is waiting for the
outcome of the appeal, scheduled for 25 June 2024, and any additional hearings, as well as confirmation from the Government as to
whether it will issue new regulations in response to this issue.
(ii)Amounts in the financial statements
2023
£m
2022
£m
Amount included in the balance sheet
Present value of funded obligations
(30,201)
(28,965)
Fair value of scheme assets
33,733
32,697
Net amount recognised in the balance sheet
3,532
3,732
Notes to the consolidated financial statements continued
for the year ended 31 December
100
Lloyds Bank plc Annual Report and Accounts 2023
Note 11: Retirement benefit obligations continued
2023
£m
2022
£m
Net amount recognised in the balance sheet
At 1 January
3,732
4,404
Net defined benefit pension credit (charge)
80
(123)
Actuarial (losses) gains on defined benefit obligation
(1,304)
17,222
Return on plan assets
(318)
(20,302)
Employer contributions
1,342
2,530
Exchange and other adjustments
–
1
At 31 December
3,532
3,732
2023
£m
2022
£m
Movements in the defined benefit obligation
At 1 January
(28,965)
(47,130)
Current service cost
(88)
(180)
Interest expense
(1,394)
(902)
Remeasurements:
Actuarial gains – demographic assumptions
153
288
Actuarial losses – experience
(1,067)
(1,186)
Actuarial (losses) gains – financial assumptions
(390)
18,120
Benefits paid
1,544
2,048
Past service cost
(5)
(4)
Settlements
–
13
Exchange and other adjustments
11
(32)
At 31 December
(30,201)
(28,965)
2023
£m
2022
£m
Analysis of the defined benefit obligation
Active members
(2,955)
(3,088)
Deferred members
(8,438)
(8,515)
Dependants
(1,572)
(1,349)
Pensioners
(17,236)
(16,013)
At 31 December
(30,201)
(28,965)
2023
£m
2022
£m
Changes in the fair value of scheme assets
At 1 January
32,697
51,534
Return on plan assets excluding amounts included in interest income
(318)
(20,302)
Interest income
1,602
997
Employer contributions
1,342
2,530
Benefits paid
(1,544)
(2,048)
Settlements
–
(13)
Administrative costs paid
(35)
(34)
Exchange and other adjustments
(11)
33
At 31 December
33,733
32,697
Notes to the consolidated financial statements continued
for the year ended 31 December
101
Lloyds Bank plc Annual Report and Accounts 2023
Note 11: Retirement benefit obligations continued
The (credit) expense recognised in the income statement for the year ended 31 December comprises:
2023
£m
2022
£m
2021
£m
Current service cost
88
180
213
Net interest amount
(208)
(95)
(29)
Settlements
–
–
1
Past service cost – plan amendments
5
4
11
Plan administration costs incurred during the year
35
34
38
Total defined benefit pension (credit) expense
(80)
123
234
(iii)Composition of scheme assets
2023
2022
Quoted
£m
Unquoted
£m
Total
£m
Quoted
£m
Unquoted
£m
Total
£m
Debt instruments1:
Fixed interest government bonds
5,657
–
5,657
3,007
–
3,007
Index-linked government bonds
16,105
–
16,105
15,497
–
15,497
Corporate and other debt securities
7,305
–
7,305
3,978
–
3,978
Asset-backed securities
4
–
4
–
–
–
29,071
–
29,071
22,482
–
22,482
Pooled investment vehicles
613
8,361
8,974
2,730
15,863
18,593
Property
–
97
97
–
116
116
Equity instruments
23
62
85
7
47
54
Money market instruments, cash, derivatives and other
assets and liabilities
466
(4,960)
(4,494)
1,069
(9,617)
(8,548)
At 31 December
30,173
3,560
33,733
26,288
6,409
32,697
1Of the total debt instruments, £26,777 million (2022: £20,369 million) were investment grade (credit ratings equal to or better than ‘BBB’).
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:
2023
£m
2022
£m
Alternative credit funds
1,962
2,222
Bond and debt funds
571
354
Equity funds
1,674
1,421
Hedge and mutual funds
808
240
Infrastructure funds
1,147
1,193
Liquidity funds
1,585
11,527
Property funds
1,227
1,604
Other
–
32
At 31 December
8,974
18,593
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:
2023
%
2022
%
Discount rate
4.70
4.93
Rate of inflation:
Retail Price Index (RPI)
2.96
3.13
Consumer Price Index (CPI)
2.47
2.69
Rate of salary increases
0.00
0.00
Weighted-average rate of increase for pensions in payment
2.73
2.84
Notes to the consolidated financial statements continued
for the year ended 31 December
102
Lloyds Bank plc Annual Report and Accounts 2023
Note 11: Retirement benefit obligations continued
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. A
gap of 130 basis points has been assumed between RPI and CPI in 2024 reducing to 120 basis points in 2025, 110 basis points in 2026 and
100 basis points from 2027 to 2030; thereafter a 10 basis point gap has been assumed.
Men
Women
2023
Years
2022
Years
2023
Years
2022
Years
Life expectancy for member aged 60, on the valuation date
26.7
26.7
28.7
28.8
Life expectancy for member aged 60, 15 years after the valuation date
27.8
27.8
29.8
30.0
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 2023 is assumed to live for, on average, 26.7 years for a male and 28.7 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 and 25 per cent weight on 2022 mortality experience.
(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
2023
£m
2022
£m
2023
£m
2022
£m
Inflation (including pension increases)1:
Increase of 0.1 per cent
11
13
224
251
Decrease of 0.1 per cent
(12)
(13)
(235)
(245)
Discount rate2:
Increase of 0.1 per cent
(22)
(25)
(355)
(379)
Decrease of 0.1 per cent
21
24
363
388
Expected life expectancy of members:
Increase of one year
45
38
927
745
Decrease of one year
(46)
(39)
(946)
(762)
1At 31 December 2023 , the assumed rate of RPI inflation is 2.96 per cent and CPI inflation 2.47 per cent ( 2022: RPI 3.13 per cent and CPI 2.69 per cent).
2At 31 December 2023 , the assumed discount rate is 4.70 per cent ( 2022: 4.93 per cent).
Notes to the consolidated financial statements continued
for the year ended 31 December
103
Lloyds Bank plc Annual Report and Accounts 2023
Note 11: 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 50 per
cent of scheme assets at 31 December 2023.
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 2023 the asset-liability matching strategy mitigated c.117 per cent
of the liability sensitivity to interest rate movements and c.125 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.
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 2023 the value of scheme assets included £ (160) 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 c.30 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:
2023
Years
2022
Years
Duration of the defined benefit obligation
13
15
Maturity analysis of benefits expected to be paid:
2023
£m
2022
£m
Within 12 months
1,697
1,409
Between 1 and 2 years
1,513
1,464
Between 2 and 5 years
4,886
4,678
Between 5 and 10 years
9,159
8,930
Between 10 and 15 years
9,176
9,296
Between 15 and 25 years
16,882
17,479
Between 25 and 35 years
12,343
12,720
Between 35 and 45 years
6,121
6,138
In more than 45 years
1,595
1,685
Notes to the consolidated financial statements continued
for the year ended 31 December
104
Lloyds Bank plc Annual Report and Accounts 2023
Note 11: 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 2023 the charge to the income statement in respect of defined contribution schemes was
£414 million ( 2022: £314 million; 2021: £287 million ), representing the contributions payable by the employer in accordance with each
scheme’s rules.
Other 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 2023
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 10.00 per cent (2022: 6.74 per cent).
Movements in the other retirement benefits obligation:
2023
£m
2022
£m
At 1 January
(35)
(103)
Actuarial (losses) gains
(11)
68
Insurance premiums paid
3
3
Charge for the year
(1)
(2)
Exchange and other adjustments
–
(1)
At 31 December
(44)
(35)
Notes to the consolidated financial statements continued
for the year ended 31 December
105
Lloyds Bank plc Annual Report and Accounts 2023
Note 12: Auditors’ remuneration
Fees payable to the Bank’s auditors by the Group are as follows:
2023
£m
2022
£m
2021
£m
Fees payable for the:
– audit of the Bank’s current year Annual report
5.1
4.9
4.7
– audits of the Bank’s subsidiaries
12.2
10.8
9.5
– total audit fees in respect of the statutory audit of Group entities1
17.3
15.7
14.2
– services normally provided in connection with statutory and regulatory filings or engagements
0.3
0.8
0.7
Total audit fees2
17.6
16.5
14.9
Other audit-related fees2
0.1
0.4
0.4
All other fees2
0.1
0.2
0.5
Total non-audit services3
0.2
0.6
0.9
Total fees payable to the Bank’s auditors by the Group
17.8
17.1
15.8
1As defined by the Financial Reporting Council (FRC).
2As defined by the Securities and Exchange Commission (SEC).
3As 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 £0.5 million in 2023 ( 2022 : £1.4 million; 2021 : £1.6 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 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 financial statements of Lloyds
Banking Group 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.
Lloyds Banking Group has procedures that are designed to ensure auditor independence for Lloyds Banking Group plc and all of its
subsidiaries, including prohibiting certain non-audit services. All audit and non-audit assignments must be pre-approved by the Lloyds
Banking Group Audit Committee (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 Bank Group in respect of the
following:
2023
£m
2022
£m
2021
£m
Audits of Group pension schemes
0.4
0.3
0.3
Reviews of the financial position of corporate and other borrowers
–
–
–
Notes to the consolidated financial statements continued
for the year ended 31 December
106
Lloyds Bank plc Annual Report and Accounts 2023
Note 13: Impairment
Year ended 31 December 2023
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
In respect of:
Loans and advances to banks
(3)
–
–
–
(3)
Loans and advances to customers
269
(270)
412
(73)
338
Debt securities
–
–
–
–
–
Financial assets at amortised cost
266
(270)
412
(73)
335
Impairment charge (credit) on drawn balances
266
(270)
412
(73)
335
Loan commitments and financial guarantees
31
(19)
(2)
–
10
Financial assets at fair value through other comprehensive income
(2)
–
–
–
(2)
Total impairment charge (credit)
295
(289)
410
(73)
343
Year ended 31 December 2022
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
In respect of:
Loans and advances to banks
9
–
–
–
9
Loans and advances to customers
(232)
679
882
(9)
1,320
Debt securities
6
–
–
–
6
Financial assets at amortised cost
(217)
679
882
(9)
1,335
Impairment (credit) charge on drawn balances
(217)
679
882
(9)
1,335
Loan commitments and financial guarantees
20
92
(1)
–
111
Financial assets at fair value through other comprehensive income
6
–
–
–
6
Total impairment (credit) charge
(191)
771
881
(9)
1,452
Year ended 31 December 2021
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
In respect of:
Loans and advances to banks
(4)
–
–
–
(4)
Loans and advances to customers
(436)
(1,008)
498
(135)
(1,081)
Debt securities
–
–
–
–
–
Financial assets at amortised cost
(440)
(1,008)
498
(135)
(1,085)
Impairment (credit) charge on drawn balances
(440)
(1,008)
498
(135)
(1,085)
Loan commitments and financial guarantees
(89)
(133)
(9)
–
(231)
Financial assets at fair value through other comprehensive income
(2)
–
–
–
(2)
Total impairment (credit) charge
(531)
(1,141)
489
(135)
(1,318)
The impairment charge includes a charge of £73 million (2022: no charge; 2021: release of £77 million) in respect of residual value
impairment and voluntary terminations within the Group’s UK motor finance business.
Notes to the consolidated financial statements continued
for the year ended 31 December
107
Lloyds Bank plc Annual Report and Accounts 2023
Note 14: Tax
Analysis of tax expense for the year
2023
£m
2022
£m
2021
£m
UK corporation tax:
Current tax on profit for the year
(1,307)
(1,050)
(1,349)
Adjustments in respect of prior years
87
110
83
(1,220)
(940)
(1,266)
Foreign tax:
Current tax on profit for the year
(44)
(20)
(21)
Adjustments in respect of prior years
2
(12)
22
(42)
(32)
1
Current tax expense
(1,262)
(972)
(1,265)
Deferred tax:
Current year
(559)
(498)
851
Adjustments in respect of prior years
(28)
170
(169)
Deferred tax (expense) credit
(587)
(328)
682
Tax expense
(1,849)
(1,300)
(583)
Factors affecting the tax expense for the year
The UK corporation tax rate for the year was 23.5 per cent (2022: 19.0 per cent; 2021: 19.0 per cent). The increase in applicable tax rate
from 2022 relates to the change in statutory tax rate effective from 1 April 2023. An explanation of the relationship between tax expense
and accounting profit is set out below.
2023
£m
2022
£m
2021
£m
Profit before tax
7,056
6,094
5,785
UK corporation tax thereon
(1,658)
(1,158)
(1,099)
Impact of surcharge on banking profits
(290)
(340)
(415)
Non-deductible costs: conduct charges
(30)
(5)
(167)
Non-deductible costs: bank levy
(31)
(25)
(19)
Other non-deductible costs
(53)
(58)
(59)
Non-taxable income
14
48
22
Tax relief on coupons on other equity instruments
78
46
65
Tax-exempt gains on disposals
71
–
2
Remeasurement of deferred tax due to rate changes
(8)
(21)
1,168
Differences in overseas tax rates
(3)
(55)
(17)
Adjustments in respect of prior years
61
268
(64)
Tax expense
(1,849)
(1,300)
(583)
Notes to the consolidated financial statements continued
for the year ended 31 December
108
Lloyds Bank plc Annual Report and Accounts 2023
Note 14: Tax continued
Deferred tax
The Group’s deferred tax assets and liabilities are as follows:
Statutory position
2023
£m
2022
£m
Tax disclosure
2023
£m
2022
£m
Deferred tax assets
4,636
5,857
Deferred tax assets
6,863
7,999
Deferred tax liabilities
(157)
(208)
Deferred tax liabilities
(2,384)
(2,350)
Net deferred tax asset at 31 December
4,479
5,649
Net deferred tax asset at 31 December
4,479
5,649
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 2022
5,018
760
300
17
69
37
–
176
6,377
Credit (charge) to the income
statement
(4)
(237)
114
(3)
(22)
183
8
(66)
(27)
Credit (charge) to other comprehensive
income
–
–
(155)
–
–
1,804
–
–
1,649
At 31 December 2022
5,014
523
259
14
47
2,024
8
110
7,999
Credit (charge) to the income
statement
(267)
(253)
(40)
12
–
29
73
(36)
(482)
Credit (charge) to other comprehensive
income
–
–
–
–
–
(628)
(26)
–
(654)
At 31 December 2023
4,747
270
219
26
47
1,425
55
74
6,863
Deferred tax liabilities
Capitalised
software
enhancements
£m
Acquisition
fair value
£m
Pension
assets
£m
Derivatives
£m
Asset
revaluations1
£m
Other
temporary
differences
£m
Total
£m
At 1 January 2022
(275)
(352)
(1,331)
–
(52)
(319)
(2,329)
(Charge) credit to the income statement
117
29
29
(470)
41
(47)
(301)
Credit to other comprehensive income
–
–
283
–
11
–
294
Exchange and other adjustments
–
–
–
–
–
(14)
(14)
At 31 December 2022
(158)
(323)
(1,019)
(470)
–
(380)
(2,350)
(Charge) credit to the income statement
69
35
(5)
(213)
–
9
(105)
Credit to other comprehensive income
–
–
53
–
–
66
119
Acquisitions
–
(58)
–
–
–
–
(58)
Exchange and other adjustments
–
–
–
–
–
10
10
At 31 December 2023
(89)
(346)
(971)
(683)
–
(295)
(2,384)
1Financial assets at fair value through other comprehensive income.
Notes to the consolidated financial statements continued
for the year ended 31 December
109
Lloyds Bank plc Annual Report and Accounts 2023
Note 14: Tax continued
At 31 December 2023 the Group carried net deferred tax assets on its balance sheet of £4,636 million (2022 : £5,857 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 £4,747 million
(2022: £5,014 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 (2022: 2036) 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 2034, 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
Deferred tax assets of £142 million (2022: £147 million) have not been recognised in respect of £564 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, £50 million (2022: £53 million) relates to losses that will expire if not used within
20 years, and £7 million (2022: £7 million) relates to losses with no expiry date.
Critical accounting judgements and key sources of estimation uncertainty
Critical judgement:
The Group believes that its interpretation of the tax rules on group relief are correct
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 its enquiry into the matter and issued a closure notice. The Group’s interpretation of the UK
rules has not changed and hence it appealed to the First Tier Tax Tribunal, with a hearing having taken place in May 2023. If the final
determination of the matter by the judicial process is that HMRC’s position is correct, management believes that this would result in an
increase in current tax liabilities of approximately £800 million (including interest) and a reduction in the Group’s deferred tax asset of
approximately £285 million. The Group, following conclusion of the hearing and 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
110
Lloyds Bank plc Annual Report and Accounts 2023
Note 15: 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
Total
£m
At 31 December 2023
Held for
trading
£m
Other
£m
Financial assets
Cash and balances at central banks
–
–
–
–
–
57,909
57,909
Financial assets at fair value through profit
or loss
–
–
1,862
–
–
–
1,862
Derivative financial instruments
72
3,093
–
–
–
–
3,165
Loans and advances to banks
–
–
–
–
–
8,810
8,810
Loans and advances to customers
–
–
–
–
–
433,124
433,124
Reverse repurchase agreements
–
–
–
–
–
32,751
32,751
Debt securities
–
–
–
–
–
12,546
12,546
Due from fellow Lloyds Banking Group
undertakings
–
–
–
–
–
840
840
Financial assets at amortised cost
–
–
–
–
–
488,071
488,071
Financial assets at fair value through other
comprehensive income
–
–
–
–
27,337
–
27,337
Other
–
–
–
–
–
240
240
Total financial assets
72
3,093
1,862
–
27,337
546,220
578,584
Financial liabilities
Deposits from banks
–
–
–
–
–
3,557
3,557
Customer deposits
–
–
–
–
–
441,953
441,953
Repurchase agreements
–
–
–
–
–
37,702
37,702
Due to fellow Lloyds Banking Group
undertakings
–
–
–
–
–
2,932
2,932
Financial liabilities at fair value through profit
or loss
–
–
–
5,255
–
–
5,255
Derivative financial instruments
427
3,880
–
–
–
–
4,307
Notes in circulation
–
–
–
–
–
1,392
1,392
Debt securities in issue at amortised cost
–
–
–
–
–
52,449
52,449
Other
–
–
–
–
–
1,912
1,912
Subordinated liabilities
–
–
–
–
–
6,935
6,935
Total financial liabilities
427
3,880
–
5,255
–
548,832
558,394
Notes to the consolidated financial statements continued
for the year ended 31 December
111
Lloyds Bank plc Annual Report and Accounts 2023
Note 15: Measurement basis of financial assets and liabilities 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
Total
£m
At 31 December 2022
Held for
trading
£m
Other
£m
Financial assets
Cash and balances at central banks
–
–
–
–
–
72,005
72,005
Financial assets at fair value through profit
or loss
–
–
1,371
–
–
–
1,371
Derivative financial instruments
19
3,838
–
–
–
–
3,857
Loans and advances to banks
–
–
–
–
–
8,363
8,363
Loans and advances to customers
–
–
–
–
–
435,627
435,627
Reverse repurchase agreements
–
–
–
–
–
39,259
39,259
Debt securities
–
–
–
–
–
7,331
7,331
Due from fellow Lloyds Banking Group
undertakings
–
–
–
–
–
816
816
Financial assets at amortised cost
–
–
–
–
–
491,396
491,396
Financial assets at fair value through other
comprehensive income
–
–
–
–
22,846
–
22,846
Other
–
–
–
–
–
229
229
Total financial assets
19
3,838
1,371
–
22,846
563,630
591,704
Financial liabilities
Deposits from banks
–
–
–
–
–
4,658
4,658
Customer deposits
–
–
–
–
–
446,172
446,172
Repurchase agreements
–
–
–
–
–
48,590
48,590
Due to fellow Lloyds Banking Group
undertakings
–
–
–
–
–
2,539
2,539
Financial liabilities at fair value through profit
or loss
–
–
–
5,159
–
–
5,159
Derivative financial instruments
506
5,385
–
–
–
–
5,891
Notes in circulation
–
–
–
–
–
1,280
1,280
Debt securities in issue at amortised cost
–
–
–
–
–
49,056
49,056
Other
–
–
–
–
–
1,617
1,617
Subordinated liabilities
–
–
–
–
–
6,593
6,593
Total financial liabilities
506
5,385
–
5,159
–
560,505
571,555
Notes to the consolidated financial statements continued
for the year ended 31 December
112
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities
At 31 December 2023, the carrying value of the Group’s financial instrument assets held at fair value was £32,364 million (2022:
£28,074 million ), and its financial instrument liabilities held at fair value was £9,562 million (2022 : £11,050 million).
(1)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.
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, property, plant 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, derivatives 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 and 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 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
113
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities continued
(2)Financial assets and liabilities carried at fair value
(A)Financial assets (excluding derivatives)
Valuation hierarchy
At 31 December 2023, the Group’s financial assets (excluding derivatives) carried at fair value totalled £29,199 million (2022:
£24,217 million). The table below analyses these financial assets by balance sheet classification, asset type and valuation methodology
(level 1, 2 or 3, as described above). The fair value measurement approach is recurring in nature. There were no significant transfers
between level 1 and 2 during the year. For amounts included below which are subject to repurchase and reverse repurchase
agreements see note 38.
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
At 31 December 2023
Financial assets at fair value through profit or loss
Loans and advances to customers
–
1,391
266
1,657
Equity shares
201
–
4
205
Total financial assets at fair value through profit or loss
201
1,391
270
1,862
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
14,074
48
–
14,122
Asset-backed securities
–
121
52
173
Corporate and other debt securities
951
12,090
–
13,041
15,025
12,259
52
27,336
Equity shares
–
–
1
1
Total financial assets at fair value through other comprehensive income
15,025
12,259
53
27,337
Total financial assets (excluding derivatives) at fair value
15,226
13,650
323
29,199
At 31 December 2022
Financial assets at fair value through profit or loss
Loans and advances to customers
–
841
291
1,132
Equity shares
235
–
4
239
Total financial assets at fair value through profit or loss
235
841
295
1,371
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
10,839
357
–
11,196
Asset-backed securities
–
87
51
138
Corporate and other debt securities
531
10,980
–
11,511
11,370
11,424
51
22,845
Equity shares
–
–
1
1
Total financial assets at fair value through other comprehensive income
11,370
11,424
52
22,846
Total financial assets (excluding derivatives) at fair value
11,605
12,265
347
24,217
Movements in level 3 portfolio
The table below analyses movements in level 3 financial assets (excluding derivatives) at fair value, recurring basis.
2023
2022
Financial
assets at
fair value
through
profit or loss
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
Total level 3
financial assets
(excluding
derivatives)
at fair value,
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
financial assets
(excluding
derivatives)
at fair value,
recurring basis
£m
At 1 January
295
52
347
399
56
455
Exchange and other adjustments
–
(1)
(1)
–
3
3
(Losses) gains recognised in the income statement
within other income
(1)
5
4
(20)
(3)
(23)
Purchases/increases to customer loans
–
–
–
3
–
3
Sales/repayments of customer loans
(24)
(3)
(27)
(87)
(4)
(91)
At 31 December
270
53
323
295
52
347
Gains (losses) recognised in the income statement,
within other income, relating to the change in fair
value of those assets held at 31 December
–
4
4
(19)
–
(19)
Notes to the consolidated financial statements continued
for the year ended 31 December
114
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities continued
Valuation methodology for financial assets (excluding derivatives)
Loans and advances to customers
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 certain collateralised loan obligations and
collateralised debt obligations.
(B)Financial liabilities (excluding derivatives)
Valuation hierarchy
At 31 December 2023, the Group’s financial liabilities (excluding derivatives) carried at fair value, comprised its financial liabilities at fair
value through profit or loss and totalled £5,255 million (2022: £5,159 million). The table below analyses these financial liabilities by
balance sheet classification and valuation methodology (level 1, 2 or 3, as described on page 113). The fair value measurement
approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
2023
2022
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Debt securities in issue designated at fair value
through profit or loss
–
5,232
23
5,255
–
5,133
26
5,159
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2023 was
£10,433 million, which was £5,178 million higher than the balance sheet carrying value (2022: £11,195 million, which was £6,036 million
higher than the balance sheet carrying value). At 31 December 2023 there was a cumulative £90 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, an increase of £234 million arose in 2023 and a decrease of
£519 million arose in 2022.
Movements in level 3 portfolio
The table below analyses movements in the level 3 financial liabilities (excluding derivatives) at fair value portfolio.
2023
£m
2022
£m
At 1 January
26
33
Gains recognised in the income statement within other income
(1)
(3)
Redemptions
(2)
(4)
At 31 December
23
26
Gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities
held at 31 December
(1)
(3)
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 2023, the own credit adjustment arising from the fair valuation of £5,255 million (2022: £5,159 million) of
the Group’s debt securities in issue designated at fair value through profit or loss resulted in a loss of £234 million (2022: gain of
£519 million), before tax, recognised in other comprehensive income.
Notes to the consolidated financial statements continued
for the year ended 31 December
115
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities continued
(C)Derivatives
Valuation hierarchy
All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2023, such assets totalled £3,165 million (2022:
£3,857 million) and liabilities totalled £4,307 million (2022: £5,891 million). The table below analyses these derivative balances by valuation
methodology (level 1, 2 or 3, as described on page 113). The fair value measurement approach is recurring in nature. There were no
significant transfers between level 1 and level 2 during the year.
2023
2022
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Derivative assets
–
3,165
–
3,165
–
3,857
–
3,857
Derivative liabilities
–
(4,168)
(139)
(4,307)
–
(5,728)
(163)
(5,891)
Movements in level 3 portfolio
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
2023
2022
Derivative
assets
£m
Derivative
liabilities
£m
Derivative
assets
£m
Derivative
liabilities
£m
At 1 January
–
(163)
16
(207)
Gains recognised in the income statement within other income
–
3
1
27
Purchases (additions)
–
–
–
(9)
(Sales) redemptions
–
21
–
25
Transfers out of the level 3 portfolio
–
–
(17)
1
At 31 December
–
(139)
–
(163)
Gains recognised in the income statement, within other income, relating to the change
in fair value of those assets or liabilities held at 31 December
–
2
–
26
Valuation methodology for derivatives
The Group’s derivatives are valued using 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 are valued using standard models with observable inputs, including 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.
Complex interest rate products where inputs to the valuation are significant and unobservable are classified as level 3.
Certain 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
116
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities continued
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 2022 and 2023:
2023
£m
2022
£m
At 1 January
50
154
Income statement credit
(11)
(104)
At 31 December
39
50
Represented by:
2023
£m
2022
£m
Credit Valuation Adjustment
32
48
Debit Valuation Adjustment
(3)
(8)
Funding Valuation Adjustment
10
10
39
50
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 10 per cent increase in LGD
increases the CVA by £8 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 2023).
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 1 per cent rise in the CDS spread would lead to an increase in the DVA of £6 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 1 per cent rise in interest rates would lead to a £16 million fall in the overall valuation adjustment to £13 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 10 basis points
increase in the cost of funds will increase the funding valuation adjustment by £1 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 2023, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £5 million (2022: £6 million).
Notes to the consolidated financial statements continued
for the year ended 31 December
117
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities continued
(D)Sensitivity of level 3 valuations
Critical accounting judgements and key sources of estimation uncertainty
Key sources of estimation uncertainty:
Interest rate spreads, credit spreads, earnings multiples and interest rate volatility
The Group’s valuation control framework and a description of level 1, 2 and 3 financial assets and liabilities is set out in section (1) above.
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 section (C)(i) above.
2023
2022
Effect of reasonably possible
alternative assumptions1
Effect of reasonably possible
alternative assumptions1
Valuation techniques
Significant
unobservable inputs2
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Financial assets at fair value through profit or loss
Loans and
advances to
customers
Discounted cash
flows
Interest rate
spreads
(+/- 50 bps)3
266
21
(19)
291
25
(23)
Equity
investments
n/a
4
1
(1)
4
2
(2)
270
295
Financial assets at fair value through other comprehensive income
Asset-backed
securities
Lead manager or
broker quote/
consensus pricing
n/a
52
2
(1)
51
4
(4)
Equity
investments
n/a
1
–
–
1
–
–
53
52
Level 3 financial assets carried at fair value
323
347
Financial liabilities at fair value through profit or loss
Securitisation
notes
Discounted cash
flows
Interest rate
spreads
(+/- 50 bps)5
23
1
(1)
26
1
(1)
Derivative financial liabilities
Interest rate
derivatives
Option pricing
model
Interest rate
volatility
( 13 %/200%) 6
16
–
–
13
–
–
Shared
appreciation
rights
Market values –
property valuation
HPI (+/- 1%)7
123
13
(12)
150
16
(16)
139
163
Level 3 financial liabilities carried at fair value
162
189
1Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
2Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations.
32022: +/- 50bps.
42022: 31%/59%.
52022: +/- 50bps.
62022: 13%/168%.
72022: +/- 1%.
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities and derivatives are as follows:
• 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
Notes to the consolidated financial statements continued
for the year ended 31 December
118
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities continued
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 volatility parameters have been flexed within a range.
(3)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 113). 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 2023
Loans and advances to banks
8,810
8,810
–
–
8,810
Loans and advances to customers
433,124
423,183
–
–
423,183
Reverse repurchase agreements
32,751
32,751
–
32,751
–
Debt securities
12,546
12,506
–
8,392
4,114
Due from fellow Lloyds Banking Group undertakings
840
840
–
–
840
Financial assets at amortised cost
488,071
478,090
–
41,143
436,947
At 31 December 2022
Loans and advances to banks
8,363
8,363
–
–
8,363
Loans and advances to customers
435,627
430,980
–
–
430,980
Reverse repurchase agreements
39,259
39,259
–
39,259
–
Debt securities
7,331
7,334
167
7,167
–
Due from fellow Lloyds Banking Group undertakings
816
816
–
–
816
Financial assets at amortised cost
491,396
486,752
167
46,426
440,159
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.
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
119
Lloyds Bank plc Annual Report and Accounts 2023
Note 16: Fair values of financial assets and liabilities continued
(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 113).
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 1
£m
Level 2
£m
Level 3
£m
At 31 December 2023
Deposits from banks
3,557
3,557
–
3,557
–
Customer deposits
441,953
442,391
–
442,391
–
Repurchase agreements
37,702
37,702
–
37,702
–
Due to fellow Lloyds Banking Group undertakings
2,932
2,932
–
2,932
–
Debt securities in issue at amortised cost
52,449
52,243
–
52,243
–
Subordinated liabilities
6,935
7,160
–
7,160
–
At 31 December 2022
Deposits from banks
4,658
4,660
–
4,660
–
Customer deposits
446,172
445,916
–
445,916
–
Repurchase agreements
48,590
48,590
–
48,590
–
Due to fellow Lloyds Banking Group undertakings
2,539
2,539
–
2,539
–
Debt securities in issue at amortised cost
49,056
48,818
–
48,818
–
Subordinated liabilities
6,593
6,760
–
6,760
–
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 at amortised cost
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 Lloyds Banking 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.
(4)Reclassifications of financial assets
There have been no reclassifications of financial assets in 2022 or 2023.
Notes to the consolidated financial statements continued
for the year ended 31 December
120
Lloyds Bank plc Annual Report and Accounts 2023
Note 17: Derivative financial instruments
The fair values and notional amounts of derivative instruments are set out in the following table:
2023
2022
Contract/
notional
amount
£m
Fair value
Contract/
notional
amount
£m
Fair value
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Trading and other
Exchange rate contracts
96,730
853
686
114,145
1,500
1,976
Interest rate contracts
815,557
2,183
3,006
1,124,299
2,221
3,171
Credit derivatives
3,595
48
65
4,058
105
97
Equity and other contracts
65
9
123
63
12
141
Total derivative assets/liabilities - trading and other
915,947
3,093
3,880
1,242,565
3,838
5,385
Hedging
Derivatives designated as fair value hedges
134,666
71
413
128,188
9
496
Derivatives designated as cash flow hedges
451,109
1
14
236,226
10
10
Total derivative assets/liabilities - hedging
585,775
72
427
364,414
19
506
Total recognised derivative assets/liabilities
1,501,722
3,165
4,307
1,606,979
3,857
5,891
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 38 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 38
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
Notes to the consolidated financial statements continued
for the year ended 31 December
121
Lloyds Bank plc Annual Report and Accounts 2023
Note 17: Derivative financial instruments continued
Details of the Group’s hedging instruments are set out below:
Maturity
At 31 December 2023
Up to 1 month
£m
1 to 3 months
£m
3 to 12 months
£m
1 to 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
1,908
4,993
16,411
73,607
37,712
134,631
Average fixed interest rate
0.95%
1.44%
2.11%
3.05%
2.03%
Cash flow hedges
Foreign exchange
Currency swap
Notional
12
49
439
41
–
541
Average EUR/GBP exchange rate
–
1.14
1.14
1.10
–
Average USD/GBP exchange rate
1.25
1.27
1.24
1.20
–
Interest rate
Interest rate swap
Notional
9,148
22,496
73,979
277,180
67,765
450,568
Average fixed interest rate
4.14%
4.20%
3.89%
3.39%
2.61%
Maturity
At 31 December 2022
Up to 1 month
£m
1 to 3 months
£m
3 to 12 months
£m
1 to 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
796
12,236
31,539
51,094
32,488
128,153
Average fixed interest rate
3.20%
0.10%
0.68%
2.04%
1.88%
Cash flow hedges
Foreign exchange
Currency swap
Notional
16
35
207
48
4
310
Average EUR/GBP exchange rate
–
–
–
–
–
Average USD/GBP exchange rate
1.23
1.26
1.19
1.23
1.18
Interest rate
Interest rate swap
Notional
4,476
4,891
24,929
152,862
48,758
235,916
Average fixed interest rate
3.18%
1.46%
2.42%
2.46%
1.63%
Notes to the consolidated financial statements continued
for the year ended 31 December
122
Lloyds Bank plc Annual Report and Accounts 2023
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 2023
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
3
–
2
Interest rate swaps
134,631
68
413
(3,098)
Cash flow hedges
Foreign exchange
Currency swaps
541
1
14
(14)
Interest rate
Interest rate swaps
450,568
–
–
2,221
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
128,153
8
496
3,108
Cash flow hedges
Foreign exchange
Currency swaps
310
10
10
25
Interest rate
Interest rate swaps
235,916
–
–
(6,417)
All amounts are held within derivative financial instruments.
Notes to the consolidated financial statements continued
for the year ended 31 December
123
Lloyds Bank plc Annual Report and Accounts 2023
Note 17: Derivative financial instruments continued
The Group’s hedged items are as follows:
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
Continuing
hedges
£m
Discontinued
hedges
£m
At 31 December 2023
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Fair value hedges
Interest rate
Fixed rate mortgages1
75,871
–
25
–
2,542
Fixed rate issuance2
–
30,852
–
1,463
(672)
Fixed rate bonds3
24,146
–
(331)
–
962
Cash flow hedges
Foreign exchange
Foreign currency issuance2
14
(11)
20
Customer deposits4
–
–
3
Interest rate
Customer loans1
(1,721)
(3,529)
(1,914)
Central bank balances5
(468)
(272)
(1,425)
Customer deposits4
250
2,169
23
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
Continuing
hedges
£m
Discontinued
hedges
£m
At 31 December 2022
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Fair value hedges
Interest rate
Fixed rate mortgages1
73,282
–
(2,602)
–
(3,199)
Fixed rate issuance2
–
28,391
–
2,069
2,422
Fixed rate bonds3
19,259
–
(1,549)
–
(2,350)
Cash flow hedges
Foreign exchange
Foreign currency issuance2
(25)
6
11
Customer deposits4
–
–
3
Interest rate
Customer loans1
5,931
(6,051)
(921)
Central bank balances5
2,194
(1,597)
(916)
Customer deposits4
(1,661)
2,332
(46)
1 Included within loans and advances to customers.
2 Included within debt securities in issue at amortised cost.
3 Included within financial assets at amortised cost and 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 £960 million relating to fixed rate issuances of £170 million and mortgages of
£790 million (2022: liability of £1,449 million relating to fixed rate issuances of £221 million and mortgages of £1,228 million).
Notes to the consolidated financial statements continued
for the year ended 31 December
124
Lloyds Bank plc Annual Report and Accounts 2023
Note 17: Derivative financial instruments continued
Gains and losses arising from hedge accounting are summarised as follows:
Gain (loss)
recognised
in other
comprehensive
income
£m
Hedge
ineffectiveness
recognised in
the income
statement1
£m
Amounts reclassified from reserves
to income statement as:
At 31 December 2023
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
(264)
Fixed rate issuance
(13)
Fixed rate bonds
13
Cash flow hedges
Foreign exchange
Foreign currency issuance
(14)
–
–
5
Interest expense
Customer deposits
–
–
–
–
Interest expense
Interest rate
Customer loans
(134)
17
–
1,663
Interest income
Central bank balances
297
3
–
519
Interest income
Customer deposits
576
(3)
–
(670)
Interest expense
Gain (loss)
recognised
in other
comprehensive
income
£m
Hedge
ineffectiveness
recognised in
the
income
statement1
£m
Amounts reclassified from reserves
to income statement as:
At 31 December 2022
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
(29)
Fixed rate bonds
(14)
Cash flow hedges
Foreign exchange
Foreign currency issuance
25
–
–
(6)
Interest expense
Customer deposits
3
–
–
–
Interest expense
Interest rate
Customer loans
(6,718)
(29)
–
5
Interest income
Central bank balances
(2,171)
1
–
2
Interest income
Customer deposits
2,341
22
–
(2)
Interest expense
1 Hedge ineffectiveness is included in the income statement within net trading income.
There was no gain or loss in either 2023 or 2022 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.
At 31 December 2023 £2,072 million of total recognised derivative assets of and £3,241 million of total recognised derivative liabilities of
(2022: £2,931 million of assets and £4,479 million of liabilities) had a contractual residual maturity of greater than one year.
Notes to the consolidated financial statements continued
for the year ended 31 December
125
Lloyds Bank plc Annual Report and Accounts 2023
Note 18: Loans and advances to customers
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
At 1 January 2023
362,766
60,103
7,611
9,622
440,102
678
1,792
1,752
253
4,475
Exchange and other adjustments1
2,432
(8)
(8)
18
2,434
(8)
(1)
106
67
164
Transfers to Stage 1
18,355
(18,317)
(38)
–
393
(385)
(8)
–
Transfers to Stage 2
(17,963)
18,545
(582)
–
(53)
121
(68)
–
Transfers to Stage 3
(1,214)
(2,507)
3,721
–
(13)
(223)
236
–
Impact of transfers between stages
(822)
(2,279)
3,101
–
(254)
401
312
459
73
(86)
472
459
Other changes in credit quality 2
106
(103)
802
8
813
Additions and repayments
8,168
(3,951)
(2,338)
(1,043)
836
90
(81)
(862)
(81)
(934)
Charge (credit) to the income
statement
269
(270)
412
(73)
338
Disposals and derecognition 3
(3,685)
(892)
(122)
(743)
(5,442)
(54)
(59)
(24)
(34)
(171)
Advances written off
(1,229)
–
(1,229)
(1,229)
–
(1,229)
Recoveries of advances written off in
previous years
116
–
116
116
–
116
At 31 December 2023
368,859
52,973
7,131
7,854
436,817
885
1,462
1,133
213
3,693
Allowance for impairment losses
(885)
(1,462)
(1,133)
(213)
(3,693)
Net carrying amount
367,974
51,511
5,998
7,641
433,124
Drawn ECL coverage4 (%)
0.2
2.8
15.9
2.7
0.8
1Exchange 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.
2Includes a charge for methodology and model changes of £60 million, split by stage as £ 96 million charge for Stage 1, £ 33 million credit for Stage 2, £ 1 million credit for
Stage 3 and £ 2 million credit for POCI.
3 Relates to the securitisations of legacy Retail mortgages and Retail unsecured loans.
4Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers.
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
At 1 January 2022
382,366
34,884
6,406
10,977
434,633
909
1,112
1,573
210
3,804
Exchange and other adjustments1
(1,574)
24
(21)
12
(1,559)
1
1
43
65
110
Transfers to Stage 1
8,329
(8,256)
(73)
–
176
(167)
(9)
–
Transfers to Stage 2
(34,889)
35,291
(402)
–
(66)
135
(69)
–
Transfers to Stage 3
(1,235)
(2,527)
3,762
–
(8)
(158)
166
–
Impact of transfers between stages
(27,795)
24,508
3,287
–
(119)
697
268
846
(17)
507
356
846
Other changes in credit quality 2
(312)
84
617
49
438
Additions and repayments
9,769
687
(1,315)
(1,354)
7,787
97
88
(91)
(58)
36
(Credit) charge to the income
statement
(232)
679
882
(9)
1,320
Advances written off
(928)
(13)
(941)
(928)
(13)
(941)
Recoveries of advances written off in
previous years
182
–
182
182
–
182
At 31 December 2022
362,766
60,103
7,611
9,622
440,102
678
1,792
1,752
253
4,475
Allowance for impairment losses
(678)
(1,792)
(1,752)
(253)
(4,475)
Net carrying amount
362,088
58,311
5,859
9,369
435,627
Drawn ECL coverage3 (%)
0.2
3.0
23.0
2.6
1.0
1Exchange 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.
2Includes a credit for methodology and model changes of £63 million, split by stage as £2 million charge for Stage 1, £11 million charge for Stage 2, £47 million credit for
Stage 3 and £29 million credit for POCI.
3Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers.
The total allowance for impairment losses includes £187 million (2022 : £92 million) in respect of residual value impairment and voluntary
terminations within the Group’s UK Motor Finance business.
At 31 December 2023 £377,462 million (2022: £389,517 million) of loans and advances to customers had a contractual residual maturity of
greater than one year.
Notes to the consolidated financial statements continued
for the year ended 31 December
126
Lloyds Bank plc Annual Report and Accounts 2023
Note 18: Loans and advances to customers continued
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
At 1 January 2023
257,517
41,783
3,416
9,622
312,338
91
552
311
253
1,207
Exchange and other adjustments1
–
–
–
18
18
–
–
53
67
120
Transfers to Stage 1
12,202
(12,195)
(7)
–
66
(65)
(1)
–
Transfers to Stage 2
(12,673)
13,103
(430)
–
(7)
33
(26)
–
Transfers to Stage 3
(450)
(1,656)
2,106
–
–
(66)
66
–
Impact of transfers between stages
(921)
(748)
1,669
–
(50)
91
115
156
9
(7)
154
156
Other changes in credit quality 2
43
(104)
14
8
(39)
Additions and repayments
1,202
(1,955)
(553)
(1,043)
(2,349)
19
(49)
(67)
(81)
(178)
Charge (credit) to the income
statement
71
(160)
101
(73)
(61)
Disposals and derecognition 3
(1,202)
(547)
(94)
(743)
(2,586)
(1)
(18)
(7)
(34)
(60)
Advances written off
(108)
–
(108)
(108)
–
(108)
Recoveries of advances written off in
previous years
7
–
7
7
–
7
At 31 December 2023
256,596
38,533
4,337
7,854
307,320
161
374
357
213
1,105
Allowance for impairment losses
(161)
(374)
(357)
(213)
(1,105)
Net carrying amount
256,435
38,159
3,980
7,641
306,215
Drawn ECL coverage4 (%)
0.1
1.0
8.2
2.7
0.4
1Exchange 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.
2Includes a charge for methodology and model changes of £74 million, split by stage as £91 million charge for Stage 1, £12 million credit for Stage 2, £(3) million credit for
Stage 3 and £2 million credit for POCI.
3Relates to the securitisation of legacy Retail mortgages.
4Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers.
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
At 1 January 2022
273,629
21,798
1,940
10,977
308,344
48
394
184
210
836
Exchange and other adjustments1
–
–
–
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
(11)
189
149
327
Other changes in credit quality 2
36
(21)
(1)
49
63
Additions and repayments
5,268
670
(585)
(1,354)
3,999
18
(10)
(45)
(58)
(95)
Charge (credit) to the income
statement
43
158
103
(9)
295
Advances written off
(28)
(13)
(41)
(28)
(13)
(41)
Recoveries of advances written off in
previous years
24
–
24
24
–
24
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 coverage3 (%)
–
1.3
9.1
2.6
0.4
1Exchange 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.
2Includes a credit for methodology and model changes of £96 million, split by stage as £nil for Stage 1, £12 million credit for Stage 2, £55 million credit for Stage 3 and
£ 29 million credit for POCI.
3Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers.
Notes to the consolidated financial statements continued
for the year ended 31 December
127
Lloyds Bank plc Annual Report and Accounts 2023
Note 18: Loans and advances to customers continued
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.
The Group’s impairment charge comprises impact of transfers between stages, other changes in credit quality and additions and
repayments.
Advances written off have first been transferred to Stage 3 and then acquired a full allowance through other changes in credit quality.
Recoveries of advances written off in previous years are shown at the full recovered value, with a corresponding entry in repayments
and release of allowance through other changes in credit quality.
Note 19: Allowance for expected credit losses
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 2023, the Group’s expected credit loss
allowance was £4,021 million (2022 : £4,796 million ), of which £ 3,707 million ( 2022 : £ 4,492 million ) was in respect of drawn balances.
The Group’s total impairment allowances were as follows:
Allowance for expected credit losses
At 31 December 2023
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
In respect of:
Loans and advances to banks
6
–
–
–
6
Loans and advances to customers
885
1,462
1,133
213
3,693
Debt securities
7
–
1
–
8
Financial assets at amortised cost
898
1,462
1,134
213
3,707
Provisions in relation to loan commitments and financial guarantees
153
159
2
–
314
Total
1,051
1,621
1,136
213
4,021
Expected credit loss in respect of financial assets at fair value through other comprehensive
income (memorandum item)
7
–
–
–
7
Allowance for expected credit losses
At 31 December 2022
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
In respect of:
Loans and advances to banks
9
–
–
–
9
Loans and advances to customers
678
1,792
1,752
253
4,475
Debt securities
7
–
1
–
8
Financial assets at amortised cost
694
1,792
1,753
253
4,492
Provisions in relation to loan commitments and financial guarantees
122
178
4
–
304
Total
816
1,970
1,757
253
4,796
Expected credit loss in respect of financial assets at fair value through other comprehensive
income (memorandum item)
9
–
–
–
9
Notes to the consolidated financial statements continued
for the year ended 31 December
128
Lloyds Bank plc Annual Report and Accounts 2023
Note 19: Allowance for expected credit losses continued
The calculation of the Group’s expected credit loss allowances and provisions against loan commitments and guarantees, which are
set out above, under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are
set out below:
Critical accounting judgements and key sources of estimation uncertainty
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 individual assessment of material cases and the use of judgemental adjustments made to
impairment modelling processes that 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
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 include end-of-term payments on past due interest-only accounts and loans
considered in probation 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.
Significant increase in credit risk
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 boundary1 (%)
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
1Probability-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 general probation period is applied to assets in
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.
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
129
Lloyds Bank plc Annual Report and Accounts 2023
Note 19: Allowance for expected credit losses continued
Individual assessments and application of judgement in adjustments to modelled ECL
The table below analyses total ECL allowances by portfolio, separately identifying the amounts that have been modelled, those that
have been individually assessed and those arising through the application of judgemental adjustments.
Judgements due to:
Modelled
ECL
£m
Individually
assessed
£m
Inflationary
and interest
rate risk
£m
Other1
£m
Total
ECL
£m
At 31 December 2023
UK mortgages
991
–
61
63
1,115
Credit cards
703
–
92
15
810
Other Retail
867
–
32
46
945
Commercial Banking
1,090
340
–
(280)
1,150
Other
1
–
–
–
1
Total
3,652
340
185
(156)
4,021
At 31 December 2022
UK mortgages
946
–
49
214
1,209
Credit cards
698
–
93
(28)
763
Other Retail
903
–
53
60
1,016
Commercial Banking
910
1,008
–
(111)
1,807
Other
1
–
–
–
1
Total
3,458
1,008
195
135
4,796
12022 includes £1 million which was previously reported within judgements due to COVID-19.
Individual assessed ECL
Stage 3 ECL in Commercial Banking is largely assessed on an individual basis by the Business Support Unit using bespoke assessment of
loss for each specific client based on potential 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 2023,
individually assessed provisions for Commercial Banking were £340 million (2022: £1,008 million) which reflected a range of £291 million
to £413 million (2022: £908 million to £1,140 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, such as probability of 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 applies
appropriate judgemental adjustments to the ECL 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 specific release criteria is identified.
During 2022 the intensifying inflationary pressures, alongside rising interest rates within the Group’s outlook created further risks not
deemed to be fully captured by ECL models. These pressures played out in 2023 with households experiencing increased interest rates
and living costs. These risks, whilst still present, are beginning to subside with inflation now reducing and interest rates now believed to
have peaked. As a result, the judgements held in respect of inflationary and interest rate risks are at a slightly reduced level of
£185 million (2022: £195 million). Other judgements continue to be applied for broader data and model limitations, both increasing and
decreasing ECL. These include incremental risks associated with a material devaluation in commercial real estate prices present since
2022. Given ECL models only capture future price movements, and not the suppressed level, there is a risk that further losses are yet to
emerge as well as greater risk on specific sector valuations. At 31 December 2023 judgemental adjustments resulted in net additional
ECL allowances totalling £29 million (2022: £330 million).
Judgements due to inflationary and interest rate risk
UK mortgages: £61 million (2022: £49 million)
There has been only modest evidence of credit deterioration in the UK mortgages portfolio through 2023 despite the high levels of
inflation and the rising interest rate environment. Increases in new to arrears and defaults that have emerged are mainly driven by
variable rate customers, who have experienced material increases in their monthly payment. Mortgage ECL models use UK Bank Rate
as a driver of predicted defaults largely capturing the stretch on customers due to increased payments, and that has contributed
materially to the elevated levels of ECL at 31 December 2023. The impact is also partly mitigated by stressed affordability assessments
applied at loan origination which means most customers have demonstrated the ability to absorb payment shocks.
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. The risk remains for customers maturing from low fixed rate deals, the
accumulated impact on variable rate product holders, lower levels of real household income and rental cover value. Therefore a
judgemental uplift in ECL has been taken in these segments of the mortgages portfolio, either where inflation is expected to present a
more material risk, or where segments within the model do not recognise UK Bank Rate as a material driver of predicted defaults.
Notes to the consolidated financial statements continued
for the year ended 31 December
130
Lloyds Bank plc Annual Report and Accounts 2023
Note 19: Allowance for expected credit losses continued
Credit cards: £92 million (2022: £93 million) and Other Retail: £32 million (2022: £53 million)
The Group’s ECL models for credit cards and personal loan portfolios use predictions of wage growth to account for future affordability
stress. As elevated 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 also 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 has 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 deterioration to date, uplifts continue to be applied to recognise that continued inflation and
interest rates risks remain.
Other judgements
UK mortgages: £63 million (2022: £214 million)
These adjustments principally comprise:
Increase in time to repossession: £106 million (2022: £118 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 is limited. This reflects an adjustment made to allow for an increase in the time assumed between default and
repossession. A number of defaulted accounts, equivalent in scale to the estimated shortfall in possessions experienced, have had their
provision coverage judgementally increased to the level of those accounts already in repossession. 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 judgmentally set to an increased level based on observed historical losses incurred on accounts
that were of an equivalent status.
Asset recovery values: £nil (2022: £69 million)
The low level of repossession volumes throughout 2020 to 2022 restricted the calibration of Forced Sale Discount (FSD) model
parameters which uses the achieved sales price experience over the last 12 months. Over this period management partly incorporated
an increasing trend in FSD rates through judgementally extending the observation period. At December 2023 the level of sales volumes
observed over the past 12 months has subsequently returned to an adequate level for model calibrations to again be performed
removing the need for judgemental adjustment.
Adjustment for specific segments: £23 million (2022: £25 million)
The Group monitors risks across specific segments of its portfolios which may not be fully captured through wider collective models.
The judgement for fire safety and cladding uncertainty has been maintained. 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.
Adjustment for Stage 2 oversensitivity: £(68) million (2022: £nil)
Management has observed an increasing degree of oversensitivity in the number of recently originated low risk accounts moving to
Stage 2 through the PD trigger mechanism. This arises from a blend of factors currently present, with the combination of the Group’s
current MES assumptions and the uplift approach applied, disproportionately applying greater forward-looking uplifts to recent
vintages. Given these accounts have shown no significant movement in observed credit scores and were originated under a similar or
more adverse economic outlook, an adjustment has been made pending a model rebuild. Management has judgementally increased
the threshold applied to these accounts by one further grade (to what is set out on page 129) which results in £6 billion of assets being
moved back to Stage 1 which results in a lower 12-month ECL.
Credit cards: £15 million (2022: £(28) million) and Other Retail: £46 million (2022: £60 million)
These adjustments principally comprise:
Lifetime extension on revolving products: Credit cards: £67 million (2022: £82 million) and Other Retail: £10 million (2022: £14 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 ECL models were developed. Incremental defaults beyond year three
are calculated through the extrapolation of the default trajectory observed throughout the three years and beyond. The judgement
has reduced slightly in the period following refinement to the discounting methodology applied.
Adjustments to loss given defaults (LGDs): Credit cards: £(50) million (2022: £(96) million) and Other Retail: £37 million (2022: £13 million)
A number of adjustments have been made to the loss given default assumptions used within unsecured and motor credit models. For
unsecured portfolios, the adjustments reflect the impact of changes in collection debt sale strategy on the Group’s LGD models,
incorporating up to date customer performance and forward flow debt sale pricing. For motor, the adjustment captures a decline in
used car prices.
Commercial Banking: £(280) million (2022: £(111) million)
These adjustments principally comprise:
Corporate insolvency rates: £(287) million (2022: £(35) million)
During 2023, the volume of UK corporate insolvencies continued to exhibit an increasing trend beyond December 2019 levels, revealing
a marked misalignment 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 to anchor future loss estimates to. Given the Group’s asset quality remains strong with
low new defaults, a negative adjustment is applied by using the long-term average rate. The larger negative adjustment in the period
reflects the widening gap between the increasing industry level and the long-term average rate used.
Adjustments to loss given defaults (LGDs): £(105) million (2022: £(105) million)
Following a review on the loss given default approach for commercial exposures, management deems that 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
131
Lloyds Bank plc Annual Report and Accounts 2023
Note 19: Allowance for expected credit losses continued
Commercial Real Estate (CRE) price reduction: £65 million (2022: £nil)
Rolling the forecast model forwards into the period has resulted in the material fall in CRE prices seen in late 2022 moving out of the
model assumptions used to assess ECL. Given the model uses future changes in the metric as a driver of defaults and loss rates there is
a risk that the model benefit that arises does not reflect the residual risk caused by the sustained low level of prices. Management
therefore considers it appropriate to judgementally reinstate the CRE price drop within the ECL model assumptions given the materially
reduced level in CRE prices could still trigger additional defaults Within this adjustment management has refined the potential impact
on loss rates through capturing updated valuations as well as stressing valuations on specific sectors where evidence suggests
valuations may lag achievable levels, notably in cases of stressed sale.
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 the potential for supply shocks remains an elevated concern. The Group has continued to
include a non-modelled severe downside scenario for Group ECL calculations for 31 December 2023 reporting.
Base case and MES economic assumptions
The Group’s base case economic scenario has been updated to reflect ongoing geopolitical developments, and further evidence of
easing of inflationary pressures allowing shifts to less restrictive monetary policies globally. The Group’s updated base case scenario
has three conditioning assumptions: first, the wars in Ukraine and the Middle East remain geographically contained and do not lead to
a major escalation in energy prices; second, China’s economic stabilisation policy is effective; and third, less restrictive monetary and
fiscal policy throughout this year.
Based on these assumptions and incorporating the economic data published in the fourth quarter, the Group’s base case scenario is
for slow expansion in GDP and a rise in the unemployment rate alongside modest changes in residential and commercial property
prices. Following a reduction in inflationary pressures, UK Bank Rate is expected to be lowered during 2024. 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 2023, 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 at 31 December 2023 covers the five years 2023 to 2027. 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, so 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 at 31 December 2023 is 1 January 2023. 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
132
Lloyds Bank plc Annual Report and Accounts 2023
Note 19: Allowance for expected credit losses continued
At 31 December 2023
2023
%
2024
%
2025
%
2026
%
2027
%
2023 to 2027
average
%
Start to
peak
%
Start to
trough
%
Upside
Gross domestic product
0.3
1.5
1.7
1.7
1.9
1.4
8.1
0.2
Unemployment rate
4.0
3.3
3.1
3.1
3.1
3.3
4.2
3.0
House price growth
1.9
0.8
6.9
7.2
6.8
4.7
25.7
(1.2)
Commercial real estate price growth
(3.9)
9.0
3.8
1.3
1.3
2.2
11.5
(3.9)
UK Bank Rate
4.94
5.72
5.61
5.38
5.18
5.37
5.79
4.25
CPI inflation
7.3
2.7
3.1
3.2
3.1
3.9
10.2
2.1
Base case
Gross domestic product
0.3
0.5
1.2
1.7
1.9
1.1
6.4
0.2
Unemployment rate
4.2
4.9
5.2
5.2
5.0
4.9
5.2
3.9
House price growth
1.4
(2.2)
0.5
1.6
3.5
1.0
4.8
(1.2)
Commercial real estate price growth
(5.1)
(0.2)
0.1
0.0
0.8
(0.9)
(1.2)
(5.3)
UK Bank Rate
4.94
4.88
4.00
3.50
3.06
4.08
5.25
3.00
CPI inflation
7.3
2.7
2.9
2.5
2.2
3.5
10.2
2.1
Downside
Gross domestic product
0.2
(1.0)
(0.1)
1.5
2.0
0.5
3.4
(1.2)
Unemployment rate
4.3
6.5
7.8
7.9
7.6
6.8
8.0
3.9
House price growth
1.3
(4.5)
(6.0)
(5.6)
(1.7)
(3.4)
2.0
(15.7)
Commercial real estate price growth
(6.0)
(8.7)
(4.0)
(2.1)
(1.2)
(4.4)
(1.2)
(20.4)
UK Bank Rate
4.94
3.95
1.96
1.13
0.55
2.51
5.25
0.43
CPI inflation
7.3
2.8
2.7
1.8
1.1
3.2
10.2
1.0
Severe downside
Gross domestic product
0.1
(2.3)
(0.5)
1.3
1.8
0.1
1.0
(2.9)
Unemployment rate
4.5
8.7
10.4
10.5
10.1
8.8
10.5
3.9
House price growth
0.6
(7.6)
(13.3)
(12.7)
(7.5)
(8.2)
2.0
(35.0)
Commercial real estate price growth
(7.7)
(19.5)
(10.6)
(7.7)
(5.2)
(10.3)
(1.2)
(41.8)
UK Bank Rate – modelled
4.94
2.75
0.49
0.13
0.03
1.67
5.25
0.02
UK Bank Rate – adjusted1
4.94
6.56
4.56
3.63
3.13
4.56
6.75
3.00
CPI inflation – modelled
7.3
2.7
2.2
0.9
(0.2)
2.6
10.2
(0.3)
CPI inflation – adjusted1
7.6
7.5
3.5
1.3
1.0
4.2
10.2
0.9
Probability-weighted
Gross domestic product
0.3
0.1
0.8
1.6
1.9
0.9
5.4
0.1
Unemployment rate
4.2
5.3
5.9
5.9
5.7
5.4
6.0
3.9
House price growth
1.4
(2.5)
(0.9)
(0.3)
1.8
(0.1)
2.0
(2.8)
Commercial real estate price growth
(5.3)
(1.9)
(1.1)
(1.0)
(0.2)
(1.9)
(1.2)
(9.9)
UK Bank Rate – modelled
4.94
4.64
3.52
3.02
2.64
3.75
5.25
2.59
UK Bank Rate – adjusted1
4.94
5.02
3.93
3.37
2.95
4.04
5.42
2.89
CPI inflation – modelled
7.3
2.7
2.8
2.3
1.9
3.4
10.2
1.9
CPI inflation – adjusted1
7.4
3.2
3.0
2.4
2.0
3.6
10.2
2.0
1 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.
Base case scenario by quarter1
At 31 December 2023
First
quarter
2023
%
Second
quarter
2023
%
Third
quarter
2023
%
Fourth
quarter
2023
%
First
quarter
2024
%
Second
quarter
2024
%
Third
quarter
2024
%
Fourth
quarter
2024
%
Gross domestic product
0.3
0.0
(0.1)
0.0
0.1
0.2
0.3
0.3
Unemployment rate
3.9
4.2
4.2
4.3
4.5
4.8
5.0
5.2
House price growth
1.6
(2.6)
(4.5)
1.4
(1.1)
(1.5)
0.5
(2.2)
Commercial real estate price growth
(18.8)
(21.2)
(18.2)
(5.1)
(4.1)
(3.8)
(2.2)
(0.2)
UK Bank Rate
4.25
5.00
5.25
5.25
5.25
5.00
4.75
4.50
CPI inflation
10.2
8.4
6.7
4.0
3.8
2.1
2.3
2.8
1Gross 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
133
Lloyds Bank plc Annual Report and Accounts 2023
Note 19: Allowance for expected credit losses continued
At 31 December 2022
2022
%
2023
%
2024
%
2025
%
2026
%
2022 to 2026
average
%
Start to
peak
%
Start to
trough
%
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
UK Bank Rate – adjusted 1
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)
CPI inflation – adjusted 1
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
UK Bank Rate – adjusted 1
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
CPI inflation – adjusted 1
9.1
8.9
4.3
2.5
1.7
5.3
11.0
1.6
1The 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.
Base case scenario by quarter1
At 31 December 2022
First
quarter
2022
%
Second
quarter
2022
%
Third
quarter
2022
%
Fourth
quarter
2022
%
First
quarter
2023
%
Second
quarter
2023
%
Third
quarter
2023
%
Fourth
quarter
2023
%
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
1Gross 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
134
Lloyds Bank plc Annual Report and Accounts 2023
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 probability of default and hence the staging of assets is constant across all
the scenarios. In each economic scenario the ECL for individual assessments is held constant reflecting the basis on which they are
evaluated. Judgemental adjustments applied through changes to model inputs or parameters, or more qualitative post model
adjustments, are apportioned across the scenarios in proportion to modelled ECL where this better reflects the sensitivity of these
adjustments to each scenario. 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 £673 million compared to £668 million at
31 December 2022.
At 31 December 2023
At 31 December 2022
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
1,115
395
670
1,155
4,485
1,209
514
790
1,434
3,874
Credit cards
810
600
771
918
1,235
763
596
727
828
1,180
Other Retail
945
850
920
981
1,200
1,016
907
992
1,056
1,290
Commercial Banking
1,150
780
986
1,342
2,179
1,807
1,434
1,618
1,953
3,059
Other
1
1
1
1
1
1
1
1
2
2
ECL allowance
4,021
2,626
3,348
4,397
9,100
4,796
3,452
4,128
5,273
9,405
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. In each economic scenario the ECL for individual assessments is held constant
reflecting the basis on which they are evaluated. Judgemental adjustments applied through changes to model inputs or parameters,
or more qualitative post-model adjustments, are apportioned across the scenarios in proportion to modelled ECL where this better
reflects the sensitivity of these adjustments to each scenario. A probability-weighted scenario is not shown as this view does not reflect
the basis on which ECL is calculated. 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 £586 million compared to £791 million at 31 December 2022.
At 31 December 2023
At 31 December 2022
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
UK mortgages
384
617
1,070
5,403
469
734
1,344
7,848
Credit cards
593
770
931
1,279
563
719
842
1,320
Other Retail
923
1,004
1,076
1,328
886
984
1,059
1,450
Commercial Banking
835
1,044
1,486
3,194
1,403
1,567
2,046
4,672
Other
–
–
–
–
1
1
2
2
ECL allowance
2,735
3,435
4,563
11,204
3,322
4,005
5,293
15,292
The impact of isolated changes in the UK unemployment rate and House Price Index (HPI) has been assessed on a univariate basis.
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 staging held flat to the reported probability-weighted view and is assessed through the direct
impact on modelled ECL and only includes judgemental adjustments applied through changes to model inputs.
The table below shows the impact on the Group’s ECL resulting from a 1 percentage point increase or decrease in the UK
unemployment rate. The increase or decrease is presented based on the adjustment phased evenly over the first 10 quarters of the
base case scenario. A more immediate increase or decrease would drive a more material ECL impact as it would be fully reflected in
both 12-month and lifetime probability of defaults.
At 31 December 2023
At 31 December 2022
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
UK mortgages
33
(32)
26
(21)
Credit cards
38
(38)
41
(41)
Other Retail
19
(19)
25
(25)
Commercial Banking
87
(81)
99
(90)
ECL impact
177
(170)
191
(177)
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 increase or decrease in the UK HPI. The increase or decrease is presented based on the adjustment phased evenly
over the first 10 quarters of the base case scenario.
At 31 December 2023
At 31 December 2022
10pp increase
in HPI
£m
10pp decrease
in HPI
£m
10pp increase
in HPI
£m
10pp decrease
in HPI
£m
ECL impact
(201)
305
(225)
370
Notes to the consolidated financial statements continued
for the year ended 31 December
135
Lloyds Bank plc Annual Report and Accounts 2023
Note 20: Finance lease receivables
The Group’s finance lease receivables are classified as loans and advances to customers and accounted for at amortised cost. These
balances are analysed as follows:
2023
£m
2022
£m
Not later than 1 year
5,903
6,523
Later than 1 year and not later than 2 years
4,817
4,087
Later than 2 years and not later than 3 years
4,579
3,818
Later than 3 years and not later than 4 years
3,051
3,007
Later than 4 years and not later than 5 years
618
416
Later than 5 years
354
397
Gross investment
19,322
18,248
Unearned future finance income
(2,175)
(1,553)
Rentals received in advance
(12)
(120)
Net investment
17,135
16,575
The net investment represents amounts recoverable as follows:
2023
£m
2022
£m
Not later than 1 year
5,205
5,793
Later than 1 year and not later than 2 years
4,305
3,637
Later than 2 years and not later than 3 years
4,069
3,534
Later than 3 years and not later than 4 years
2,696
2,879
Later than 4 years and not later than 5 years
544
380
Later than 5 years
316
352
Net investment
17,135
16,575
Equipment leased to customers under finance lease 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 £350 million (2022: £264 million ).
The Group’s finance lease assets are comprised as follows:
2023
£m
2022
£m
Electric vehicles
1,336
584
Internal combustion engine vehicles
11,425
10,919
Hybrid vehicles
1,144
742
Other
3,230
4,330
Net investment
17,135
16,575
Notes to the consolidated financial statements continued
for the year ended 31 December
136
Lloyds Bank plc Annual Report and Accounts 2023
Note 21: Goodwill and other intangible assets 1
Goodwill
£m
Brands
£m
Purchased
credit card
relationships
£m
Customer-
related
intangibles
£m
Capitalised
software
enhancements
£m
Total
£m
Cost 2 :
At 1 January 2022
814
584
1,002
50
6,381
8,831
Exchange and other adjustments
–
–
–
–
1
1
Additions
–
–
–
–
1,395
1,395
Disposals and write-offs
–
–
–
–
(186)
(186)
At 31 December 2022
814
584
1,002
50
7,591
10,041
Exchange and other adjustments
–
–
–
–
1
1
Additions
143
1
–
180
1,474
1,798
Disposals
–
–
–
–
(292)
(292)
At 31 December 2023
957
585
1,002
230
8,774
11,548
Accumulated amortisation:
At 1 January 2022
344
204
621
50
2,998
4,217
Exchange and other adjustments
–
–
1
–
(10)
(9)
Charge for the year 3
–
–
70
–
825
895
Disposals and write-offs
–
–
–
–
(186)
(186)
At 31 December 2022
344
204
692
50
3,627
4,917
Charge for the year 3
–
–
70
9
1,007
1,086
Disposals
–
–
–
–
(292)
(292)
At 31 December 2023
344
204
762
59
4,342
5,711
Balance sheet amount at 31 December 20234
613
381
240
171
4,432
5,837
Balance sheet amount at 31 December 20224
470
380
310
–
3,964
5,124
1See note 1 regarding changes to presentation.
2For 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.
3The charge for the year is recognised in operating expenses (note 9).
4Includes core deposit intangible of £nil, cost of £2,770 million and accumulated amortisation of £2,770 million.
Goodwill
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, which supports the Group’s sustainability ambitions, will enable the Group to expand its salary sacrifice
proposition within motor finance. The total fair value of the purchase consideration was £331 million, settled in cash, and the business
has been consolidated into the Group’s results since 21 February 2023. The acquisition is expected to provide significant growth
opportunities and funding synergies. Goodwill of £143 million has been recognised on the transaction. None of the goodwill recognised
is deductible for tax purposes. Acquisition-related costs of £3 million have been included in operating expenses for the year ended
31 December 2023. The revenue included in the consolidated statement of comprehensive income since 21 February 2023 contributed
by Tusker was £171 million, with net loss after tax of £11 million over the same period. Had Tusker been consolidated from 1 January 2023,
the consolidated statement of comprehensive income would have included revenue of £196 million and a net loss after tax of
£6 million.
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 £613 million (2022: £470 million), £302 million, or
49 per cent (2022: £302 million, 64 per cent) has been allocated to the Credit card cash generating unit and £309 million, or 50 per cent
(2022: £166 million, 35 per cent) has been allocated to the Motor business cash generating units, both in the Group’s Retail division.
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 10.5 per cent, based on the Group’s cost of equity. This is equivalent to a pre-tax rate of 14.0 per cent. The budgets and
plans are based upon past experience adjusted to take into account anticipated changes in credit card volumes having regard to
expected market conditions and competitor activity. The cash flows beyond the four-year period assume 3.5 per cent growth, which
does not exceed the long-term average growth rates for the markets in which the Cards business participates. 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.
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 10.5 per cent, based on the Group’s cost of equity. This is equivalent to a pre-tax rate of 14.0 per cent. The budgets and plans are
based upon past experience adjusted to take into account anticipated changes in sales volumes having regard to expected market
conditions and competitor activity. 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
137
Lloyds Bank plc Annual Report and Accounts 2023
Note 21: Goodwill and other intangible assets continued
Other intangible assets
The brand arising from the acquisition of Bank of Scotland in 2009 is recognised on the Group’s balance sheet and has been
determined to have an indefinite useful life. The carrying value at 31 December 2023 was £380 million (2022: £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 cash-generating unit, a discount rate of 10.5 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 22: Other assets
2023
£m
20221
£m
Property, plant and equipment:
Investment properties
–
3
Premises
903
852
Equipment
1,163
1,278
Operating lease assets (see below)
6,523
4,816
Right-of-use assets (note 23)
1,025
1,119
9,614
8,068
Settlement balances and items in the course of collection from banks
279
327
Prepayments
1,338
1,105
Other assets
707
622
Total other assets
11,938
10,122
1See note 1 regarding changes to presentation.
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:
Within 1 year
£m
1 to 2 years
£m
2 to 3 years
£m
3 to 4 years
£m
4 to 5 years
£m
Over 5 years
£m
Total
£m
At 31 December 2023
1,336
857
680
309
70
4
3,256
At 31 December 2022
912
620
322
102
11
–
1,967
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. Operating lease assets
are comprised as follows:
2023
£m
2022
£m
Electric vehicles
3,259
1,610
Internal combustion engine vehicles
1,815
2,042
Hybrid vehicles
1,444
1,159
Other
5
5
Total operating lease assets
6,523
4,816
Note 23: 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 22 ).
2023
£m
2022
£m
At 1 January
1,119
1,268
Exchange and other adjustments
6
–
Additions
135
97
Disposals
(32)
(33)
Depreciation charge for the year
(203)
(213)
At 31 December
1,025
1,119
The Group’s lease liabilities are recognised within other liabilities (note 25 ). The maturity analysis of the Group’s lease liabilities on an
undiscounted basis is set out in the liquidity risk section of note 38 .
The total cash outflow for leases in the year ended 31 December 2023 was £209 million (2022: £204 million). The amount recognised
within interest expense in respect of lease liabilities is disclosed in note 5.
Notes to the consolidated financial statements continued
for the year ended 31 December
138
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Debt securities in issue
2023
2022
At fair value
through profit
or loss
£m
At
amortised
cost
£m
Total
£m
At fair value
through profit
or loss
£m
At
amortised
cost
£m
Total
£m
Senior unsecured notes issued
5,232
22,642
27,874
5,133
21,377
26,510
Covered bonds
–
14,318
14,318
–
14,240
14,240
Certificates of deposit issued
–
3,096
3,096
–
1,607
1,607
Securitisation notes
23
4,211
4,234
26
2,780
2,806
Commercial paper
–
8,182
8,182
–
9,052
9,052
Total debt securities in issue
5,255
52,449
57,704
5,159
49,056
54,215
Covered bonds and securitisation programmes
At 31 December 2023, the bonds held by external parties and those held internally, were secured on certain loans and advances to
customers amounting to £27,019 million (2022: £28,231 million) which 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 at amortised cost.
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 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.
At 31 December 2023, the Group’s securitisation notes in issue held by external parties includes £23 million at fair value through profit or
loss (2022: £26 million). Those notes held internally, are secured on loans and advances to customers amounting to £30,190 million
(2022: £28,981 million), 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 at amortised cost.
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships.
Cash deposits of £3,678 million (2022: £3,789 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 2023 these obligations had not been
triggered; the maximum exposure under these facilities was £4 million (2022: £4 million).
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 2023 (2022: none).
At 31 December 2023 £32,036 million (2022: £30,571 million) of debt securities in issue at amortised cost had a contractual residual
maturity of greater than one year.
Note 25: Other liabilities
2023
£m
2022 1
£m
Settlement balances and items in the course of transmission to banks
507
466
Lease liabilities
1,589
1,260
Other creditors and accruals
4,164
4,277
Total other liabilities
6,260
6,003
1See note 1 regarding changes to presentation.
The maturity analysis of the Group’s lease liabilities on an undiscounted basis is set out in the liquidity risk section of note 38 .
Note 26: Provisions
Critical accounting judgements and key sources of estimation uncertainty
Critical judgement:
Determining whether a present obligation exists and whether it is more likely than not that an outflow of
resources will be required to settle that obligation
Key sources of estimation uncertainty:
Populations impacted, response rates and uphold rates
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
139
Lloyds Bank plc Annual Report and Accounts 2023
Note 26: Provisions continued
Provisions
for financial
commitments
and guarantees
£m
Regulatory
and legal
provisions
£m
Other
£m
Total
£m
At 1 January 2023
304
708
579
1,591
Exchange and other adjustments
–
7
1
8
Provisions applied
–
(362)
(322)
(684)
Charge for the year
10
661
330
1,001
At 31 December 2023
314
1,014
588
1,916
Provisions for financial commitments and guarantees
Provisions are recognised for expected credit losses on undrawn loan commitments and financial guarantees.
Regulatory and legal provisions
In the course of its business, the Group is engaged on a regular basis in discussions with UK and overseas regulators and other
governmental authorities on a range of matters, including legal and regulatory reviews and, from time to time, enforcement
investigations (including in relation to compliance with applicable laws and regulations, such as those relating to prudential regulation,
consumer protection, investment advice, business conduct, systems and controls, environmental, competition/anti-trust, tax, anti-
bribery, anti-money laundering and sanctions). Any matters discussed or identified during such discussions and inquiries may result in,
among other things, further inquiry or investigation, other action being taken by governmental and/or regulatory authorities, increased
costs being incurred by the Group, remediation of systems and controls, public or private censure, restriction of the Group’s business
activities and/or fines. The Group also receives complaints in connection with its past conduct and claims brought by or on behalf of
current and former employees, customers (including their appointed representatives), investors and other third parties and is subject
to legal proceedings and other legal actions from time to time. Any events or circumstances disclosed could have a material adverse
effect on the Group’s financial position, operations or cash flows. Provisions are held where the Group can reliably estimate a probable
outflow of economic resources. The ultimate liability of the Group may be significantly more, or less, than the amount of any provision
recognised. If the Group is unable to determine a reliable estimate, a contingent liability is disclosed. The recognition of a provision
does not amount to an admission of liability or wrongdoing on the part of the Group. During the year ended 31 December 2023 the
Group charged a further £661 million in respect of legal actions and other regulatory matters and the unutilised balance at
31 December 2023 was £ 1,014 million (31 December 2022 : £708 million ). The most significant items are outlined below.
Motor commission review
A £ 450 million provision, all recognised in the fourth quarter, has been established for the potential impact of the recently announced
FCA review into historical motor finance commission arrangements and sales.
As disclosed in previous periods, the Group continues to receive a number of court claims and complaints in respect of motor finance
commissions and is actively engaging with the FOS in its assessment of these complaints. On 10 January 2024, the FOS issued its Final
Decision on a complaint relating to the Group, as well as decisions relating to other industry participants. On 11 January 2024, the FCA
announced a section 166 review of historical motor finance commission arrangements and sales and plans to communicate a
decision on next steps in the third quarter of 2024 on the basis of the evidence collated in the review. The FCA has indicated that such
steps could include establishing an industry-wide consumer redress scheme and/or applying to the Financial Markets Test Case
Scheme, to help resolve any contested legal issues of general importance.
Following the FCA Motor Market Review in March 2019, the FCA issued a policy statement in July 2020 prohibiting the use of discretionary
commission models from 28 January 2021, which the Group adhered to. The Group continues to believe that its historical practices were
compliant with the law and regulations in place at that time.
As noted above, in response to both the FOS decisions and the FCA announcement the Group has recognised a charge of £450 million.
This includes estimates for operational and legal costs, including litigation costs, together with estimates for potential awards, based
on various scenarios using a range of assumptions, including for example, commission models, commission rates, applicable time
periods (between 2007 and 2021), response rates and uphold rates. Costs and awards could arise in the event that the FCA concludes
there has been misconduct and customer loss that requires remediation, or from adverse litigation decisions. However, while the FCA
review is progressing there is significant uncertainty as to the extent of misconduct and customer loss, if any, the nature and extent of
any remediation action, if required, and its timing. The ultimate financial impact could therefore materially differ from the amount
provided, both higher or lower. The Group welcomes the FCA intervention through an independent section 166 review.
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 its decisions in a generous, fair and common sense
manner, assessing claims against an expanded definition of the fraud and on a lower evidential basis.
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 90 per cent of the population have now had outcomes via this new process. The provision is unchanged
in 2023. Notwithstanding the settled claims and the increase in outcomes 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 Cranston’s recommendations in full.
Notes to the consolidated financial statements continued
for the year ended 31 December
140
Lloyds Bank plc Annual Report and Accounts 2023
Note 26: Provisions continued
Payment protection insurance (PPI)
The Group has incurred costs for PPI over a number of years totalling £21,906 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.
Other
The Group carries provisions of £137 million ( 2022 : £112 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 2023 provisions of £240 million (31 December 2022: £108 million) were held.
The Group carries provisions of £46 million (2022 : £86 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.
Note 27: Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:
Preferred
securities
£m
Undated
£m
Dated
£m
Total
£m
At 1 January 2022
1,661
170
6,827
8,658
Issued during the year1:
8.133% Dated Subordinated Fixed Rate Reset notes 2033 (US$1,000 million)
–
–
837
837
Repurchases and redemptions during the year1:
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
(6)
–
521
515
Other movements (cash and non-cash) 2
(1)
2
(1,236)
(1,235)
At 31 December 2022
–
146
6,447
6,593
Issued during the year1:
5.25% Fixed Rate Reset Dated Subordinated Notes 2033 (S$500 million)
–
–
288
288
Fixed-to-Floating Rate Dated Subordinated Notes 2033 (A$750 million)
–
–
382
382
–
–
670
670
Repurchases and redemptions during the year1:
9.625% Subordinated Bonds 2023 (£300 million)
–
–
(92)
(92)
7.07% Subordinated Fixed Rate Notes 2023 (€175 million)
–
–
(155)
(155)
8.75% Perpetual Subordinated Bonds (£100 million)
–
(5)
–
(5)
7.375% Subordinated Undated Instruments (£150 million)
–
–
–
–
8% Undated Subordinated Step-up Notes 2023 (£200 million)
–
–
–
–
–
(5)
(247)
(252)
Foreign exchange movements
–
–
(268)
(268)
Other movements (cash and non-cash) 2
–
–
192
192
At 31 December 2023
–
141
6,794
6,935
1 Issuances in the year generated cash inflows of £670 million ( 2022: £837 million ); the repurchases and redemptions resulted in cash outflows of £ 251 million (2022:
£2,216 million).
2Other movements include hedge accounting movements and cash payments in respect of interest on subordinated liabilities in the year amounting to £335 million
( 2022: £397 million ) offset by the interest expense in respect of subordinated liabilities of £ 395 million ( 2022: £367 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 2023 (2022: none ).
Notes to the consolidated financial statements continued
for the year ended 31 December
141
Lloyds Bank plc Annual Report and Accounts 2023
Note 27: Subordinated liabilities continued
Preference shares
The Bank has in issue one class of preference shares which are classified as liabilities under accounting standards.
2023
2022
2023
Number
of shares
2022
Number
of shares
2021
Number
of shares
£m
% of
share
capital
£m
% of
share
capital
2021
£m
6% Non-cumulative Redeemable
Preference shares of GBP1.00
100
100
100
–
–
–
–
–
The rights and obligations attaching to these shares are set out in the Bank’s articles of association, a copy of which can be obtained
from Companies House or from the Lloyds Banking Group website (www.lloydsbankinggroup.com/who-we-are/group-overview/
corporate-governance.html).
Note 28: Share capital
Issued and fully paid ordinary share capital
Ordinary shares of £1 each1
2023
Number
of shares
2022
Number
of shares
2021
Number
of shares
2023
£m
2022
£m
2021
£m
At 1 January and 31 December
1,574,285,752
1,574,285,752
1,574,285,752
1,574
1,574
1,574
1 Ordinary shares represent effectively 100 per cent of total share capital in issue as the issued preference shares represent below 0.01 per cent.
Ordinary shares
The holders of ordinary shares are entitled to receive the Bank’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 Bank’s
articles of association) and on a winding up may share in the assets of the Bank.
Issued and fully paid preference shares
The Bank has in issue one class of preference shares which are classified as liabilities under accounting standards and which are
included in note 27 .
Note 29: Other reserves
2023
£m
2022
£m
2021
£m
Merger reserve1
6,348
6,348
6,348
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
(322)
(393)
(362)
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
–
–
–
Cash flow hedging reserve
(3,554)
(5,168)
(451)
Foreign currency translation reserve
(77)
(44)
(135)
At 31 December
2,395
743
5,400
1 There has been no movements in this reserve in 2023 , 2022 or 2021 .
The merger reserve arose on the transfer of HBOS plc from the Bank’s ultimate holding company in January 2010.
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
142
Lloyds Bank plc Annual Report and Accounts 2023
Note 29: Other reserves continued
Movements in other reserves were as follows:
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
2023
£m
2022
£m
2021
£m
At 1 January
(393)
(362)
(558)
Change in fair value
(41)
(132)
137
Deferred tax
11
34
(44)
Current tax
1
8
–
(29)
(90)
93
Income statement transfers in respect of disposals (note 8)
140
76
116
Deferred tax
(38)
(23)
(11)
102
53
105
Impairment recognised in the income statement
(2)
6
(2)
At 31 December
(322)
(393)
(362)
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
2023
£m
2022
£m
2021
£m
At 1 January
–
–
–
Change in fair value
–
–
–
Deferred tax
–
(1)
1
–
(1)
1
Realised gains and losses transferred to retained profits
–
–
–
Deferred tax
–
1
(1)
–
1
(1)
At 31 December
–
–
–
Cash flow hedging reserve
2023
£m
2022
£m
2021
£m
At 1 January
(5,168)
(451)
1,507
Change in fair value of hedging derivatives
725
(6,520)
(2,138)
Deferred tax
(207)
1,803
606
518
(4,717)
(1,532)
Net income statement transfers
1,517
(1)
(584)
Deferred tax
(421)
1
158
1,096
–
(426)
At 31 December
(3,554)
(5,168)
(451)
Foreign currency translation reserve
2023
£m
2022
£m
2021
£m
At 1 January
(44)
(135)
(116)
Currency translation differences arising in the year
(33)
91
(19)
At 31 December
(77)
(44)
(135)
Notes to the consolidated financial statements continued
for the year ended 31 December
143
Lloyds Bank plc Annual Report and Accounts 2023
Note 30: Retained profits
2023
£m
2022
£m
2021
£m
At 1 January
31,792
28,836
25,750
Profit attributable to ordinary shareholders
4,858
4,528
4,826
Post-retirement defined benefit scheme remeasurements
(1,205)
(2,152)
1,062
Gains and losses attributable to own credit risk (net of tax)
(168)
364
(52)
Dividends paid (note 32)
(4,700)
–
(2,900)
Issue costs of other equity instruments (net of tax)
(5)
–
(1)
Repurchases and redemptions of other equity instruments
–
–
(9)
Capital contributions received
215
221
164
Return of capital contributions
(1)
(4)
(4)
Change in non-controlling interests
–
–
(1)
Realised gains and losses on equity shares held at fair value through other comprehensive income
–
(1)
1
At 31 December
30,786
31,792
28,836
Note 31: Other equity instruments
2023
£m
2022
£m
2021
£m
At 1 January
4,268
4,268
5,935
Issued in the year:
£750 million Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Permanent Write-Down Securities
750
–
–
£500 million Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Permanent Write-Down Securities
–
–
500
£750 million Floating Rate Additional Tier 1 Perpetual Subordinated Permanent Write-Down Securities
–
–
750
£300 million Floating Rate Additional Tier 1 Perpetual Subordinated Permanent Write-Down Securities
–
–
300
750
–
1,550
Repurchases and redemptions during the year:
£1,376 million Additional Tier 1 Perpetual Subordinated Permanent Write-Down Securities
–
–
(1,376)
€736 million Additional Tier 1 Perpetual Subordinated Permanent Write-Down Securities
–
–
(612)
$1,642 million Additional Tier 1 Perpetual Subordinated Permanent Write-Down Securities
–
–
(1,229)
–
–
(3,217)
Profit for the year attributable to other equity holders
334
241
344
Distributions on other equity instruments
(334)
(241)
(344)
At 31 December
5,018
4,268
4,268
The principal terms of the AT1 securities are described below:
• The securities rank behind the claims against the Bank of unsubordinated creditors on a winding-up
• The fixed rate reset securities bear a fixed rate of interest until the first call date. After the initial call date, in the event that they are
not redeemed, the fixed rate reset AT1 securities will bear interest at rates fixed periodically in advance. The floating rate AT1
securities will be reset quarterly both prior to and following the first call date
• Interest on the securities will be due and payable only at the sole discretion of the Bank and the Bank 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 the Bank, in whole at the first call date, or at any interest payment
date thereafter. In addition, the AT1 securities are repayable, at the option of the Bank, in whole for certain regulatory or tax reasons.
Any repayments require the prior consent of the PRA
• The securities will be subject to a Permanent Write Down should the Common Equity Tier 1 ratio of the Bank fall below 7.0 per cent
Note 32: Dividends on ordinary shares
Dividends paid during the year were as follows:
2023
£m
2022
£m
2021
£m
Interim dividends
4,700
–
2,900
Notes to the consolidated financial statements continued
for the year ended 31 December
144
Lloyds Bank plc Annual Report and Accounts 2023
Note 33: 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:
Compensation
2023
£m
2022
£m
2021
£m
Salaries and other short-term benefits
15
11
10
Post-employment benefits
–
–
–
Share-based payments
15
14
14
Total compensation
30
25
24
The aggregate of the emoluments of the directors was £9.3 million ( 2022 : £9.2 million ; 2021: £10.6 million ).
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £nil (2022: £nil; 2021:
£nil).
The total for the highest paid director (Charlie Nunn) was £5,105,000 (2022: Charlie Nunn: £5,160,000 ; 2021: Sir António Horta-Osório:
£3,117,000); this did not include any gain on exercise of Lloyds Banking Group plc shares in any year.
Share options over Lloyds Banking Group plc shares
2023
million
2022
million
2021
million
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
–
–
–
Share plans settled in Lloyds Banking Group plc shares
2023
million
2022
million
2021
million
At 1 January
72
74
117
Granted, including certain adjustments (includes entitlements of appointed key management personnel)
27
29
19
Exercised/lapsed (includes entitlements of former key management personnel)
(44)
(31)
(62)
At 31 December
55
72
74
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:
Loans
2023
£m
2022
£m
2021
£m
At 1 January
2
3
2
Advanced (includes loans to appointed key management personnel)
–
1
1
Repayments (includes loans to former key management personnel)
(1)
(2)
–
At 31 December
1
2
3
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of
between 1.09 per cent and 32.40 per cent in 2023 (2022: 1.01 per cent and 30.15 per cent; 2021: 0.39 per cent and 22.93 per cent).
No provisions have been recognised in respect of loans given to key management personnel (2022 and 2021: £ nil).
Deposits
2023
£m
2022
£m
2021
£m
At 1 January
10
11
11
Placed (includes deposits of appointed key management personnel)
45
37
26
Withdrawn (includes deposits of former key management personnel)
(41)
(38)
(26)
At 31 December
14
10
11
Deposits placed by key management personnel attracted interest rates of up to 6.25 per cent (2022: 5.0 per cent; 2021: 1.0 per cent).
At 31 December 2023, the Group did not provide any guarantees in respect of key management personnel ( 2022 and 2021: none).
At 31 December 2023, transactions, arrangements and agreements entered into by the Group and its banking subsidiaries with
directors and connected persons included amounts outstanding in respect of loans and credit card transactions of £23.6 thousand
with six directors and no connected persons (2022: £2.1 thousand with three directors and no connected persons; 2021: £0.6 million with
five directors and two connected persons).
Notes to the consolidated financial statements continued
for the year ended 31 December
145
Lloyds Bank plc Annual Report and Accounts 2023
Note 33: Related party transactions continued
Balances and transactions with fellow Lloyds Banking Group undertakings
Balances and transactions between members of the Lloyds Bank Group
In accordance with IFRS 10 Consolidated Financial Statements, transactions and balances between the Bank and its subsidiary
undertakings, and between those subsidiary undertakings, have all been eliminated on consolidation and thus are not reported as
related party transactions of the Group.
Balances and transactions with Lloyds Banking Group plc and fellow subsidiaries of the Bank
The Bank and its subsidiaries have balances due to and from the Bank’s parent company, Lloyds Banking Group plc and fellow
subsidiaries of the Bank. These are included on the Group’s balance sheet as follows:
2023
£m
2022
£m
Assets, included within:
Derivative financial instruments
1,137
1,120
Financial assets at amortised cost: due from fellow Lloyds Banking Group undertakings
840
816
Financial assets at fair value through profit or loss
1
–
1,978
1,936
Liabilities, included within:
Due to fellow Lloyds Banking Group undertakings
2,932
2,539
Derivative financial instruments
953
1,084
Debt securities in issue at amortised cost
18,131
17,648
Subordinated liabilities
6,919
6,490
28,935
27,761
These balances include Lloyds Banking Group plc’s banking arrangements and, due to the size and volume of transactions passing
through these accounts, it is neither practical nor meaningful to disclose information on gross inflows and outflows. During 2023 the
Group earned £9 million interest income on the above asset balances (2022: £11 million; 2021: £11 million) and the Group incurred
£1,010 million interest expense on the above liability balances (2022: £666 million; 2021: £500 million).
Details of intercompany recharges recognised within other operating income are given in note 8 and details of contingent liabilities
and commitments entered into on behalf of fellow Lloyds Banking Group undertakings are given in note 34.
Other related party transactions
Pension funds
The Group provides banking services to certain of its pension funds. At 31 December 2023, customer deposits of £133 million (2022:
£155 million) related to the Group’s pension funds.
Joint ventures and associates
At 31 December 2023 there were loans and advances to customers of £47 million (2022: £21 million) outstanding and balances within
customer deposits of £6 million (2022: £58 million) relating to joint ventures and associates.
During the year the Group paid fees of £4 million (2022: £5 million) to the Lloyds Banking Group’s Schroders Personal Wealth joint venture
and no payment was made (2022: £18 million) under the terms of agreements put in place on the establishment of the joint venture.
Note 34: Contingent liabilities, commitments and guarantees
Contingent liabilities, commitments and guarantees arising from the banking business
At 31 December 2023 contingent liabilities, such as performance bonds and letters of credit, arising from the banking business were
£2,755 million (2022 : £2,900 million).
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. Total commitments and guarantees were £122,733 million (2022: £127,369 million), of which in respect of undrawn formal
standby facilities, credit lines and other commitments to lend, £53,722 million (2022: £57,782 million) was irrevocable.
Capital commitments
Capital expenditure contracted but not provided for at 31 December 2023 amounted to £1,240 million (2022: £1,663 million) and 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
146
Lloyds Bank plc Annual Report and Accounts 2023
Note 34: Contingent liabilities, commitments and guarantees continued
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Lloyds Banking 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 Lloyds Banking 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 Lloyds Banking Group may be subject and this cap is set at the cash consideration received
by the Lloyds Banking Group for the sale of its stake in Visa Europe to Visa Inc in 2016. In 2016, the Lloyds Banking 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 from time to time. Any such release and any subsequent sale of Visa common stock
does not impact the contingent liability.
LIBOR and other trading rates
Certain Lloyds Banking 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 Lloyds Banking 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 Lloyds Banking 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 Lloyds Banking Group of any private lawsuits or ongoing
related challenges to the interpretation or validity of any of the Lloyds Banking Group’s contractual arrangements, including their timing
and scale. As such, it is not practicable to provide an estimate of any potential financial effect.
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 its enquiry into the matter and issued a closure notice. The Group’s interpretation of the UK
rules has not changed and hence it appealed to the First Tier Tax Tribunal, with a hearing having taken place in May 2023. If the final
determination of the matter by the judicial process is that HMRC’s position is correct, management believes that this would result in an
increase in current tax liabilities of approximately £800 million (including interest) and a reduction in the Group’s deferred tax asset of
approximately £285  million. The Group, following conclusion of the hearing and 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.
FCA investigation into the Group’s anti-money laundering control framework
The FCA has opened an investigation into the Group’s compliance with domestic UK money laundering regulations and the FCA’s rules
and Principles for Businesses, with a focus on aspects of its anti-money laundering control framework. The Group has been fully co-
operating with the investigation. It is not currently possible to estimate the potential financial impact, if any, to the Group.
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 (including their appointed
representatives), investors or other third parties, as well as legal and regulatory reviews, enquiries and examinations, requests for
information, audits, challenges, investigations and enforcement actions, which could relate to a number of issues. This includes matters
in relation to compliance with applicable laws and regulations, such as those relating to prudential regulation, consumer protection,
investment advice, business conduct, systems and controls, environmental, competition/anti-trust, tax, anti-bribery, anti-money
laundering and sanctions, some of which may be beyond the Group’s control, 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. 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 26.
Notes to the consolidated financial statements continued
for the year ended 31 December
147
Lloyds Bank plc Annual Report and Accounts 2023
Note 35: 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 24 for securitisations and covered bond vehicles, note 11 for structured entities associated with the
Group’s pension schemes, and below. Details of the Group’s interests in unconsolidated structured entities are also included below .
Asset-backed conduits
In addition to the structured entities discussed in note 24, 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 2023 was £2,808 million ( 2022 : £2,357 million ), comprising £ 1,521 million of loans and advances
(2022: £1,464 million), £698 million of debt securities (2022: £850 million) and £589 million of financial assets at fair value through profit or
loss (2022: £43 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 2023
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.
Unconsolidated structured entities
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 following table describes the types of structured entities that the Group does not consolidate but in which it holds an interest.
Total assets of
structured entities
Type of entity
Nature and purpose of structured entities
Interest held by the Group
2023
£bn
2022
£bn
Securitisation vehicles
These vehicles issue asset-backed notes to
investors and facilitate the management of
the Group’s balance sheet.
• Interest in notes issued by the vehicles
• Fees for loan servicing
5
–
The following table sets out an analysis of the carrying amount of interest held by the Group in the unconsolidated structured entities.
The maximum exposure to loss is the carrying amounts of the assets held.
Carrying amount
2023
£m
2022
£m
Notes held in securitisation vehicles
4,016
–
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 non-contractual financial or other support in the future.
The carrying amount of assets transferred to securitisation vehicles at the time of transfer was £5,481 million and the Group recognised
a gain of £31 million on transfer.
Continuing involvement in financial assets that have been derecognised
The Group has derecognised financial assets in their entirety following transactions with securitisation vehicles, as noted above. The
continuing involvement largely arises from funding provided to the vehicles through the purchase of issued notes. The majority of these
notes are recognised as debt securities held at amortised cost, with the remaining notes held by the Group recognised at fair value
through profit or loss. The carrying amount of these interests and the maximum exposure to loss is included in the table above. At 31
December 2023 the fair value of the retained notes was £4,032 million. The income from the Group’s interest in these structures for the
year ended 31 December 2023 and cumulatively for the lifetime was £124 million.
Notes to the consolidated financial statements continued
for the year ended 31 December
148
Lloyds Bank plc Annual Report and Accounts 2023
Note 36: Transfers of financial assets
Transferred financial assets derecognised in their entirety with ongoing exposure
Through asset securitisations, the Group has transferred financial assets which were derecognised in their entirety, with some
continuing involvement. Further details are available in note 35.
Transferred financial assets that continue to be recognised
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 24, 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 24). The liabilities shown in the table below have
recourse to the transferred assets.
2023
2022
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Repurchase and securities lending transactions
Debt securities held at amortised cost
1,401
–
1,162
–
Financial assets at fair value through other comprehensive income
9,583
4,906
11,801
6,571
Securitisation programmes
Financial assets at amortised cost:
Loans and advances to customers1
30,190
4,234
28,981
2,806
1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £ 19,617 million (31 December 2022: £21,887 million).
Notes to the consolidated financial statements continued
for the year ended 31 December
149
Lloyds Bank plc Annual Report and Accounts 2023
Note 37: 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.
Related amounts where
set off in the balance
sheet not permitted1
Potential
net amounts
if offset
of related
amounts
permitted
£m
Gross
amounts of
assets and
liabilities2
£m
Amount
offset in
the balance
sheet3
£m
Net amounts
presented in
the balance
sheet
£m
Cash
collateral
received/
pledged
£m
Non-cash
collateral
received/
pledged
£m
At 31 December 2023
Financial assets
Financial assets at fair value through profit or loss
1,862
–
1,862
–
–
1,862
Derivative financial instruments
42,629
(39,464)
3,165
(679)
(2,213)
273
Financial assets at amortised cost:
Loans and advances to banks
8,810
–
8,810
(1,178)
–
7,632
Loans and advances to customers
436,424
(3,300)
433,124
(137)
(2,214)
430,773
Reverse repurchase agreements
40,387
(7,636)
32,751
58
(32,559)
250
Debt securities
12,546
–
12,546
–
–
12,546
498,167
(10,936)
487,231
(1,257)
(34,773)
451,201
Financial assets at fair value through other comprehensive
income
27,337
–
27,337
–
(5,051)
22,286
Financial liabilities
Deposits from banks
3,557
–
3,557
(753)
–
2,804
Customer deposits
442,593
(640)
441,953
(20)
(2,214)
439,719
Repurchase agreements
45,338
(7,636)
37,702
60
(37,714)
48
Financial liabilities at fair value through profit or loss
5,255
–
5,255
–
(1)
5,254
Derivative financial instruments
46,431
(42,124)
4,307
(1,223)
(2,898)
186
Related amounts where
set off in the balance
sheet not permitted1
Potential
net amounts
if offset
of related
amounts
permitted
£m
Gross
amounts of
assets and
liabilities2
£m
Amount
offset in
the balance
sheet3
£m
Net amounts
presented in
the balance
sheet
£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
1,371
–
1,371
–
–
1,371
Derivative financial instruments
55,541
(51,684)
3,857
(767)
(2,983)
107
Financial assets at amortised cost:
Loans and advances to banks
8,363
–
8,363
(1,147)
–
7,216
Loans and advances to customers
438,957
(3,330)
435,627
(308)
(2,171)
433,148
Reverse repurchase agreements
49,694
(10,435)
39,259
–
(39,259)
–
Debt securities
7,331
–
7,331
–
–
7,331
504,345
(13,765)
490,580
(1,455)
(41,430)
447,695
Financial assets at fair value through other comprehensive
income
22,846
–
22,846
–
(6,393)
16,453
Financial liabilities
Deposits from banks
4,658
–
4,658
(626)
–
4,032
Customer deposits
447,096
(924)
446,172
(141)
(2,171)
443,860
Repurchase agreements
59,025
(10,435)
48,590
–
(48,590)
–
Financial liabilities at fair value through profit or loss
5,159
–
5,159
–
–
5,159
Derivative financial instruments
59,981
(54,090)
5,891
(1,455)
(3,988)
448
1The 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 respect 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.
2Net of impairment allowances.
3The 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
150
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management
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 and capital 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 55.
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 Lloyds Banking 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 2023 the aggregate notional principal of interest rate and other swaps (predominantly interest rate) designated as fair
value hedges was £134,631 million ( 2022: £128,153 million) with a net fair value liability of £345 million (2022: liability of £488 million) (note
17). The losses on the hedging instruments were £3,096 million (2022: gains of £3,106 million). The gains on the hedged items attributable
to the hedged risk were £2,832 million (2022: losses of £3,127 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 2023 was £450,568 million (2022:
£235,916 million) with a net fair value liability of £nil (2022: £nil) (note 17). In 2023, ineffectiveness recognised in the income statement that
arises from cash flow hedges was a gain of £17 million (2022: loss of £6 million).
Interest rate benchmark reform
Following the completion of industry events, including the two London Clearing House USD derivatives transition events in the second
quarter of the year, together with bilateral customer consents, the Group has transitioned materially all of its LIBOR linked products. We
continue to work with customers to transition a small number of remaining contracts that were not subject to the above events and
either have a future dated transition trigger or have defaulted to the relevant synthetic LIBOR benchmark in the interim. Each remaining
contract has a known path to transition which is not expected to have a material impact on the Group’s financial statements.
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.
(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.
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 has overseas operations in Europe. Structural foreign currency exposures in respect of operations with a Euro functional
currency are £1,442 million (2022: £1,817 million).
Notes to the consolidated financial statements continued
for the year ended 31 December
151
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
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 is considered to be the balance sheet carrying amount or,
for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts.
2023
2022
Maximum
exposure
£m
Offset1
£m
Net
exposure
£m
Maximum
exposure
£m
Offset1
£m
Net
exposure
£m
Financial assets at fair value through profit or loss2
1,657
–
1,657
1,132
–
1,132
Derivative financial instruments
3,165
(1,169)
1,996
3,857
(1,811)
2,046
Financial assets at amortised cost, net3:
Loans and advances to banks, net3
8,810
–
8,810
8,363
–
8,363
Loans and advances to customers, net3
433,124
(2,214)
430,910
435,627
(2,171)
433,456
Reverse repurchase agreements, net3
32,751
–
32,751
39,259
–
39,259
Debt securities, net3
12,546
–
12,546
7,331
–
7,331
487,231
(2,214)
485,017
490,580
(2,171)
488,409
Financial assets at fair value through other comprehensive
income2
27,336
–
27,336
22,845
–
22,845
Off-balance sheet items:
Acceptances and endorsements
191
–
191
58
–
58
Other items serving as direct credit substitutes
286
–
286
781
–
781
Performance bonds, including letters of credit, and other
transaction-related contingencies
2,278
–
2,278
2,061
–
2,061
Irrevocable commitments and guarantees
53,722
–
53,722
57,782
–
57,782
56,477
–
56,477
60,682
–
60,682
575,866
(3,383)
572,483
579,096
(3,982)
575,114
1Offset 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.
2Excluding equity shares.
3Amounts shown net of related impairment allowances.
Notes to the consolidated financial statements continued
for the year ended 31 December
152
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: 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 2023 the most significant concentrations of exposure were in mortgages.
2023
£m
2022
£m
Agriculture, forestry and fishing
7,038
7,447
Construction
3,856
4,057
Energy and water supply
3,437
2,515
Financial, business and other services
21,441
21,281
Lease financing
17,135
16,575
Manufacturing
3,763
3,311
Personal:
Mortgages1
322,113
322,480
Other
25,287
26,099
Postal and telecommunications
2,482
2,409
Property companies
20,292
20,866
Transport, distribution and hotels
9,973
13,062
Total loans and advances to customers before allowance for impairment losses
436,817
440,102
Allowance for impairment losses (note 19)
(3,693)
(4,475)
Total loans and advances to customers
433,124
435,627
1Includes 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
Cash and balances at central banks
Significantly all of the Group’s cash and balances at central banks of £57,909 million (2022: £72,005 million) are due from the Bank of
England or the Deutsche Bundesbank.
Loans and advances banks
Significantly all of the Group’s loans and advances to banks are assessed as Stage 1.
Loans and advances to customers
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 £364 million (2022: £577 million) (with outstanding amounts due of £1,167 million (2022: £1,360 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 £180 million (2022: £126 million) were modified during the year. No material gain or
loss was recognised by the Group.
As at 31 December 2023 assets that had been previously modified while classified as Stage 2 or Stage 3 and were classified as Stage 1
amounted to £5 million (2022: £5,279 million).
Notes to the consolidated financial statements continued
for the year ended 31 December
153
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
Drawn exposures
Allowance for expected credit losses
Gross drawn exposures and 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 2023
Retail – UK mortgages
RMS 1–3
226,740
4,137
–
–
230,877
123
37
–
–
160
RMS 4–6
29,637
27,037
–
–
56,674
38
151
–
–
189
RMS 7–9
219
2,713
–
–
2,932
–
37
–
–
37
RMS 10
–
590
–
–
590
–
13
–
–
13
RMS 11–13
–
4,056
–
–
4,056
–
136
–
–
136
RMS 14
–
–
4,337
7,854
12,191
–
–
357
213
570
256,596
38,533
4,337
7,854
307,320
161
374
357
213
1,105
Retail – credit cards
RMS 1–3
3,906
5
–
–
3,911
9
–
–
–
9
RMS 4–6
7,159
1,248
–
–
8,407
91
65
–
–
156
RMS 7–9
1,548
1,069
–
–
2,617
67
145
–
–
212
RMS 10
12
220
–
–
232
1
50
–
–
51
RMS 11–13
–
366
–
–
366
–
141
–
–
141
RMS 14
–
–
284
–
284
–
–
130
–
130
12,625
2,908
284
–
15,817
168
401
130
–
699
Retail – loans and overdrafts
RMS 1–3
638
1
–
–
639
1
–
–
–
1
RMS 4–6
5,152
250
–
–
5,402
83
18
–
–
101
RMS 7–9
1,256
473
–
–
1,729
44
50
–
–
94
RMS 10
43
135
–
–
178
4
27
–
–
31
RMS 11–13
14
328
–
–
342
2
113
–
–
115
RMS 14
–
–
196
–
196
–
–
118
–
118
7,103
1,187
196
–
8,486
134
208
118
–
460
Retail – UK Motor Finance
RMS 1–3
9,979
569
–
–
10,548
142
12
–
–
154
RMS 4–6
2,791
998
–
–
3,789
41
29
–
–
70
RMS 7–9
769
228
–
–
997
3
13
–
–
16
RMS 10
–
63
–
–
63
–
7
–
–
7
RMS 11–13
2
169
–
–
171
–
30
–
–
30
RMS 14
–
–
112
–
112
–
–
63
–
63
13,541
2,027
112
–
15,680
186
91
63
–
340
Retail – other
RMS 1–3
13,613
240
–
–
13,853
3
4
–
–
7
RMS 4–6
2,197
186
–
–
2,383
16
13
–
–
29
RMS 7–9
–
86
–
–
86
–
4
–
–
4
RMS 10
–
6
–
–
6
–
–
–
–
–
RMS 11–13
88
7
–
–
95
–
–
–
–
–
RMS 14
–
–
144
–
144
–
–
47
–
47
15,898
525
144
–
16,567
19
21
47
–
87
Total Retail
305,763
45,180
5,073
7,854
363,870
668
1,095
715
213
2,691
Commercial Banking
CMS 1–5
12,145
–
–
–
12,145
2
–
–
–
2
CMS 6–10
17,259
121
–
–
17,380
23
–
–
–
23
CMS 11–14
30,366
2,793
–
–
33,159
129
57
–
–
186
CMS 15–18
3,618
4,070
–
–
7,688
63
229
–
–
292
CMS 19
9
809
–
–
818
–
81
–
–
81
CMS 20–23
–
–
2,058
–
2,058
–
–
418
–
418
63,397
7,793
2,058
–
73,248
217
367
418
–
1,002
Other1
(301)
–
–
–
(301)
–
–
–
–
–
Total loans and advances to
customers
368,859
52,973
7,131
7,854
436,817
885
1,462
1,133
213
3,693
1Drawn exposures include centralised fair value hedge accounting adjustments.
Notes to the consolidated financial statements continued
for the year ended 31 December
154
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
Drawn exposures
Allowance for expected credit losses
Gross drawn exposures and 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
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
Commercial Banking
CMS 1–5
11,906
14
–
–
11,920
2
–
–
–
2
CMS 6–10
16,689
293
–
–
16,982
21
2
–
–
23
CMS 11–14
30,646
4,963
–
–
35,609
123
83
–
–
206
CMS 15–18
3,257
4,352
–
–
7,609
46
239
–
–
285
CMS 19
12
810
–
–
822
–
74
–
–
74
CMS 20–23
–
–
3,348
–
3,348
–
–
1,069
–
1,069
62,510
10,432
3,348
–
76,290
192
398
1,069
–
1,659
Other1
(3,198)
–
–
–
(3,198)
–
–
–
–
–
Total loans and advances to
customers
362,766
60,103
7,611
9,622
440,102
678
1,792
1,752
253
4,475
1Drawn exposures include centralised fair value hedge accounting adjustments.
Notes to the consolidated financial statements continued
for the year ended 31 December
155
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
Reverse repurchase agreement held at amortised cost
All of the Group’s reverse repurchase agreements held at amortised cost are assessed as Stage 1.
Debt securities held at amortised cost
At 31 December 2023 £12,434 million of the Group’s gross debt securities held at amortised cost were investment grade (credit ratings
equal to or better than ‘BBB’) (2022: £7,336 million), £20 million were sub-investment grade (2022: £nil) and £100 million not rated (2022:
£3 million).
Financial assets at fair value through other comprehensive income (excluding equity shares)
At 31 December 2023 £27,267 million of the Group’s financial assets at fair value through other comprehensive income (excluding equity
shares) were investment grade (credit ratings equal to or better than ‘BBB’) (2022: £22,753 million), £55 million were sub-investment
grade (2022: £51 million) and £14 million not rated (2022: £41 million).
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.
2023
2022
Investment
grade1
£m
Other 2
£m
Total
£m
Investment
grade1
£m
Other 2
£m
Total
£m
Trading and other
1,763
193
1,956
2,435
283
2,718
Hedging
72
–
72
14
5
19
1,835
193
2,028
2,449
288
2,737
Due from fellow Lloyds Banking Group undertakings
1,137
1,120
Total derivative financial instruments
3,165
3,857
1Credit ratings equal to or better than ‘BBB’.
2Other comprises sub-investment grade (2023: £125 million; 2022: £112 million) and not rated (2023: £68 million; 2022: £176 million).
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
156
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
Undrawn exposures
Allowance for expected credit losses
Gross undrawn exposures and 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 2023
Retail – UK mortgages
RMS 1–3
12,207
36
–
–
12,243
7
–
–
–
7
RMS 4–6
456
190
–
–
646
1
2
–
–
3
RMS 7–9
5
16
–
–
21
–
–
–
–
–
RMS 10
–
5
–
–
5
–
–
–
–
–
RMS 11–13
–
37
–
–
37
–
–
–
–
–
RMS 14
–
–
25
58
83
–
–
–
–
–
12,668
284
25
58
13,035
8
2
–
–
10
Retail – credit cards
RMS 1–3
39,857
24
–
–
39,881
21
–
–
–
21
RMS 4–6
14,522
2,079
–
–
16,601
38
29
–
–
67
RMS 7–9
606
322
–
–
928
7
8
–
–
15
RMS 10
2
40
–
–
42
–
2
–
–
2
RMS 11–13
–
69
–
–
69
–
6
–
–
6
RMS 14
–
–
40
–
40
–
–
–
–
–
54,987
2,534
40
–
57,561
66
45
–
–
111
Retail – loans and overdrafts
RMS 1–3
4,354
1
–
–
4,355
4
–
–
–
4
RMS 4–6
1,638
239
–
–
1,877
10
7
–
–
17
RMS 7–9
223
122
–
–
345
5
13
–
–
18
RMS 10
4
28
–
–
32
–
4
–
–
4
RMS 11–13
–
49
–
–
49
–
12
–
–
12
RMS 14
–
–
15
–
15
–
–
–
–
–
6,219
439
15
–
6,673
19
36
–
–
55
Retail – UK Motor Finance
RMS 1–3
274
–
–
–
274
–
–
–
–
–
RMS 4–6
959
–
–
–
959
2
–
–
–
2
RMS 7–9
250
–
–
–
250
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
–
–
RMS 11–13
3
–
–
–
3
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
–
–
1,486
–
–
–
1,486
2
–
–
–
2
Retail – other
RMS 1–3
544
–
–
–
544
–
–
–
–
–
RMS 4–6
267
–
–
–
267
1
–
–
–
1
RMS 7–9
–
–
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
–
–
811
–
–
–
811
1
–
–
–
1
Total Retail
76,171
3,257
80
58
79,566
96
83
–
–
179
Commercial Banking
CMS 1–5
14,345
–
–
–
14,345
1
–
–
–
1
CMS 6–10
16,661
6
–
–
16,667
16
–
–
–
16
CMS 11–14
8,494
1,520
–
–
10,014
27
23
–
–
50
CMS 15–18
910
1,132
–
–
2,042
13
47
–
–
60
CMS 19
–
33
–
–
33
–
6
–
–
6
CMS 20–23
–
–
64
–
64
–
–
2
–
2
40,410
2,691
64
–
43,165
57
76
2
–
135
Other
2
–
–
–
2
–
–
–
–
–
Total
116,583
5,948
144
58
122,733
153
159
2
–
314
Notes to the consolidated financial statements continued
for the year ended 31 December
157
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
Undrawn exposures
Allowance for expected credit losses
Gross undrawn exposures and 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
Commercial Banking
CMS 1–5
15,266
–
–
–
15,266
1
–
–
–
1
CMS 6–10
16,508
34
–
–
16,542
11
2
–
–
13
CMS 11–14
8,657
1,296
–
–
9,953
27
27
–
–
54
CMS 15–18
779
800
–
–
1,579
8
42
–
–
50
CMS 19
–
85
–
–
85
–
10
–
–
10
CMS 20–23
–
–
48
–
48
–
–
4
–
4
41,210
2,215
48
–
43,473
47
81
4
–
132
Other
2
–
–
–
2
–
–
–
–
–
Total
120,492
6,683
127
67
127,369
122
178
4
–
304
Notes to the consolidated financial statements continued
for the year ended 31 December
158
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
(D)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 both 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 customers and reverse repurchase agreements as set out below. The
Group does not hold collateral against debt securities which are classified as financial assets held at amortised cost.
Loans and advances to customers
Retail lending
UK mortgages
An analysis by loan-to-value ratio of the Group’s UK 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. 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.
2023
2022
Gross drawn exposures
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
Less than 70 per cent
193,235
28,754
3,882
7,168
233,039
210,457
33,205
3,161
8,845
255,668
70 per cent to 80 per cent
36,413
4,506
290
333
41,542
31,788
5,264
170
359
37,581
80 per cent to 90 per cent
20,949
2,821
87
142
23,999
11,942
2,604
48
149
14,743
90 per cent to 100 per cent
5,981
2,389
30
91
8,491
3,319
606
13
113
4,051
Greater than 100 per cent
18
63
48
120
249
11
104
24
156
295
Total
256,596
38,533
4,337
7,854
307,320
257,517
41,783
3,416
9,622
312,338
The energy performance certificate (EPC) profile of the security associated with the Group’s UK mortgage portfolio is shown below:
EPC profile
A
£m
B
£m
C
£m
D
£m
E
£m
F
£m
G
£m
Unrated
properties
£m
Total
At 31 December 2023
971
41,250
64,466
95,958
34,327
6,663
1,465
62,220
307,320
At 31 December 2022
731
37,075
60,086
93,010
35,015
6,990
1,519
77,912
312,338
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 20.2 per cent (2022: 25.0 per cent) of the UK mortgage portfolio; this portion is 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 other retail lending is unsecured. At 31 December 2023, Stage 3 other retail lending amounted to £378 million, net of an
impairment allowance of £358 million (2022: £475 million, net of an impairment allowance of £372 million).
Stage 1 and Stage 2 other retail lending amounted to £55,814 million (2022: £53,825 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 other retail lending show assets gross of collateral and therefore disclose the
maximum loss exposure. The Group believes that this approach is appropriate.
Commercial lending
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.
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.
Notes to the consolidated financial statements continued
for the year ended 31 December
159
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
Stage 3 secured lending
The value of collateral is re-evaluated and its legal soundness reassessed 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 2023, Stage 3 secured commercial lending amounted to £503 million, net of an impairment allowance of £133 million
(2022: £389 million, net of an impairment allowance of £159 million). The fair value of the collateral held in respect of impaired secured
commercial lending was £598 million (2022: £471 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.
Reverse repurchase agreements
There were reverse repurchase agreements which are accounted for as collateralised loans with a carrying value of £32,751 million
(2022: £39,259 million), against which the Group held collateral with a fair value of £32,501 million, capped at the reverse repurchase
agreement carrying value (2022: £29,011 million). These transactions were generally conducted under terms that are usual and
customary for standard secured lending activities.
Financial assets at fair value through profit or loss (excluding equity shares)
Securities held as collateral in the form of stock borrowed amounted to £7,979 million (2022: £16,667 million). Of this amount,
£2,087 million (2022: £8,311 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 £1,996 million
(2022: £2,046 million), cash collateral of £679 million (2022: £767 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2023, the Group held irrevocable loan commitments and other credit-related contingencies of £56,477 million (2022:
£60,682 million). Collateral is held as security, in the event that lending is drawn down, on £13,036 million (2022: £16,442 million) of these
balances.
Collateral repossessed
During the year, £229 million of collateral was repossessed (2022: £219 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
There are balances arising from repurchase transactions of £37,702 million (2022: £48,590 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 2023 was £37,654 million, capped at the repurchase agreement carrying value (2022: £53,732 million
including over collaterisation).
Securities lending transactions
The following on-balance sheet financial assets have been lent to counterparties under securities lending transactions:
2023
£m
2022
£m
Financial assets at fair value through other comprehensive income
4,532
5,408
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 24.
Notes to the consolidated financial statements continued
for the year ended 31 December
160
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: 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 financial instrument liabilities of the Group 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 to 3
months
£m
3 to 12
months
£m
1 to 5
years
£m
Over 5
years
£m
Total
£m
At 31 December 2023
Deposits from banks
1,776
947
241
611
1
3,576
Customer deposits
412,803
5,790
15,547
8,570
255
442,965
Repurchase agreements
3,626
4,092
1,085
31,399
–
40,202
Financial liabilities at fair value through profit or loss
118
42
416
1,094
4,425
6,095
Debt securities in issue at amortised cost
1,386
6,651
14,283
30,893
10,932
64,145
Lease liabilities
13
69
242
754
586
1,664
Subordinated liabilities
23
58
238
4,548
5,099
9,966
Total non-derivative financial liabilities
419,745
17,649
32,052
77,869
21,298
568,613
Derivative financial liabilities:
Gross settled derivatives – outflows
405
332
7,640
6,465
4,168
19,010
Gross settled derivatives – inflows
(188)
(206)
(7,534)
(6,527)
(4,241)
(18,696)
Gross settled derivatives – net flows
217
126
106
(62)
(73)
314
Net settled derivative liabilities
2,232
–
51
65
317
2,665
Total derivative financial liabilities
2,449
126
157
3
244
2,979
At 31 December 2022
Deposits from banks
3,728
28
179
673
83
4,691
Customer deposits
430,808
3,565
7,164
4,882
304
446,723
Repurchase agreements
12,494
6,188
904
33,054
38
52,678
Financial liabilities at fair value through profit or loss
84
60
100
1,565
3,736
5,545
Debt securities in issue at amortised cost
4,400
8,571
6,717
25,886
7,802
53,376
Lease liabilities
7
52
161
557
611
1,388
Subordinated liabilities
24
89
687
4,775
7,945
13,520
Total non-derivative financial liabilities
451,545
18,553
15,912
71,392
20,519
577,921
Derivative financial liabilities:
Gross settled derivatives – outflows
2,815
3,241
3,501
7,920
4,700
22,177
Gross settled derivatives – inflows
(1,927)
(2,996)
(3,372)
(7,862)
(4,731)
(20,888)
Gross settled derivatives – net flows
888
245
129
58
(31)
1,289
Net settled derivative liabilities
2,652
(19)
54
271
250
3,208
Total derivative financial liabilities
3,540
226
183
329
219
4,497
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest
of £16 million (2022: £16 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 52.
Notes to the consolidated financial statements continued
for the year ended 31 December
161
Lloyds Bank plc Annual Report and Accounts 2023
Note 38: Financial risk management continued
The figures below are presented in timing categories representing the remaining offer periods of lending commitments or remaining
coverage periods of financial guarantees, but the Group could be required to lend or pay amounts under those arrangements earlier
than the periods presented below. Payment under the significant majority of the Group’s lending commitments and financial
guarantee contracts could be required to be made on demand.
Within 1
year
£m
1 to 3
years
£m
3 to 5
years
£m
Over 5
years
£m
Total
£m
At 31 December 2023
Acceptances and endorsements
191
–
–
–
191
Other contingent liabilities
1,192
595
183
594
2,564
Total contingent liabilities
1,383
595
183
594
2,755
Lending commitments and guarantees
91,674
16,577
11,591
2,789
122,631
Other commitments
–
38
41
23
102
Total commitments and guarantees
91,674
16,615
11,632
2,812
122,733
Total contingents, commitments and guarantees
93,057
17,210
11,815
3,406
125,488
At 31 December 2022
Acceptances and endorsements
58
–
–
–
58
Other contingent liabilities
1,667
548
181
446
2,842
Total contingent liabilities
1,725
548
181
446
2,900
Lending commitments and guarantees
91,310
8,256
10,780
16,984
127,330
Other commitments
–
–
10
29
39
Total commitments and guarantees
91,310
8,256
10,790
17,013
127,369
Total contingents, commitments and guarantees
93,035
8,804
10,971
17,459
130,269
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 in accordance with the relevant provisions of the Capital Requirements
Directive (CRD V) and Capital Requirements Regulation (UK CRR). This is supplemented through additional regulation set out under the
PRA Rulebook and through 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 and Ring-
Fenced Banks 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 27.
Note 39: Cash flow statement
(A)Change in operating assets
2023
£m
2022
£m
2021
£m
Change in amounts due from fellow Lloyds Banking Group undertakings
(24)
(77)
(1)
Change in other financial assets held at amortised cost
9,394
(167)
3,406
Change in financial assets at fair value through profit or loss
(491)
427
(124)
Change in derivative financial instruments
279
(2,877)
1,548
Change in other operating assets
(235)
(206)
345
Change in operating assets
8,923
(2,900)
5,174
(B)Change in operating liabilities
2023
£m
2022
£m
2021
£m
Change in deposits from banks
(1,101)
1,295
(2,867)
Change in customer deposits
(4,219)
(3,201)
24,221
Change in repurchase agreements
(10,888)
18,484
1,922
Change in amounts due to fellow Lloyds Banking Group undertakings
(408)
(603)
(806)
Change in financial liabilities at fair value through profit or loss
(138)
(859)
(380)
Change in derivative financial instruments
(1,584)
1,248
(3,585)
Change in debt securities in issue at amortised cost
3,393
332
(10,569)
Change in other operating liabilities1
(380)
198
174
Change in operating liabilities
(15,325)
16,894
8,110
1 Includes an increase of £ 329 million ( 2022 : decrease of £150 million ; 2021 : decrease of £182 million) in respect of lease liabilities.
Notes to the consolidated financial statements continued
for the year ended 31 December
162
Lloyds Bank plc Annual Report and Accounts 2023
Note 39: Cash flow statement continued
(C)Non-cash and other items
2023
£m
2022
£m
2021
£m
Interest expense on subordinated liabilities
399
377
570
Revaluation of investment properties
1
–
–
Net (credit) charge in respect of defined benefit schemes
(79)
125
236
Depreciation and amortisation
2,851
2,348
2,777
Regulatory and legal provisions
661
225
1,177
Other provision movements
7
(134)
(82)
Allowance for loan losses
335
1,335
(1,085)
Write-off of allowance for loan losses, net of recoveries
(1,113)
(759)
(935)
Impairment charge (credit) relating to undrawn balances
10
111
(231)
Impairment (credit) charge on financial assets at fair value through other comprehensive income
(2)
6
(2)
Foreign exchange impact on balance sheet1
273
30
159
Other non-cash items
3,182
(673)
(1,173)
Total non-cash items
6,525
2,991
1,411
Contributions to defined benefit schemes
(1,345)
(2,533)
(1,347)
Payments in respect of regulatory and legal provisions
(362)
(587)
(680)
Other
–
–
(45)
Total other items
(1,707)
(3,120)
(2,072)
Non-cash and other items
4,818
(129)
(661)
1When 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
2023
£m
2022
£m
2021
£m
Net assets acquired:
Cash and cash equivalents
38
–
–
Intangible assets
182
–
–
Other assets
672
–
–
Deferred tax
(58)
–
–
Other liabilities
(646)
–
–
Goodwill arising on acquisition
143
–
–
Cash consideration
331
–
–
Less cash and cash equivalents acquired
(38)
–
–
Acquisition of and additional investment in joint ventures
–
–
3
Net cash outflow arising from acquisitions of subsidiaries and businesses
293
–
3
(E)Analysis of cash and cash equivalents as shown in the balance sheet
2023
£m
2022
£m
2021
£m
Cash and balances at central banks
57,909
72,005
54,279
Less mandatory reserve deposits1
(1,740)
(1,935)
(2,007)
56,169
70,070
52,272
Loans and advances to banks and reverse repurchase agreements
15,186
11,913
7,474
Less amounts with a maturity of three months or more
(4,817)
(6,782)
(3,786)
10,369
5,131
3,688
Total cash and cash equivalents
66,538
75,201
55,960
1Mandatory 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.
Notes to the consolidated financial statements continued
for the year ended 31 December
163
Lloyds Bank plc Annual Report and Accounts 2023
Note
2023
£m
2022
£m
Assets
Cash and balances at central banks
52,268
66,783
Financial assets at fair value through profit or loss
6
6,255
4,994
Derivative financial instruments
7
7,049
7,793
Loans and advances to banks
8,512
7,984
Loans and advances to customers
8
106,497
113,948
Reverse repurchase agreements
32,751
39,259
Debt securities
10,144
6,471
Due from fellow Lloyds Banking Group undertakings
124,627
119,282
Financial assets at amortised cost
282,531
286,944
Financial assets at fair value through other comprehensive income
6
27,156
22,675
Intangible assets
10
4,150
3,698
Current tax recoverable
12
312
Deferred tax assets
4
3,001
3,556
Investment in subsidiary undertakings
11
31,591
31,197
Retirement benefit assets
3
2,118
2,075
Other assets1
12
3,310
3,268
Total assets
419,441
433,295
Liabilities
Deposits from banks
3,380
4,465
Customer deposits
266,907
269,473
Repurchase agreements
7,305
18,380
Due to fellow Lloyds Banking Group undertakings
20,400
20,342
Financial liabilities at fair value through profit or loss
6
10,474
9,244
Derivative financial instruments
7
7,614
10,347
Debt securities in issue at amortised cost
14
41,365
39,819
Other liabilities 1
15
3,317
3,498
Retirement benefit obligations
3
54
50
Provisions
16
838
744
Subordinated liabilities
17
6,421
5,920
Total liabilities
368,075
382,282
Equity
Share capital
18
1,574
1,574
Share premium account
18
600
600
Other reserves
19
(1,106)
(1,734)
Retained profits2
20
45,280
46,305
Shareholders’ equity
46,348
46,745
Other equity instruments
18
5,018
4,268
Total equity
51,366
51,013
Total equity and liabilities
419,441
433,295
1See note 1 regarding changes to presentation.
2The Bank recorded a profit after tax for the year of £ 4,660 million (2022: £3,517 million).
No income statement or statement of comprehensive income has been shown for the Bank, as permitted by section 408 of the
Companies Act 2006.
The accompanying notes are an integral part of the Bank financial statements.
The directors approved the Bank financial statements on 29 February 2024.
1.8.1 41326_Signature_CharlieNunn_v2-2.jpg
1.8.2 41326_Signature_WilliamChalmers-2.jpg
Sir Robin Budenberg
Chair
Charlie Nunn
Group Chief Executive
William Chalmers
Chief Financial Officer
Bank balance sheet
at 31 December
164
Lloyds Bank plc Annual Report and Accounts 2023
Attributable to ordinary shareholders
Share
capital and
premium
£m
Other
reserves
£m
Retained
profits
£m
Total
£m
Other
equity
instruments
£m
Total
£m
At 1 January 2023
2,174
(1,734)
46,305
46,745
4,268
51,013
Comprehensive income
Profit for the year
–
–
4,326
4,326
334
4,660
Other comprehensive income
Post-retirement defined benefit scheme remeasurements,
net of tax
–
–
(692)
(692)
–
(692)
Movements in revaluation reserve in respect of financial
assets held at fair value through other comprehensive
income, net of tax:
Debt securities
–
(120)
–
(120)
–
(120)
Gains and losses attributable to own credit risk, net of tax
–
–
(168)
(168)
–
(168)
Movements in cash flow hedging reserve, net of tax
–
751
–
751
–
751
Movements in foreign currency translation reserve,
net of tax
–
(3)
–
(3)
–
(3)
Total other comprehensive income (loss)
–
628
(860)
(232)
–
(232)
Total comprehensive income1,2
–
628
3,466
4,094
334
4,428
Transactions with owners
Dividends
–
–
(4,700)
(4,700)
–
(4,700)
Distributions on other equity instruments
–
–
–
–
(334)
(334)
Issue of other equity instruments
–
–
(5)
(5)
750
745
Capital contributions received
–
–
215
215
–
215
Return of capital contributions
–
–
(1)
(1)
–
(1)
Total transactions with owners
–
–
(4,491)
(4,491)
416
(4,075)
Realised gains and losses on equity shares held at fair
value through other comprehensive income
–
–
–
–
–
–
At 31 December 2023
2,174
(1,106)
45,280
46,348
5,018
51,366
1No income statement or statement of comprehensive income has been shown for the Bank , as permitted by section 408 of the Companies Act 2006.
2Total comprehensive income attributable to owners of the parent was £ 4,428 million (2022: £90 million; 2021: £3,540 million).
The accompanying notes are an integral part of the Bank financial statements.
Bank statement of changes in equity
for the year ended 31 December
165
Lloyds Bank plc Annual Report and Accounts 2023
Attributable to ordinary shareholders
Share
capital and
premium
£m
Other
reserves
£m
Retained
profits
£m
Total
£m
Other
equity
instruments
£m
Total
£m
At 1 January 2021
2,174
1,382
42,677
46,233
5,935
52,168
Comprehensive income
Profit for the year
–
–
3,249
3,249
344
3,593
Other comprehensive income
Post-retirement defined benefit scheme remeasurements,
net of tax
–
–
556
556
–
556
Movements in revaluation reserve in respect of financial
assets held at fair value through other comprehensive
income, net of tax:
Debt securities
–
91
–
91
–
91
Equity shares
–
1
–
1
–
1
Gains and losses attributable to own credit risk, net of tax
–
–
(52)
(52)
–
(52)
Movements in cash flow hedging reserve, net of tax
–
(647)
–
(647)
–
(647)
Movements in foreign currency translation reserve,
net of tax
–
(2)
–
(2)
–
(2)
Total other comprehensive income
–
(557)
504
(53)
–
(53)
Total comprehensive income1
–
(557)
3,753
3,196
344
3,540
Transactions with owners
Dividends
–
–
(2,900)
(2,900)
–
(2,900)
Distributions on other equity instruments
–
–
–
–
(344)
(344)
Issue of other equity instruments
–
–
(1)
(1)
1,550
1,549
Repurchases and redemptions of other equity instruments
–
–
(9)
(9)
(3,217)
(3,226)
Capital contributions received
–
–
164
164
–
164
Return of capital contributions
–
–
(4)
(4)
–
(4)
Total transactions with owners
–
–
(2,750)
(2,750)
(2,011)
(4,761)
Realised gains and losses on equity shares held at fair
value through other comprehensive income
–
(1)
1
–
–
–
At 31 December 2021
2,174
824
43,681
46,679
4,268
50,947
Comprehensive income
Profit for the year
–
–
3,276
3,276
241
3,517
Other comprehensive income
Post-retirement defined benefit scheme remeasurements,
net of tax
–
–
(1,232)
(1,232)
–
(1,232)
Movements in revaluation reserve in respect of financial
assets held at fair value through other comprehensive
income, net of tax:
Debt securities
–
(109)
–
(109)
–
(109)
Equity shares
–
(1)
–
(1)
–
(1)
Gains and losses attributable to own credit risk, net of tax
–
–
364
364
–
364
Movements in cash flow hedging reserve, net of tax
–
(2,452)
–
(2,452)
–
(2,452)
Movements in foreign currency translation reserve,
net of tax
–
3
–
3
–
3
Total other comprehensive income
–
(2,559)
(868)
(3,427)
–
(3,427)
Total comprehensive income1
–
(2,559)
2,408
(151)
241
90
Transactions with owners
Distributions on other equity instruments
–
–
–
–
(241)
(241)
Capital contributions received
–
–
221
221
–
221
Return of capital contributions
–
–
(4)
(4)
–
(4)
Total transactions with owners
–
–
217
217
(241)
(24)
Realised gains and losses on equity shares held at fair
value through other comprehensive income
–
1
(1)
–
–
–
At 31 December 2022
2,174
(1,734)
46,305
46,745
4,268
51,013
1No income statement or statement of comprehensive income has been shown for the Bank, as permitted by section 408 of the Companies Act 2006.
The accompanying notes are an integral part of the Bank financial statements.
Bank statement of changes in equity continued
for the year ended 31 December
166
Lloyds Bank plc Annual Report and Accounts 2023
Note
2023
£m
2022
£m
2021
£m
Cash flows from operating activities
Profit before tax
6,329
4,107
3,301
Adjustments for:
Change in operating assets
25 (A)
8,782
(5,368)
38,804
Change in operating liabilities
25 (B)
(15,938)
22,262
(28,015)
Non-cash and other items
25 (C)
2,422
(2,817)
(2,059)
Net tax paid
(728)
(243)
(11)
Net cash provided by operating activities
867
17,941
12,020
Cash flows from investing activities
Purchase of financial assets
(10,293)
(9,563)
(8,775)
Proceeds from sale and maturity of financial assets
5,286
10,641
7,730
Purchase of fixed assets
(1,731)
(1,674)
(1,255)
Proceeds from sale of fixed assets
11
3
5
Additional capital injections to subsidiaries
(350)
(600)
(11)
Dividends received from subsidiaries
122
1,850
1,391
Distributions on other equity instruments received
191
125
112
Capital repayments and redemptions
–
32
2,576
Disposal of businesses, net of cash disposed
–
5
–
Net cash (used in) provided by investing activities
(6,764)
819
1,773
Cash flows from financing activities
Dividends paid to ordinary shareholders
(4,700)
–
(2,900)
Distributions on other equity instruments
(334)
(241)
(344)
Return of capital contributions
(1)
(4)
(4)
Interest paid on subordinated liabilities
(285)
(290)
(423)
Proceeds from issue of subordinated liabilities
670
837
3,262
Proceeds from issue of other equity instruments
745
–
1,549
Repayment of subordinated liabilities
(92)
(2,156)
(3,049)
Repurchases and redemptions of other equity instruments
–
–
(3,226)
Borrowings from parent company
1,942
1,852
543
Repayments of borrowings to parent company
(931)
–
(4,813)
Interest paid on borrowings from parent company
(210)
(200)
(226)
Net cash used in financing activities
(3,196)
(202)
(9,631)
Effects of exchange rate changes on cash and cash equivalents
–
1
–
Change in cash and cash equivalents
(9,093)
18,559
4,162
Cash and cash equivalents at beginning of year
70,789
52,230
48,068
Cash and cash equivalents at end of year
25 (D)
61,696
70,789
52,230
The accompanying notes are an integral part of the Bank financial statements.
Bank cash flow statement
for the year ended 31 December
167
Lloyds Bank plc Annual Report and Accounts 2023
Note 1: Basis of preparation and accounting policies
The financial statements of Lloyds Bank 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 financial assets
measured at fair value through other comprehensive income, certain financial assets and liabilities at fair value through profit or loss
and all derivative contracts. The accounting policies of the Bank 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 Bank’s auditors by the Group are set out in note 12 to the consolidated financial statements.
Presentational changes
The following changes have been made to the presentation of the Bank’s balance sheet to provide a more relevant analysis of the
Bank’s financial position:
• Items in the course of collection from banks are reported within other assets rather than separately on the face of the balance
sheet
• Items in the course of transmission to banks are reported within other liabilities rather than separately on the face of the balance
sheet
There has been no change in the basis of accounting for any of the underlying transactions. Comparatives for 2022 have been
restated.
Note 2: Critical accounting judgements and key sources of estimation uncertainty
The preparation of the Bank’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 Bank 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 Bank 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 Bank’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 Bank’s results and financial position, are as follows:
• Retirement benefit obligations (note 3)
• Fair value of financial instruments (note 16 to the consolidated financial statements)
• Allowance for expected credit losses (note 19 to the consolidated financial statements)
• Regulatory and legal provisions (note 26 to the consolidated financial statements)
Note 3: Retirement benefit obligations
2023
£m
2022
£m
Amounts recognised in the balance sheet
Retirement benefit assets
2,118
2,075
Retirement benefit obligations
(54)
(50)
Total amounts recognised in the balance sheet
2,064
2,025
The total amounts recognised in the balance sheet relate to:
2023
£m
2022
£m
Defined benefit pension schemes
2,089
2,046
Other retirement benefit schemes
(25)
(21)
Total amounts recognised in the balance sheet
2,064
2,025
Pension schemes
Defined benefit schemes
(i)Characteristics of and risks associated with the Bank’s schemes
Note 11 to the consolidated financial statements outlines the characteristics of and risks associated with the Group’s and the Bank’s
defined benefit pension schemes; the two significant schemes for the Bank are the Lloyds Bank Pension Scheme No. 1 and the Lloyds
Bank Pension Scheme No. 2.
(ii)Amounts in the financial statements
2023
£m
2022
£m
Amount included in the balance sheet
Present value of funded obligations
(19,033)
(18,485)
Fair value of scheme assets
21,122
20,531
Net amount recognised in the balance sheet
2,089
2,046
Notes to the Bank financial statements continued
for the year ended 31 December
168
Lloyds Bank plc Annual Report and Accounts 2023
Note 3: Retirement benefit obligations continued
2023
£m
2022
£m
Net amount recognised in the balance sheet
At 1 January
2,046
2,384
Net defined benefit pension credit (charge)
53
(53)
Actuarial (losses) gains on defined benefit obligation
(681)
10,027
Return on plan assets
(272)
(11,919)
Employer contributions
944
1,605
Exchange and other adjustments
(1)
2
At 31 December
2,089
2,046
2023
£m
2022
£m
Movements in the defined benefit obligation
At 1 January
(18,485)
(29,222)
Current service cost
(41)
(82)
Interest expense
(889)
(560)
Remeasurements:
Actuarial gains – demographic assumptions
86
178
Actuarial losses – experience
(560)
(635)
Actuarial (losses) gains – financial assumptions
(207)
10,484
Benefits paid
1,058
1,369
Past service cost
(1)
(2)
Exchange and other adjustments
6
(15)
At 31 December
(19,033)
(18,485)
2023
£m
2022
£m
Analysis of the defined benefit obligation
Active members
(1,563)
(1,730)
Deferred members
(4,981)
(5,184)
Dependants
(1,116)
(953)
Pensioners
(11,373)
(10,618)
At 31 December
(19,033)
(18,485)
2023
£m
2022
£m
Changes in the fair value of scheme assets
At 1 January
20,531
31,606
Return on plan assets excluding amounts included in interest income
(272)
(11,919)
Interest income
1,006
612
Employer contributions
944
1,605
Benefits paid
(1,058)
(1,369)
Administrative costs paid
(22)
(21)
Exchange and other adjustments
(7)
17
At 31 December
21,122
20,531
Notes to the Bank financial statements continued
for the year ended 31 December
169
Lloyds Bank plc Annual Report and Accounts 2023
Note 3: Retirement benefit obligations continued
(iii)Composition of scheme assets
2023
2022
Quoted
£m
Unquoted
£m
Total
£m
Quoted
£m
Unquoted
£m
Total
£m
Debt instruments1:
Fixed interest government bonds
3,283
–
3,283
1,527
–
1,527
Index-linked government bonds
8,775
–
8,775
8,527
–
8,527
Corporate and other debt securities
4,531
–
4,531
2,400
–
2,400
16,589
–
16,589
12,454
–
12,454
Pooled investment vehicles
292
5,591
5,883
267
12,888
13,155
Equity instruments
19
41
60
4
31
35
Money market instruments, cash, derivatives and other
assets and liabilities
19
(1,429)
(1,410)
325
(5,438)
(5,113)
At 31 December
16,919
4,203
21,122
13,050
7,481
20,531
1Of the total debt instruments £ 15,127 million (2022 : £11,077 million) were investment grade (credit ratings equal to or better than ‘BBB’).
The assets of all of the funded plans are held independently of the Bank’s assets in separate trustee-administered funds.
The pension schemes’ pooled investment vehicles comprise:
2023
£m
2022
£m
Alternative credit funds
1,233
1,433
Bond and debt funds
314
296
Equity funds
1,194
1,022
Hedge and mutual funds
529
161
Infrastructure funds
460
471
Liquidity funds
1,228
8,564
Property funds
925
1,208
At 31 December
5,883
13,155
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
Note 11 to the consolidated financial statements includes details of the assumptions used in the valuations of the Group’s and the
Bank’s defined benefit pension schemes, including information on anticipated life expectancy.
(v)Amount, timing and uncertainty of future cash flows
Risk exposure of the defined benefit schemes
Note 11 to the consolidated financial statements includes details of the significant risks faced by the Group and the Bank in relation to
their defined benefit schemes.
Notes to the Bank financial statements continued
for the year ended 31 December
170
Lloyds Bank plc Annual Report and Accounts 2023
Note 3: Retirement benefit obligations continued
Sensitivity analysis
The effect of reasonably possible changes in key assumptions on the value of scheme liabilities and the resulting pension charge in the
Bank’s income statement and on the net defined benefit pension scheme asset, for the Bank’s two 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
2023
£m
2022
£m
2023
£m
2022
£m
Inflation (including pension increases)1:
Increase of 0.1 per cent
7
9
148
167
Decrease of 0.1 per cent
(8)
(8)
(155)
(159)
Discount rate2:
Increase of 0.1 per cent
(13)
(15)
(221)
(239)
Decrease of 0.1 per cent
13
15
226
243
Expected life expectancy of members:
Increase of one year
30
26
620
505
Decrease of one year
(31)
(26)
(634)
(517)
1At 31 December 2023, the assumed rate of RPI inflation is 2.96 per cent and CPI inflation 2.47 per cent (2022: RPI 3.13 per cent and CPI 2.69 per cent).
2At 31 December 2023, the assumed discount rate is 4.70 per cent (2022: 4.93 per cent).
Sensitivity analysis method and assumptions
The sensitivity analysis above reflects the impact on the liabilities of the Bank’s two most significant schemes which account for over 98
per cent of the Bank’s defined benefit obligations. While differences in the underlying liability profiles for the remainder of the Bank’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 Bank 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
Note 11 to the consolidated financial statements includes a discussion of the measures taken by the Group and the Bank to match
scheme assets and liabilities.
Notes to the Bank financial statements continued
for the year ended 31 December
171
Lloyds Bank plc Annual Report and Accounts 2023
Note 3: Retirement benefit obligations continued
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:
2023
Years
2022
Years
Duration of the defined benefit obligation
12
14
Maturity analysis of benefits expected to be paid:
2023
£m
2022
£m
Within 12 months
1,194
994
Between 1 and 2 years
1,045
1,021
Between 2 and 5 years
3,325
3,217
Between 5 and 10 years
6,048
5,985
Between 10 and 15 years
5,755
5,923
Between 15 and 25 years
10,181
10,706
Between 25 and 35 years
6,984
7,273
Between 35 and 45 years
3,044
3,053
In more than 45 years
554
606
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 Bank’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 Bank 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.
Other retirement benefit schemes
The Bank operates a number of schemes which provide post-retirement healthcare benefits to certain employees, retired employees
and their dependants. Under the principal scheme the Bank 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 Bank 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 2023
by qualified independent actuaries. The principal assumptions used were as set out in note 11 to the consolidated financial statements.
Movements in the other retirement benefits obligation:
2023
£m
2022
£m
At 1 January
(21)
(65)
Actuarial (losses) gains
(6)
44
Insurance premiums paid
2
2
Charge for the year
–
(1)
Exchange and other adjustments
–
(1)
At 31 December
(25)
(21)
Notes to the Bank financial statements continued
for the year ended 31 December
172
Lloyds Bank plc Annual Report and Accounts 2023
Note 4: Tax
Deferred tax
The Bank’s deferred tax assets and liabilities are as follows:
Statutory position
2023
£m
2022
£m
Tax disclosure
2023
£m
2022
£m
Deferred tax assets
3,001
3,556
Deferred tax assets
3,707
4,381
Deferred tax liabilities
–
–
Deferred tax liabilities
(706)
(825)
Net deferred tax asset at 31 December
3,001
3,556
Net deferred tax asset at 31 December
3,001
3,556
The statutory position reflects the deferred tax assets and liabilities as disclosed in the Bank balance sheet and takes into account the
ability of the Bank 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 2022
3,190
406
210
10
36
–
–
9
3,861
Credit (charge) to the income
statement
(29)
(74)
106
(3)
(16)
(316)
2
16
(314)
Credit (charge) to other comprehensive
income
–
–
(155)
–
–
989
–
–
834
At 31 December 2022
3,161
332
161
7
20
673
2
25
4,381
Credit (charge) to the income
statement
(271)
(130)
(27)
14
–
–
–
(14)
(428)
Credit (charge) to other comprehensive
income
–
–
–
–
–
(292)
46
(246)
At 31 December 2023
2,890
202
134
21
20
381
48
11
3,707
Deferred tax liabilities
Capitalised
software
enhancements
£m
Pension
assets
£m
Derivatives
£m
Asset
revaluations1
£m
Other
temporary
differences
£m
Total
£m
At 1 January 2022
(256)
(799)
(316)
(52)
(4)
(1,427)
(Charge) credit to the income statement
110
19
316
(1)
(94)
350
Credit to other comprehensive income
–
199
–
53
–
252
At 31 December 2022
(146)
(581)
–
–
(98)
(825)
(Charge) credit to the income statement
64
(2)
–
–
1
63
(Charge) credit to other comprehensive income
–
(10)
–
–
66
56
At 31 December 2023
(82)
(593)
–
–
(31)
(706)
1Financial assets at fair value through other comprehensive income.
At 31 December 2023 the Bank carried net deferred tax assets of £3,001 million (2022 : £3,556 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 Bank has recognised a deferred tax asset of £2,890 million
(2022: £3,161 million) in respect of trading losses carried forward, and they will be utilised as taxable profits arise in future periods.
Deferred tax not recognised
Deferred tax assets of £118 million (2022: £118 million) have not been recognised in respect of £467 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, £16 million (2022: £16 million) relates to losses that will expire if not used within
20 years, and £5 million (2022: £5 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.
Notes to the Bank financial statements continued
for the year ended 31 December
173
Lloyds Bank plc Annual Report and Accounts 2023
Note 5: 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 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
Total
£m
At 31 December 2023
Held for
trading
£m
Other
£m
Financial assets
Cash and balances at central banks
–
–
–
–
–
52,268
52,268
Financial assets at fair value through profit
or loss
–
–
6,255
–
–
–
6,255
Derivative financial instruments
72
6,977
–
–
–
–
7,049
Loans and advances to banks
–
–
–
–
–
8,512
8,512
Loans and advances to customers
–
–
–
–
–
106,497
106,497
Reverse repurchase agreements
–
–
–
–
–
32,751
32,751
Debt securities
–
–
–
–
–
10,144
10,144
Due from fellow Lloyds Banking Group
undertakings
–
–
–
–
–
124,627
124,627
Financial assets at amortised cost
–
–
–
–
–
282,531
282,531
Financial assets at fair value through other
comprehensive income
–
–
–
–
27,156
–
27,156
Other
–
–
–
–
–
189
189
Total financial assets
72
6,977
6,255
–
27,156
334,988
375,448
Financial liabilities
Deposits from banks
–
–
–
–
–
3,380
3,380
Customer deposits
–
–
–
–
–
266,907
266,907
Repurchase agreements
–
–
–
–
–
7,305
7,305
Due to fellow Lloyds Banking Group
undertakings
–
–
–
–
–
20,400
20,400
Financial liabilities at fair value through profit
or loss
–
–
–
10,474
–
–
10,474
Derivative financial instruments
420
7,194
–
–
–
–
7,614
Debt securities in issue at amortised cost
–
–
–
–
–
41,365
41,365
Other
–
–
–
–
–
929
929
Subordinated liabilities
–
–
–
–
–
6,421
6,421
Total financial liabilities
420
7,194
–
10,474
–
346,707
364,795
Notes to the Bank financial statements continued
for the year ended 31 December
174
Lloyds Bank plc Annual Report and Accounts 2023
Note 5: Measurement basis of financial assets and liabilities 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
Total
£m
At 31 December 2022
Held for
trading
£m
Other
£m
Financial assets
Cash and balances at central banks
–
–
–
–
–
66,783
66,783
Financial assets at fair value through profit
or loss
–
–
4,994
–
–
–
4,994
Derivative financial instruments
6
7,787
–
–
–
–
7,793
Loans and advances to banks
–
–
–
–
–
7,984
7,984
Loans and advances to customers
–
–
–
–
–
113,948
113,948
Reverse repurchase agreements
–
–
–
–
–
39,259
39,259
Debt securities
–
–
–
–
–
6,471
6,471
Due from fellow Lloyds Banking Group
undertakings
–
–
–
–
–
119,282
119,282
Financial assets at amortised cost
–
–
–
–
–
286,944
286,944
Financial assets at fair value through other
comprehensive income
–
–
–
–
22,675
–
22,675
Other
–
–
–
–
–
182
182
Total financial assets
6
7,787
4,994
–
22,675
353,909
389,371
Financial liabilities
Deposits from banks
–
–
–
–
–
4,465
4,465
Customer deposits
–
–
–
–
–
269,473
269,473
Repurchase agreements
–
–
–
–
–
18,380
18,380
Due to fellow Lloyds Banking Group
undertakings
–
–
–
–
–
20,342
20,342
Financial liabilities at fair value through profit
or loss
–
–
–
9,244
–
–
9,244
Derivative financial instruments
498
9,849
–
–
–
–
10,347
Debt securities in issue at amortised cost
–
–
–
–
–
39,819
39,819
Other
–
–
–
–
–
944
944
Subordinated liabilities
–
–
–
–
–
5,920
5,920
Total financial liabilities
498
9,849
–
9,244
–
359,343
378,934
Notes to the Bank financial statements continued
for the year ended 31 December
175
Lloyds Bank plc Annual Report and Accounts 2023
Note 6: Fair values of financial assets and liabilities
At 31 December 2023, the carrying value of the Bank’s financial instrument assets held at fair value was £40,460 million (2022:
£35,462 million), and its financial instrument liabilities held at fair value was £18,088 million (2022: £19,591 million).
(1)Fair value measurement
Note 16 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments of the Group and the
Bank measured at fair value are categorised and discusses valuation methodologies.
(2)Financial assets and liabilities carried at fair value
(A)Financial assets (excluding derivatives)
Valuation hierarchy
At 31 December 2023, the Bank’s financial assets (excluding derivatives) carried at fair value totalled £33,411 million (2022: £27,669 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 113). 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 2023
Financial assets at fair value through profit or loss
Loans and advances to customers
–
801
–
801
Corporate and other debt securities
–
5,450
–
5,450
Equity shares
–
–
4
4
Total financial assets at fair value through profit or loss
–
6,251
4
6,255
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
13,949
48
–
13,997
Asset-backed securities
–
118
–
118
Corporate and other debt securities
951
12,090
–
13,041
14,900
12,256
–
27,156
Total financial assets at fair value through other comprehensive income
14,900
12,256
–
27,156
Total financial assets (excluding derivatives) at fair value
14,900
18,507
4
33,411
At 31 December 2022
Financial assets at fair value through profit or loss
Loans and advances to customers
–
798
–
798
Corporate and other debt securities
–
4,192
–
4,192
Equity shares
–
–
4
4
Total financial assets at fair value through profit or loss
–
4,990
4
4,994
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
10,720
357
–
11,077
Asset-backed securities
–
87
–
87
Corporate and other debt securities
531
10,980
–
11,511
11,251
11,424
–
22,675
Total financial assets at fair value through other comprehensive income
11,251
11,424
–
22,675
Total financial assets (excluding derivatives) at fair value
11,251
16,414
4
27,669
Movements in level 3 portfolio
The table below analyses movements in level 3 financial assets (excluding derivatives) at fair value, recurring basis.
2023
2022
Financial
assets at
fair value
through
profit or loss
£m
Total level 3
financial assets
(excluding
derivatives)
at fair value,
recurring basis
£m
Financial
assets at
fair value
through
profit or loss
£m
Total level 3
financial assets
(excluding
derivatives)
at fair value,
recurring basis
£m
At 1 January
4
4
37
37
Sales/repayments of customer loans
–
–
(33)
(33)
At 31 December
4
4
4
4
Notes to the Bank financial statements continued
for the year ended 31 December
176
Lloyds Bank plc Annual Report and Accounts 2023
Note 6: Fair values of financial assets and liabilities continued
(B)Financial liabilities (excluding derivatives)
Valuation hierarchy
At 31 December 2023, the Bank’s financial liabilities (excluding derivatives) carried at fair value, comprised its financial liabilities at fair
value through profit or loss and totalled £10,474 million (2022: £9,244 million). The table below analyses these financial liabilities by
balance sheet classification and valuation methodology (level 1, 2 or 3, as described on page 113). The fair value measurement
approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
2023
2022
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Debt securities in issue designated at fair value
through profit or loss
–
10,474
–
10,474
–
9,244
–
9,244
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2023 was
£10,398 million, which was £76 million lower than the balance sheet carrying value (2022: £11,158 million, which was £1,914 million higher
than the balance sheet carrying value). At 31 December 2023 there was a cumulative £90 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, an increase of £234 million arose in 2023 and a decrease of £519 million
arose in 2022.
(C)Derivatives
Valuation hierarchy
All of the Bank’s derivative assets and liabilities are carried at fair value. At 31 December 2023 , such assets totalled £7,049 million (2022:
£7,793 million ) and liabilities totalled £7,614 million (2022: £10,347 million). The table below analyses these derivative balances by
valuation methodology (level 1, 2 or 3, as described on page 113). The fair value measurement approach is recurring in nature. There
were no significant transfers between level 1 and level 2 during the year.
2023
2022
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Derivative assets
–
7,049
–
7,049
–
7,793
–
7,793
Derivative liabilities
–
(7,603)
(11)
(7,614)
–
(10,334)
(13)
(10,347)
Movements in level 3 portfolio
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
2023
2022
Derivative
assets
£m
Derivative
liabilities
£m
Derivative
assets
£m
Derivative
liabilities
£m
At 1 January
–
(13)
16
(31)
Gains recognised in the income statement within other income
–
–
1
26
Purchases (additions)
–
–
–
(9)
(Sales) redemptions
–
2
–
–
Transfers out of the level 3 portfolio
–
–
(17)
1
At 31 December
–
(11)
–
(13)
Gains recognised in the income statement, within other income, relating to the change
in fair value of those assets or liabilities held at 31 December
–
–
–
25
Notes to the Bank financial statements continued
for the year ended 31 December
177
Lloyds Bank plc Annual Report and Accounts 2023
Note 6: Fair values of financial assets and liabilities continued
(3)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 Bank which are carried at amortised cost by valuation
methodology (level 1, 2 or 3, as described on page 113). 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 2023
Loans and advances to banks
8,512
8,512
–
–
8,512
Loans and advances to customers
106,497
104,381
–
–
104,381
Reverse repurchase agreements
32,751
32,751
–
32,751
–
Debt securities
10,144
10,012
–
7,692
2,320
Due from fellow Lloyds Banking Group undertakings
124,627
124,627
–
–
124,627
Financial assets at amortised cost
282,531
280,283
–
40,443
239,840
At 31 December 2022
Loans and advances to banks
7,984
7,984
–
–
7,984
Loans and advances to customers
113,948
112,542
–
–
112,542
Reverse repurchase agreements
39,259
39,259
–
39,259
–
Debt securities
6,471
6,479
167
6,312
–
Due from fellow Lloyds Banking Group undertakings
119,282
119,282
–
–
119,282
Financial assets at amortised cost
286,944
285,546
167
45,571
239,808
(B)Financial liabilities
Valuation hierarchy
The table below analyses the fair values of those financial liabilities of the Bank which are carried at amortised cost by valuation
methodology (level 1, 2 or 3, as described on page 113).
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 1
£m
Level 2
£m
Level 3
£m
At 31 December 2023
Deposits from banks
3,380
3,380
–
3,380
–
Customer deposits
266,907
267,176
–
267,176
–
Repurchase agreements
7,305
7,305
–
7,305
–
Due to fellow Lloyds Banking Group undertakings
20,400
20,400
–
20,400
–
Debt securities in issue at amortised cost
41,365
41,069
–
41,069
–
Subordinated liabilities
6,421
6,529
–
6,529
–
At 31 December 2022
Deposits from banks
4,465
4,465
–
4,465
–
Customer deposits
269,473
269,316
–
269,316
–
Repurchase agreements
18,380
18,380
–
18,380
–
Due to fellow Lloyds Banking Group undertakings
20,342
20,342
–
20,342
–
Debt securities in issue at amortised cost
39,819
39,594
–
39,594
–
Subordinated liabilities
5,920
5,974
–
5,974
–
(4)Reclassifications of financial assets
There have been no reclassifications of financial assets in 2022 or 2023.
Notes to the Bank financial statements continued
for the year ended 31 December
178
Lloyds Bank plc Annual Report and Accounts 2023
Note 7: Derivative financial instruments
Note 17 to the consolidated financial statements includes a discussion of the types of derivatives held by the Group and the Bank and
the strategies for doing so.
The fair values and notional amounts of derivative instruments are set out in the following table:
2023
2022
Contract/
notional
amount
£m
Fair value
Contract/
notional
amount
£m
Fair value
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Trading and other
Exchange rate contracts
100,473
1,032
723
118,237
1,852
2,080
Interest rate contracts
1,361,789
5,939
6,407
1,455,752
5,876
7,742
Credit derivatives
3,106
6
64
3,323
58
27
Equity and other contracts
–
–
–
1
1
–
Total derivative assets/liabilities - trading and other
1,465,368
6,977
7,194
1,577,313
7,787
9,849
Hedging
Derivatives designated as fair value hedges
55,395
72
413
50,460
1
497
Derivatives designated as cash flow hedges
98,166
–
7
47,706
5
1
Total derivative assets/liabilities - hedging
153,561
72
420
98,166
6
498
Total recognised derivative assets/liabilities
1,618,929
7,049
7,614
1,675,479
7,793
10,347
Notes to the Bank financial statements continued
for the year ended 31 December
179
Lloyds Bank plc Annual Report and Accounts 2023
Note 7: Derivative financial instruments continued
Details of the Bank’s hedging instruments are set out below:
Maturity
At 31 December 2023
Up to 1 month
£m
1 to 3 months
£m
3 to 12 months
£m
1 to 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
133
1,200
3,554
26,405
24,068
55,360
Average fixed interest rate
1.55%
0.40%
1.88%
1.96%
1.75%
Cash flow hedges
Foreign exchange
Currency swap
Notional
5
20
227
6
–
258
Average USD/GBP exchange rate
1.25
1.27
1.24
1.20
–
Interest rate
Interest rate swap
Notional
1,000
33
4,208
47,132
45,535
97,908
Average fixed interest rate
0.92%
4.66%
1.49%
2.58%
2.27%
Maturity
At 31 December 2022
Up to 1 month
£m
1 to 3 months
£m
3 to 12 months
£m
1 to 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
796
486
4,314
23,553
21,276
50,425
Average fixed interest rate
3.20%
2.15%
0.66%
1.90%
1.43%
Cash flow hedges
Foreign exchange
Currency swap
Notional
–
21
52
12
–
85
Average USD/GBP exchange rate
1.22
1.23
1.28
1.27
–
Interest rate
Interest rate swap
Notional
15
9,549
91
17,008
20,958
47,621
Average fixed interest rate
3.29%
1.62%
3.74%
1.39%
1.09%
Notes to the Bank financial statements continued
for the year ended 31 December
180
Lloyds Bank plc Annual Report and Accounts 2023
Note 7: Derivative financial instruments continued
The carrying amounts of the Bank’s hedging instruments are as follows:
Carrying amount of the hedging instrument
At 31 December 2023
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
3
–
2
Interest rate swaps
55,360
69
413
(414)
Cash flow hedges
Foreign exchange
Currency swaps
258
–
7
(4)
Interest rate
Interest rate swaps
97,908
–
–
1,284
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
50,425
–
497
(76)
Cash flow hedges
Foreign exchange
Currency swaps
85
5
1
26
Interest rate
Interest rate swaps
47,621
–
–
(2,688)
All amounts are held within derivative financial instruments.
Notes to the Bank financial statements continued
for the year ended 31 December
181
Lloyds Bank plc Annual Report and Accounts 2023
Note 7: Derivative financial instruments continued
The Bank’s hedged items are as follows:
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
Continuing
hedges
£m
Discontinued
hedges
£m
At 31 December 2023
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Fair value hedges
Interest rate
Fixed rate issuance1
–
24,449
–
1,599
(551)
Fixed rate bonds2
24,146
–
(331)
–
962
Cash flow hedges
Foreign exchange
Foreign currency issuance1
4
(11)
17
Interest rate
Customer loans3
(1,247)
238
(586)
Central bank balances4
(390)
(5)
(856)
Customer deposits5
434
(300)
141
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
Continuing
hedges
£m
Discontinued
hedges
£m
At 31 December 2022
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Fair value hedges
Interest rate
Fixed rate issuance1
–
22,971
–
2,353
2,359
Fixed rate bonds2
19,259
–
(1,549)
–
(2,326)
Cash flow hedges
Foreign exchange
Foreign currency issuance1
(26)
(1)
15
Interest rate
Customer loans3
1,490
(868)
(246)
Central bank balances4
1,347
(436)
(904)
Customer deposits5
(54)
59
(24)
1 Included within debt securities in issue at amortised cost.
2 Included within financial assets at amortised cost and financial assets at fair value through other comprehensive income.
3 Included within loans and advances to customers.
4 Included within cash and balances at central banks.
5 Included within customer deposits.
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 an asset of £28 million ( 2022: asset of £69 million) relating to fixed rate issuances.
Notes to the Bank financial statements continued
for the year ended 31 December
182
Lloyds Bank plc Annual Report and Accounts 2023
Note 7: Derivative financial instruments continued
Gains and losses arising from hedge accounting are summarised as follows:
Gain (loss)
recognised
in other
comprehensive
income
£m
Hedge
ineffectiveness
recognised in
the income
statement1
£m
Amounts reclassified from reserves
to income statement as:
At 31 December 2023
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 issuance
(15)
Fixed rate bonds
14
Cash flow hedges
Foreign exchange
Foreign currency issuance
(5)
–
–
(1)
Interest expense
Interest rate
Customer loans
700
23
–
65
Interest income
Central bank balances
319
11
–
159
Interest income
Customer deposits
(224)
(7)
–
30
Interest expense
Gain (loss)
recognised
in other
comprehensive
income
£m
Hedge
ineffectiveness
recognised in
the income
statement1
£m
Amounts reclassified from reserves
to income statement as:
At 31 December 2022
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 issuance
(31)
Fixed rate bonds
(14)
Cash flow hedges
Foreign exchange
Foreign currency issuance
26
–
–
1
Interest expense
Interest rate
Customer loans
(1,848)
(36)
–
(162)
Interest income
Central bank balances
(1,354)
–
–
(196)
Interest income
Customer deposits
87
4
–
5
Interest expense
1 Hedge ineffectiveness is included in the income statement within net trading income.
In 2023 and 2022 there were no gains or losses 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.
At 31 December 2023 £5,987 million of total recognised derivative assets of and £9,940 million of total recognised derivative liabilities of
(2022: £6,933 million of assets and £8,926 million of liabilities) had a contractual residual maturity of greater than one year.
Notes to the Bank financial statements continued
for the year ended 31 December
183
Lloyds Bank plc Annual Report and Accounts 2023
Note 8: Loans and advances to customers
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
At 1 January 2023
94,852
17,516
2,952
115,320
293
698
381
1,372
Exchange and other adjustments1
(327)
1
(6)
(332)
(5)
–
(11)
(16)
Transfers to Stage 1
4,867
(4,842)
(25)
–
160
(156)
(4)
–
Transfers to Stage 2
(4,794)
4,964
(170)
–
(21)
40
(19)
–
Transfers to Stage 3
(515)
(872)
1,387
–
(6)
(84)
90
–
Impact of transfers between stages
(442)
(750)
1,192
–
(112)
162
94
144
21
(38)
161
144
Other changes in credit quality
21
(10)
380
391
Additions and repayments
(494)
(2,727)
(677)
(3,898)
32
(44)
(29)
(41)
Charge (credit) to the income statement
74
(92)
512
494
Disposals and derecognition 2
(2,482)
(345)
(28)
(2,855)
(53)
(42)
(17)
(112)
Advances written off
(465)
(465)
(465)
(465)
Recoveries of advances written off in
previous years
22
22
22
22
At 31 December 2023
91,107
13,695
2,990
107,792
309
564
422
1,295
Allowance for impairment losses
(309)
(564)
(422)
(1,295)
Net carrying amount
90,798
13,131
2,568
106,497
Drawn ECL coverage3 (%)
0.3
4.1
14.1
1.2
1 Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind and derecognising assets as a result of modifications.
2Relates to the securitisation of Retail unsecured loans.
3Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers.
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
At 1 January 2022
103,110
12,084
2,698
117,892
358
404
414
1,176
Exchange and other adjustments1
476
(4)
(23)
449
–
–
(11)
(11)
Transfers to Stage 1
3,024
(2,998)
(26)
–
81
(76)
(5)
–
Transfers to Stage 2
(9,988)
10,187
(199)
–
(24)
47
(23)
–
Transfers to Stage 3
(645)
(893)
1,538
–
(4)
(52)
56
–
Impact of transfers between stages
(7,609)
6,296
1,313
–
(55)
242
81
268
(2)
161
109
268
Other changes in credit quality
(120)
56
234
170
Additions and repayments
(1,125)
(860)
(690)
(2,675)
57
77
(19)
115
(Credit) charge to the income statement
(65)
294
324
553
Advances written off
(390)
(390)
(390)
(390)
Recoveries of advances written off in
previous years
44
44
44
44
At 31 December 2022
94,852
17,516
2,952
115,320
293
698
381
1,372
Allowance for impairment losses
(293)
(698)
(381)
(1,372)
Net carrying amount
94,559
16,818
2,571
113,948
Drawn ECL coverage2 (%)
0.3
4.0
12.9
1.2
1 Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind and derecognising assets as a result of modifications.
2Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers.
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.
The Group’s impairment charge comprises impact of transfers between stages, other changes in credit quality and additions and
repayments.
Advances written off have first been transferred to Stage 3 and then acquired a full allowance through other changes in credit quality.
Recoveries of advances written off in previous years are shown at the full recovered value, with a corresponding entry in repayments
and release of allowance through other changes in credit quality.
At 31 December 2023 £73,466 million (2022: £89,440 million) of loans and advances to customers had a contractual residual maturity of
greater than one year.
Notes to the Bank financial statements continued
for the year ended 31 December
184
Lloyds Bank plc Annual Report and Accounts 2023
Note 9: Finance leases receivables
The Bank’s finance lease receivables are classified as loans and advances to customers and accounted for at amortised cost. These
balances are analysed as follows:
2023
£m
2022
£m
Not later than 1 year
1,812
2,276
Later than 1 year and not later than 2 years
810
203
Later than 2 years and not later than 3 years
455
446
Later than 3 years and not later than 4 years
170
127
Later than 4 years and not later than 5 years
56
60
Later than 5 years
19
9
Gross investment
3,322
3,121
Unearned future finance income
(251)
(52)
Rentals received in advance
–
(99)
Net investment
3,071
2,970
The net investment represents amounts recoverable as follows:
2023
£m
2022
£m
Not later than 1 year
1,601
2,162
Later than 1 year and not later than 2 years
786
188
Later than 2 years and not later than 3 years
442
435
Later than 3 years and not later than 4 years
168
121
Later than 4 years and not later than 5 years
55
55
Later than 5 years
19
9
Net investment
3,071
2,970
Equipment leased to customers under finance leases relates to structured financing transactions to fund the purchase of property,
plant and equipment, motor vehicles, office equipment and other items. There was an allowance for hire purchase receivables
included in the allowance for impairment losses of £29 million ( 2022: £21 million).
Note 10: Intangible assets
Capitalised
software
enhancements
£m
Cost:
At 1 January 2022
5,696
Additions
1,335
Disposals and write-offs
(152)
At 31 December 2022
6,879
Exchange and other adjustments
1
Additions
1,381
Disposals
(223)
At 31 December 2023
8,038
Accumulated amortisation:
At 1 January 2022
2,600
Exchange and other adjustments
(9)
Charge for the year
742
Disposals and write-offs
(152)
At 31 December 2022
3,181
Charge for the year
930
Disposals
(223)
At 31 December 2023
3,888
Balance sheet amount at 31 December 2023
4,150
Balance sheet amount at 31 December 2022
3,698
Notes to the Bank financial statements continued
for the year ended 31 December
185
Lloyds Bank plc Annual Report and Accounts 2023
Note 11: Investment in subsidiary undertakings
2023
£m
2022
£m
At 1 January
31,197
30,588
Additions and capital injections
350
–
Capital contributions
44
1,875
Capital repayments
–
(32)
Disposals
–
(1,234)
At 31 December
31,591
31,197
Details of the subsidiaries and related undertakings are given on pages 202 to 205 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 Bank’s subsidiaries in paying dividends or repaying loans and advances. All regulated
banking subsidiaries are required to maintain capital at levels agreed with the regulators; this may impact those subsidiaries’ ability to
make distributions.
Note 12: Other assets
2023
£m
20221
£m
Property, plant and equipment:
Premises
504
466
Equipment
987
1,121
Right-of-use assets (note 13 )
603
626
2,094
2,213
Settlement balances and items in the course of collection from banks
219
234
Prepayments
735
575
Other assets
262
246
Total other assets
3,310
3,268
1See note 1 regarding changes to presentation.
Note 13: Lessee disclosures
The table below sets out the movement in the Bank’s right-of-use assets, which are primarily in respect of premises, and are
recognised within other assets (note 12).
2023
£m
2022
£m
At 1 January
626
690
Exchange and other adjustments
7
–
Additions
108
80
Disposals
(11)
(12)
Depreciation charge for the year
(127)
(132)
At 31 December
603
626
The Bank’s lease liabilities are recognised within other liabilities (note 15). The maturity analysis of the Bank’s lease liabilities on an
undiscounted basis is set out in the liquidity risk section of note 24 . The total cash outflow for leases in the year ended 31 December
2023 was £ 108 million (2022: £107 million).
Note 14: Debt securities in issue
2023
2022
At fair value
through profit
or loss
£m
At
amortised
cost
£m
Total
£m
At fair value
through profit
or loss
£m
At
amortised
cost
£m
Total
£m
Senior unsecured notes issued
10,474
16,896
27,370
9,244
16,683
25,927
Covered bonds
–
13,616
13,616
–
13,485
13,485
Certificates of deposit issued
–
3,096
3,096
–
1,607
1,607
Securitisation notes
–
658
658
–
278
278
Commercial paper
–
7,099
7,099
–
7,766
7,766
Total debt securities in issue
10,474
41,365
51,839
9,244
39,819
49,063
At 31 December 2023 £22,859 million (2022: £23,301 million) of debt securities in issue at amortised cost had a contractual residual
maturity of greater than one year.
Notes to the Bank financial statements continued
for the year ended 31 December
186
Lloyds Bank plc Annual Report and Accounts 2023
Note 15: Other liabilities
2023
£m
2022 1
£m
Settlement balances and items in the course of transmission to banks
350
297
Lease liabilities
681
706
Other creditors and accruals
2,286
2,495
Total other liabilities
3,317
3,498
1See note 1 regarding changes to presentation.
The maturity analysis of the Bank’s lease liabilities on an undiscounted basis is set out in the liquidity risk section of note 24 .
Note 16: Provisions
Provisions
for financial
commitments
and guarantees
£m
Regulatory
and legal
provisions
£m
Other
£m
Total
£m
At 1 January 2023
186
140
418
744
Exchange and other adjustments
1
–
(3)
(2)
Provisions applied
–
(131)
(260)
(391)
Charge for the year
(4)
247
244
487
At 31 December 2023
183
256
399
838
Note 26 to the consolidated financial statements outlines the significant provisions of the Group and the Bank.
Note 17: Subordinated liabilities
Preferred
securities
£m
Undated
£m
Dated
£m
Total
£m
At 1 January 2022
1,626
102
6,179
7,907
Issued in the year1:
8.133% Dated Subordinated Fixed Rate Reset notes 2033 (US$1,000 million)
–
–
837
837
Repurchases and redemptions during the year1:
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)
7.625% Dated Subordinated Notes 2025 (£750 million)
–
–
(502)
(502)
(1,620)
–
(502)
(2,122)
Foreign exchange movements
(6)
–
445
439
Other movements (cash and non-cash)
–
–
(1,141)
(1,141)
At 31 December 2022
–
102
5,818
5,920
Issued in the year1:
5.25% Fixed Rate Reset Dated Subordinated Notes 2033 (S$500 million)
–
–
288
288
Fixed-to-Floating Rate Dated Subordinated Notes 2033 (A$750 million)
–
–
382
382
–
–
670
670
Repurchases and redemptions during the year1:
9.625% Subordinated Bonds 2023 (£300 million)
–
–
(92)
(92)
8% Undated Subordinated Step-up Notes 2023 (£200 million)
–
–
–
–
–
–
(92)
(92)
Foreign exchange movements
–
–
(244)
(244)
Other movements (cash and non-cash)
–
–
167
167
At 31 December 2023
–
102
6,319
6,421
1 Issuances in the year generated cash inflows of £670 million ( 2022 : £837 million ); the repurchases and redemptions resulted in cash outflows of £92 million (2022 :
£2,156 million).
2Other movements include hedge accounting movements and cash payments in respect of interest on subordinated liabilities in the year amounting to £285 million
(2022 : £290 million) offset by the interest expense in respect of subordinated liabilities of £329 million (2022: £300 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 Bank has not had any defaults of
principal, interest or other breaches with respect to its subordinated liabilities during 2023 (2022: none).
Preference shares
The Bank has in issue one class of preference shares which are classified as liabilities under accounting standards.
Notes to the Bank financial statements continued
for the year ended 31 December
187
Lloyds Bank plc Annual Report and Accounts 2023
Note 18: Share capital and other equity instruments
Details of the Bank’s share capital and other equity instruments are provided in notes 28 and 31 to the consolidated financial
statements.
Note 19: Other reserves
2023
£m
2022
£m
2021
£m
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
(124)
(4)
105
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
–
–
–
Cash flow hedging reserve
(981)
(1,732)
720
Foreign currency translation reserve
(1)
2
(1)
At 31 December
(1,106)
(1,734)
824
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 Bank’s net investment in foreign operations.
Movements in other reserves were as follows:
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
2023
£m
2022
£m
2021
£m
At 1 January
(4)
105
14
Change in fair value
(39)
(50)
139
Deferred tax
11
23
(47)
Current tax
–
–
–
(28)
(27)
92
Income statement transfers in respect of disposals
(123)
(118)
(2)
Deferred tax
35
30
–
(88)
(88)
(2)
Impairment recognised in the income statement
(4)
6
1
At 31 December
(124)
(4)
105
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
2023
£m
2022
£m
2021
£m
At 1 January
–
–
–
Change in fair value
–
–
–
Deferred tax
–
(1)
1
–
(1)
1
Realised gains and losses transferred to retained profits
–
–
–
Deferred tax
–
1
(1)
–
1
(1)
At 31 December
–
–
–
Cash flow hedging reserve
2023
£m
2022
£m
2021
£m
At 1 January
(1,732)
720
1,367
Change in fair value of hedging derivatives
790
(3,089)
(438)
Deferred tax
(222)
894
82
568
(2,195)
(356)
Net income statement transfers
253
(352)
(399)
Deferred tax
(70)
95
108
183
(257)
(291)
At 31 December
(981)
(1,732)
720
Notes to the Bank financial statements continued
for the year ended 31 December
188
Lloyds Bank plc Annual Report and Accounts 2023
Note 19: Other reserves continued
Foreign currency translation reserve
2023
£m
2022
£m
2021
£m
At 1 January
2
(1)
1
Currency translation differences arising in the year
(3)
3
(2)
At 31 December
(1)
2
(1)
Note 20: Retained profits
2023
£m
2022
£m
2021
£m
At 1 January
46,305
43,681
42,677
Profit attributable to ordinary shareholders (see below)
4,326
3,276
3,249
Post-retirement defined benefit scheme remeasurements
(692)
(1,232)
556
Gains and losses attributable to own credit risk (net of tax)
(168)
364
(52)
Dividends paid1
(4,700)
–
(2,900)
Issue costs of other equity instruments (net of tax)
(5)
–
(1)
Repurchases and redemptions of other equity instruments
–
–
(9)
Capital contributions received
215
221
164
Return of capital contributions
(1)
(4)
(4)
Realised gains and losses on equity shares held at fair value through other comprehensive income
–
(1)
1
At 31 December
45,280
46,305
43,681
1Details of the Bank’s dividends are as set out in note 32 to the consolidated financial statements.
The profit after tax of the Bank was arrived at as follows:
2023
£m
2022
£m
2021
£m
Net interest income
10,526
7,605
4,606
Net fee and commission income
914
800
848
Dividends received
122
1,850
1,391
Net trading and other operating income
2,151
1,027
1,956
Other income
3,187
3,677
4,195
Total income
13,713
11,282
8,801
Operating expenses
(6,947)
(6,430)
(6,273)
Impairment (charge) credit
(437)
(745)
773
Profit before tax
6,329
4,107
3,301
Tax (expense) credit
(1,669)
(590)
292
Profit for the year
4,660
3,517
3,593
Profit attributable to ordinary shareholders
4,326
3,276
3,249
Profit attributable to other equity holders
334
241
344
Profit for the year
4,660
3,517
3,593
Notes to the Bank financial statements continued
for the year ended 31 December
189
Lloyds Bank plc Annual Report and Accounts 2023
Note 21: Related party transactions
Key management personnel
The key management personnel of the Group and the Bank are the same. The relevant disclosures are given in note 33 to the
consolidated financial statements.
Balances and transactions with fellow Lloyds Banking Group undertakings
Balances and transactions between members of the Lloyds Bank Group
The Bank, as a result of its position as parent of a banking group, has a large number of transactions with various of its subsidiary
undertakings; these are included on the balance sheet of the Bank as follows:
2023
£m
2022
£m
Assets, included within:
Financial assets at fair value through profit or loss
5,450
4,192
Derivative financial instruments
4,442
4,566
Financial assets at amortised cost: due from fellow Lloyds Banking Group undertakings
124,177
118,689
134,069
127,447
Liabilities, included within:
Due to fellow Lloyds Banking Group undertakings
17,693
17,891
Derivative financial instruments
3,855
5,076
Debt securities in issue at amortised cost
97
79
21,645
23,046
Due to the size and volume of transactions passing through these accounts, it is neither practical nor meaningful to disclose
information on gross inflows and outflows. During 2023 the Bank earned interest income on the above asset balances of £ 6,706 million
(2022 : £3,423 million; 2021: £1,933 million) and incurred interest expense on the above liability balances of £1,695 million (2022: £787 million;
2021: £327 million).
In addition, the Bank raised recharges of £2,089 million (2022: £2,099 million; 2021 : £1,609 million) on its subsidiaries in respect of costs
incurred and also received fees of £24 million (2022: £22 million; 2021: £70 million), and paid fees of £15 million (2022: £6 million; 2021:
£31 million ), for various services provided between the Bank and its subsidiaries.
Details of intercompany recharges recognised within other operating income are given in note 8 and details of contingent liabilities
and commitments entered into on behalf of fellow Lloyds Banking Group undertakings are given in note 34.
Balances and transactions with Lloyds Banking Group plc and fellow subsidiaries of the Bank
The Bank has balances due to and from the Bank’s parent company, Lloyds Banking Group plc and fellow subsidiaries of the Bank. These
are included on the balance sheet as follows:
2023
£m
2022
£m
Assets, included within:
Derivative financial instruments
1,136
1,120
Financial assets at amortised cost: due from fellow Lloyds Banking Group undertakings
450
593
1,586
1,713
Liabilities, included within:
Due to fellow Lloyds Banking Group undertakings
2,707
2,451
Financial liabilities at fair value through profit or loss
5,242
4,112
Derivative financial instruments
890
1,033
Debt securities in issue at amortised cost
12,903
13,380
Subordinated liabilities
7,035
6,618
28,777
27,594
These balances include Lloyds Banking Group plc’s banking arrangements and, due to the size and volume of transactions passing
through these accounts, it is neither practical nor meaningful to disclose information on gross inflows and outflows. During 2023 the
Bank earned £9 million interest income on the above asset balances (2022: £11 million; 2021: £11 million) and the Bank incurred
£830 million interest expense on the above liability balances (2022: £570 million; 2021: £468 million).
Other related party transactions
Related party information in respect of other related party transactions is given in note 33 to the consolidated financial statements.
Notes to the Bank financial statements continued
for the year ended 31 December
190
Lloyds Bank plc Annual Report and Accounts 2023
Note 22: Contingent liabilities, commitments and guarantees
Note 34 to the consolidated financial statements outlines the significant contingent liabilities of the Group and the Bank, other than
those arising from the banking business which are detailed below.
Contingent liabilities, commitments and guarantees arising from the banking business
At 31 December 2023 contingent liabilities, such as performance bonds and letters of credit, arising from the banking business were
£2,645 million (2022: £2,803 million), of which £nil (2022 : £ nil ) was incurred on behalf of fellow Lloyds Banking Group undertakings. The
contingent liabilities of the Bank arise in the normal course of its banking business and it is not practicable to quantify their future
financial effect. Total commitments and guarantees were £61,198  million (2022: £60,749 million), of which £3,090 million (2022 :
£3,141 million ) was incurred on behalf of fellow Lloyds Banking Group undertakings. Of the amounts shown above in respect of undrawn
formal standby facilities, credit lines and other commitments to lend, £35,575 million (2022: £34,788 million) was irrevocable.
Note 23: Transfers of financial assets
Continuing involvement in financial assets that have been derecognised
The Bank has derecognised financial assets in their entirety following transactions with securitisation vehicles, as detailed in note 35 to
the consolidated financial statements. The Bank’s continuing involvement largely arises from funding provided to the vehicles through
the purchase of issued notes. The majority of these notes are recognised as debt securities held at amortised cost, with the remaining
notes held by the Bank recognised at fair value through profit or loss. The carrying amount of these interests and the maximum
exposure to loss is included in note 35 to the consolidated financial statements. At 31 December 2023 the fair value of the retained
notes was £2,325 million. The income from the Bank’s interest in these structures for the year ended 31 December 2023 and cumulatively
for the lifetime was £10 million.
Details of transferred financial assets that continue to be recognised in full are as follows.
The Bank 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 Bank. In all cases, the transferee has the right to sell or repledge the assets concerned.
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 Bank’s obligation to repurchase the transferred assets. The liabilities shown
in the table below have recourse to the transferred assets.
2023
2022
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Repurchase and securities lending transactions
Debt securities held at amortised cost
1,401
–
1,162
–
Financial assets at fair value through other comprehensive income
10,332
4,761
11,552
6,052
Securitisation programmes
Financial assets at amortised cost:
Loans and advances to customers1
–
561
3,366
278
1 The carrying value of transferred assets for the Bank includes amounts relating to assets transferred to structured entities which are fully consolidated into the Group. The
liabilities associated with such assets are issued by the structured entities.
Note 24: Financial risk management
Market risk
(A)Interest rate risk
Note 38 to the consolidated financial statements outlines the nature of the interest rate risk to which the Group and the Bank are
exposed and how this is managed.
At 31 December 2023 the aggregate notional principal of interest rate and other swaps (predominantly interest rate) designated as fair
value hedges was £55,360 million (2022: £50,425 million) with a net fair value liability of £344 million (2022 : liability of £497 million) (note
7). The losses on the hedging instruments were £412 million (2022: losses of £78 million). The gains on the hedged items attributable to
the hedged risk were £411 million (2022: gains of £33 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 2023 was £97,908 million (2022:
£47,621 million) with a net fair value liability of £nil (2022 : £nil) (note 7). In 2023, ineffectiveness recognised in the income statement that
arises from cash flow hedges was a gain of £27 million (2022: loss of £32 million).
Interest rate benchmark reform
Note 38 to the consolidated financial statements outlines the steps that the Group and the Bank are taking to manage the transition to
alternative benchmark rates.
(B)Foreign exchange risk
Note 38 to the consolidated financial statements outlines the nature of the foreign exchange risk to which the Group and the Bank are
exposed and the steps taken to manage this.
Notes to the Bank financial statements continued
for the year ended 31 December
191
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
Credit risk
(A)Maximum credit exposure
The maximum credit risk exposure of the Bank 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 is considered to be the balance sheet carrying amount or,
for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts.
2023
2022
Maximum
exposure
£m
Offset1
£m
Net
exposure
£m
Maximum
exposure
£m
Offset1
£m
Net
exposure
£m
Financial assets at fair value through profit or loss2
6,251
–
6,251
4,990
–
4,990
Derivative financial instruments
7,049
(1,070)
5,979
7,793
(1,657)
6,136
Financial assets at amortised cost, net3
Loans and advances to banks, net3
8,512
–
8,512
7,984
–
7,984
Loans and advances to customers, net3
106,497
(1,602)
104,895
113,948
(1,577)
112,371
Reverse repurchase agreements, net3
32,751
–
32,751
39,259
–
39,259
Debt securities, net3
10,144
–
10,144
6,471
–
6,471
157,904
(1,602)
156,302
167,662
(1,577)
166,085
Financial assets at fair value through other comprehensive
income
27,156
–
27,156
22,675
–
22,675
Off-balance sheet items:
Acceptances and endorsements
191
–
191
58
–
58
Other items serving as direct credit substitutes
285
–
285
779
–
779
Performance bonds, including letters of credit, and other
transaction-related contingencies
2,169
–
2,169
1,966
–
1,966
Irrevocable commitments and guarantees
35,575
–
35,575
34,788
–
34,788
38,220
–
38,220
37,591
–
37,591
236,580
(2,672)
233,908
240,711
(3,234)
237,477
1Offset 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.
2Excluding equity shares.
3Amounts shown net of related impairment allowances.
(B)Concentrations of exposure
Note 38 to the consolidated financial statements includes a discussion of how the Group and the Bank manage concentration risk.
2023
£m
2022
£m
Agriculture, forestry and fishing
2,573
2,698
Construction
3,121
3,333
Energy and water supply
3,402
2,447
Financial, business and other services
19,084
18,977
Lease financing
3,071
2,970
Manufacturing
3,465
2,996
Personal:
Mortgages1
38,108
42,771
Other
7,960
9,652
Postal and telecommunications
2,329
2,166
Property companies
17,224
17,859
Transport, distribution and hotels
7,455
9,451
Total loans and advances to customers before allowance for impairment losses
107,792
115,320
Allowance for impairment losses
(1,295)
(1,372)
Total loans and advances to customers
106,497
113,948
1Includes both UK and overseas mortgage balances.
The Bank’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
Cash and balances at central banks
Significantly all of the Bank’s cash and balances at central banks of £52,268 million (2022: £66,783 million) are due from the Bank of
England or the Deutsche Bundesbank.
Loans and advances to customers
Note 38 to the consolidated financial statements includes details of the internal credit rating systems used by the Group and the Bank.
Notes to the Bank financial statements continued
for the year ended 31 December
192
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
Drawn exposures
Allowance for expected credit losses
Gross drawn exposures and expected
credit loss allowance
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
At 31 December 2023
Retail – UK mortgages
RMS 1–3
26,381
658
–
27,039
6
2
–
8
RMS 4–6
4,258
3,698
–
7,956
2
18
–
20
RMS 7–9
22
538
–
560
–
5
–
5
RMS 10
–
92
–
92
–
1
–
1
RMS 11–13
–
707
–
707
–
12
–
12
RMS 14
–
–
1,162
1,162
–
–
71
71
30,661
5,693
1,162
37,516
8
38
71
117
Retail – credit cards
RMS 1–3
1,312
2
–
1,314
3
–
–
3
RMS 4–6
1,661
341
–
2,002
20
19
–
39
RMS 7–9
328
329
–
657
14
51
–
65
RMS 10
–
64
–
64
–
16
–
16
RMS 11–13
–
90
–
90
–
36
–
36
RMS 14
–
–
68
68
–
–
31
31
3,301
826
68
4,195
37
122
31
190
Retail – loans and overdrafts
RMS 1–3
208
–
–
208
–
–
–
–
RMS 4–6
2,512
94
–
2,606
52
12
–
64
RMS 7–9
451
154
–
605
15
18
–
33
RMS 10
17
54
–
71
1
12
–
13
RMS 11–13
4
158
–
162
–
55
–
55
RMS 14
–
–
91
91
–
–
54
54
3,192
460
91
3,743
68
97
54
219
Retail – UK Motor Finance
RMS 1–3
457
5
–
462
4
–
–
4
RMS 4–6
1
2
–
3
–
–
–
–
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
5
–
5
–
2
–
2
RMS 14
–
–
7
7
–
–
4
4
458
12
7
477
4
2
4
10
Retail – other
RMS 1–3
–
–
–
–
1
–
–
1
RMS 4–6
472
83
–
555
–
5
–
5
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
68
68
–
–
23
23
472
83
68
623
1
5
23
29
Total Retail
38,084
7,074
1,396
46,554
118
264
183
565
Commercial Banking
CMS 1–5
10,146
–
–
10,146
2
–
–
2
CMS 6–10
15,322
115
–
15,437
21
–
–
21
CMS 11–14
23,999
2,473
–
26,472
117
51
–
168
CMS 15–18
3,122
3,432
–
6,554
51
189
–
240
CMS 19
8
601
–
609
–
60
–
60
CMS 20–23
–
–
1,594
1,594
–
–
239
239
52,597
6,621
1,594
60,812
191
300
239
730
Other1
426
–
–
426
–
–
–
–
Total loans and advances to customers
91,107
13,695
2,990
107,792
309
564
422
1,295
1Drawn exposures include centralised fair value hedge accounting adjustments.
Notes to the Bank financial statements continued
for the year ended 31 December
193
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
Drawn exposures
Allowance for expected credit losses
Gross drawn exposures and expected
credit loss allowance
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
At 31 December 2022
Retail – UK mortgages
RMS 1–3
33,607
3,474
–
37,081
5
18
–
23
RMS 4–6
964
1,982
–
2,946
1
15
–
16
RMS 7–9
4
484
–
488
–
7
–
7
RMS 10
–
187
–
187
–
4
–
4
RMS 11–13
–
433
–
433
–
16
–
16
RMS 14
–
–
944
944
–
–
69
69
34,575
6,560
944
42,079
6
60
69
135
Retail – credit cards
RMS 1–3
1,110
2
–
1,112
2
–
–
2
RMS 4–6
1,500
375
–
1,875
13
19
–
32
RMS 7–9
300
377
–
677
10
53
–
63
RMS 10
–
63
–
63
–
15
–
15
RMS 11–13
–
93
–
93
–
38
–
38
RMS 14
–
–
73
73
–
–
27
27
2,910
910
73
3,893
25
125
27
177
Retail – loans and overdrafts
RMS 1–3
322
–
–
322
1
–
–
1
RMS 4–6
3,449
206
–
3,655
51
11
–
62
RMS 7–9
961
312
–
1,273
39
40
–
79
RMS 10
29
102
–
131
3
23
–
26
RMS 11–13
9
218
–
227
2
87
–
89
RMS 14
–
–
133
133
–
–
69
69
4,770
838
133
5,741
96
161
69
326
Retail – UK Motor Finance
RMS 1–3
348
4
–
352
2
–
–
2
RMS 4–6
6
3
–
9
–
–
–
–
RMS 7–9
–
2
–
2
–
–
–
–
RMS 10
–
1
–
1
–
–
–
–
RMS 11–13
–
3
–
3
–
1
–
1
RMS 14
–
–
13
13
–
–
7
7
354
13
13
380
2
1
7
10
Retail – other
RMS 1–3
229
1
–
230
1
–
–
1
RMS 4–6
328
102
–
430
–
5
–
5
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
63
63
–
–
26
26
557
103
63
723
1
5
26
32
Total Retail
43,166
8,424
1,226
52,816
130
352
198
680
Commercial Banking
CMS 1–5
9,355
14
–
9,369
2
–
–
2
CMS 6–10
14,994
269
–
15,263
19
2
–
21
CMS 11–14
24,143
4,411
–
28,554
107
75
–
182
CMS 15–18
2,587
3,708
–
6,295
35
204
–
239
CMS 19
10
690
–
700
–
65
–
65
CMS 20–23
–
–
1,726
1,726
–
–
183
183
51,089
9,092
1,726
61,907
163
346
183
692
Other1
597
–
–
597
–
–
–
–
Total loans and advances to customers
94,852
17,516
2,952
115,320
293
698
381
1,372
1Drawn exposures include centralised fair value hedge accounting adjustments.
Notes to the Bank financial statements continued
for the year ended 31 December
194
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
Loans and advances banks
Significantly all of the Bank’s loans and advances to banks are assessed as Stage 1.
Reverse repurchase agreement held at amortised cost
All of the Bank’s reverse repurchase agreements held at amortised cost are assessed as Stage 1.
Debt securities held at amortised cost
At 31 December 2023 £10,031 million of the Bank’s gross debt securities held at amortised cost were investment grade (credit ratings
equal to or better than ‘BBB’) (2022: £6,476 million), £20 million were sub-investment grade (2022: £nil) and £99 million not rated (2022:
£nil).
Financial assets at fair value through other comprehensive income
At 31 December 2023 £27,142 million of the Bank’s financial assets at fair value through other comprehensive income were investment
grade (credit ratings equal to or better than ‘BBB’) (2022: £22,634 million), £nil were sub-investment grade (2022: £nil) and £14 million not
rated (2022: £41 million).
Derivative assets
An analysis of derivative assets is given in note 7. The Bank reduces exposure to credit risk by using master netting agreements and by
obtaining collateral in the form of cash or highly liquid securities.
2023
2022
Investment
grade1
£m
Other 2
£m
Total
£m
Investment
grade1
£m
Other 2
£m
Total
£m
Trading and other
1,386
13
1,399
2,000
101
2,101
Hedging
72
–
72
1
5
6
1,458
13
1,471
2,001
106
2,107
Due from fellow Lloyds Banking Group undertakings
5,578
5,686
Total derivative financial instruments
7,049
7,793
1Credit ratings equal to or better than ‘BBB’.
2Other comprises sub-investment grade (2023: £9 million; 2022: £7 million) and not rated (2023: £4 million; 2022: £99 million).
Financial guarantees and irrevocable loan commitments
Financial guarantees represent undertakings that the Bank 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 Bank 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.
Notes to the Bank financial statements continued
for the year ended 31 December
195
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
Undrawn exposures
Allowance for expected credit losses
Gross undrawn exposures and expected
credit loss allowance
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
At 31 December 2023
Retail – UK mortgages
RMS 1–3
845
1
–
846
–
–
–
–
RMS 4–6
7
2
–
9
–
–
–
–
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
852
3
–
855
–
–
–
–
Retail – credit cards
RMS 1–3
11,281
9
–
11,290
5
–
–
5
RMS 4–6
3,311
594
–
3,905
9
12
–
21
RMS 7–9
127
99
–
226
1
4
–
5
RMS 10
–
11
–
11
–
1
–
1
RMS 11–13
–
13
–
13
–
–
–
–
RMS 14
–
–
11
11
–
–
–
–
14,719
726
11
15,456
15
17
–
32
Retail – loans and overdrafts
RMS 1–3
2,467
–
–
2,467
2
–
–
2
RMS 4–6
948
86
–
1,034
6
3
–
9
RMS 7–9
130
60
–
190
3
5
–
8
RMS 10
3
15
–
18
–
2
–
2
RMS 11–13
–
27
–
27
–
9
–
9
RMS 14
–
–
8
8
–
–
–
–
3,548
188
8
3,744
11
19
–
30
Retail – UK Motor Finance
RMS 1–3
–
–
–
–
–
–
–
–
RMS 4–6
–
–
–
–
–
–
–
–
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Retail – other
RMS 1–3
4
–
–
4
–
–
–
–
RMS 4–6
217
–
–
217
1
–
–
1
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
221
–
–
221
1
–
–
1
Total Retail
19,340
917
19
20,276
27
36
–
63
Commercial Banking
CMS 1–5
13,778
–
–
13,778
1
–
–
1
CMS 6–10
16,254
6
–
16,260
16
–
–
16
CMS 11–14
7,636
1,318
–
8,954
23
20
–
43
CMS 15–18
824
1,022
–
1,846
12
43
–
55
CMS 19
–
21
–
21
–
4
–
4
CMS 20–23
–
–
63
63
–
–
1
1
38,492
2,367
63
40,922
52
67
1
120
Other
–
–
–
–
–
–
–
–
Total
57,832
3,284
82
61,198
79
103
1
183
Notes to the Bank financial statements continued
for the year ended 31 December
196
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
Undrawn exposures
Allowance for expected credit losses
Gross undrawn exposures and expected
credit loss allowance
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
At 31 December 2022
Retail – UK mortgages
RMS 1–3
1,134
1
–
1,135
–
–
–
–
RMS 4–6
–
–
–
–
–
–
–
–
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
1,134
1
–
1,135
–
–
–
–
Retail – credit cards
RMS 1–3
10,641
12
–
10,653
3
–
–
3
RMS 4–6
3,472
851
–
4,323
7
9
–
16
RMS 7–9
133
132
–
265
1
3
–
4
RMS 10
–
12
–
12
–
1
–
1
RMS 11–13
–
16
–
16
–
1
–
1
RMS 14
–
–
12
12
–
–
–
–
14,246
1,023
12
15,281
11
14
–
25
Retail – loans and overdrafts
RMS 1–3
2,379
–
–
2,379
2
–
–
2
RMS 4–6
925
125
–
1,050
5
6
–
11
RMS 7–9
145
77
–
222
4
9
–
13
RMS 10
3
19
–
22
–
4
–
4
RMS 11–13
–
33
–
33
–
9
–
9
RMS 14
–
–
9
9
–
–
–
–
3,452
254
9
3,715
11
28
–
39
Retail – UK Motor Finance
RMS 1–3
–
–
–
–
–
–
–
–
RMS 4–6
–
–
–
–
–
–
–
–
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Retail – other
RMS 1–3
45
–
–
45
–
–
–
–
RMS 4–6
180
–
–
180
1
–
–
1
RMS 7–9
–
–
–
–
–
–
–
–
RMS 10
–
–
–
–
–
–
–
–
RMS 11–13
–
–
–
–
–
–
–
–
RMS 14
–
–
–
–
–
–
–
–
225
–
–
225
1
–
–
1
Total Retail
19,057
1,278
21
20,356
23
42
–
65
Commercial Banking
CMS 1–5
12,102
–
–
12,102
1
–
–
1
CMS 6–10
17,965
32
–
17,997
12
1
–
13
CMS 11–14
7,499
1,218
–
8,717
24
26
–
50
CMS 15–18
734
727
–
1,461
8
37
–
45
CMS 19
–
70
–
70
–
10
–
10
CMS 20–23
–
–
46
46
–
–
2
2
38,300
2,047
46
40,393
45
74
2
121
Other
–
–
–
–
–
–
–
–
Total
57,357
3,325
67
60,749
68
116
2
186
Notes to the Bank financial statements continued
for the year ended 31 December
197
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
(D)Collateral held as security for financial assets
The principal types of collateral accepted by the Bank 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 both the type of agreement and the
counterparty. The Bank 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 Bank holds collateral in respect of loans and advances to customers and reverse repurchase agreements as set out below. The
Bank does not hold collateral against debt securities which are classified as financial assets held at amortised cost.
Loans and advances to customers
Retail lending
UK mortgages
An analysis by loan-to-value ratio of the Bank’s UK 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. 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.
2023
2022
Gross drawn exposures
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Less than 70 per cent
27,852
5,128
1,052
34,032
32,367
5,910
886
39,163
70 per cent to 80 per cent
1,951
311
74
2,336
1,656
411
36
2,103
80 per cent to 90 per cent
713
148
18
879
446
185
13
644
90 per cent to 100 per cent
143
95
6
244
105
36
3
144
Greater than 100 per cent
2
11
12
25
1
18
6
25
Total
30,661
5,693
1,162
37,516
34,575
6,560
944
42,079
Reverse repurchase agreements
There were reverse repurchase agreements which are accounted for as collateralised loans with a carrying value of £32,751 million
(2022: £39,259 million), against which the Bank held collateral with a fair value of £32,501 million, capped at the reverse repurchase
agreement carrying value (2022: £29,011 million). These transactions were generally conducted under terms that are usual and
customary for standard secured lending activities.
Financial assets at fair value through profit or loss (excluding equity shares)
Securities held as collateral in the form of stock borrowed amounted to £8,098 million (2022: £16,676 million). Of this amount,
£3,137 million (2022: £8,979 million) had been resold or repledged as collateral for the Bank’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 Bank 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 £5,979 million
(2022: £6,136 million), cash collateral of £362 million (2022: £550 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2023, the Bank held irrevocable loan commitments and other credit-related contingencies of £38,220 million (2022:
£37,591 million). Collateral is held as security, in the event that lending is drawn down, on £855 million (2022: £1,135 million) of these
balances.
Collateral repossessed
During the year, £24 million of collateral was repossessed (2022: £21 million), consisting primarily of residential property.
In respect of retail portfolios, the Bank 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 Bank
takes physical possession of assets held as collateral against commercial lending. In such cases, the assets are carried on the Bank’s
balance sheet and are classified according to the Bank’s accounting policies.
Notes to the Bank financial statements continued
for the year ended 31 December
198
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
(E)Collateral pledged as security
The Bank 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
There are balances arising from repurchase transactions of £7,305 million (2022: £18,380 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 2023 was £7,257 million, capped at the repurchase agreement carrying value (2022: £15,188 million
including over collaterisation).
Securities lending transactions
The following on-balance sheet financial assets have been lent to counterparties under securities lending transactions:
2023
£m
2022
£m
Financial assets at fair value through other comprehensive income
5,421
5,669
Liquidity risk
The table below analyses financial instrument liabilities of the Bank 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 to 3
months
£m
3 to 12
months
£m
1 to 5
years
£m
Over 5
years
£m
Total
£m
At 31 December 2023
Deposits from banks
1,766
947
241
442
–
3,396
Customer deposits
259,921
2,667
3,022
1,227
73
266,910
Repurchase agreements
3,229
4,092
29
2
–
7,352
Financial liabilities at fair value through profit or loss
118
42
416
1,071
4,425
6,072
Debt securities in issue at amortised cost
755
6,100
13,157
23,633
8,416
52,061
Lease liabilities
1
22
65
235
369
692
Subordinated liabilities
23
41
207
4,106
4,846
9,223
Total non-derivative financial liabilities
265,813
13,911
17,137
30,716
18,129
345,706
Derivative financial liabilities:
Gross settled derivatives – outflows
389
298
7,541
5,841
2,510
16,579
Gross settled derivatives – inflows
(187)
(199)
(7,438)
(5,900)
(2,545)
(16,269)
Gross settled derivatives – net flows
202
99
103
(59)
(35)
310
Net settled derivative liabilities
1,921
–
51
31
317
2,320
Total derivative financial liabilities
2,123
99
154
(28)
282
2,630
At 31 December 2022
Deposits from banks
3,727
28
179
478
82
4,494
Customer deposits
264,274
1,538
2,085
1,468
110
269,475
Repurchase agreements
12,279
6,188
–
–
–
18,467
Financial liabilities at fair value through profit or loss
84
60
100
1,565
3,709
5,518
Debt securities in issue at amortised cost
3,854
7,715
6,186
20,961
4,839
43,555
Lease liabilities
6
29
95
297
351
778
Subordinated liabilities
24
26
488
4,264
7,455
12,257
Total non-derivative financial liabilities
284,248
15,584
9,133
29,033
16,546
354,544
Derivative financial liabilities:
Gross settled derivatives – outflows
2,730
3,214
3,433
7,274
3,084
19,735
Gross settled derivatives – inflows
(1,877)
(2,989)
(3,303)
(7,210)
(3,135)
(18,514)
Gross settled derivatives – net flows
853
225
130
64
(51)
1,221
Net settled derivative liabilities
2,298
(19)
54
271
213
2,817
Total derivative financial liabilities
3,151
206
184
335
162
4,038
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest
of £11 million (2022: £11 million ) per annum for the Bank which is payable in respect of those instruments for as long as they remain in
issue is not included beyond 5 years.
Notes to the Bank financial statements continued
for the year ended 31 December
199
Lloyds Bank plc Annual Report and Accounts 2023
Note 24: Financial risk management continued
The figures below are presented in timing categories representing the remaining offer periods of lending commitments or remaining
coverage periods of financial guarantees, but the Bank could be required to lend or pay amounts under those arrangements earlier
than the periods presented below. Payment under the significant majority of the Bank’s lending commitments and financial guarantee
contracts could be required to be made on demand.
Within 1
year
£m
1 to 3
years
£m
3 to 5
years
£m
Over 5
years
£m
Total
£m
At 31 December 2023
Acceptances and endorsements
191
–
–
–
191
Other contingent liabilities
1,169
585
183
517
2,454
Total contingent liabilities
1,360
585
183
517
2,645
Lending commitments and guarantees
31,473
15,999
10,981
2,643
61,096
Other commitments
–
38
41
23
102
Total commitments and guarantees
31,473
16,037
11,022
2,666
61,198
Total contingents, commitments and guarantees
32,833
16,622
11,205
3,183
63,843
At 31 December 2022
Acceptances and endorsements
58
–
–
–
58
Other contingent liabilities
1,650
540
180
375
2,745
Total contingent liabilities
1,708
540
180
375
2,803
Lending commitments and guarantees
26,090
6,984
10,187
17,449
60,710
Other commitments
–
–
10
29
39
Total commitments and guarantees
26,090
6,984
10,197
17,478
60,749
Total contingents, commitments and guarantees
27,798
7,524
10,377
17,853
63,552
Capital risk
Note 38 to the consolidated financial statements includes a discussion of the management of the capital risk faced by the Group and
the Bank.
Note 25: Cash flow statement
(A)Change in operating assets
2023
£m
2022
£m
2021
£m
Change in amounts due from fellow Lloyds Banking Group undertakings
(5,345)
(10,858)
20,347
Change in other financial assets held at amortised cost
15,148
7,993
15,167
Change in financial assets at fair value through profit or loss
(1,261)
(465)
(2,805)
Change in derivative financial instruments
402
(1,985)
6,085
Change in other operating assets
(162)
(53)
10
Change in operating assets
8,782
(5,368)
38,804
(B)Change in operating liabilities
2023
£m
2022
£m
2021
£m
Change in deposits from banks
(1,085)
1,697
(2,449)
Change in customer deposits
(2,566)
790
13,627
Change in repurchase agreements
(11,075)
18,302
(14,426)
Change in amounts due to fellow Lloyds Banking Group undertakings
(743)
(4,182)
(12,468)
Change in financial liabilities at fair value through profit or loss
996
(58)
1,828
Change in derivative financial instruments
(2,733)
4,245
(4,970)
Change in debt securities in issue at amortised cost
1,546
1,380
(9,670)
Change in other operating liabilities1
(278)
88
513
Change in operating liabilities
(15,938)
22,262
(28,015)
1Includes a decrease of £ 25 million (2022 : decrease of £72 million ; 2021 : decrease of £108 million ) in respect of lease liabilities.
Notes to the Bank financial statements continued
for the year ended 31 December
200
Lloyds Bank plc Annual Report and Accounts 2023
Note 25: Cash flow statement continued
(C)Non-cash and other items
2023
£m
2022
£m
2021
£m
Interest expense on subordinated liabilities
329
300
484
Net (credit) charge in respect of defined benefit schemes
(53)
54
114
Depreciation and amortisation
1,475
1,462
1,671
Regulatory and legal provisions
247
127
196
Other provision movements
(16)
(95)
(71)
Allowance for loan losses
491
567
(648)
Write-off of allowance for loan losses, net of recoveries
(443)
(346)
(442)
Impairment charge (credit) relating to undrawn balances
(4)
73
(134)
Impairment (credit) charge on financial assets at fair value through other comprehensive income
(4)
6
1
Dividends and distributions on other equity instruments received from subsidiary undertakings
(313)
(1,975)
(1,503)
Additional capital injections to subsidiaries
(44)
(46)
(36)
Foreign exchange impact on balance sheet1
85
(246)
(48)
Other non-cash items
1,749
(959)
(867)
Total non-cash items
3,499
(1,078)
(1,283)
Contributions to defined benefit schemes
(946)
(1,607)
(823)
Payments in respect of regulatory and legal provisions
(131)
(132)
(190)
Other
–
–
237
Total other items
(1,077)
(1,739)
(776)
Non-cash and other items
2,422
(2,817)
(2,059)
1When 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)Analysis of cash and cash equivalents as shown in the balance sheet
2023
£m
2022
£m
2021
£m
Cash and balances at central banks
52,268
66,783
49,618
Less mandatory reserve deposits1
(817)
(957)
(963)
51,451
65,826
48,655
Loans and advances to banks and reverse repurchase agreements
14,888
11,534
7,287
Less amounts with a maturity of three months or more
(4,643)
(6,571)
(3,712)
10,245
4,963
3,575
Total cash and cash equivalents
61,696
70,789
52,230
1Mandatory 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 Bank’s day-to-day operations they are excluded from cash and cash equivalents.
Note 26: Other information
Lloyds Bank plc is incorporated as a public limited company and registered in England with the registered number 2065. Lloyds Bank
plc’s registered office is 25 Gresham Street, London, EC2V 7HN, and its principal executive offices are located at 25 Gresham Street,
London, EC2V 7HN.
Lloyds Bank plc and its subsidiaries form a leading UK-based financial services group, whose businesses provide a wide range of
banking and financial services in the UK and in certain locations overseas.
Lloyds Bank plc’s immediate parent undertaking and ultimate parent undertaking and controlling party is Lloyds Banking Group plc
which is incorporated in Scotland . Copies of the consolidated Annual Report and Accounts of Lloyds Banking Group plc may be
obtained from Lloyds Banking Group’s head office at 25 Gresham Street, London EC2V 7HN or downloaded via
www.lloydsbankinggroup.com.
Notes to the Bank financial statements continued
for the year ended 31 December
201
Lloyds Bank plc Annual Report and Accounts 2023
In compliance with section 409 of the Companies Act 2006, the
following comprises a list of all related undertakings of the Group
as at 31 December 2023. The list includes each undertaking’s
registered office and the percentage of the class(es) of shares
held by the Group. All shares held are ordinary shares unless
indicated otherwise in the notes.
Subsidiary undertakings
The Group directly or indirectly holds 100 per cent of the share
class and a majority of voting rights (including where the
undertaking does not have share capital as indicated) in the
following undertakings. All material subsidiary undertakings are
consolidated by Lloyds Banking Group.
Name of undertaking
Notes
A G Finance Ltd
17 ii iii
A.C.L. Ltd
1 i
ACL Autolease Holdings Ltd
1 i
Alex Lawrie Factors Ltd
9 i
Alex. Lawrie Receivables Financing Ltd
9 i
Amberdate Ltd
1 i v
Anglo Scottish Utilities Partnership 1
+ *
Aquilus Ltd
13 i ‡
Automobile Association Personal Finance Ltd
4 i
Bank of Scotland (B G S) Nominees Ltd
5 *
Bank of Scotland Edinburgh Nominees Ltd
5 *
Bank of Scotland Equipment Finance Ltd
13 i ‡
Bank of Scotland plc
5 i v
Bank of Scotland Structured Asset Finance Ltd
1 i
Bank of Scotland Transport Finance 1 Ltd
13 i ‡
Bank of Wales Ltd
20 i
Barents Leasing Ltd
1 i
Birchcrown Finance Ltd
1 v vii
Birmingham Midshires Financial Services Ltd
13 i ‡
Birmingham Midshires Mortgage Services Ltd
13 i ‡
Black Horse (TRF) Ltd
1 i
Black Horse Finance Holdings Ltd
1 ii iii
Black Horse Finance Management Ltd
13 i ‡
Black Horse Group Ltd
1 i v
Black Horse Ltd
1 i
Boltro Nominees Ltd
1 i
BOS (Ireland) Property Services 2 Ltd
16 i ‡
BOS (Shared Appreciation Mortgages (Scotland)) Ltd
4 i
BOS (Shared Appreciation Mortgages (Scotland) No. 2) Ltd
4 i
BOS (Shared Appreciation Mortgages (Scotland) No. 3) Ltd
4 i
BOS (Shared Appreciation Mortgages) No. 1 plc
4 # i
BOS (Shared Appreciation Mortgages) No. 2 plc
4 # i
BOS (Shared Appreciation Mortgages) No. 3 plc
4 # i
BOS (Shared Appreciation Mortgages) No. 4 plc
4 # i
BOS (Shared Appreciation Mortgages) No. 5 plc
4 i
BOS (Shared Appreciation Mortgages) No. 6 plc
4 i
BOS Personal Lending Ltd
4 ii iii
BOSSAF Rail Ltd
1 i
British Linen Leasing (London) Ltd
5 i
British Linen Leasing Ltd
5 i
British Linen Shipping Ltd
5 i
Capital 1945 Ltd
13 i ‡
Capital Bank Leasing 3 Ltd
13 i ‡
Capital Bank Leasing 5 Ltd
20 i
Capital Bank Leasing 12 Ltd
5 i
Name of undertaking
Notes
Capital Bank Property Investments (3) Ltd
20 i
Capital Personal Finance Ltd
4 i
Cardnet Merchant Services Ltd
1 # ^ iii xii
Cashfriday Ltd
9 i
Caveminster Ltd
1 i
CF Asset Finance Ltd
13 i ‡
Cheltenham & Gloucester plc
12 i
Cloak Lane Funding Sàrl
8 i
Cloak Lane Investments Sàrl
8 i
Conquest Securities Ltd
1 v vii
Corbiere Asset Investments Ltd
1 ii iii
Dunstan Investments (UK) Ltd
1 i
Eurolead Services Holdings Ltd
9 i
First Retail Finance (Chester) Ltd
4 i
Forthright Finance Ltd
20 i
General Leasing (No. 12) Ltd
13 i ‡
Gresham Nominee 1 Ltd
1 i
Gresham Nominee 2 Ltd
1 i
Halifax Group Ltd
13 i ‡
Halifax Leasing (March No.2) Ltd
1 i
Halifax Leasing (September) Ltd
1 i
Halifax Ltd
13 i ‡
Halifax Loans Ltd
4 i
Halifax Pension Nominees Ltd
1 i
Halifax Vehicle Leasing (1998) Ltd
4 i
Hamsard 3352 Ltd
10 ii iii iv ix
xiii xiv
Hamsard 3353 Ltd
10 i
HBOS Covered Bonds LLP
4 *
HBOS plc
5 i v vi
HBOS Social Housing Covered Bonds LLP
20 *
HBOS UK Ltd
5 i
Heidi Finance Holdings (UK) Ltd
1 i
Hill Samuel Bank Ltd
13 i ‡
Hill Samuel Finance Ltd
1 v x
Hill Samuel Leasing Co. Ltd
1 i
Home Shopping Personal Finance Ltd
4 i
HVF Ltd
1 i
Hyundai Car Finance Ltd
17 ii iii
IBOS Finance Ltd
13 i ‡
International Motors Finance Ltd
17 ii #
Kanaalstraat Funding C.V.
28 *
Landau Finance Ltd
11 i
LB Healthcare Trustee Ltd
1 i
LBCF Ltd
9 i
LBI Leasing Ltd
1 i
Lex Autolease (CH) Ltd
1 i
Lex Autolease (VC) Ltd
1 i
Lex Autolease Carselect Ltd
1 i
Lex Autolease Ltd
1 i
Lex Vehicle Leasing (Holdings) Ltd
13 ii iii xi ‡
Lex Vehicle Leasing Ltd
13 i ‡
Lime Street (Funding) Ltd
13 i ‡
Lloyds (Gresham) Ltd
1 i xi
Lloyds (Nimrod) Specialist Finance Ltd
1 i
Subsidiaries and related undertakings
202
Lloyds Bank plc Annual Report and Accounts 2023
Name of undertaking
Notes
Lloyds Asset Leasing Ltd
1 i
Lloyds Bank (Colonial & Foreign) Nominees Ltd
1 i
Lloyds Bank (I.D.) Nominees Ltd
1 i
Lloyds Bank Asset Finance Ltd
1 i
Lloyds Bank Commercial Finance Ltd
9 i
Lloyds Bank Commercial Finance Scotland Ltd
23 i
Lloyds Bank Corporate Asset Finance (HP) Ltd
1 i
Lloyds Bank Corporate Asset Finance (No.2) Ltd
1 i
Lloyds Bank Corporate Asset Finance (No.3) Ltd
1 i
Lloyds Bank Corporate Asset Finance (No.4) Ltd
1 i
Lloyds Bank Covered Bonds LLP
26 *
Lloyds Bank Covered Bonds (LM) Ltd
26 i
Lloyds Bank Equipment Leasing (No. 1) Ltd
1 i
Lloyds Bank Equipment Leasing (No. 7) Ltd
1 i
Lloyds Bank Equipment Leasing (No. 9) Ltd
1 i
Lloyds Bank Financial Services (Holdings) Ltd
1 i v
Lloyds Bank General Leasing (No. 3) Ltd
1 i
Lloyds Bank General Leasing (No. 5) Ltd
13 i ‡
Lloyds Bank General Leasing (No. 11) Ltd
13 i ‡
Lloyds Bank GmbH
29 i
Lloyds Bank Leasing (No. 6) Ltd
1 i
Lloyds Bank Leasing Ltd
1 i
Lloyds Bank Maritime Leasing (No. 10) Ltd
1 i
Lloyds Bank Nominees Ltd
1 i
Lloyds Bank Offshore Pension Trust Ltd
21 i
Lloyds Bank Pension ABCS (No. 1) LLP
1 *
Lloyds Bank Pension ABCS (No. 2) LLP
1 *
Lloyds Bank Pension Trust (No. 1) Ltd
13 i ‡
Lloyds Bank Pension Trust (No. 2) Ltd
13 i ‡
Lloyds Bank Pensions Property (Guernsey) Ltd
30 ii iii
Lloyds Bank Property Company Ltd
1 i
Lloyds Bank S.F. Nominees Ltd
1 i
Lloyds Bank Subsidiaries Ltd
1 i
Lloyds Bank Trustee Services Ltd
1 i
Lloyds Banking Group Pensions Trustees Ltd
1 i
Lloyds Capital GP Ltd
2 i ‡
Lloyds Far East Sàrl
8 i
Lloyds General Leasing Ltd
1 i
Lloyds Hypotheken B.V.
25 i
Lloyds Industrial Leasing Ltd
1 i
Lloyds Investment Securities No.5 Ltd
1 i
Lloyds Leasing (North Sea Transport) Ltd
1 i
Lloyds Leasing Developments Ltd
1 i
Lloyds Offshore Global Services Private Ltd
18 i
Lloyds Plant Leasing Ltd
1 i
Lloyds Portfolio Leasing Ltd
1 i
Lloyds Project Leasing Ltd
1 i
Lloyds Property Investment Company No. 4 Ltd
1 i
Lloyds Secretaries Ltd
1 i
Lloyds TSB Pacific Ltd
14 i
Lloyds UDT Asset Rentals Ltd
13 i ‡
Lloyds UDT Leasing Ltd
1 i
Lloyds UDT Ltd
13 i ‡
Lloyds Your Tomorrow Trustee Ltd
13 i ‡
Loans.co.uk Ltd
20 i
Name of undertaking
Notes
London Taxi Finance Ltd
1 ii iii
Lotus Finance Ltd
17 ii iii
LTGP Limited Partnership Incorporated
30 *
Maritime Leasing (No. 19) Ltd
1 i
MBNA Ltd
20 i
Membership Services Finance Ltd
4 i
Mitre Street Funding Sàrl
8 i
NFU Mutual Finance Ltd
20 ii viii
NWS Trust Ltd
5 i
Pacific Leasing Ltd
1 i
Perry Nominees Ltd
1 i
PIPS Asset Investments Ltd
1 ii iii
Proton Finance Ltd
17 ii iii
R.F. Spencer and Company Ltd
9 i
Ranelagh Nominees Ltd
1 i
Retail Revival (Burgess Hill) Investments Ltd
1 i
Savban Leasing Ltd
1 i
Scotland International Finance B.V.
28 i
Scottish Widows Services Ltd
3 i
Seabreeze Leasing Ltd
1 i
Seaspirit Leasing Ltd
1 i
Shogun Finance Ltd
17 ii iii
St. Mary’s Court Investments
1 i
Standard Property Investment (1987) Ltd
5 ii #
Sussex County Homes Ltd
4 i
Suzuki Financial Services Ltd
17 ii #
The Agricultural Mortgage Corporation plc
22 i
The British Linen Company Ltd
5 i
The Mortgage Business plc
4 i
Thistle Leasing
+ *
Tower Hill Property Investments (7) Ltd
13 i # ‡
Tower Hill Property Investments (10) Ltd
20 i #
Tranquility Leasing Ltd
1 i
Tuskerdirect Ltd
10 i
UDT Budget Leasing Ltd
13 i ‡
United Dominions Leasing Ltd
1 i
United Dominions Trust Ltd
1 i
Ward Nominees (Abingdon) Ltd
1 i
Waymark Asset Investments Ltd
1 ii iii
Wood Street Leasing Ltd
1 i
Subsidiaries and related undertakings continued
203
Lloyds Bank plc Annual Report and Accounts 2023
The Group has determined that it has the power to exercise
control over the following entities without having the majority of
the voting rights of the undertakings. Unless otherwise stated, the
undertakings do not have share capital or the Group does not
hold any shares.
Name of undertaking
Notes
Addison Social Housing Holdings Ltd
31
Cancara Asset Securitisation Ltd
27
Candide Financing 2021-1 B.V.
15
Cardiff Auto Receivables Securitisation 2019-1 plc
26
Cardiff Auto Receivables Securitisation 2022-1 plc
26
Cardiff Auto Receivables Securitisation Holdings Ltd
26
Connery Holdings Ltd
31
Deva Financing Holdings Ltd
26 §
Edgbaston RMBS Holdings Ltd
26 §
Elland RMBS 2018 plc
26
Elland RMBS Holdings Ltd
26
Fontwell Securities 2016 Ltd
31
Fontwell II Securities 2020 DAC
24
Gresham Receivables (No. 3) Ltd
27
Gresham Receivables (No. 10) Ltd
27
Gresham Receivables (No. 13) UK Ltd
7
Gresham Receivables (No. 15) UK Ltd
7
Gresham Receivables (No. 16) UK Ltd
7
Gresham Receivables (No. 20) Ltd
27
Gresham Receivables (No. 24) Ltd
27
Gresham Receivables (No.27) UK Ltd
7
Gresham Receivables (No.28) Ltd
27
Gresham Receivables (No.29) Ltd
27
Gresham Receivables (No. 32) UK Ltd
7
Gresham Receivables (No.34) UK Ltd
7
Gresham Receivables (No.35) Ltd
27
Gresham Receivables (No.36) UK Ltd
7
Gresham Receivables (No.37) UK Ltd
7
Gresham Receivables (No.38) UK Ltd
7
Gresham Receivables (No.39) UK Ltd
7
Gresham Receivables (No.40) UK Ltd
7
Gresham Receivables (No.41) UK Ltd
7
Gresham Receivables (No.44) UK Ltd
7
Gresham Receivables (No.45) UK Ltd
7
Gresham Receivables (No.46) UK Ltd
7
Gresham Receivables (No.47) UK Ltd
7
Gresham Receivables (No.48) UK Ltd
7
Guildhall Asset Purchasing Company (No.11) UK Ltd
7
Housing Association Risk Transfer 2019 DAC
24
Lingfield 2014 I Holdings Ltd
26
Lingfield 2014 I plc
6 ‡
Lloyds Bank Covered Bonds (Holdings) Ltd
26
Molineux RMBS 2016-1 plc
26
Molineux RMBS Holdings Ltd
26
Penarth Asset Securitisation Holdings Ltd
26
Penarth Funding 1 Ltd
26
Penarth Funding 2 Ltd
26
Penarth Master Issuer plc
26
Penarth Receivables Trustee Ltd
26
Permanent Funding (No. 1) Ltd
26
Permanent Funding (No. 2) Ltd
26
Name of undertaking
Notes
Permanent Holdings Ltd
26
Permanent Master Issuer plc
26
Permanent Mortgages Trustee Ltd
26
Permanent PECOH Holdings Ltd
26
Permanent PECOH Ltd
26
Salisbury Securities 2015 Ltd
31
Salisbury II Securities 2016 Ltd
31
Salisbury II-A Securities 2017 Ltd
31
Salisbury III Securities 2019 DAC
24
Stichting Holding Candide Financing
15
Stichting Security Trustee Candide 2021-1 B.V.
15
Syon Securities 2019 DAC
24
Syon Securities 2020 DAC
24
Syon Securities 2020-2 DAC
24
Wetherby II Securities 2018 DAC
19
Wetherby III Securities 2019 DAC
24
Wilmington Cards 2021-1 plc
26
Wilmington Cards Holdings Ltd
26
Wilmington Receivables Trustee Ltd
26
Subsidiaries and related undertakings continued
204
Lloyds Bank plc Annual Report and Accounts 2023
Associated undertakings
The Group has a participating interest in the following undertakings.
Name of undertaking
% of share class held by immediate parent
company (or by the Group where this varies)
Registered office address
Notes
Addison Social Housing Ltd
20%
1 Bartholomew Lane, London, EC2N 2AX
i
Connery Ltd
20%
44 Esplanade, St. Helier, Jersey, JE4 9WG
i &
Registered office addresses
1
25 Gresham Street, London, EC2V 7HN
2
c/o BDO LLP, 5 Temple Square, Temple Street, Liverpool, L2 5RH
3
69 Morrison Street, Edinburgh, EH3 8YF
4
Trinity Road, Halifax, West Yorkshire, HX1 2RG
5
The Mound, Edinburgh, EH1 1YZ
6
40a Station Road, Upminster, Essex, RM14 2TR
7
Wilmington Trust SP Services (London) Limited, Third Floor, 1 King’s
Arms Yard, London, EC2R 7AF
8
17 Boulevard F.W. Raiffeisen, L-2411 Luxembourg
9
1 Brookhill Way, Banbury, Oxon, OX16 3EL
10
Building 4 Hatters Lane, Croxley Green Business Park, Watford,
Hertfordshire, WD18 8YF
11
Building 4 Hatters Lane, Croxley Green Business Park, Watford,
Hertfordshire, WS18 8YF
12
Barnett Way, Gloucester, GL4 3RL
13
1 More London Place, London, SE1 2AF
14
18th Floor, United Centre, 95 Queensway, Hong Kong
15
Basisweg 10, 1043 AP, Amsterdam
16
Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland
17
St William House, Tresillian Terrace, Cardiff, CF10 5BH
18
6/12, Primrose Road, Bangalore, 560025, India
19
1-2 Victoria Buildings, Haddington Road, Dublin 4, Ireland
20
Cawley House, Chester Business Park, Chester, CH4 9FB, United
Kingdom
21
3rd Floor, IFC5, Castle Street, St. Helier, JE2 3BY, Jersey
22
Keens House, Anton Mill Road, Andover, Hampshire, SP10 2NQ
23
110 St. Vincent Street, Glasgow, G2 4QR
24
5th Floor, The Exchange, George’s Dock, IFSC, Dublin 1, Ireland
25
Fascinatio Boulevard 1302, 2909VA Capelle aan den IJssel,
Netherlands
26
1 Bartholomew Lane, London, EC2N 2AX
27
26 New Street, St. Helier, Jersey, JE2 3RA
28
De Entrée 254, 1101 EE, Amsterdam, Netherlands
29
Karl-Liebknecht-STR. 5, D-10178 Berlin, Germany
30
PO Box 186, Royal Chambers, St Julian’s Avenue, St Peter Port, GY1
4HP, Guernsey
31
44 Esplanade, St. Helier, Jersey, JE4 9WG
Notes
*
The undertaking does not have share capital
+
The undertaking does not have a registered office
#
In relation to subsidiary undertakings, an undertaking external to
the Group holds shares
^
Shares held directly by Lloyds Banking Group plc
&
The Group holds voting rights of between 20% and 49.9%
‡
The undertaking is in liquidation
i
Ordinary shares
ii
A Ordinary shares
iii
B Ordinary shares
iv
D Ordinary shares
v
Preference shares
vi
Non-voting deferred shares
vii
Ordinary non-voting shares
viii
C Ordinary shares
ix
E Ordinary shares
x
Ordinary limited voting shares
xi
Redeemable preference shares
xii
Deferred shares
xiii
C1 Ordinary shares
xiv
C2 Ordinary shares
Subsidiaries and related undertakings continued
205
Lloyds Bank plc Annual Report and Accounts 2023