Annual Review 2019 4 Annual Report and Accounts 2019

Our Group Group highlights We are the largest UK retail and commercial provider Solid financial performance in a challenging environment with around 26 million customers and a presence in nearly every community. The Group’s main business activities are retail and commercial banking, general insurance and long-term £3.0bn 3.37p 27% savings, provided through well (33)% +5% recognised brands including Lloyds Statutory profit after tax Progressive and sustainable Total shareholder return , , Bank of and was lower largely due to the ordinary dividend per share increased in the year reflecting Scottish Widows. additional PPI charge. Tax including interim and the increased ordinary dividend expense of £1.4 billion final dividends and higher share price Our shares are quoted on the London and New York stock exchanges and we are one of the largest companies in the FTSE 100 index. 7.8% 48.5% 13.8% Our reporting (3.9)pp (0.8)pp (0.1)pp Lower return on tangible Cost: income ratio continues Common equity tier 1 ratio We aim to report in an integrated equity given lower to improve remains strong way to reflect the way we operate. As statutory profit well as reporting our financial results, we also report on our strategy and approach to operating responsibly and take into account relevant economic, political, social, regulatory and environmental factors. 16.4m 74% 20 of 22 +4% +1pp Within this year’s report we have also Digitally active customers Employee engagement index Helping Britain Prosper Plan sought to address the additional continued to increase and we improved, two points above targets achieved including the reporting requirements arising from remain the largest digital bank the norm for top performing new sustainability KPI Section 172 of the Companies Act in the UK UK companies 2006 and the 2018 UK Corporate Governance Code. All the above key performance This Annual Report and Accounts indicators directly impact contains forward looking statements remuneration outcomes and with respect to the Group’s plans and support the delivery of our reward principles. its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the forward looking statements on page 330 of our Annual Report and Accounts. Picture this Inside this year’s Annual Review In 2019, we offered colleagues from across the Group an opportunity Strategic report to submit photographs that they Chairman’s statement 2 felt represented our purpose of Helping Britain Prosper. The winning Group Chief Executive’s review 5 photos are marked with this symbol Key performance indicators 8 alongside the photographer’s name. Our external environment 10 Our business 14 Our strategic priorities 16 Our key stakeholders and Board engagement 20 Responsible business 26 Financial performance overview 36 Risk overview 40 This Annual Review incorporates the Shareholder information 47 Strategic Report which forms part of the 2019 Annual Report and Accounts along Board of Directors 48 with some information about the Board of Directors’ remuneration report 50 Directors, a summary of Group results and detail on remuneration as well as some general shareholder information.

On behalf of the Board Lord Blackwell Chairman Lloyds Banking Group 19 February 2020 Lloyds Banking Group Annual Review 2019 1

Bea’s Room

During 2019, we’ve lent £13.8 billion to support people to buy their first home, helped over 350,000 more people save for their future and supported more than 100,000 businesses across the UK to start up and grow. Given our customer focused strategy, ambitious transformation programme and digital strength, the Group remains well placed to continue to support its customers, Help Britain Prosper and deliver long-term sustainable success.

Helping Britain Prosper Plan on pages 27 to 34 2 Lloyds Banking Group Annual Review 2019

Chairman’s statement Significant strategic progress positioning us well to respond to the changing environment

Given our unique position at the heart of the UK economy, the successful transition to a more sustainable, lower-carbon economy is of strategic importance to us. Lord Blackwell Chairman

Overview and strategy Our weak spot continued to be the ongoing I am also pleased, that as announced in May 2019, legacy from past misconduct, with another the Group will be moving to quarterly dividend During 2019, the Group has continued to make significant provision for PPI mis-selling as payments this year with the first payment in significant strategic progress and deliver solid we approached the deadline for customer respect of the first quarter of 2020 due in June. financial performance in a challenging external compensation claims last August. In addition, environment. Much of the year was impacted despite the organisation’s best intentions to Supporting the UK economy by economic and political uncertainty, but our provide rapid and generous compensation customer focus has remained strong and the through uncertain times to victims of the historic HBOS Reading cornerstone of our business. We have and will continue to play an active Fraud, we also had to acknowledge that part in supporting the UK economy, to which review of this process by The Group is driven by our powerful purpose of our success is inextricably linked. As part of our Sir Ross Cranston highlighted shortcomings Helping Britain Prosper. As I have mentioned in purpose of Helping Britain Prosper, we believe which now require us to ensure customers previous years, despite the external challenges, we have a responsibility to help address the can opt into a further review if they are not the Board are determined to continue building social, economic and environmental challenges satisfied with their outcome. We have learned value for shareholders by maintaining our that the UK faces, whether we're helping a number of lessons from this, on how to focus on results delivery whilst simultaneously people buy a house, supporting businesses to improve our handling of small business investing in the major transformation required start up and grow, building digital skills, being customers, which we will build into our to serve our customers and operate effectively a leader in diversity or helping the transition to ongoing operations. The Board and Executive in a digital world. This transformation not only a low carbon economy. requires adopting new technologies, but also team remain committed to doing whatever adapting to the new skills, culture and ways is necessary to ensure all victims impacted We are supporting businesses by providing of working that the digital revolution requires. by past failures receive fair recompense that funding, once again lending them up to Delivering this effectively while remaining reflects the importance we attach to earning £18 billion in 2020, and the skills and tools they true to our traditional values and focusing on and retaining the trust of our customers. will need to develop and grow. For instance, customer service is a tremendous challenge, our Digital Academies provide relevant free but we are committed to building a successful Performance and capital return training and our International Trade Portal helps them find new customers overseas. and sustainable Group of which we can all We delivered a solid financial performance Additionally we have helped 2,000 social be proud. in 2019 despite the challenging external entrepreneurs start up and scale and we have environment. I am naturally disappointed that We remain on track to deliver our regional teams working with Be the Business our statutory result was significantly impacted commitment of more than £3 billion of to address productivity issues and provide a by the additional PPI charge in the year as strategic investment over the three year plan boost for local companies. noted above. Despite this, our performance period, having invested around £2 billion continues to demonstrate the resilience of to date. This investment, which in 2019 Given our unique position at the heart of the our customer franchise and business model, continued to focus on further enhancing our UK economy, the successful transition to a the appropriateness of our strategy and the leading customer experience, digitising the more sustainable, lower-carbon economy strength of our balance sheet. Group, maximising Group capabilities and is of strategic importance to us. In response transforming ways of working, is essential to With this in mind I am pleased to announce to the global issue of climate change, the sustain our long-term competitive advantage. that the Board has recommended an Group reached a new milestone with the increased final ordinary dividend of development of a new goal, working with At the same time we continue to invest in new 2.25 pence per share, bringing the total customers, Government and the market to growth opportunities. In 2019 we successfully ordinary dividend for 2019 to 3.37 pence per help reduce emissions we finance by more launched Personal Wealth with the share, an increase of 5 per cent on last year than 50 per cent by 2030. We have made ambition of becoming a top three financial and in line with the Group’s policy to deliver sustainability a focus area in our Helping planning business by the end of 2023 as a a progressive and sustainable ordinary Britain Prosper Plan and throughout 2019 we complement to our growing pensions and dividend. While we concluded that we should have continued to build on this by developing retirement business in Scottish Widows. We be prudent in not distributing further capital the new reporting framework, which can be also acquired Bank’s £3.5 billion UK this year, the Board will continue to assess this found on pages 28 to 31. prime residential mortgage portfolio. in future years. Lloyds Banking Group Annual Review 2019 3

OUR CONTRIBUTION TO THE UK

As the UK’s leading financial services provider we are making a significant positive impact on the UK economy

Customers Shareholders Communities Suppliers £15.5 trillion £2.4 billion paid and Environment £5.9 billion paid of payments in dividends to £50.8 million in 2019 processed in 2019 c.2.4 million donated to help >95 per cent of = 7x UK GDP shareholders communities in 2019 direct suppliers £61.2 billion SME More than 246,000 located in the UK and Mid Markets hours volunteered Tracey Bewick lending portfolio Biggest mortgage lender in UK with Regulators and c.£289 billion Government portfolio Colleagues £2.9 billion tax paid £18 billion lending in 2019 commitment to UK One of the businesses largest employers The UK’s largest in the UK corporate tax payer

Our stakeholders on pages 20 to 25

Equally important is how we engage with our ensuring all colleagues can feel confident in a more simplified remuneration structure with customers on this issue and to support this bringing their true selves to work and reach a clear alignment to the purpose and strategy change we have trained over 800 colleagues, their full potential. of the Group, whilst appropriately rewarding enhancing their awareness of the risks and performance. The changes also support the opportunities the transition to a low carbon I also want to recognise the great work that long-term goal to narrow the gap between economy represents. We will also continue is done by all of our Charitable Foundations. executive and wider colleague remuneration. our partnership with the Cambridge Institute This was illustrated by the award recently won Full details of the proposed Policy and for Sustainability Leadership to provide high by the Foundation for England rationale for the proposed changes can quality training to executives and colleagues and Wales, recognised as the leading grant be found within the Directors’ Report on in risk management, product development maker in the Civil Society Charity Awards for Remuneration on pages 98 to 102 of our and client facing roles. its commitment to helping small and local charities thrive for the long-term. Annual Report and Accounts. The policy will be subject to shareholder approval at the Our partnership with Mental Health UK The Board and senior management have a AGM in May. began in 2017, with the aim of raising vital role to play in shaping and embedding £4 million over a two year period, however we a healthy corporate culture, and this has Despite facing a challenging external quickly exceeded that and have raised over been a major focus of the Board’s attention environment, we have delivered a solid £11 million to date. As a Group we believe over the last year. The values and standards financial performance for the year. The that a shift in mindset is needed amongst UK of behaviour we set are an important additional PPI charge has however significantly employers when it comes to mental health influence and there are strong links between impacted our statutory results. As a result of and our approach focuses on a willingness governance, strategy and establishing a this and other performance factors, the total to acknowledge, support and manage culture that supports long-term success. Group Performance Share (GPS) outcome mental health in the workplace. In 2019, we Throughout 2019, the Board has continued for the Group decreased 33 per cent to announced that we are continuing our journey to evolve the Group’s culture plan, focusing £310.1 million. with Mental Health UK for another two years on our Group values; putting customers The total GPS outcome remains a small and aim to raise a further £4 million by the first, keeping it simple and making a proportion of underlying profit at 3.7 per cent end of 2021. In addition, we aim to continue difference together. Our aim is a culture and an even smaller proportion of overall to raise awareness and reduce stigma. We where every colleague is encouraged to take revenues. Cash GPS awards are capped at have committed to training 2,500 colleagues responsibility for ensuring we do the right £2,000 per colleague, with additional amounts to become Mental Health Advocates by 2020, thing for every customer. and also provided colleagues with training to paid in shares and subject to deferral and help support customers. The results from the Group’s 2019 colleague performance adjustment to ensure their survey, which can be found on page 9, ultimate value reflects sustained performance. Our colleagues and culture acknowledge the positive work that has been More information on this year's outcomes completed. Transforming our culture with and on how we ensure our approach to Throughout 2019, I have travelled across colleagues, empowered to speak out and remuneration supports our strategy can be Britain to see how colleagues are embracing drive their personal development, is critical to found in the Directors’ Remuneration Report new ways of working and the contribution they the successful delivery of our current strategy. on pages 98 to 123 of our Annual Report are making towards Helping Britain Prosper. and Accounts. These visits enabled me to see first-hand how Remuneration we support customers and respond to their needs in a challenging environment. There has been a substantial focus on remuneration throughout 2019. The I am delighted that we have been named as a Remuneration Committee has engaged top 10 employer for working families, and also extensively with our shareholders and other retained our place on both the Stonewall Top key stakeholders to develop the proposed 100 Employers list for the fifth year in a row 2020 Directors’ Remuneration Policy. The and ’ Top 50 Employers for Women changes proposed within the new policy for the eighth consecutive year. This great have been designed in the interests of our news demonstrates our clear commitment to stakeholders and take on board feedback for 4 Lloyds Banking Group Annual Review 2019

Chairman’s statement continued

Directors SOCIETY OF THE FUTURE We review the Board’s composition and diversity regularly and have continued to strengthen and further diversify the We recognise that society’s expectations of the Group knowledge and experience on our Board. as a major UK corporation are evolving During 2019, we have announced a number of Board changes, as outlined below. As a UK, customer-focused business, In June 2019, the Board and the senior George Culmer, our Group Financial Officer we recognise that our success and management team took part in an retired in the third quarter of 2019. George prospects are inextricably linked to the intensive two-day strategy meeting to played a vital role in helping the Group navigate health of the UK economy. Our focus revisit our expectations of the current its way through the aftermath of the financial on helping to improve the prosperity of strategy and review the key trends that crisis to return to full private ownership. individuals, businesses and communities have emerged since. As part of this, I want to pay tribute to George’s tremendous across the UK therefore not only makes the Board debated the transformation contribution and to thank him on behalf of the commercial sense, but also represents a required to meet these evolving Board, our colleagues and our shareholders. social responsibility for an organisation expectations and obligations to the such as ours. In recent years, we have fully Society of the Future. I am pleased to welcome William Chalmers, embraced this through our purpose of who formally took the reins as the Group’s This recognised that, to continue to Helping Britain Prosper which continues to Chief Financial Officer in August 2019. We operate as a successful business, it make a significant positive impact across are pleased to have been able to attract a will be increasingly important that we the UK, while also giving our colleagues a candidate of William’s calibre to the Board. demonstrate the contribution we make real sense of pride and meaning. He brings a wealth of experience that will be to the communities in which we operate of significant benefit to the Group. As we look ahead, we recognise that the and the value we provide in Helping I am also pleased to welcome two new external environment is changing at an Britain Prosper, with an emphasis on independent Non-Executive Directors extraordinary rate and the UK is being demonstrating that acting responsibly and to the Board; Sarah Legg, who became confronted by a range of evolving social, ethically and delivering good outcomes for a member of the Audit and Board Risk economic and environmental challenges customers, colleagues and shareholders Committee in December 2019 and that are unprecedented in nature and should not come at the detriment of Catherine Woods who will join us in require a bold response. At the same shareholder returns, but rather be an March 2020. Catherine will join the Board Risk time, stakeholder expectations of how integral part of achieving them. This and Remuneration Committees. major UK institutions should respond are session provided a solid foundation for us changing, raising fundamental questions to develop the next phase of our strategy In addition to these changes, after many regarding how companies can retain during the course of 2020. years as a Senior Executive for the Group, their implicit licence to operate while also Juan Colombás, Executive Director and remaining both relevant and attractive to Chief Operating Officer, announced his plan a diverse range of stakeholders, including to retire in July 2020. The Board is grateful to customers, colleagues, shareholders and Juan for the major contribution he has made the broader society. to the transformation of the Group. Anita Frew stepped down as Senior Independent Director in December and will also retire as Deputy Chairman and Non-Executive Director in May 2020, having served nine years on the Board. Anita has been an extremely valuable Board member and will be much missed. Alan Dickinson succeeded Anita as Senior Independent Director and will also take on the role of Deputy Chairman, bringing his significant Board, financial and regulatory experience to these roles. Last October I also announced that I plan to retire from my role as Chairman of Lloyds Banking Group once my successor is appointed, at or before the AGM in 2021, which would mark nine years on the Board. I will be sad to leave, but know I will do so with great pride in what has been accomplished to rebuild the Group’s strength and shape its development so it can continue to play its important role in supporting the UK’s prosperity. Summary I would like to thank all of our colleagues for their significant contribution in 2019. It is the commitment, support and dedication from all of them that enables us to succeed and I believe the Group remains well positioned as a result of the transformation underway to continue delivering for customers and shareholders.

Lord Blackwell Chairman Lloyds Banking Group Annual Review 2019 5

Group Chief Executive’s review Solid financial performance with market leading efficiency and returns

We have made significant strategic progress and our performance continues to demonstrate the competitive advantage of our business model. António Horta-Osório Group Chief Executive

In 2019 the Group has continued to deliver for Reading and ensuring that victims of the reductions in the closed mortgage book and customers while making significant strategic HBOS Reading fraud have their claims lower balances in Mid Markets and Global progress and delivering a solid financial assessed in an open and transparent manner. Corporates. The reduction in Commercial performance in a challenging external We have apologised to those impacted and balances is due to continued optimisation of market. While it is disappointing that this are determined to put things right. the portfolio as we actively address low risk- was impacted by the additional PPI charge adjusted return relationships. in the year, as a result of this performance, Given our clear UK focus, our performance the Board has been able to recommend is inextricably linked to the health of the The Group is strongly capital generative, an increased total ordinary dividend of UK economy. During 2019, UK economic although this has been impacted by PPI in 3.37 pence per share. performance has remained resilient 2019. Given our strong capital position at the in the face of significant political and year end, the Board has recommended a final In February 2018 we announced an ambitious economic uncertainty, supported by record ordinary dividend of 2.25 pence per share, plan to transform the Group for success in a employment, low interest rates and rising real bringing the total ordinary dividend for the digital world, supported by over £3 billion of wages. Although uncertainty remains given year to 3.37 pence per share. This represents strategic investment. We are now two-thirds the ongoing negotiation of international an increase of 5 per cent on 2018 and is in of the way through the plan and have made trade agreements, there is now a clearer sense line with our progressive and sustainable significant progress in further digitising the of direction and we remain well placed to ordinary dividend policy. The Group’s capital Group, enhancing customer experience, Help Britain Prosper, support our customers position remains strong with a pro forma maximising our capabilities as an integrated and deliver strong and sustainable returns CET1 ratio of 13.8 per cent after allowing financial services provider and transforming for shareholders. for ordinary dividends. the way we work. We have made significant progress in our Financial performance Creating competitive advantages customer proposition. For example, our Statutory profit before tax of £4.4 billion was 26 per cent lower than 2018 and earnings per unique Single Customer View capability Market provides customers with the ability to view share at 3.5 pence was down 36 per cent, leading efficiency their pensions and long-term savings products due to the PPI charge of £2.45 billion in alongside their banking products. Insurance 2019 (2018: £0.75 billion). Underlying profit Greater Net cost and Wealth has seen strong growth in life of £7.5 billion was down 7 per cent on 2018, investment reduction capacity and pensions sales, driven by new members reflecting continued revenue pressure and Sustainable in existing workplace schemes, increased higher impairments partly offset by lower and superior auto enrolment workplace contributions and total costs. Our relentless focus on cost returns bulk annuities. In partnership with Schroders, efficiency has led to a reduction in operating costs, where we enhanced our guidance during the third quarter of 2019 we launched Enhancements Improvement Schroders Personal Wealth, with the ambition twice during 2019. This was achieved whilst to internal to customer of becoming a top three financial planning increasing strategic investment and our processes experience business by the end of 2023. Also in the third net promoter scores. Our cost:income ratio quarter, the Group announced the acquisition improved again to 48.5 per cent. Credit quality of ’s prime UK residential remains strong with the Group’s net asset mortgage portfolio, which complements quality ratio of 29 basis points in line with the our organic strategy. target of less than 30 basis points, despite two material corporate cases. Historic conduct issues remain disappointing but we continue to be focused on doing the Loans and advances decreased by £4 billion right thing for our customers. The Group to £440 billion. The acquisition of Tesco is fully committed to implementing all of Bank’s prime UK residential mortgage the recommendations contained within portfolio, as well as organic growth in targeted Sir Ross Cranston's report relating to HBOS segments including SME and UK Motor Finance, was more than offset by continued 6 Lloyds Banking Group Annual Review 2019

Group Chief Executive’s review continued

STRATEGIC PROGRESS

Leading customer Digitising M E A experience the Group IS X T I I M

G I I S We are committed to maintaining the UK’s Investment in technology remains a

E D LEADING CUSTOMER number one branch network and customer- key strategic priority for the Group and EXPERIENCE facing colleagues in branch now spend enables us to improve the experience around 50 per cent of their time addressing of our customers and colleagues; customers’ complex needs technology spend now represents TR ANSFORM We are trialling new branch formats, 19 per cent of operating costs including a new flagship Having introduced automation for The Group’s ambitious three year strategic branch and Home by Halifax repetitive tasks, we have created over plan was launched in February 2018 and we 1 million cumulative hours of colleague are on track to achieve our targeted strategic We have continued to develop our digital capacity and our transformation has outcomes. We have made significant proposition and our digitally-active covered around 55 per cent of the progress in transforming the Group for customer base has increased again to Group’s cost base success in a digital world and, in line with our 16.4 million, of which 10.7 million are active commitment to invest more than £3 billion on their mobile banking app; 75 per cent of Virtual assistants are currently managing over the period, have invested £2 billion to products are now originated digitally up to 5,000 customer conversations daily, date across our four strategic pillars. We are using our deep understanding with satisfaction increasing by more than 10 points. Around 25 per cent of queries In addition to completing the third stage of our diverse customer base to deliver tailored propositions such as Club Lloyds are handled without being passed to a of our strategic plan, in 2020 we will also colleague and we expect this to increase begin to consider the next phase of our and the Halifax Prize Draw journey. Work will begin at pace in the In enhancing capabilities and accelerating summer on the new strategic plan, which our transformation, we are working in we expect to announce in February 2021, collaboration with a number of fintechs along with updated longer term financial and we continue to monitor opportunities targets. This work will take into account a in this space wide range of factors, including the evolving external environment, emerging changes across society and changing expectations 16.4m 14% of how companies should respond to digitally active customers year-on-year increase such challenges. in technology spend

Our strategic priorities on pages 16 to 19

Maximising Group Transforming capabilities ways of working is now available to all We are making our biggest ever digital customers and our unique Single investment in people, with a focus on Customer View capability is available to ensuring that we are able to continue to over 5 million customers attract, develop and retain the talent and We have exceeded our goal of attracting capabilities we will need in the future over 1 million new pension customers, We have significantly increased the ‘skills a year ahead of target and we have of the future’ training delivered to our continued to make progress towards the colleagues to a cumulative 3.2 million target of growing open book assets under hours since 2018 and around 33 per cent administration by £50 billion by the end of change is now delivered using of 2020, with cumulative net growth of Agile methodologies £37 billion since 2017 The Group has hired over 1,200 We launched Schroders Personal Wealth, colleagues in 2019 across critical areas with the ambition of becoming a top three such as engineering, data science and financial planning business by end of 2023 cyber security, in line with our plan to Commercial Banking has supported treble strategic hiring compared to 2018 Insurance and Wealth by sourcing and enabling the Group to reduce the use £0.6 billion of new long-term assets to of external resource support five new bulk annuity transactions

>5m 3.2m customers with access to hours of future skills Single Customer View training delivered Lloyds Banking Group Annual Review 2019 7

Helping Britain Prosper Plan We are committed to the long-term success of the UK with our purpose of Helping Protecting Britain Prosper. This is why we launched our the planet Helping Britain Prosper Plan in 2014 which also underpins our environmental, social and for future governance efforts. For 2019 we met 20 out generations of 22 objectives of the Plan, and some key achievements are outlined below. The Group is committed to helping customers to buy a home. In 2019 we lent £13.8 billion Pekwor Jones to first time buyers across the UK including through innovative products like our Lloyds In January 2020, the Group announced The next decade will be crucial for Bank Lend a Hand and Halifax Family Boost its new ambitious goal to work with protecting the planet for future mortgages. We have also increased net customers, government and the market generations, and financial services lending to start-ups, SMEs and Mid Market to help reduce the carbon emissions has a critical role to play. We are fully customers to £3.4 billion since 2018 together we finance by more than 50 per cent committed to supporting our customers, with achieving our target of lending £18 billion by 2030. clients and colleagues to transition to UK businesses in 2019. to a low carbon economy, working We are working hard to help people save >50% by 2030 closely with other organisations and for the future and in 2019 in partnership We aim to help reduce the emissions we government to create the solutions that with Schroders, we launched Schroders finance by more than 50 per cent by 2030 will accelerate progress and ultimately Personal Wealth. Our open book assets under Help Britain Prosper. administration have increased by £37 billion This goal recognises the urgent need to António Horta-Osório, since the start of the current strategic plan. tackle climate change, grow the green Group Chief Executive More generally, our banking savings range economy and promote green finance operates transparent pricing for all, with for the future prosperity of the UK. Read customers able to upgrade their accounts more on pages 28 to 31. online with one click when better products become available. The Group is committed to helping the UK transition to a sustainable, low carbon economy. Over the last five years we have raised over £2.8 billion in green bonds for UK corporate issuers, more than any other UK financial services company. We have also supported renewable energy projects that power the equivalent of 5.1 million homes. Our colleagues have also taken an active role Net asset quality ratio expected to be less in supporting good causes, including raising As we look forward, we want to play our part in than 30 basis points over £11 million for Mental Health UK over tackling climate change and we have targeted Capital build expected to be within the a two year period, as well as volunteering working with our customers, government Group’s ongoing guidance range of 170 to 246,000 hours of their time through our Day to and the market to help reduce the emissions 200 basis points per year and risk-weighted Make a Difference initiative. we finance by more than 50 per cent by assets to be broadly in line with 2019 2030, in line with the UK’s Net Zero Goal In addition, the Group has paid £2.9 billion Expect increased statutory return on and the Paris Agreement. We are one of the tax in 2019 and we are proud to be the largest tangible equity of 12 to 13 per cent, driven first organisations in the world to commit to corporate tax payer in the UK. by resilient underlying profit and lower all three of The Climate Group’s ambitious below the line charges sustainability initiatives, which aim to speed We have issued a separate presentation on up the transition to a low carbon economy our approach to environmental, social and The Group faces the future with confidence. by committing to source 100 per cent of governance issues, which can be found on the As a result, we will continue to target a our electricity from renewable sources, Group's external website. progressive and sustainable ordinary improve energy productivity and transition to dividend. In 2020, the Group will also electric vehicles. Outlook commence paying dividends quarterly, accelerating payments to shareholders, with Over 2019, UK economic performance has The Group was the first FTSE100 company the first dividend being paid in June 2020. to establish targets for championing remained resilient in the face of significant diversity within its business and we now have political and economic uncertainty, supported 36.8 per cent of senior roles held by women, by record employment, low interest rates up almost 8 percentage points since 2014 and rising real wages. Although uncertainty and we continue to aim to meet our target remains given the ongoing negotiation of of 40 per cent by the end of 2020. With international trade agreements and the rate António Horta-Osório 10.2 per cent of roles across the Group held outlook remains challenging, there is now a Group Chief Executive by Black, Asian and Minority Ethnic (BAME) clearer sense of direction and we remain well colleagues, we have exceeded our 2020 target placed to Help Britain Prosper, support our of 10 per cent. customers and deliver strong and sustainable returns for shareholders. The Group’s We have also helped over 700,000 individuals, confidence in the business model and future small businesses and charities to develop performance is reflected in our guidance digital skills in 2019, and we are on track for for 2020: our target of 1.8 million by 2020. Our Digital Knowhow workshops have also helped Net interest margin of 2.75 to 2.80 per cent thousands of organisations learn how to Operating costs to be less than avoid fraud and take advantage of digital £7.7 billion with the cost:income ratio marketing techniques. lower than in 2019 8 Lloyds Banking Group Annual Review 2019

Key performance indicators Our strategy has delivered solid performance

Financial

Pay for performance Underlying profit before tax Statutory profit after tax across the Group £m £m Key performance indicators are regularly reviewed by the Board, with an aim to provide a fair, balanced and 7,531 3,006 comprehensive view of the Group's 2019 7,531 2019 3,006 2018 20181 performance. The measures outlined 8,066 4,506 20171 7,628 20171 on these pages identify the most 3,649 20161 6,782 20161 2,605 effective output measures for assessing 1 20151 7,275 2015 1,036 financial and non-financial performance including progress towards becoming Underlying profit before tax was lower in 2019, Statutory profit after tax was lower in 2019, largely the best bank for customers, colleagues reflecting lower and higher impairment due to the additional PPI charge. The tax expense charges, partly offset by the Group’s continued was £1.4 billion. and shareholders. progress in cost reductions. We previously reported statutory profit before tax To ensure our colleagues act in the 1 Restated to include remediation. but changed to statutory profit after tax at full year best interests of all our stakeholders, 2019 to further align our key performance indicators to remuneration. remuneration at all levels of the organisation is aligned to the strategic 1 Restated to reflect amendments to IAS12. priorities and financial performance of the business and also takes into account specific risk management controls. Ordinary dividend Statutory return on tangible equity Within this year’s report we have p per share % updated our key performance indicators to reflect these priorities. All the key performance indicators directly impact 3.37 7.8 remuneration outcomes and support the 2019 3.37 2019 7.8 delivery of our reward principles. 2018 3.21 2018 11.7 2017 3.05 2017 8.9 The remuneration awarded to Executive 2016 2.55 2016 6.6 Directors is heavily weighted towards 2015 2.25 2015 2.6 the delivery of long-term, sustainable performance. As part of our 2020 An increased ordinary dividend of 3.37 pence per The statutory return on tangible equity was lower in share, in line with our progressive and sustainable 2019 given the lower statutory profit, largely due to Remuneration Policy, our proposed ordinary dividend policy. additional PPI charges. move to long-term share awards continues to support the Group’s 2020 TARGET strategic aims and the long-term Statutory return on tangible equity sustainable success of the business, 12 to 13% page 117 of our Annual Report and Accounts. As per pages 101 and 110 of our Annual Report and Accounts our 2020 balanced scorecard measures will remain broadly unchanged from 2019 and will be used in both short term and Cost:income ratio Common equity tier 1 ratio (CET1) long-term reward decision making. % % KPIs have been proposed to underpin the long term share awards focusing on capital strength, relative returns 48.5 13.8 and a progressive and sustainable 2019 48.5 20191 13.8 ordinary dividend. 2018 49.3 20181 13.9 2017 51.8 20171 13.9 2016 55.3 20161 13.0 20151 54.2 20151 13.0 The Group’s market-leading cost:income ratio Our common equity tier 1 ratio remains strong. including remediation continued to provide a competitive advantage and further strengthened to 48.5 per cent in 2019.

CURRENT TARGET CURRENT TARGET Cost income ratio including remediation Ongoing CET1 capital ratio target of c.12.5 per to be lower in 2020 cent plus a management buffer of c.1 per cent 1 Excluding TSB. 1 Pro forma, reflecting insurance dividends paid in the subsequent reporting period. 2018 also includes share Financial performance overview buyback and 2016 reflects MBNA. on pages 36 to 39 Lloyds Banking Group Annual Review 2019 9

Financial Non-Financial

Economic profit Customer satisfaction Digitally active customers £m (net promoter score) m 3,138 62.8 16.4 2019 3,138 2019 62.8 2019 16.4 2018 3,291 2018 61.8 2018 15.7 2017 3,987 2017 61.2 2017 13.4 2016 3,377 2016 61.8 2016 12.5 2015 2,233 2015 58.5 2015 11.5 Economic profit, a measure of profit taking into Our net promoter score is the measure of Reflecting the pace of digital adoption, the number account expected losses, tax and a charge for equity customer service at key touch points and reflects of active digital customers increased in the year to utilisation. Economic profit in 2019 was impacted by the likelihood of customers recommending us. 16.4 million, with 10.7 million mobile banking app lower net income received in the year. Customer satisfaction increased in 2019. customers and average customer logons at 23 times From a strategic perspective this measures how well per month. we are delivering a leading customer experience. From a strategic perspective this indicates the It tells us how effective we are in building strong progress we are making in digitising the Group customer relationships. from the customer usage standpoint.

Total shareholder return Customer complaints Employee engagement index % FCA reportable complaints per 1,000 accounts % favourable 27 2.9 74 2019 27 H1 2019 2.9 2019 74 2018 (20) H2 2018 3.4 2018 73 2017 14 H1 2018 3.9 2017 76 2016 (10) H2 2017 4.2 2016 71 2015 (2) H1 2017 4.1 2015 71 Total shareholder return reflects share price FCA reportable complaints excluding PPI and claims Colleague engagement was two points above performance and dividends received. Our share management companies have significantly the norm for top performing UK companies with price increased by 21 per cent in 2019. reduced over the last five years. colleagues continuing to score pride and advocacy We do make mistakes, but when this happens, we favourably. High scores were also achieved for work hard to fix the issue quickly for the customers customer focus, wellbeing, recognition and involved and learn from any mistakes. speaking out. From a strategic perspective, reduction in customer From a strategic perspective this indicates how complaints confirms our achievements in delivering much progress we are making in transforming ways a leading customer experience. of working.

NEW KPI

Helping Britain Prosper Plan Green finance targets achieved £bn 20/22 >4.9 2019 20/22 This year an additional key performance indicator 2018 20/22 has been included to reflect the work we’re doing to 2017 21/22 support the transition to a low carbon economy. 2016 20/24 We have quantified the finance we provide through 2015 27/28 existing green finance products (Clean Growth Finance Initiative; Commercial Real Estate Green We have made strong progress since we launched Loans Initiative; Renewable Energy Financing) and the Plan in 2014. In 2019, we achieved 20 out of green bonds facilitation. Since 2016, this totalled 22 targets, helping to address some of the social, more than £4.9 billion and we will continue to add to economic and environmental challenges the UK this activity in 2020. faces. Find out more on page 27. From a strategic perspective achievement of these targets helps us to learn what progress we are making in across all areas of our strategy. 10 Lloyds Banking Group Annual Review 2019

Our external environment The UK market, to which our performance is inextricably linked, continues to evolve

The economic outlook appears to be ECONOMY improving. Nevertheless, in a long-term UK economic growth context growth is expected to remain 2.5 subdued and interest rates low - core to 2.0 Highlights that is the low rate of productivity growth, 1.4% GDP growth 1.5 Given our focus on UK customers, the with the recent weakness of businesses’ Group’s prospects are closely linked to the investment spending suggesting a 1.0 fortunes of the UK economy significant improvement is unlikely near-term. 0.5 On the assumption that the global Uncertainty for some UK companies may 0.0 economy remains broadly stable, we would persist in 2020 and drag on investment as the 1918171615 expect the UK economy to grow in 2020 to UK attempts to negotiate a comprehensive Source: ONS 2022 at a pace slightly above that achieved trade deal with the EU to a tight timescale. in the past two years However, improved pay growth is likely to Our low risk business model and focus on support households’ spending, and the likely UK unemployment rates efficiency positions us well irrespective fiscal stimulus is expected to provide some 6 of macro conditions. Nevertheless, if the boost to the economy. 3.8% 5 economy was to be impacted significantly 4 The fundamental drivers behind the subdued Unemployment rate by crystallisation of either domestic trends in the housing market are expected 3 or international risks, Group financial to remain in place - the high level of prices 2 performance would be impacted relative to incomes that constrains first-time- 1 buyer demand, and expectations that interest 0 Overview rates could rise from their current low level. 1918171615 Source: ONS As a leading UK bank, our prospects are There are, or course, significant risks to this closely aligned to the outlook for the UK outlook. The growth-cycle in both of the economy. Through 2019, the economy world’s largest economies - US and China UK housing market - is in its mature stage, and the coronavirus continued to show resilience to twin 8 outbreak and ongoing trade war could challenges from a slowing global economy 7 and increasing domestic political uncertainty. complicate the task of policymakers in guiding 2.3% 6 Although growth of the UK economy has growth towards a stable and sustainable House price growth 5 level. Conversely, high asset prices and (Q4 vs. Q4 Basis) 4 slowed to its weakest since the financial 3 crisis a decade ago, and interest rates corporate debt levels in some countries could be vulnerabilities if an improvement in 2 remain very low, unemployment has fallen 1 further to a 44 year low and house prices global economic growth and a resulting rise 0 have continued to grow. Barring any sudden in interest rates causes unexpected shifts 1918171615 shocks to business or consumer confidence, in currencies or herd behaviour in financial Source: Halifax house price index growth is expected to rise mildly in 2020, but markets as shareholders change their appetite between different types of investments. international trade-protectionism, the current Pay growth vs inflation coronavirus outbreak in China, geo-political Domestically, the future trading relationship instability and the nature of the UK’s exit from with the EU remains uncertain, as does 5 Pay growth the EU, all present risks to that outlook. businesses’ response to that uncertainty. 4 Barring sudden shocks stemming from these 3 challenges, the UK economy is expected Market dynamics 2 to grow through 2020 to 2022 at around During 2019, there have been divergent trends 1 CPI inflation between UK businesses and households. 1.5 per cent, slightly above the 1.4 per cent average across the past two years. The 0 For businesses, uncertainty for the domestic 2015 2016 2017 2018 2019 political and economic outlook translated unemployment rate is expected to rise only a Source: ONS into a second consecutive year of reduced little from its current 44 year low. The outlook investment spending and commercial real for the bank rate is uncertain, but capacity constraints and a fiscal boost may support a estate prices fell slightly. Low productivity Link to principal risks moderate increase in interest rates. House growth remains a key challenge for the Credit prices are expected to continue to grow mildly. UK economy, however, the flip-side has Capital been buoyant employment. Households This picture of subdued but broadly stable Funding and liquidity continued to increase spending in 2019 as low growth is likely to be reflected across our Market unemployment boosted pay growth whilst markets. Consumer credit growth has slowed softening global growth reduced inflation. significantly over the past couple of years after Link to strategic priorities Maximising Group capabilities The UK housing market remained subdued a prior period of strong growth, but we expect through much of 2019, although falling that the slowdown has now run its course. mortgage rates and the election of a Our response government with a strong Parliamentary Given our UK focus, the Group’s prospects are majority appeared to be beginning to closely linked to the performance of the UK stimulate the market towards the end of economy. Our low risk, stable business model the year. The level of housing transactions and focus on efficiency positions us well to was broadly flat at around 20 per cent lower continue to support customers irrespective of than the norm prior to 2008, with muted macro conditions. price growth. Lloyds Banking Group Annual Review 2019 11

We are also investing in our branch and CUSTOMER telephony channels to ensure that these are REGULATION able to address our customers’ more complex needs more effectively, and continue to Highlights provide access to banking services for our Highlights Customer expectations are being shaped more vulnerable customers. The UK financial services sector is expected by experiences outside of financial services, to remain highly regulated with convenience, choice and greater levels Given our history and scale, we have a wealth New regulation and market reviews of personalisation becoming increasingly of customer data and remain focused on continue to be issued, with further important using this valuable insight ethically and regulatory changes anticipated responsibly to develop products and services While customers want to be in control Uncertainty remains around the impact of of their finances through digital channels, that are more personalised to our different customers’ needs. the UK’s exit from the EU on the existing human interaction is still valued for more regulatory and legal framework complex financial needs Against the broader backdrop of increasing Expectations on how companies engage with expectations and an evolving competitive environment and societal issues are rising environment, we cannot become complacent Market dynamics and need to continue to improve the A number of regulatory changes have been Market dynamics customer experience to remain relevant and implemented in the last 12 months including attractive to customers. Open Banking, overdraft charging and the Consistent with recent trends, customer embedding of ring-fencing requirements with expectations continue to be shaped by their Customer satisfaction key areas of focus for 2020 as below: experience outside of financial services, with (net promoter score) 63 speed and convenience and greater levels of 61 Customer treatment choice and personalisation, based on richer Fair treatment of customers remains a priority data insight, becoming more important in an +3% for the FCA, with particular focus on those increasingly competitive market. Improvement in customer in vulnerable circumstances as well as long satisfaction during our standing customers. As technological capabilities across the current strategic plan banking sector continue to become more Capital regulation sophisticated, customers also increasingly 1917 The Group continues to prepare for further want and expect to be in control of their regulatory capital developments in particular finances, with the ability both to see their implementation of the final Basel III reforms. accounts and monitor transactions across LIBOR transition multiple providers. Against this, human The transition from LIBOR to alternative interaction for more complex or emotive Adapting to changing behaviours reference rates will mean changes to products needs continues to be valued as part of a Customer channel interactions and funding structures. multi-channel servicing approach. (indexed to 2014) Other Similar to personal customers, business client 300 Start of current Digital A number of other regulatory initiatives are in expectations spanning speed, convenience strategic plan the pipeline which seek to address, amongst and insight-driven personalisation are being 200 other things; operational resilience, climate shaped by experiences outside of financial change, General Insurance, revised Payment services. Alongside this, smaller business Services Directive (PSD2) requirements, customers are starting to look for support 100 Branch MIFIDII and fraud. beyond their banking needs. 0 While not yet a major driver of behaviour 2014 2017 2019 Our response and preferences, customers are becoming As a Group we always seek to comply with all increasingly aware of societal and related regulation. environmental issues, with rising expectations of how the companies they engage with are Given the Group’s simple, low risk business responding to these challenges. model, it is well placed to meet these requirements and welcomes the positive effect that they will have on the industry, its Our response customers and other stakeholders. We have a strong track record in providing our customers with the products and services they value, while also offering convenience and choice in the channel they choose to interact with us. We remain committed to our multi-channel model, comprising the UK’s largest digital Link to principal risks Link to principal risks bank and branch network, and are focused Regulatory and legal Credit on ensuring that this remains relevant to Capital evolving customer preferences. As part of Conduct this, we are continuing to strengthen our Operational Funding and liquidity digital capabilities, with a number of recent Link to strategic priorities Market enhancements putting our customers more in Delivering a leading customer Link to strategic priorities control of their finances and resulting in strong experience Maximising Group capabilities digital customer satisfaction scores. 12 Lloyds Banking Group Annual Review 2019

Our external environment continued

Our response In 2019, we surpassed more than 1 million TECHNOLOGY hours saved through the use of robotics since In line with our position as the largest digital the launch of our latest strategic plan in 2018, bank in the UK, we are investing heavily in creating significant capacity for our colleagues technology to ensure that we can continue Highlights to focus their time on delivering tangible to deliver meaningful enhancements to the The pace of digital adoption and disruption improvements to our customer experience. customer experience while also delivering continues to surpass expectations and is These improvements are being delivered in organisational improvements in terms of likely to increase further in the coming years the form of new features, such as the roll responsiveness, insight and efficiency. Our The use of new technologies is increasing out of location based searches to improve technology spend is among the top quartile efficiency within the financial services sector the identification of fraudulent payments, of global peers, with the amount spent in and delivering meaningful improvements as well as by making better use of data 2019 equivalent to 19 per cent of our to the customer experience for the benefit of our customers, such as operating cost base. Importantly, in excess harnessing the insights from robotics to Cyber security and the protection of 75 per cent of this spend is focused on improve credit decisioning. and appropriate use of customer data creating new capabilities and enhancing remain important factors in retaining existing ones, with this investment critical We also continue to invest in the resilience customer trust to successfully delivering our modular and security of our systems, ensuring approach to transformation. that customer data remains safe despite the significant pace of change in Market dynamics We view our market leading efficiency technological trends. Digital adoption trends continue to surpass position as a unique competitive advantage expectations, with the significant uptake in this respect, as it creates capacity for further driven by changes in demographics and an significant investment. This investment, increasing similarity in customer behaviour such as in the increased use of intelligent Link to principal risks across multiple geographies. As a result, systems and machine learning, is delivering Credit we are seeing a significant change in how improved processes and further productivity Capital customers interact with financial services enhancements, and through this, is helping Funding and liquidity to future proof our business. providers, while expectations of service are Market often being influenced by technology-led Link to strategic priorities experiences outside of financial services. Maximising Group capabilities The combination of heightened expectations and increasing levels of competition has resulted in greater levels of investment in 1 technology across the sector, with Technology spend as a % of operating costs 16.4 mill ion placing increasing importance on delivering innovative new features for customers as well Highest in peer-set: 19% 16% 19% digitally active as continually upgrading and modernising back-office infrastructure. Banks are also 19 17 customers 15 14 regularly adopting new technologies such Technology as machine learning and artificial intelligence spend to increase the effectiveness and efficiency up 14% year on with which more routine tasks are performed, year while also using greater data driven insight to Lloyds North UK European deliver an improved customer experience. America Average Average Average In addition, as the sharing of data becomes increasingly important to both banks and 1 Estimated. Regional averages based on a selection of peers where disclosure exists. Proxy for technology customers, there is a growing onus on how spend calculated based on available disclosure in prior this is safeguarded. For example, the shift annual reports or shareholder presentations and may not towards cloud technologies from in-house be like for like. data storage can deliver a number of benefits for customers. These include increasing levels of insight and faster rates of product Customers are using the digital channel innovation, but open up the financial services more than ever for simpler needs sector to new cyber-related risks which must % volume of products originated digitally be carefully managed. In a period in which competition from digital-only providers 86 has grown significantly, trust remains a key 78 82 differentiator for established banks and 68 59 therefore security and resilience remain 54 45 areas of great importance. 39 34

18

New bank Savings Loans Credit Home accounts cards insurance 2014 2019 Lloyds Banking Group Annual Review 2019 13

Our response with 75 per cent of products now originated COMPETITION digitally and we operate the largest digital We continue to respond effectively to the bank in the UK with 16.4 million customers and increasingly competitive environment, 10.7 million mobile app customers, while our supported by our significant reach and Highlights customer satisfaction scores remain strong. Regulatory changes have resulted in proven track record of providing products increased competition across more and services that our customers value In addition, we remain committed to retaining traditional product lines, as excess liquidity with this underpinned by significant the largest branch network in the UK. This is deployed within ring-fenced bank entities investment capacity. allows our customers to interact with us in whichever way they prefer, while also providing The competitive landscape also continues Across our core markets such as mortgages, a human touch point for more complex financial to evolve with growth across a number of we have looked to prioritise value while needs. Our network is also key to building and digital-only providers, while we are also maintaining share and supporting our deepening our business banking relationships. seeing emerging signs of participation from purpose of Helping Britain Prosper. As We see these as unique competitive large technology companies marginal players have withdrawn from the advantages, and combined with our ongoing market, we have more recently strengthened commitment to innovation, provide us with our position, including through the acquisition a strong platform to maintain relevance and Market dynamics of Tesco Bank’s mortgage portfolio in deepen relationships with our customer base. We continue to operate in an highly September. Alongside this, we have also competitive environment, driven by regulatory continued to invest in areas where we are changes, shifting customer behaviours under-represented, such as Insurance and increasing levels of innovation across and Commercial Banking, in line with the Link to principal risks the sector. commitments outlined at the start of this Regulatory and legal strategic plan. Conduct Across our traditional business lines, ring- Operational fencing regulation has seen a number of In response to changes to the competitive our competitors deploy excess liquidity environment from the ongoing shift in digital People to support asset growth within the UK, usage and new entrants, our multi-channel Link to strategic priorities specifically within mortgages where customer and multi-brand offering enables us to Delivering a leading customer rates have in the last few years hit record lows. continue to effectively meet the varying experience While this is beneficial for our customers, needs of our diverse customer base. Our Maximising Group capabilities this has depressed margins across the UK digital channel is now our most prominent, banking sector and more recently has resulted in some smaller participants stepping back The evolving competitive environment1 from the market. OLOGY Beyond this, digital-only providers have ECHN COMPA GE T NIE grown their share of the UK market within LAR S the past year. This growth has predominantly been driven by neo-banks that provide a more traditional customer offering alongside NKS AND FIN leading digital functionality and are able to O BA TEC NE HS target selected customer segments. This is supported by the emergence of marketplace models which enable these providers to collaborate with more specialist fintechs LENGER BA to provide a broader suite of products and AL NK CH S financial services, both for personal and business banking customers.

In response, a number of traditional LISHED P EE TA R competitors have attempted to replicate S S the success of neo-banks by developing E their own digital-only offerings, often under separate and newly created brand names. A number of international peers have also entered the UK market through digital only challengers, taking advantage of the supportive regulatory environment and increasing similarity in customer behaviours across multiple geographies. Elsewhere, we have also started to see the first signs of large technology companies participating in financial services, often partnering with local incumbent banks across different geographies. While the scale of their future ambitions is uncertain at this stage, the power of their brand and large customer bases pose future disruption threats. 1 Selective participants, not exhaustive. 14 Lloyds Banking Group Annual Review 2019

Our business How we create value, and what sets us apart

OUR PURPOSE OUR CULTURE

Helping Britain Prosper Our core values underpin our purpose Given our focus on the UK, our success is to Help Britain Prosper interwoven with the UK’s prosperity. We aim Ensuring we create the right environment for our to Help Britain Prosper through creating a colleagues to deliver our aim to become the best responsible business that focuses on customers’ bank for customers, colleagues and shareholders needs, and delivering long-term sustainable Putting customers first success for shareholders. Helping Britain Prosper Plan on pages 27 to 34 Keeping it simple Making a difference together Our culture on page 74 of our Annual Report and Accounts

OUR BUSINESS MODEL RISKS TO OUR BUSINESS MODEL

We are a simple, low-risk, customer focused Prudent, low risk participation choices As a large, UK focused financial services UK financial services provider with distinctive with strong capital position provider we face several external and and sustainable competitive strengths: Being low risk is fundamental to our business internal challenges: model. Our low risk appetite is reflected The main external challenges we face are Multi-brand, multi-channel proposition through the quality of our loan portfolio and as previously discussed on pages 10 to 13 with data driven customer experience underwriting criteria. Our financial strength Uncertain outlook for the UK economy Operating in an integrated way through a has been transformed in recent years and range of distribution channels and brands our capital position is strong. Evolving customer needs ensures our customers can interact with us and behaviours when and how they want and enables us Rigorous execution and management High levels of regulation to address the needs of different customer discipline focusing on key skills of the future segments more effectively. Experience of delivering change in recent Radically changing competitive and years provides benefit as we further regulatory landscape Comprehensive product range with all transform the business. financial needs served in one place Technologies and societal attitudes rapidly reshaping business models Our product range is driven by customer Creating competitive advantages needs and is informed through We believe that these capabilities provide We also face a number of comprehensive customer analysis and insight. competitive advantage and enable us to internal challenges: UK’s largest digital bank, branch network continue to deliver for customers whilst also Operating as efficiently as and customer franchise with leading delivering sustainable and superior returns possible, while remaining the best integrated propositions over the longer term, as outlined below. bank for customers Our scale and reach across the UK means Attracting, developing and retaining that our franchise extends to around Market the best talent to respond to new ways 26 million customers, with 16.4 million leading efficiency of working digitally active. We are uniquely positioned Ensuring IT systems are effective and to deal with customers’ banking and Greater Net cost resilient and that we are prepared for investment needs. investment reduction capacity the threat of cyber risk Sustainable Market leading efficiency through and superior We recognise these challenges and tech-enabled productivity improvements returns Our simpler operating model and focus continue to evolve our business model on efficiency provide a cost advantage, and strategy, to enhance their sustainability enabling us to invest more to the benefit of Enhancements Improvement over the longer term. to internal to customer both customers and shareholders. processes experience Lloyds Banking Group Annual Review 2019 15

OUR AIM

Best bank for customers, colleagues and shareholders Doing the right thing for our customers, colleagues and shareholders by meeting their financial needs, helping them succeed, improving our service proposition and creating value for them, is fundamental to our business model and the long-term sustainability of the business.

OUR GROUP OUR STRATEGY

The Group has a unique customer proposition enabling us to serve the Transforming the Group for success in a digital world financial needs of customers in one place. In February 2018, we launched our three Strategic priorities We operate multiple-brands through three year strategy to transform the Group core divisions; Retail, Commercial Banking for success in a digital world. Leading customer experience and Insurance and Wealth. Our simple, low risk customer focused Driving stronger customer strategy builds on our purpose of relationships through best-in-class Helping Britain Prosper and our propositions while continuing to distinctive strengths. provide our customers with brilliant servicing and a seamless experience We identified four strategic priorities across all channels. focused on the financial needs and behaviours of the customer of the Digitising the Group future and are investing more than Deploying new technology to improve £3 billion in these strategic initiatives our efficiency and make banking over the plan period. simpler and easier for customers. Board oversight of our strategy on page 75 of our Annual Report and Accounts Maximising Group capabilities Strategic priorities on pages 16 to 19 Aligning the Group’s capabilities as the UK’s sole integrated financial services provider to deepen customer relationships and grow in targeted segments.

Transforming ways of working Enhancing colleague skills and processes, investing in agile working practices and embracing new technology to drive better outcomes for customers. 16 Lloyds Banking Group Annual Review 2019

Our strategic priorities Leading customer experience

In order to be the best bank for Progress in 2019 a number of changes to ensure that our customers, we recognise that network reflects our customers’ evolving In 2019, we have built on the strong progress we must continue to adapt to needs. As part of this, we have expanded the delivered in 2018, with further improvements changes in customer behaviour, reach of our remote advice service to around in our customer propositions supporting technology-driven competition 580 branches, which alongside the ability to the continued growth of our franchise and and regulation. Our propositions access the service from the comfort of their improved measures of customer satisfaction. must be reflective of heightened own homes, is providing our customers with customer expectations for Building a market leading digital increased choice and convenience in how ease of access, personalisation experience they can discuss their financial needs with and relevance, as well as the We are the largest digital bank in the UK, with us. In addition, our branch colleagues have needs created by changing 16.4 million digitally active and 10.7 million also been able to increase their focus on life patterns. mobile app customers. During the year, we addressing customers more complex financial have seen increased customer engagement needs, with this now accounting for around with the enhanced digital features introduced 50 per cent of their time. in 2018 and have launched a range of new KEY OBJECTIVES Personalising our customer propositions FOR 2018 TO 2020 features that enable our customers to be more We recognise that our diverse customer base in control of their finances. These include want and expect different things and have the ability to change address via the mobile Remain number 1 UK digital bank continued to develop products and services with Open Banking functionality app and app statement searches, the latter that are more personalised to their specific of which is being used c.1.2 million times per Unrivalled reach with UK’s largest needs. Among these, we have launched branch network, serving complex month on average and is helping us to reduce a range of smart tools that our customers needs our use of paper. can access digitally, including upcoming Data-driven and personalised customer propositions Consistent with this focus, we have also built payment alerts and a ‘Save the Change’ on our progress in allowing our customers feature, through which they can aim to achieve to see all their bank accounts, across a range of financial goals through small MEASURING different providers, in one place. In 2019, behavioural changes. PERFORMANCE we were the first UK bank to expand this Open Banking aggregation capability to include both savings accounts and credit Focus for 2020 16.4 million cards. We’re unique amongst our banking digitally active customers peers in enabling our customers to also view In 2020, we will continue to focus these products together with their Group on improving our customers’ digital #1 insurance and pensions products, with our banking experience, with new features Maintained the largest branch Single Customer View demonstrating strong providing them with greater insights into network in the UK engagement levels. their transactional activity and ability to achieve their financial goals. We will #1 branch network, serving complex needs also continue to deepen our customer As a core element of our multi-channel insights to develop more personalised model, we remain committed to maintaining products and services, while also the largest branch network in the UK and ensuring our branch network remains our market share of around 21 per cent by relevant to our customers’ needs. 2020. In the year we have continued to make

Our unique Single Customer View Our Single Customer View capability allows our customers to see all their financial needs in one place, from bank accounts helping me to pension and insurance products. At the end of 2019, more than 5 million customers had access to this, with priorities for 2020 see the including extending this to around 9 million customers, while also increasing full picture functionality.

I can see my pension alongside my banking now which is great, really useful Lloyds Banking Group customer Lloyds Banking Group Annual Review 2019 17

Digitising the Group

Our market leading cost Increased fintech engagement position and customer franchise Accelerating our As well as investing in technology capabilities, are sources of competitive we recognise that we also need to embrace advantage. However, we must external innovation and work collaboratively not be complacent and must transformation to transform the Group for success in a further digitise the Group to digital world. Our Corporate Ventures Panel drive additional operational encourages colleagues from across the efficiencies, improve the Group to propose opportunities to a panel of experience of our customers experts. This has already resulted in a number and colleagues and allow us of exciting partnerships, such as with Thought to invest more for the future. Machine, Trov and OneUp, our most recent In addition, we must continue partnership which provides online financial to simplify and progressively management services for smaller businesses. transform our IT architecture in order to use data more efficiently, enhance our multi- channel customer engagement and create a scalable and resilient infrastructure.

KEY OBJECTIVES FOR 2018 TO 2020 Progress in 2019 and we expect this to surpass 70 per cent by Deeper end-to-end transformation the end of 2020. targeting 70 per cent of our cost base We have continued to progress our technology Simplification and progressive enabled transformation during the course The scaling of our use of machine learning is modernisation of our data and IT of the year, delivering better products and also delivering improved customer outcomes. infrastructure services that customers value and reducing For example, virtual assistants managed up Technology enabled productivity time to market. We are also driving additional to 5,000 customer conversations daily in 2019, improvements across the business operational efficiencies across the organisation with customer satisfaction increasing by more as we progressively modernise our IT and data than 10 points. In addition, around 25 per cent MEASURING architecture and improve processes. This has of queries are handled without being passed PERFORMANCE been underpinned by a continued commitment to a colleague, a trend that is expected to to invest significantly in technology. increase further. Top quartile technology spend The Group has also significantly increased 19% Consistent with the scale of our transformation, Top quartile technology spend, its adoption of private cloud, with more equivalent to 19% of operating costs we continue to invest significantly in than 650 applications now migrated. These technology. In 2019, our technology spend, investments deliver a more efficient, scalable 55% which increased by 14 per cent year on year, and flexible infrastructure and underpin the of the cost base covered equated to 19 per cent of operating costs continuous improvement of our products and by transformation and remains among the top quartile of services for our customers’ benefit. global peers. Importantly this was achieved while reducing operating costs, with our The largest digital bank in the UK modular approach to transformation and IT With 16.4 million digitally active users and modernisation delivering business efficiencies 10.7 mobile app users, we are the largest and creating capacity for greater levels digital bank in the UK, with 75 per cent of of investment. The mix of our technology products now originated digitally. In line with spend also continues to evolve, with greater this continued shift to digital channels, we emphasis on the development of new are continuing to roll out new features for our capabilities, with the combination of this and customers, resulting in increased engagement enhancing existing capabilities accounting for as adoption increases. over 75 per cent of spend in 2019. Embracing the power of technology As our transformation progresses, we have Focus for 2020 significantly increased our adoption of new Our technology investment will technologies and are seeing a number of continue to focus on areas that deliver tangible customer and colleague benefits as a meaningful benefits for our customers result. For example, having introduced the use and colleagues. We will further embrace of robotics for simple, repetitive tasks in 2018, new technologies and increase data we have now created in excess of 1 million capabilities to develop insight-driven cumulative hours of colleague capacity, propositions, while ensuring that these allowing them to focus on more value adding reflect customer expectations. This will activities for our customers. In addition, be delivered alongside a rigorous focus around 55 per cent of our cost base has now on ensuring the safety and security of our been covered by transformation. This is up customers’ data. from just from 12 per cent at the end of 2017 18 Lloyds Banking Group Annual Review 2019

Our strategic priorities continued

Maximising Group capabilities

To better address our Progress in 2019 joint-venture’s target of becoming a top three customers’ banking and UK financial planning business by the end In 2019 we have continued to enhance and insurance needs as an integrated of 2023. In addition, as part of our broader leverage the Group’s capabilities and unique financial services provider and strategic partnership, we are developing a full business model to meet our customers’ improve their overall experience, service offering for our customers, including banking and insurance needs more effectively. we will make better use of our access to a leading wealth and investment competitive strengths and Meeting our customers’ growing financial management business and a mass market unique business model. planning and retirement needs direct offering that is due to launch in 2020. As the UK’s sole integrated financial services Improving the experience of our provider, we are unique in being able to show Commercial Banking clients and serve all of our customers’ financial needs KEY OBJECTIVES We have delivered material improvements in one place. In 2019, we extended our Single FOR 2018 TO 2020 to our client experience, while also meeting Customer View capability to over 5 million our £18 billion gross lending commitment to customers, who are now able to view their +£50 billion growth in financial UK businesses, remaining a leader in green insurance and pension products alongside planning and retirement open book financing and maintaining our strong support the banking products they hold with us and assets under administration for exporters and manufactures. We have other providers. Importantly, this is enabling >1 million new pensions customers significantly reduced the time taken to fulfil our customers to engage with their longer- +£6 billion of additional net lending various client needs through the digitisation of term savings needs more proactively, with to start-ups, SMEs and Mid Market key banking processes. In business banking, engagement levels surpassing those of stand customers the average time to cash for new unsecured alone insurers. loans has been reduced from 6 days in 2018 Building on our progress in 2018, we have also MEASURING to a few hours. Similarly, the launch of API PERFORMANCE rolled out a number of improvements to our connectivity has resulted in a response time long-term savings and pensions customer of 1.5 seconds for payables transactions, propositions, with our workplace pensions while also driving significantly quicker and £37 billion offering also benefiting from the close more accurate asset finance credit decisions. cumulative open book assets under coordination of our Commercial Banking and Through the enhancement of our cash administration growth Insurance & Wealth businesses. Taken together management and payments capabilities, with further transfers from the acquired Zurich we have also successfully deepened our >5m book, we have successfully grown our open client relationships. customers on Single Customer View book retirement and investment assets under administration by around £30 billion in the year, >1m or £37 billion since 2017. new pension customers, achieving Leveraging our partnership with Schroders Focus for 2020 target a year ahead of schedule to accelerate our Wealth strategy In 2020, we will extend the reach and In 2019 we formally launched Schroders functionality of Single Customer View to £3.4bn Personal Wealth, a market-leading wealth around 9 million customers, introducing net lending to start-ups, SMEs proposition, which combines the investment new features that will enable customers and Mid Market customers capabilities and innovative product offering to engage with their long-term savings of Schroders with our distribution footprint and investments more proactively. In and digital reach. This allows us to better addition, we will continue to support serve our customers’ financial planning and the development of Schroders Personal retirement needs, and underpins this Wealth in line with its ambitious targets, while also making further improvements to our business clients’ digital banking experience.

Strong start for Schroders helping me Personal Wealth Our joint venture with Schroders has harnessed the unique strengths of two of the save for the UK’s strongest financial services businesses to create a market-leading wealth proposition future with the expertise and broad spectrum of investment and retirement products to optimise customers’ entire financial lives. Schroders Personal Wealth has got off to a strong start since its launch, with Retail wealth referrals from the Group up 33 per cent in 2019.

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Transforming ways of working

Our colleagues are crucial to the Colleague training success of our business. In order to deliver our transformation and development during the current strategic plan As part of our largest ever investment in and beyond, our colleagues our people, we are rolling out 4.4 million will require new skills and cumulative additional training hours to capabilities to reflect the develop key skills of the future. These skills changing needs of the business are split across 10 categories ranging from as it adapts to the evolving leadership to data analytics and customer operating environment. At excellence and will ensure that we are well the same time, colleagues’ positioned to transform the Group for success expectations of their employers in a digital world, while also providing growth are changing. As a result, we opportunities for our colleagues. are making our biggest ever investment in colleagues to ensure that we continue to attract, develop and retain these I think it’s great that skills and capabilities, while the bank is investing fostering a culture that supports so heavily in my a way of working that is agile, development. It has trust based and reinforces the allowed me to develop Group’s values. new skills and gives me the confidence to put them into practice KEY OBJECTIVES FOR 2018 TO 2020 Lloyds Banking Group colleague

50 per cent increase in training and development to 4.4 million hours Progress in 2019 Changing the way we work Consistent with our aim to embrace new ways Up to 30 per cent change efficiency With our competitive environment of working, we have continued to make things improvement increasingly influenced by technological easier than ever before for our colleagues change and innovation, it is critical that to work in a more collaborative manner. we continue to equip our colleagues with 96 per cent of our colleagues are now based the skills needed to deliver our ongoing MEASURING in one of our six strategic hub locations. We transformation. We have made significant PERFORMANCE continue to invest in improving the working progress in 2019 and are seeing tangible environment with 34,000 colleagues benefiting benefits as these changes take effect. These from refreshed workplaces in 2019. Our achievements also continue to be supported 3.2 million ongoing changes to working environments are by improvements to our working environment, cumulative future skills training helping create a hub of agile working, focusing hours delivered with benefits including greater collaboration on collaborative activity-based spaces which and efficiency. foster innovation and make it easier for our 33% Building skills for the future colleagues to focus on delivering better of change delivered by Agile experiences for our customers. Moreover, by methodologies To deliver our significant transformation, we are continuing to make our biggest ever creating an environment where colleagues investment in our people during the course can collaborate more easily regardless of of the current strategic plan. In 2019, we location, this will help us as an organisation delivered 5.5 million of total training hours, an significantly reduce our carbon footprint. The increase of 28 per cent compared to 2018. We combination of these factors is resulting in have also now delivered more than 3.2 million a cultural shift across the Group, with over of cumulative training hours to develop the 33 per cent of change now delivered using skills for the future since the end of 2017, and Agile methodologies and we continue to are well positioned to deliver our target of expect this number to surpass 50 per cent by 4.4 million cumulative training hours by the the end of 2020. end of 2020. In addition to up-skilling our colleagues, Focus for 2020 we are also using targeted recruitment to We will continue to provide our introduce new skills into the organisation colleagues with the required skills to across areas that will support the new strategic support our ongoing transformation, competencies of the Group going forward. with more specialist skills gaps being We have also hired over 1,200 colleagues addressed by targeted recruitment. This, across critical areas such as engineering, data combined with our shift towards a more science and cyber security. The integration collaborative culture will enable us to of skills such as these into our colleague base reduce bureaucracy, harness innovation positions us well to continue transforming the and deliver change more efficiently than Group for success in a digital world, with other ever before, while also making the Group benefits including a reduced reliance on third- a more attractive place for people to work. party providers. 20 Lloyds Banking Group Annual Review 2019

Our key stakeholders and Board engagement Reflecting the needs of our stakeholders in Board decisions

Indirect engagement Engaging, consulting and acting on CUSTOMERS The Board reviews the customer dashboard, the needs of different stakeholders is which provides a detailed insight into the critical for the development of a culture Group’s performance in respect of delivering and strategy that achieves long-term As a retail and commercial financial services on our customer related ambitions and agreed sustainable success. provider we understand that long-term improvements in the dashboard’s construct The Board has a comprehensive stakeholder success is only possible with a customer- during the course of the year. The Board also engagement programme and always aims centric business model and therefore approves the annual customer plans, which to act in the best interest of the Group and customer impact is critical to all Board set out the customer related priorities for the to be fair and balanced in its approach. The decisions. Group’s divisions for the coming year. needs of different stakeholders are always considered as well as the consequences of any With around 26 million customers, we strive The Chairman, Chief Executive and other Board decision in the long-term and the importance to treat them fairly, making it easy for them to members regularly review customer complaints of our reputation for high standards of find, understand and access products that are to understand areas where we can improve and business conduct. It may not always be right for them, whatever their circumstances. review how we respond to complaints. possible to provide a positive outcome for all To ensure the Board truly understands the The Board also looks to benchmark stakeholders and the Board frequently has to changing needs of customers and their views performance among customers and uses make difficult decisions based on competing on the bank, various initiatives, direct and insight from a range of internal and external priorities. However, comprehensive indirect have been implemented. research, including net promoter scores and engagement enables informed decision other customer indices, to improve services. making taking into account the consequences Customer priorities for different stakeholders. Market leading digital proposition The Board receives regular updates and To enable and ensure stakeholder with branch access reports on progress of the Group strategy, considerations are at the heart of all corporate Single home for customers’ including the development of the next decision making, a wide range of papers banking and insurance needs strategic phase, ensuring the customer remains at the heart of our strategic investment. relating to different stakeholder groups are Personalised customer propositions presented and discussed regularly by the Better experience across all channels The Board receives insight and guidance in Board. In addition all papers submitted to the relation to the competitive environment and Board are required to consider the impact of Direct engagement market shares, providing strategic insight and proposals on key stakeholder groups. The Board takes advantage of all available generating good discussion among the Board, We engage in many different ways and this opportunities to engage with customers. In resulting in either actions or key learnings section outlines our key stakeholder groups, 2019, these included a series of branch/office taken in the Group. how we are interacting with them and how visits and customer events for retail, commercial The focus on customers is not just evidenced they inform strategic decision making. It and insurance customers. Client contact by the regularity of presentations to Board, also provides examples of key strategic enables direct feedback and informs strategic but also by the existence of the Group decisions made during the year and the Board decision making. Customer First Committee. This Committee engagement involved. In July 2019, we launched the reconnecting is composed of members of senior This section (pages 20 to 27) acts as our with customers pilot programme, specifically management and regularly reports to the Section 172(1) statement; however, given the designed to bring senior leaders across the Board. The Committee acts as the custodian importance of stakeholder focus, long-term Group closer to our customers and customer- of Group wide customer experience and has strategy and reputation, these are integrated facing teams. responsibility for monitoring, reviewing and throughout the report. challenging the divisions to make changes to The Chairman and a number of Non‑Executive support the delivery of the Group’s aim and Section 172(1) Statement and Statement Directors also attended customer insights customer-centric culture. of Engagement with Employees and sessions monthly across the UK to hear Our response to customer priorities Other Stakeholders directly from customers about their lives and In accordance with the Companies Act 2006 what is important to them. Leading customer experience (the ‘Act’) (as amended by the Companies Read more on page 16 Earning and retaining the trust of customers (Miscellaneous Reporting) Regulations Digitising the Group 2018), the Directors provide this statement is a priority for the Board with regular updates received. The Group remains committed Read more on page 17 describing how they have had regard to the Maximising Group capabilities matters set out in section 172(1) of the Act, to doing whatever is necessary to ensure Read more on page 18 when performing their duty to promote the all customers impacted by past conduct success of the Company, under section 172. failures receive fair recompense. During Helping Britain Prosper Further details on key actions in this regard 2019, an independent review highlighted Read more on pages 27 to 34 are also contained within the Corporate shortcomings in our approach to victims of the Governance Report on pages 65 to 94 and historic HBOS Reading fraud and as a result the Directors’ Report on pages 94 to 97 of the Board is now taking swift action to contact Customer feedback our Annual Report and Accounts. the impacted victims and ensure they receive is crucial to Board discussions and In accordance with the Large and fair recompense. achieving a leading customer experience Medium-sized Companies and Groups Having identified the need to upgrade the (Accounts and Reports) Regulations skills of small businesses in technology, 2008 (as amended by the Companies productivity and export opportunities, (Miscellaneous Reporting) Regulations we have been engaging with government 2018), this statement also provides details of how the Directors have engaged with and other organisations to provide and had regard to the interest of our additional support. key stakeholders. Lloyds Banking Group Annual Review 2019 21

We have a large footprint, with an important role in society and many different stakeholders to consider as we run the Group Lord Blackwell Chairman

The Board is accountable to shareholders and aims KEY BOARD DECISION to ensure that a good ADOPTING A QUARTERLY DIVIDEND dialogue is maintained

In May 2019 the Group announced that Our decision process it will move to the payment of quarterly The decision to introduce quarterly dividends, from the first quarter of 2020. dividends was made following The new approach will be to adopt three shareholder feedback and extensive equal interim ordinary dividend payments discussion at both management and for the first three quarters of the year Board level followed by, subject to performance, a The Board considered the benefits SHAREHOLDERS larger final dividend for the fourth quarter and possible drawbacks for different of the year. types of shareholders, in particular retail The first three quarterly payments, payable shareholders given the size of their holdings, along with the Group impact The Group has the largest shareholder in June, September and December will base in the UK with around 2.4 million each be 20 per cent of the previous year’s The management team consulted shareholders and we undertake a total ordinary dividend per share with the with external advisors, with payment comprehensive shareholder engagement fourth quarter payment payable in May, approaches by other large corporates programme including both institutional and following approval at the AGM. considered, and engaged with the retail shareholders with regular feedback to The Group has around 2.4 million regulators management and the Board. We strive to shareholders, the vast majority of whom The Board also looked at various options consider all shareholder groups evenly when are retail shareholders, and this approach for the phasing of dividend payments, making key decisions for the Group. will provide a more regular flow of while remaining mindful of the goal to Shareholder priorities dividend income to all shareholders whilst accelerate payments Superior returns and lower cost of equity accelerating the receipt of payments. This approach both supports our Strong capital generation and attractive Additional information on the changes, purpose to Help Britain Prosper whilst distribution policy including how shareholders can move to aligning to the Group’s progressive and Sustainable and low risk growth direct credit payments, is available on the sustainable ordinary dividend policy Group website Responsible, sustainable business model www.lloydsbankinggroup.com/investors/ Link to strategic priorities Direct engagement shareholder-info/dividends/. The Group understands the need to effectively Leading customer experience communicate with existing and potential shareholders, briefing them on strategic and financial progress and attaining feedback. The Group therefore undertakes c.500 shareholder meetings a year, with the Group Chief Indirect engagement We regularly engage with our shareholders Executive and Chief Financial Officer Board members are keen to be aware of about the information we provide to them undertaking more than 80 meetings in 2019. shareholder sentiment and ensure follow up and, where appropriate, incorporate In addition, various Non-Executive Directors actions are taken as appropriate. As such all their feedback to enhance our disclosure. have engaged with shareholders through institutional shareholder letters are registered In support of this, in February 2020, we the year, including the Chairman and the and discussed at the Group Nomination and published our first ESG focused presentation Remuneration Committee Chair. The Governance Committee. online: ‘Our approach to ESG’ www.lloydsbankinggroup.com/investors/ Chairman’s meetings were largely focused Investor Relations provides regular reports financial-performance/ on corporate strategy, governance and and feedback to the Board on key market sustainability, whilst the Remuneration issues and shareholder concerns. This Given the Group's significant retail Committee Chair has been consulting widely includes an annual presentation involving our shareholder base, we have actively looked on the new remuneration policy. In total, Non- corporate brokers on market dynamics and to increase engagement in the past twelve Executive Board members have engaged corporate perception. months and will continue to do so in 2020. We directly with shareholders representing Regular feedback is provided to the Board aim to build a sustainable communications around 30 per cent of our issued share capital and appropriate Committees on retail infrastructure, including an enhanced during the year. shareholder correspondence. corporate website, to ensure improvements deliver better insight for all our shareholders. The AGM is an opportunity for shareholders The Group communicates with its to hear directly from the Board on the Group’s shareholders through regular results Our response to shareholder priorities performance and strategic direction, and and strategy announcements and has a Group financial performance importantly, to ask questions. In 2019: comprehensive website on which detailed Read more on pages 36 to 39 – around 200 shareholders attended company information is available. To ensure ESG presentation online – ov er 67 per cent of total voting rights voted effective communication, the Group Chief www.lloydsbankinggroup.com/investors/ During 2019, we hosted two retail shareholder Executive also specifically writes to all financial-performance/ briefings, one in London and one in , shareholders, updating them on progress, Our 2020 Remuneration policy in which we updated shareholders on strategy every six months. Read more on pages 115 to 126 of our and performance and obtained feedback. Annual Report and Accounts These briefings were hosted by Investor Relations and senior management. 22 Lloyds Banking Group Annual Review 2019

Our key stakeholders and Board engagement continued

COLLEAGUES KEY BOARD DECISION CHANGING OUR REMUNERATION POLICY The Group has around 65,000 colleagues, who take pride in working for an inclusive and diverse The Group’s Remuneration Policy was last Our decision process Group and, with their support, we are building approved by shareholders at the AGM in 2017 The engagement that has taken place in 2019 a culture in which everyone feels included, and has been in operation for the last three has heavily influenced the decisions made by empowered and inspired to do the right thing years. We have published our proposed revised the Remuneration Committee. Further details for customers. Through our strategy we have Remuneration Policy within the Directors’ of the feedback we received can be found on made our biggest ever investment in colleagues Remuneration Report on pages 98 to 123 of page 99 of our Annual Report and Accounts. to ensure that we continue to attract, develop our Annual Report and Accounts. The Remuneration Committee has been and retain these skills and capabilities. We have thought carefully about the purpose mindful of the trend towards pay simplification of remuneration and believe this is an Colleague priorities across UK organisations. Shareholders have opportune time to propose a simplified reward Customer and value led culture previously voiced that the Group’s current package that provides greater alignment with Investment in training and IT construct is overly complex. Our new proposed the Group’s strategy and the experience of Remuneration Policy has been designed to Compelling colleague proposition customers, colleagues and shareholders. deliver a simplified variable reward approach. Attractive reward structure The proposed policy comprises: In addition to wholesale change of some Direct engagement A significant reduction in executive pension reward structures, such as the introduction of We work to maintain an open dialogue with contributions the Long Term Share Plan, the Committee also our colleagues. During the year the Board The introduction of a new long-term decided to maintain some existing components communicated directly with colleagues (restricted) share plan considered important parts of the overall through videos, webcasts, and our Group Continued simplification of the package. We have agreed to maintain the intranet, detailing the Group’s performance, balanced scorecard existing Balanced Scorecard structure which changes in the economic and regulatory is considered a transparent and effective tool Our engagement process environment and updates on our key strategic to drive and assess performance. To provide initiatives. We also hosted regular Ask Me Proactive engagement took place further understanding for shareholders, an Anything sessions providing the opportunity throughout 2019 with key stakeholders explanation alongside the Policy as to why the for colleagues and contingent workers to ask including shareholders, colleagues and the measures included in the scorecard provide questions and receive real time responses regulator to understand some of the drivers good strategic alignment is provided within the directly from members of the Board. for change Directors’ Remuneration Report. Our Remuneration Committee Chair Long-term implications The Board places great importance on consulted with shareholders representing We believe the revised reward structure will opportunities to engage directly with over 30 per cent of our issued share capital incentivise long-term stewardship and promote colleagues. The Board visited office locations on initial proposals and continued the good governance through a simple alignment throughout the UK, taking the opportunity dialogue as the policy evolved with shareholders. Reductions in fixed pay and to hear directly from colleagues about their Consultations with our recognised unions work and their successes, passion, drive and potential variable reward payouts will support took place to discuss key changes to reducing the gap between colleague and commitment to improve the business for the colleague pension provisions benefit of the Group’s customers. executive remuneration. Management have been focused on We offer a competitive and fair reward package. The Chairman also held a number of Town ensuring key proposed changes in variable Colleagues are also eligible to participate in Hall sessions in locations across the country, reward structures are fit for purpose for HMRC approved share plans which promote share meeting with colleagues and answering their colleagues across the Group as part of a fair ownership by giving colleagues an opportunity questions about the Group and its business, and consistent reward package to invest in Group shares. Further information can in addition to regular and informal lunches Please see page 99 and 101 of our Annual Report be found on page 116 of our Annual Report and and Accounts for further information on key areas and breakfasts with members of the senior Accounts in the Directors’ Remuneration Report. leadership team to discuss business issues. of focus discussed with stakeholders. The Group held its biggest signature annual Link to strategic priorities event, Helping Britain Prosper LIVE, which was attended by over 5,000 colleagues and was Maximising Group capabilities broadcast live to all colleagues. This event, hosted by the Group Chief A workplan was discussed and agreed in The Group believes that a diverse workforce Executive with support from key members of February 2019 and as a result, the Board now is critical to performance and regular progress the executive leadership team, provided the receives a quarterly Workforce Engagement updates are provided to the Board. report which comprises two component parts: opportunity for our colleagues to hear and see As well as its own engagement survey, the A summary of the Board’s engagement first-hand how we are progressing our strategy Group also takes part in the Banking Standards activity with colleagues and Helping Britain Prosper every day. Board assessment on a yearly basis, which Key themes raised by colleagues and trends The Board participated in the transforming provides member firms with the evidence, on people matters, including, for example support and challenge to help them achieve ways of working labs, providing them with absence or attrition the opportunity to see first-hand the activity and maintain high standards of behaviour and The Board considers that the above underway in support of improving the competence both individually and collectively. arrangements are invaluable in giving them an customer and colleague experience. There are five parts to the assessment; an online understanding of the views of the workforce employee survey, a set of Board questions, Indirect engagement and encouraging meaningful dialogue interviews with Executive and Non-Executive We held meetings throughout the year with our between the Board and the workforce. Directors and employee focus groups. recognised unions, attended by the Chair of The Board are committed to improving the Our response to colleague priorities the Remuneration Committee and the Group transparency of workforce disclosure, and Improved employee engagement Chief Executive. Key topics included the Living the Group participates in the Workforce Wage, which applies to our whole workforce. Disclosure Initiative. Fair and competitive pay and remuneration structure In June 2019, the Group People and In 2019, the Board agreed how they would Championing Britain’s diversity Productivity Director, presented to the Board engage with the workforce. The definition of Read more on page 34 workforce, was agreed by the Board as: Our on people and transforming ways of working, Transforming ways of working permanent colleagues, contingent workers and providing them with an update on the Group’s Read more on page 19 third-party suppliers that work on the Group’s people strategy, see page 19. The Board also premises delivering services to our customers receives regular updates on culture, see page EU exit preparations and supporting key business operations. 74 of our Annual Report and Accounts. Lloyds Banking Group Annual Review 2019 23

The Board recognises the responsibility the Group has to engage with and We define key Board decisions as those respond to some of the economic, social and that are significant to any of our stakeholders environment challenges the UK faces Lord Blackwell Chairman

COMMUNITIES AND ENVIRONMENT KEY BOARD DECISION TACKLING CLIMATE CHANGE As the largest retail and commercial financial services provider in the UK, we have a Across the globe, action to combat The Responsible Business Committee, presence across the country. We specifically climate change is needed. We support the a sub-committee of the Board, provides invest in local communities across Britain to Government's Clean Growth Strategy and direction and oversight, whilst at help them prosper economically and build are supporting our customers with a range Executive level, the Group Executive social cohesion by tackling disadvantage. of initiatives to help them become more Sustainability Committee (GESC), sustainable and think about environmental supported by divisional Governance Community and environmental priorities impacts, including access to green finance. Forums and working groups, Helping the transition to a sustainable low The transition to a low carbon economy provide oversight carbon economy impacts us all and subsequently is a The Board were briefed on key climate Helping Britain get a home fundamental element of our strategy and related issues by external industry Helping people save for the future core to Helping Britain Prosper. experts and also engaged on a number of external fronts Helping businesses start up and grow In 2018 following a detailed review by the Building capability and digital skills Board, we introduced a new sustainability Long-term implications metric to our Helping Britain Prosper Plan, The Board believe we have a responsibility Direct engagement signalling our intent and commitment to help drive progress towards a The Board continued to support the Group's and in January 2020, we announced an sustainable and resilient UK economy, four charitable Foundations and during Small ambitious new goal to help reduce the taking into consideration the needs of Charities Week, the Group ran campaigns carbon emissions we finance by more than different stakeholders and risks to the with each Foundation showcasing the work 50 per cent by 2030. Read more about our business, and were comfortable endorsing they do for small but vital charities including ambitious goal and other commitments on ambitious plans, given the benefit to the those tackling domestic abuse and mental pages 28 to 31 or in our approach to ESG Group and future generations. health. This demonstrated the alignment presentation online between the Group supporting vulnerable www.lloydsbankinggroup.com/ investors/ customers and the work done by charities financial-performance/ to support these social issues. Sara Weller, >£4.9bn Chair of the Group's Responsible Business Our engagement process Green finance Committee, is a Bank Trustee of the Lloyds In developing our proposals, various Read more about our approach to green finance Bank Foundation, England and Wales. stakeholder groups have been engaged on page 29 including customers, colleagues, Members of the Board visited several charities shareholders, suppliers, government >50% by 2030 in 2019, including the Manchester Digital and regulators We aim to help reduce the emissions we Academy, Angel Eyes in Northern Ireland and finance by more than 50 per cent by 2030 the Cathedral Archer project in Sheffield. The annual responsible business materiality study specifically identified Indirect engagement environmental sustainability and climate Link to strategic priorities The Group’s Helping Britain Prosper Plan is change as a critical issue and as a result Leading customer experience reviewed and approved annually by the Board further detailed analysis was undertaken to ensure it focuses on what matters most to by the Group sustainability teams Maximising Group capabilities people, businesses and communities in the UK. The Responsible Business Committee, a sub- committee of the Board, provides oversight and support for the Group’s Helping Britain The Board supports the Group’s 10 regional Our response to community and Prosper Plan, and the plans for delivering ambassadors that cover the home nations environmental priorities the aspiration to be seen as a trusted and of Scotland, Wales and Northern Ireland, Help Britain Prosper responsible business. and the seven regions of England. Through Read more on pages 27 to 34 During 2019, the Board reviewed responses the programme we have established strong ESG presentation online from the Responsible Business materiality relationships with politicians, the media, local www.lloydsbankinggroup.com/investors/ study which outlined a wide range of views on councils and other community institutions to financial-performance/ the Group. These responses then informed offer our insight on the major economic and and guided our responsible business strategy social debates the country faces. and reporting. Given our unique position within the UK, we The Board undertook various related deep are eager to play our part in tackling climate dives throughout 2019, including key areas of change, by working with our stakeholders to strategic focus such as ESG, cyber security help reduce the carbon emissions we finance. and inclusion and diversity within the Group, We want to finance a green future together. with specific focus on BAME colleagues. This We are developing longer-term broader social highlighted a number of strengths but also impact goals during 2020, as we develop our identified opportunities for the Group to thinking around the Society of the Future. further improve its behaviours and approach. 24 Lloyds Banking Group Annual Review 2019

Our key stakeholders and Board engagement continued

REGULATORS AND GOVERNMENT KEY BOARD DECISION EU EXIT PREPARATIONS

We have a strong, open and transparent relationship with our regulators and other Given our UK focus, our performance is When reviewing the possible impacts of government authorities including HMRC. inextricably linked to the health of the the EU exit, the Board have given particular We liaise with them regularly to ensure UK economy and throughout 2019 we consideration to the Group’s strong UK the business is aligned to the evolving continued to prepare for an EU exit. focus and UK-centric strategy, with specific regulatory framework. focus on the trading, financial, operational Given the importance of this topic for Regulators and Government priorities and reputational impacts for the Group, the Group and the country, numerous as well as the cyber, physical security and Ensuring firms have robust prudential stakeholders were engaged to inform fraud risks, and the continued support of standards and supervision in place our approach including customers, our customers. Fair treatment of customers colleagues, shareholders, suppliers, regulators and government. We implemented a programme to assess Adapting to market changes and horizon the legal impacts and risks of an EU exit scanning (including climate change and Our engagement process (including a no deal outcome) and to developments in data and technology) The Chairman was an active member of identify appropriate mitigants, such as Culture CityUK’s EU exit Steering Group, working establishing EU entities to ensure continuity with other major financial institutions to of certain business activities. Financial and operational resilience inform government decision making Long-term implications Risk management The extended EU Exit Executive Like all UK banks impacted by the EU exit, Recovery and resolution Forum was established, chaired by we submitted contingency plans to the Preparations for EU withdrawal the Group Chief Financial Officer, regulators both in the UK and elsewhere with comprehensive cross-Group as to how we would manage potential Direct Engagement representation, to provide an update EU exit scenarios and are well prepared During 2019 we had regular meetings with to the Board on the Group’s EU Exit to ensure continuity of our limited EU our various regulators at different levels of the contingency planning business activities at the end of transition organisation from Board to senior management. Additional updates from the EU Exit period; new European entities have been The Board and senior management continue Forum were also submitted to the established and are now operational. to engage with our regulators through Board Risk Committee and Group Given the vast majority of our business is proactive meetings to discuss various key Risk Committee in the UK, the direct impact on the Group themes, such as: customer-centric culture; Engagement with politicians, officials, from leaving the EU is relatively modest. transformation and change; operational and media, trade and other bodies to financial resilience; and credit risk. reassure our commitment to Helping Link to strategic priorities Britain Prosper The Chairman has had extensive dialogue Maximising Group capabilities with both the FCA and PRA on all aspects of Our decision process their regulatory agenda. The Group’s EU exit contingency plans Indirect Engagement continue to be monitored closely by The Board Risk Committee receives monthly the Board via specific regular updates, updates on Group regulatory interaction covering both operational status and providing a view of key areas of focus, alongside external developments, a suite of early progress made addressing regulatory actions, warning indicators and corresponding risk and current enforcement activity. mitigation plans. Our response to regulator and government priorities The Board are committed to complying with all relevant legislation, in particular that relating to prudential and conduct regulation. Appropriate regulation is considered in all Our approach to tax Board decision making. Our comprehensive and diligent approach We have a clear tax policy which is part The Board continue to closely monitor to regulation is typified by our approach to of our Board-approved Group risk the status of our regulatory relationships, tax, with HMRC being a key stakeholder for management framework. This policy sets enhancing proactive engagement across key the Group. out clear actions for colleagues to manage regulatory changes and areas of focus. Read tax risks. Like any business, our success more on regulatory change on page 11. As a Group with the purpose to Help rests on maintaining a good reputation. Britain Prosper, and with 98 per cent of our We understand that the way we approach In 2020, we will continue to adapt our business subject to tax in the UK, we’re our tax obligations has a powerful impact engagement strategy, ensuring alignment with proud to be one of the largest contributors on this reputation, so finding the most emerging areas of focus and the regulators' of UK tax revenues. As well as our tax responsible balance is vital. We comply with business plans. expense of £1.4 billion as seen in the the HMRC Code of Practice on Taxation income statement, in 2019 we also paid for Banks and Confederation of British £0.8 billion of other business taxes Industry’s Statement of tax principles. (including the Bank levy and our employer NIC costs) and £0.8 billion of irrecoverable Tax is also covered in our Code of VAT, a total tax contribution for the year of Responsibility, a code that applies to every £2.9 billion. In addition, we are also a major colleague, team and business in our Group tax collector, gathering £1.9 billion on behalf – day in, day out. The code makes tax a of HMRC. personal responsibility for every colleague in the Group. The Board recognise that tax is one of the ways in which the Group contributes to Read more about our tax strategy online society, therefore appropriate, prudent www.lloydsbankinggroup.com/ and transparent tax behaviour is a key globalassets/our-group/responsible- component of Board responsibility. business/reporting-centre/ Lloyds Banking Group Annual Review 2019 25

Our two way communication and partnership with our suppliers is vital to the success of our Group

Board approved governance has been including joint ventures. This Policy has been SUPPLIERS established to ensure that the ordering designed to assist in managing the inherent processes for all expenditure: allow risk in outsourcing services, and dealing with challenge to be made in line with our cost third party suppliers. Given the size of our organisation, we are management processes; maximise the use of appropriately sourced third party suppliers; We require suppliers to adhere to relevant reliant on external suppliers for a number of key Group policies and UK suppliers are services. As well as being important for future offer appropriate pre-commitment controls to minimise risks and unnecessary costs; give additionally required to comply with our success, we believe that dealing with suppliers Code of Supplier Responsibility. This outlines in the right way is the right thing to do. the opportunity to negotiate further savings with third party suppliers; facilitate third party our expectations for responsible business Supplier priorities suppliers being paid in a timely manner and behaviour, underpinning our efforts to share Being treated fairly and professionally avoid risk and costs associated with the use and extend good practice. This can be found during the sourcing process of non-approved channels. on our Group website www.lloydsbankinggroup.com/our-group/ Clear guidance about the Group’s payment Our response to supplier priorities working-with-suppliers/ procedures In 2019 our supplier expenditure was Working closely to share expertise in £5.9 billion with over 95 per cent of our third The Board has a zero tolerance attitude developing innovative, high quality party suppliers located in the UK. towards modern slavery in our supply chain products and services and effectively and continue to make enhancements to managing risk It is important that we have the right address the risk of and provide specific framework to operate responsibly. The training on human trafficking and modern Engaging in ways that ensure we achieve Sourcing and Supply Chain Management slavery for specialist colleagues. the best value for customers in terms of Policy applies to all businesses, divisions, price, quality and social impact Group functions and legal entities across the Building strong, collaborative relationships Group, whether based in the UK or overseas, and understanding the environment in which we operate so that they can meet our needs and our customers’ needs KEY BOARD DECISION ACQUISITION OF TESCO BANK’S UK Supporting suppliers in meeting our RESIDENTIAL MORTGAGE PORTFOLIO requirements for cybersecurity in our supply chain Direct engagement The Group announced in September 2019 The Board received regular reports We want to improve the experience of our that we had entered into an agreement and feedback on the progress of the suppliers. As such we regularly seek feedback with Tesco Bank to acquire its prime UK transaction from senior management on the Group’s on-site assurance process residential mortgage portfolio. The transaction is consistent with from suppliers in order to continually improve Our decision process Group strategy and value accretive the process. The Group has a clear strategy as to shareholders Suppliers are encouraged to express their outlined on pages 16 to 19, and the As previously indicated, the Group’s satisfaction or dissatisfaction to their points Board regularly reviews this strategy strong free capital build gives us of contact within the Group e.g. the supplier in light of the changing external flexibility to consider inorganic growth manager, the sourcing manager, the finance environment to ensure that our focus opportunities in selected target areas, contacts. Suppliers also have access to the remains the right one where we see value for shareholders Speak Up line. All potential acquisitions are assessed to The transaction is in line with this ensure alignment with strategy and that The Group collaborates with its suppliers approach and demonstrates the Group’s they deliver appropriate returns on key issues. The Group held a supplier strong commitment to the strategically breakfast with a roundtable discussion on The Board agreed the acquisition criteria core prime mortgage market cyber, resilience and information security. and discussed the key risks that needed Following this transaction, the Group’s to be assessed open mortgage book assets at the Indirect engagement Detailed analysis of the transaction was year end were ahead of the year end We work with around 3,100 active suppliers undertaken by senior management 2018 balance of varying sizes, most in professional services before attaining Board approval sectors such as IT, cyber, operations, As a customer focused business the including consultation with regulators management consultancy, legal, HR, impact on the acquired customers was marketing and communication. The acquisition of the Tesco mortgage considered and we are working closely book was proposed as it is expected together with Tesco Bank to ensure All material contracts are subject to rigorous to generate good returns to the a smooth transition for the 23,000 cost management governance and updates Group, in excess of current organic new customers on key supplier risks are provided to the Board. market opportunities, while delivering open mortgage book growth within The Board Risk Committee oversees our Link to strategic priorities the Group’s low risk strategy. It will detailed process to assess the cybersecurity also provide additional flexibility Leading customer experience of suppliers and help them meet our in participation choices in the security requirements. Maximising Group capabilities mortgage market 26 Lloyds Banking Group Annual Review 2019

Responsible business Responsible, sustainable and inclusive

With the Group’s unique If our colleagues witness something inappropriate, they can report the matter to position at the heart of the the colleague conduct management team, or British economy, we embrace make use of our independent and confidential our responsibility to help address whistleblowing service, Speak Up. In 2019 some of the economic, social colleagues reported 451 concerns, of which 216 were formally investigated following and environmental challenges triage, with 39 per cent of those investigations the UK faces. We have been substantiated, resulting in remedial action. Helping Britain Prosper for the We are working to empower our colleagues past 250 years, by delivering for and one example of this is our award winning We embrace our our customers and communities, behavioural experiments initiative, where economic, social as a responsible, sustainable and colleagues test new ways of working that can lead to permanent process and policy and environmental inclusive business. changes, including those that improve customer satisfaction. responsibilities to Engaging with our stakeholders The Group understands that engagement Help Britain Prosper Engaging and responding to stakeholders is is a two way process, so each year we ask by operating as a fundamental to being a responsible business. colleagues to share their views via our Each year we gather a wide range of views independently run colleague survey, and responsible, sustainable through our formal materiality assessment participate in the annual Banking Standards and inclusive Group. with our stakeholders, which guides both our Board Culture Assessment. strategy and reporting. Our key response Sara Weller All Group colleagues receive a competitive to their needs is the Helping Britain Prosper Non-Executive Director and Chair, and fair reward package. To encourage Plan which focuses on critical issues including Responsible Business Committee ownership, colleagues are eligible to environmental sustainability on page 28, participate in HMRC approved share plans. digital skills on page 33, and support for Further information can be found on page 116 homeowners, savers, and businesses of our Annual Report and Accounts. on page 32. Further topics highlighted by Supporting vulnerable stakeholders, and discussed below, include customers responsible governance and accountability, Protecting our customers’ Vulnerability for our customers exists in many support for colleagues, customer privacy finances and data forms, from a specific life event to something and data security, and support for Customers trust us to keep their money long-term. That’s why the Group is committed vulnerable customers. and data safe, and the Group deploys to raising awareness, fighting stigma and sophisticated technology to protect both. providing meaningful support across a range Responsible governance In addition, we play a significant role in of challenging issues. Whether supporting our and accountability the Joint Fraud Taskforce, a collaboration customers’ financial worries following a cancer between Government and industry, and diagnosis, with our partners at Macmillan, or Creating and sustaining a values-based champion the Banking Protocol, which working with Hope for Justice to provide bank culture with good governance is crucial to enables colleagues to request immediate accounts for modern slavery survivors, the ensuring our colleagues remain engaged, police support for at-risk customers. Group continues to create innovative solutions well informed and can effectively deliver our for our customers. strategy. Our rigorous internal governance The Group also works continuously to and controls, comprising numerous policies bolster defences against cyber-attacks, Another example is the development of and standards ensure that we treat all paying particular attention to reducing the a domestic and financial abuse team, our stakeholders fairly, while minimising risk. risks that vulnerable people face. We are a contribution to a very complex issue that can founding member of the Financial Services impact a wide range of our customers. The Our Board level Responsible Business Cyber Collaboration Centre, working with the Group has also signed up to the Financial Committee (RBC) oversees the Group’s Government’s National Cyber Crime Centre, Abuse Code of Practice, and we signpost performance as a responsible business, and the Cross-Market Operational Resilience the free-to-download Bright Sky app, that and delivery of our sustainability strategy. Group. We also work closely with other banks, provides comprehensive support to people Both the Board and RBC are supported recognising the importance of collaboration affected by domestic abuse. by the Group Executive Committee, when it comes to security, including being which is in turn supported by a dedicated In 2019, we were the first bank to sign up to part of the Cyber Defence Alliance (CDA). Sustainability Committee. the Mental Health Accessibility Standards, We also meet all of the requirements set supporting customers with mental health out in the EU General Data Protection problems. For customers at risk of gambling Helping colleagues Regulation (GDPR). to do the right thing related harm, we have enabled controls on While there’s much we can do, customers all of our credit and debit cards, and built All of our colleagues must be equipped play a significant role in keeping their on our own internal controls to run a pilot in to make the right decisions. The Group accounts secure. Public awareness partnership with Gamban, that helps restrict supports this by consistently promoting and campaigns are therefore crucial, and we access to gambling websites and applications embedding our policies, processes and support the Take Five campaign, while also worldwide to provide further assistance. training. Each year as part of mandatory training colleagues so that they can help training, colleagues review our Code of protect our customers. Responsibility, which outlines Group values and behaviours, and our Anti-Bribery Policy. Lloyds Banking Group Annual Review 2019 27

Responsible business Our Helping Britain Prosper Plan

Addressing some of the social, The Principles for Helping Britain Prosper Plan economic and environmental targets achieved Responsible Banking challenges facing the UK is the In September 2019, the Group became a foundation of our Helping Britain founding signatory of the United Nations Prosper Plan. The Plan takes us 20/22 Environment Programme Finance Initiative 2019 20/22 (UNEP FI) Principles for Responsible Banking. beyond business as usual, uniting 2018 20/22 This sets out a framework for a reformed the Group behind an inspiring set 2017 21/22 banking system that will better meet the of objectives. 2016 20/24 changing expectations of society. Through 2015 27/28 both our responsible business activities and 2014 20/25 the Helping Britain Prosper Plan, we are Launched in 2014 and reviewed annually, supporting the UN’s broader sustainable the Plan focuses on the areas where we Read more online development agenda, believe we can make the biggest difference. www.lloydsbankinggroup.com/our-group/ and contributing In 2018, as part of its inclusion in the Group responsible-business/prosper-plan/ towards reaching Balanced Scorecard, we set specific targets the UN Sustainable across seven areas of focus aligned to our Development Goals three year strategy, including environmental (SDGs). sustainability and progress is outlined below.

HELPING BRITAIN PROSPER PLAN 2020

2019 20201 SDG Area of focus achieved targets Supported

Helping the transition to a sustainable low carbon economy Average number of homes that could be powered as a result of our 5.1m 2 5m support of UK renewable energy projects

Helping Britain get a home Amount of lending committed to help people buy their first home £13.8bn £30bn

Helping people save for the future Growth in assets that we hold on behalf of customers in retirement £37.1bn 2 £50bn and investment products3

Supporting businesses to start up and grow Increased amount of net lending to start up, SME and £3.4bn2 £6bn Mid Market businesses

Tackling social disadvantage across Britain Number of charities we support as a result of our £100 million 2,929 2,500 commitment to the Group’s independent charitable Foundations

Building capability and digital skills Number of individuals, SMEs and charities trained in digital skills, 738,504 1.8m including internet banking

Championing Britain’s diversity Percentage of senior roles to be held by women 36.8% 40% Percentage of roles held by Black, Asian and Minority Ethnic colleagues 10.2% 10% Percentage of senior roles held by Black, Asian and Minority 6.7% 8% Ethnic colleagues

1 Figures are all cumulative 2018 to 2020 excluding Tackling social disadvantage across Britain and Championing Britain’s diversity. 2 Figures are cumulative from 2018. 3 Growth in assets under administration in our open book. Full year HBP plan www.lloydsbankinggroup.com/our-group/responsible-business/prosper-plan/ 28 Lloyds Banking Group Annual Review 2019

Responsible business Helping the transition to a sustainable low carbon economy

The UK is committed to the vision We support the aims of the 2015 Paris Agreement and the UK Government’s Clean >50% of a sustainable, low carbon Growth Strategy, which will require a radical future. Our unique position within reinvention of ways of working, living and the UK economy means that the doing business including new Government by 2030 successful transition to a more policies and sustainable finance solutions. In We aim to help reduce sustainable, low carbon economy 2018 we set out our Sustainability Strategy and when reporting on our progress, we support the emissions we is of strategic importance to us. the Taskforce on Climate-Related Financial finance by more than Disclosure (TCFD) framework, and currently plan to achieve full disclosure by 2022 in line 50 per cent by 2030 with the TCFD recommendations and the UK Government’s Green Finance Strategy.

OUR STRATEGY

Our goal and approach Our ambition As a signal of our commitment we have set an ambitious goal, We have set ourselves seven leadership ambitions to support the working with customers, Government and the market to help UK’s transition to a sustainable future: reduce the emissions we finance by more than 50 per cent by 2030, Business: become a leading UK for sustainable supporting the UK’s ambition to be net zero by 2050 and the 2015 Paris growth, supporting our clients to transition to sustainable business Agreement. During the course of 2020, we intend to conduct a review models and operations, and to pursue new clean growth opportunities of our portfolio to establish our current financed emissions and set appropriate metrics and targets for material sectors. Homes: be a leading UK provider of customer support on energy efficient, sustainable homes In order to meet our goal, we will: Vehicles: be a leading UK provider of low emission/green vehicle fleets Identify new opportunities to support our customers and clients and Pensions and investments: be a leading UK pension provider that finance the UK transition to a low carbon economy offers our customers and colleagues sustainable investment choices, Identify and manage material sustainability and climate related risks and challenge the companies we invest in to behave more sustainably across the Group, disclosing these, their impacts on the Group and and responsibly its financial planning processes, in line with the TCFD framework Insurance: be a leading UK insurer in improving the resilience of Use our scale and reach to help drive progress towards a sustainable customers’ lives against extreme weather caused by climate change and resilient UK economy through engagement with customers, Green bonds: be a leading UK bank in the green/sustainable communities, industry, Government, shareholders and suppliers bonds market Embed sustainability into the way we do business and manage Our own footprint: be a leading UK bank in reducing our own our own operations in a more sustainable way carbon footprint and challenging our suppliers to ensure our own consumption of resources, goods and services is sustainable

Steven Pratt Lloyds Banking Group Annual Review 2019 29

Responsible business

Metrics and targets For example: In 2018, we committed to develop a reporting Utilities includes financing to entities Real estate and mortgages will include framework to track performance against that have both renewable energy and loans and advances supported by our sustainability strategy. This includes non-renewable energy generation. assets which have a full range of Energy measures for our energy use, emissions, We have provided finance for more than Performance Certificate (EPC) ratings water and waste; Group and portfolio metrics 40 renewable energy projects, including including energy efficient properties that drive emission reductions related to our supporting projects such as the Neart UK motor finance includes loans and financing activity; the amount of green finance na Gaoithe offshore wind farm advances for low emission vehicles we provide; and metrics that track climate change risk (including exposure to high carbon sectors and sectors at high risk from Loans and advances to customers in high carbon sectors and selected other climate change). sectors subject to transition risks Loans and advances to % of total loans and advances The complexity of accessing robust data customers (£m)2 to customers3 has prevented us from setting a full suite of Sector/area1 Dec 2019 Dec 2018 Dec 2019 Dec 2018 targets in 2019. We intend, however, to set appropriate targets during 2020 for material Energy Coal Mining 21 28 <0.01% <0.01% sectors. Our new goal to reduce the emissions Oil and Gas 1,368 975 0.27% 0.20% we finance by more than 50 per cent by 2030 sectors Utilities (Electric and Gas) 964 1,251 0.19% 0.26% will frame the level of ambition across our High carbon Total 2,353 2,254 0.47% 0.46% targets and metrics. Agriculture, Forestry and Fishing 7,558 7,314 1.52% 1.50% Extending our own carbon Construction and Real Estate 28,228 29,470 5.67% 6.04% footprint measurement Transportation (Automotive, Aviation, 4,353 5,429 0.87% 1.11% We met our 2030 carbon reduction target in Shipping and Rail) 2019, having reduced emissions by 63 per cent since 2009. We also expanded our Scope 3 Cement, Chemicals and Steel 143 250 0.03% 0.05% Manufacture

emissions measurement to include additional risks transition to categories of emissions from business travel Mortgages 299,141 297,497 60.05% 60.96%

and colleague commuting. We continue to sectors subject other Selected UK Motor Finance 15,976 14,933 3.21% 3.06% pursue our targets to reduce emissions by 80 per cent by 2050, operational waste by 1 Exposures are based on 2007 Standard Industrial Classification codes except for Agriculture, Forestry and Fishing (based on NACE code A00-0) and Mortgages and UK Motor Finance, where the full portfolios have been used. These exposures will 80 per cent by 2025 (compared to 2014/15) include green and other sustainable finance loans, which support the transition to the low carbon economy. As such, these and water consumption by 40 per cent figures and/or trends should not be read as the only measure to gauge transition risk or financed emissions. by 2030 (compared to 2009). We will be 2 Disclosures are based on loans and advances to customers on a statutory basis, before allowance for impairment losses. developing new carbon, energy and travel Analysis covers at least 95 per cent of loans and advances and does not include data from the Insurance and Wealth division. targets in 2020. See Directors' report, page 97 3 Total loan and advances to customers were £488,088 million at 31 December 2018 and £498,247 million at 31 December 2019, see page 293 of our Annual Report and Accounts. of our Annual Report and Accounts for Group Emissions data. Green finance We have provided more than £4.9 billion in green finance since 2016 through our Clean Growth Finance Initiative, Commercial Real Estate Green Loans Initiative, Renewable Energy Financing, and green bonds facilitation. While green loan standards are evolving, we have teamed up with leading sustainability consultants when developing green finance products to determine a list of qualifying green criteria. These green finance products support a range of eligible product activity including; reducing emissions, improving energy efficiency, reducing waste, improving water efficiency, and funding low carbon transport and renewable energy. Climate risk sectors In line with TCFD recommendations, we have identified our loans and advances to customers in high carbon sectors and a selection of other sectors that will be exposed to transition risk (see table). This is our initial view and will be reviewed as our transition risk £2.3bn In November, Lloyds Banking insight develops. We continue to work with Group provided funding and our customers to support transition, taking greenfield offshore risk management services to the into account both risks and opportunities. £2.3 billion Neart na Gaoithe wind farm in (Strength of the Wind) offshore Our exposure to high carbon sectors is low Scotland wind farm, a joint venture between (less than 0.5 per cent of total loans and EDF Energy Renewables and ESB advances to customers). In addition, data for Group. Located 15km off the coast these loans and advances is presented at an of Fife, with the potential to power overall sector level and not all customers in c.375,000 Scottish homes and these sectors will have high emissions or be offsetting 400,000 tonnes of CO2 exposed to significant transition risks. emissions annually. 30 Lloyds Banking Group Annual Review 2019

Responsible business

Risk management requirements for providing general banking or funding, and now require new clients to have Climate risk is a key emerging risk for less than 30 per cent of their revenue from the the Group. Our approach to identifying operation of coal fired power stations and/or and managing climate risk is founded coal mines (previously less than 50 per cent). on embedding it into our existing risk management framework, and integrating it In addition, existing customers whose overall through policies, authorities and risk control operations include coal mining and coal power mechanisms. During 2019, we updated our generation or who supply equipment or services TCFD implementation plan to incorporate to the sector will be expected to explain how Prudential Regulatory Authority (PRA) they plan to reduce their reliance on revenue supervisory expectations and refined from coal fired power stations and/or coal deliverables, with further resource invested mines. This includes reducing such revenue in the programme. to less than 30 per cent by 2025 and, where In 2019, we included commentary on climate relevant, to eliminate UK coal power generation change risk within our Internal Capital in line with UK Government commitments. Capacity Adequacy Assessment Process Sustainability is now a mandatory part of credit (ICAAP) submission, and in 2020 we are applications in Commercial Banking for facilities building on this through our analysis of initial greater than £500,000, and we continue to scenarios to assess the impact on capital develop sector specific guidance to help requirements. We are also engaged in the relationship managers identify climate risks. industry response to the Bank of England We will review climate risk as part of the 2020 Discussion Paper to identify the best annual refresh of the Group’s Risk Appetite. approach to explore the financial risks posed by climate change within its 2021 Biennial In line with TCFD, we are also developing Exploratory Scenario (BES). forward-looking scenario analysis, We have updated our external sector incorporating physical and transition risks, Clean growth in statements to include positions on six new to help us identify risks and opportunities the fashion industry sectors including manufacturing, automotive, over the short, medium and long-term. For agriculture, animal welfare, fisheries and example, Commercial Banking are conducting Teemill Tech, a sustainable UNESCO World Heritage Sites. This is in analysis on the real estate sector for business t-shirt manufacturer, bought a addition to the existing statements on power, as usual and low carbon transition scenarios 15,000 square feet site to expand coal, mining, oil and gas, forestry and defence. and our Insurance business has conducted its operations with support from www.lloydsbankinggroup.com/Our-Group/ an initial climate stress test. We are working Lloyds Bank’s Clean Growth responsible-business/reporting-centre/. Our with external consultants to enhance scenario Finance Initiative. Their renewable statement on coal has been updated and analysis across our divisions and will use the energy-powered factory on the Isle made more ambitious. We continue with outputs to support our scenario analysis of Wight uses robotics and Artificial our policy of not financing new coal fired assessments and inform our credit risk Intelligence, creating efficiencies power stations. We have now tightened our appetite decisions and future disclosures. that make sustainability affordable. Their expansion will increase capacity tenfold, creating 100 new Governance jobs over the next three years. Given the strategic importance of our sustainability ambitions, our governance structure Teemill Tech is an ambitious firm, provides clear oversight and ownership of the sustainability strategy. This includes: which operates with sustainability at its core. The rapid growth of Teemill’s customer base speaks for Lloyds Banking Group Board itself, with customers across the UK valuing the quality of its products. Responsible Business Committee Ben Mackett Other committees where issues are Relationship Manager, discussed as appropriate Audit Committee Lloyds Bank Group Executive Committee Board Risk Committee GEC Risk Committee Divisional Risk Committees Group Executive Sustainability Committee

Group sustainability team

Divisional forums/ Group sustainability TCFD working working groups forum group

– The Responsible Business Committee (RBC), a sub-committee of the Board, chaired by Sara Weller, Group Non-Executive Director and which includes the Chairman, Lord Blackwell as a member – Th e Group Executive Sustainability Committee (GESC) which provides oversight and recommends decisions to the Group Executive Committee (GEC) – The TCFD working group, co-chaired by senior executives in risk and sustainability, coordinates the implementation of the TCFD recommendations and supports adherence to key regulatory requirements on climate risk – Th e Group Chief Risk Officer (CRO) has assumed responsibility for identifying and managing the risks arising from climate change, alongside the CROs for key legal entities Our Group sustainability team is supported by divisional sustainability governance forums led by Divisional Managing Directors, ensuring a coordinated approach to oversight, delivery and reporting of the Group’s sustainability strategy. Lloyds Banking Group Annual Review 2019 31

Responsible business

How we are delivering against our ambitions Our £2 billion Clean Growth Finance Initiative (CGFI) provides discounted In 2019, we have focused on developing new lending to low carbon projects. In 2019, products, services and processes to achieve we expanded eligibility to include our ambitions, and our progress has been hire purchase and leasing in the agriculture recognised. and manufacturing sectors. We have Lloyds Banking Group achieved the provided more than £950 million since Leadership level in the 2019 Carbon launching in 2018. Disclosure Project (CDP) Climate Change survey, scoring an A minus; the highest placed financial services firm on the Fortune Sustainability All Stars list; and won the Real Estate Capital Sustainable Finance Provider of the Year One in 14 electric cars in the UK was supplied by Group subsidiary Lex Autolease in 2019, supported by a £1 million cashback offer on pure electric vehicle (EV) orders, reducing future carbon dioxide emissions by an estimated 28 kilotonnes We continue to partner with the Cambridge Institute for Sustainability Leadership to provide high quality training to executives and colleagues in Evolving our disclosure risk management, product development In 2020, we will continue to review and and client facing roles. In 2019, over enhance our methodologies and framework 800 colleagues were trained, ensuring they for reporting Environmental, Social and are able to support clients on this journey Governance risks. This review will take into Since 2018 the Group has supported account a range of industry guidelines renewable energy projects that power the including TCFD, Principles for Responsible equivalent of 5.1 million homes, achieving Banking, Sustainability Accounting Standards our Helping Britain Prosper Plan 2020 Board (SASB), the evolving World Economic target a year early Forum (WEF) ESG standards, and regulatory reporting requirements with a view to further enhancing our disclosures and responding to the evolving needs of both our shareholders and other stakeholders.

Initiatives and collaboration Climate change is a global challenge that requires collaboration across companies and industries to ensure the risks and opportunities can be adequately identified and managed. To support this, we participate in several industry initiatives and have signed up to key principles that drive action on climate change and sustainability, including:

United Nations Environment Programme The Climate Group Finance Initiative (UNEP FI) In 2019, we were one of the first businesses We became a member of UNEP FI in 2019 globally to sign up to all three of The Climate and joined its Phase 2 Banking TCFD Pilot. Group’s campaigns: We also became a signatory to the Principles RE100 – a commitment to source for Responsible Banking and Principles for 100 per cent of our electricity from Sustainable Insurance. renewable sources by 2030 (which Coalition for Climate Resilient Investment we achieved in 2019) In September 2019, we joined the newly EP100 – a commitment to set ambitious formed coalition that aims to transform energy productivity targets by 2030 infrastructure investment by integrating EV100 – a commitment to accelerate the climate risks into decision making. transition to Electric Vehicles by 2030 University of Cambridge Banking Climate Financial Risk Forum Environment Initiative (BEI) – Bank 2030 In 2019, we joined the PRA and FCA’s joint We have been working with 12 leading Climate Financial Risk Forum, participating banks to develop a roadmap for how in the Risk Management Working Group the industry can direct capital towards that aims to deliver a UK best practice environmentally and socially sustainable handbook on implementation of the economic development. TCFD recommendations. 32 Lloyds Banking Group Annual Review 2019

Responsible business

Helping Britain Reducing get a home waste, creating As the largest lender to the UK housing sector, we recognise the importance of home growth ownership, and that a lack of affordable housing can lead to social disadvantage. Working with more than 200 housing associations across the UK, we have provided more than £6.4 billion of finance for the social Company Shop Group is the largest units, saved over 25,000 tonnes of good housing sector since 2018. commercial redistributor of surplus food food from going to waste and diversified We also continue to support The Housing and household products in the UK, into more non-food categories. Growth Partnership, which provides help enabling some of the biggest retailers, Lloyds Bank plays a key role in helping and mentoring to small and mid-sized manufacturers, food service and logistics us to expand and increase our positive house builders, who have built 1,636 new providers to unlock value from surplus, commercial, social and environmental homes across the UK since 2018. In June, which may have otherwise gone to impact as we aim to handle more Vanessa Murden, Chief Operating Officer, waste. Supported by a £4.2 million stock, open more stores and attract Retail, joined the Board of Homes England, funding package from the Lloyds Bank more members. the UK Government’s vehicle supporting the Clean Growth Financing Initiative (CGFI), delivery of affordable housing. Company Shop Group, whose head office John Marren is in South Yorkshire, opened three new Founder and Chairman of Company This year we lent £13.8 billion to first-time stores in 2019, handled over 75 million Shop Group buyers, and introduced the Lend a Hand and Family Boost mortgage propositions, which make it easier for those with little or no savings to buy their first home.

Helping people Supporting save for the businesses to future start up and grow

We want to make saving as easy as possible Supporting businesses of all types and sizes for our customers, as it helps to build financial is fundamental to Helping Britain Prosper. In Supporting social resilience, and can play a meaningful role 2019 small businesses and SMEs represent in tackling disadvantage. Accordingly, we over 99 per cent of the business population, housing ambitions continue to improve choice, flexibility and three fifths of employment and half of all control for those who are investing, saving turnover in the private sector. Since 2018 we LiveWest own and manage over 36,000 or planning for retirement. have helped over 233,000 businesses start homes from Cornwall to Gloucestershire, up, increased net lending to start up, SME and plan to provide 7,000 new homes We continually look at ways of widening and Mid Market businesses to £3.4 billion, over the next 5 years and invest £2 billion access to savings for everyone. For example, and re-affirmed our commitment to the UK’s in the regional economy over the next our Next Generation Text service supports manufacturing sector providing £2.6 billion 10 years. In September they issued a customers with hearing difficulties. And of dedicated investment. £250 million bond. Lloyds Bank were we are currently the only UK bank to offer delighted to support this finance EasyRead statements for savings accounts, Our Clean Growth Finance Initiative (CGFI), package to deliver much needed new where pictures are used to support the which aims to offer the most inclusive UK and affordable homes. meaning of the text. Our Banking savings green funding in the commercial banking range operates with transparent pricing for market, provides the incentive of discounted LiveWest offer affordable rent and all, and customers can upgrade their accounts borrowing to all types of businesses that shared ownership, building new online with one click when better products invest in reducing their environmental impact. homes, and using the profits to build become available. Since 2018, we helped 17.4 million sq. ft. of more affordable homes. With sites commercial real estate become more energy across the South West and employing In 2019, we launched Schroders Personal efficient, reducing greenhouse gas emissions over 1,400 people, they have a Wealth. This market leading proposition aims in core business processes, properties strong positive social impact. Their to tackle a growing need for professional and infrastructure. investment plans will sustain around advice as the number of people taking 7,000 jobs in the building supply chain, responsibility for their financial future This year, we also built on our financial protecting livelihoods and offering increases. In September Scottish Widows commitments, broadening our support for fresh opportunities. launched its standard annuity into the open a range of issues that impact businesses Market, enabling us to deliver a secure income every day. For example, we are giving for life to customers in a market that many SMEs access to information and support providers have left. on mental health so that they can manage it more effectively, and we are proud to be As a Group we remain committed to the first financial partner of Be the Business, responsible investment, as signatory to both which offers funding, research and tools to the Equator Principles and the UN Principles help UK businesses measure and increase for Responsible Investment. their productivity. Lloyds Banking Group Annual Review 2019 33

Responsible business

Supporting apprenticeships Tackling social Building Supporting diverse talent development is essential if we are to genuinely become disadvantage capability and the best bank for customers, colleagues and shareholders. Internally, we are delivering over 25 different apprenticeship across Britain digital skills programmes, available to all colleagues regardless of location, career stage or As one of the UK’s largest corporate The UK’s skills and productivity gap requires working pattern. The Group has partnered donors, we use our scale to reach people in significant enhancements in capability with a range of institutions including communities across the country. Our four including digital skills. To help make that Manchester Metropolitan University who independent charitable Foundations, which happen, we are facilitating digital training for offered colleagues and new recruits the cover the whole of the UK and the Channel 1.8 million people by 2020, at the same time as chance to join the degree-level Digital and Islands, are critical to our vision of tackling investing in a range of apprenticeship schemes. Technology Solutions Degree Apprenticeship. social disadvantage by partnering with local This structured programme provided The digital skills gap charities to help overcome complex social opportunities to benefit from applying the The 2019 Lloyds Bank Consumer Digital issues and rebuild lives. skills and knowledge developed at university. Index showed that more people than ever Our total community investment in are digitally connected. Digital skills help Externally, we have committed £9 million 2019 was £50.8 million and includes our individuals find a job, make progress in over three years to help SMEs to develop colleagues’ time, direct donations, and a work, save money on bills, and reduce social apprenticeships through our Levy Transfer share of the Group’s profits given annually isolation by connecting them to support initiative. And our investment of £10 million to the Foundations. In 2019, the Foundations services, as well as friends and family. The 2019 over 10 years in the Lloyds Bank Advanced received £25.9 million, enabling them to Lloyds Bank Business Digital Index showed Manufacturing Training Centre in Coventry support 2,929 charities. These charities are that digital benefits businesses and charities will support 3,500 apprentices, graduates tackling issues such as domestic abuse, too. Digital marketing skills for businesses can and engineers to be trained by 2024. We mental health, modern slavery and human open up growth opportunities, while cyber also work with the National Autistic Society trafficking, and employability. In addition skills make them more secure. to recruit and train young people with autism, with Business in the Community to to providing funding, colleagues across the Nearly one third of charities recognise they recruit and train ex-offenders, and with the UK also volunteered as mentors to charities can save around a day a week due to increased National Apprenticeship Service as active supported by the Foundations. digital capability. Not everyone, however, is members of the Apprenticeship Diversity enjoying the benefits that digital can bring. Champions Network. 11.9 million people do not have the essential digital skills for life, increasing to 17.3 million people lacking digital skills in the workplace. While the number of people who are digitally disengaged is dropping, it is forecast that 4.5 million people will remain disengaged by 2030. Small businesses without essential digital skills are nearly two and a half times more likely to close in the next two years, than those with full digital skills. The Group is part of the Department of Digital Culture Media and Working Looking to a Sport’s Digital Skills Partnership, working with brighter future organisations like Google, Be the Business and Better Together Tata Consultancy Services to deliver impactful Angela Loveridge created Better Angel Eyes Northern Ireland is a small solutions. The Group also helped found Together after identifying a gap in charity based in Belfast, which was set future.now – a coalition led by organisations parents’ understanding of online safety up in 2007 by parents of visually impaired such as the City of London, Accenture, BT and for children. It provides training to help children, to improve the support available Nominet, with over 60 partners all seeking to safeguard children online, delivering to other parents in the same situation. The close the digital divide. charity offers a range of services to families workshops for schools, childrens centres, including an education service, Saturday Lloyds Bank Academy businesses and charities, and in 2018 club and advocacy work. The Halifax The Group has developed the Lloyds Bank was nominated for the NSPCC Child Foundation for Northern Ireland was one Academy to take on these challenges. Initially Protection Trainer award. of the first funders of this charity, helping it launched in Manchester in November 2018, Angela signed up to the Lloyds Bank to secure five community grants since 2014. the Academy teaches basic digital and workplace skills through online and face-to- Academy in Bristol to draw on our The charity’s work is delivered through face courses. In November 2019 we launched expert knowledge and experience, its 2 full time and 2 part time staff and the Bristol Academy, providing additional and generate ideas to improve her own 44 volunteers. Last year, they were a support for start ups and SMEs. business. Through the courses, Angela winner of the Foundation’s Pitching has gained digital confidence and now 4 Pounds programme, seeing the Working with a range of partner organisations, understands the positive difference charity successfully pitch for a grant of including our charitable Foundations, that digital marketing can make such as £15,000 to develop an innovative virtual academia, industry and Government, the how engaging with online reviewers can reality app, which will help parents and Academy has taught around 65,000 learners make a positive impact to her business. professionals see the world through the in Manchester and Bristol. eyes of a partially sighted child. In addition, over 20,000 colleagues have volunteered to become Digital Champions In early 2019 the Chairman paid a supporting their local communities. Our personal visit to the charity to meet the Digital Knowhow workshops have helped staff and experience the developments thousands of organisations learn how to avoid for himself. fraud and take advantage of digital marketing techniques, read more online www.lloydsbankacademy.co.uk/ 34 Lloyds Banking Group Annual Review 2019

Responsible business

with disabilities, including those who became e-learning and we’re training 2,500 colleagues Championing disabled while employed. We hold a Business to become Mental Health Advocates by 2020. Disability Forum (BDF) Gold Standard, and In July, Lloyds Bank was the first organisation Britain’s diversity Disability Confident Leader status with to sign up to the Mental Health Accessibility the Department for Work and Pensions. Standards, which were developed to help In July, we received the National Autistic companies support customers with mental Approaching diversity as a business issue Society’s Autism Friendly Award, marking our health problems. reflects our firm view that diverse teams, commitment to become the UK’s first autism working within inclusive environments, are friendly bank for customers. more innovative, engaged, and deliver better outcomes for our customers. As the first FTSE Mental health 100 company to set targets to increase both We are passionate advocates for removing the gender and ethnic diversity at senior levels, we stigma attached to mental ill-health, actively continue to invest in being a leading inclusive creating a culture of openness and support, employer, where the unique differences our while developing efforts to prevent mental colleagues bring to work every day are valued. health challenges. Focus on ethnic diversity In 2019, the Group featured in Fortune’s Encouraging ethnic diversity starts with Change the World list for our work with Finding the right talking to colleagues and communities about Mental Health UK and the Group Chief their experiences. We know that role models Executive was named a top 50 world leader solution and understanding cultural difference are by Fortune magazine for raising mental health awareness. Throughout 2019 many colleagues vital, which is why we delivered cultural shared their experiences to help capability training to all colleagues in 2019, We are a founding signatory of the Mental reduce stigma around mental illness building knowledge of identity, race, faith Health at Work Commitment and our in the workplace. One colleague and background. colleague wellbeing resources provide a accessed telephone counselling range of support including direct access to through the Employee Assistance This year, we published our Ethnicity Role counselling services. We also offer colleagues Models list, featuring 70 Black, Asian and Programme. He then saw his GP, private medical benefits that give parity to which in turn led to treatment through Minority Ethnic (BAME) colleagues, and in mental and physical health conditions. June, two colleagues were named in the top Cognitive Behavioural Therapy and 100 ethnic minority executives, and a further We recognise prevention is equally as psychotherapy. two colleagues in the 50 future ethnic minority important as support, and in September we launched a personal resilience portal, for I am incredibly grateful for the support leaders in the EMpower Ethnic Minority Role I have had from the Group. I recognise Model lists. colleagues to better understand preventative measures available for both mental and that I have been fortunate, and many As a result of our focus on the issue, we physical health. others may not have access to the support I did. I’m sharing my story, exceeded our 2020 target delivering In August, our Resilient Leader training course 10.2 per cent of roles held by BAME to act as an advocate for the support received a Princess Royal Training Award, I received. colleagues, and increased the senior roles recognising its lasting impact. Over 40,000 held by BAME colleagues to 6.7 per cent, colleagues have completed our Mental Health working towards our stretching target of 8 per cent by 2020. Our Inclusion and Diversity data Gender, gender identity and 2019 2018 sexual orientation In 2019, 36.8 per cent of senior roles were held Gender by women, and we remain focused on our Board Members Male 9 9 target of 40 per cent by the end of 2020. Female 4 4 GEC and GEC Direct Reports Male 111 107 We remain on track to meet the voluntary 2020 target, set by the Hampton-Alexander Female 50 45 Review, of having 33 per cent representation Senior Managers Male 4,539 4,701 of women on, or reporting into, our Executive Female 2,647 2,573 Committee, through a focus on dedicated Colleagues Male 29,522 30,458 succession planning and skills development. For the eighth year running the Group Female 41,033 42,372 featured in the Times ‘Top 50 employers for Ethnic background women’ and the Bloomberg Gender Equality Percentage of colleagues from a BAME background 10.2% 9.5% Index for the first time. BAME managers 9.5% 9.0% We are also creating an inclusive environment BAME senior managers 6.7% 6.4% for our LGBT+ colleagues, being named Top Disability Financial Employer, and seventh overall in Percentage of colleagues who disclose they have a disability 2.8% 1.7% 2019’s Stonewall Top 100 Employers. Our Sexual orientation LGBT+ colleague network Rainbow, has over Percentage of colleagues who disclose they are lesbian, gay, 5,000 members, one of the largest of its kind bisexual or transgender 2.2% 2.0% in the UK. All data as at 31/12/2019. Group Executive Committee (GEC) assists the Group Chief Exec. in strategic, cross-business or Group- Supporting disability wide matters and inputs to Board. GEC and Direct Reports includes the Group Chief Exec., GEC and colleagues who report to a member or attendee of GEC, excluding administrative or executive support roles (personal assistant, executive assistant). We are moving the debate on from Reporting: A colleague is an individual who is paid via the Group's payroll and employed on a permanent or fixed term accommodating disabilities, to developing contract (employed for a limited period). Includes parental leavers, and internationals (UK includes Guernsey, IOM, Jersey talent and careers. In 2019, 2.8 per cent of and Gibraltar). Excludes leavers, Group Non-Executive Directors, contractors, temps, and agency staff Diversity: Calculation is based on headcount, not FTE (full-time employee value). Data source is HR system (Workday) colleagues disclosed a disability and we containing all permanent colleague details. Gender: includes international, those on parental/maternity leave, absent without support them in a range of ways. We ensure leave (AWOL) and long-term sick. Excludes contractors, Group Non-Executive Directors, temps and agency staff. All other diversity information is UK Payroll only. All diversity information is based on voluntary self-declaration, apart from gender, so is full and fair consideration to applications from not 100 per cent representative; our systems do not record diversity data of colleagues who have not declared this information. people with disabilities. We offer bespoke BAME: comprising of mixed/multiple, Asia, Black, Middle Eastern, North African and other (non-white) ethnicities. training, career development, promotions and Colleague grades: from A through to J, Senior Executive (SE), Executive (EX) and Executive Director (ED) A being the lowest. adjustments for colleagues and applicants Senior Managers: Grades F, G, H, J, SE, E and ED (F being the lowest). Managers: Grade D-E (D being the lowest). Lloyds Banking Group Annual Review 2019 35

Non-Financial Information Statement

This section of the strategic report constitutes Lloyds Banking Group’s Non-Financial Information Statement, produced to comply with sections 414CA and 414CB of the Companies Act. The information listed is incorporated by cross-reference.

Policies and standards which govern Information necessary to understand our Group and its Reporting requirement our approach impact, policies due diligence and outcomes Stakeholders Annual materiality assessment1 – En gaging and responding to our stakeholders Supplier management www.lloydsbankinggroup.com/our-group/responsible- business/reporting-centre/ – Co de of Supplier Responsibility www.lloydsbankinggroup.com/our-group/working-with- suppliers/being-a-supplier-to-lloyds-banking-group/ Environmental matters Environmental (TCFD) statement – Reflecting the needs of our stakeholders, pages 20 and 26 – He lping the transition to a sustainable low carbon economy, page 28 Employees Colleague Policy1 – Reflecting the needs of our stakeholders, pages 20 and 26 Code of Responsibility – Championing Britain’s diversity, page 34 Health and Safety Policy1 Respect for Human Rights Human Rights Policy statement – Reflecting the needs of our stakeholders, page 26 Colleague Policy1 – S uppliers, page 25 1 Pre-Employment vetting standards – Championing Britain’s diversity, page 34 Data Privacy Policy1 Modern Slavery and Human Trafficking Statement Information and Cyber Security Policy1 Social matters Volunteering standards1 – Reflecting the needs of our stakeholders: Matched giving guidelines1 Customers, page 20 – Re flecting the needs of our stakeholders: Communities and Environment, page 23 – He lping Britain Prosper Plan, page 27 – He lping Britain get a home, Helping people save for the future, Supporting business to start up and grow, Building capability and digital skills, pages 32 to 33 – Ta ckling social disadvantage across Britain, page 33 Anti-corruption Anti-Bribery Policy1 – Reflecting the needs of our stakeholders: and anti-bribery Anti-Bribery Policy Statement Customers, page 20 Anti-Money Laundering and Counter – Re flecting the needs of our stakeholders: Terrorist Financing Policy1 Colleagues, page 22 Fraud Risk Management Policy1

Description of – He lping the transition to a sustainable low carbon economy: principal risks and Risk management, page 30 impact of business activity – Ri sk overview 2019 themes, page 40 – Ou r principal risks, page 42 Description of the – Our Business Model, page 14 business model Non-financial key – Ke y performance indicators, page 08 performance indicators – Our strategic priorities, page 06 – He lping Britain Prosper Plan, page 27 – Global Reporting Initiative (GRI) standards www.lloydsbankinggroup.com/our-group/responsible- business/reporting-centre/ – R eporting Criteria www.lloydsbankinggroup.com/our-group/responsible- business/reporting-centre/ – Responsible Business Data Sheet www.lloydsbankinggroup.com/our-group/responsible- business/reporting-centre/

1 Certain Group Policies, internal standards and guidelines are not published externally. The policies mentioned above form part of the Group’s Policy Framework which is founded on key risk management principles. The policies which underpin the principles define mandatory requirements for risk management. Robust processes and controls to identify and report policy outcomes are in place and were followed in 2019. 36 Lloyds Banking Group Annual Review 2019

Financial performance overview Group

Solid financial performance Income statement The Group’s statutory profit after tax was £3,006 million, 33 per cent lower than in 2018 2019 2018 Change with resilient underlying profit partly offset by £m £m % the significant payment protection insurance Net interest income 12,377 12,714 (3)‌‌ (PPI) charge of £2,450 million taken in the year. Other income 5,732 6,010 (5)‌‌ The statutory return on tangible equity was Operating lease depreciation (967)‌‌ (956)‌‌ (1)‌‌ 7.8 per cent. Net income 17,142 17,768 (4)‌‌‌‌ Trading surplus was resilient at £8,822 million Operating costs (7,875)‌‌‌‌ (8,165)‌‌‌‌‌ 4 (2018: £9,003 million) with lower net income partly offset by the Group's continued Remediation (445)‌‌‌‌ (600)‌‌‌‌‌ 26 progress in delivering cost reductions. Total costs (8,320)‌‌ (8,765)‌‌‌‌ 5 Underlying profit was £7,531 million compared Trading surplus 8,822 9,003 (2)‌‌‌‌ to £8,066 million in 2018, reflecting lower net income and higher impairment charges, Impairment (1,291)‌‌ (937)‌‌‌‌ (38)‌‌‌‌ partly offset by the Group’s strong cost Underlying profit 7,531 8,066 (7)‌‌‌‌ performance. The Group’s market-leading Restructuring (471)‌‌ (879)‌‌‌‌ 46 underlying return on tangible equity was Volatility and other items (217)‌‌ (477)‌‌‌‌ 55 14.8 per cent. Payment protection insurance provision (2,450)‌‌ (750)‌‌‌‌ The Group’s balance sheet remains strong Statutory profit before tax 4,393 5,960 (26)‌‌‌‌ with lending growth in the open mortgage 1 book as well as targeted segments, including Tax expense (1,387)‌‌‌‌ (1, 4 5 4 )‌‌‌‌ 5 SME and UK Motor Finance. This was more Statutory profit after tax1 3,006 4,506 (33)‌‌‌‌ than offset by lower balances in Mid Markets and Global Corporates, primarily as a result of the optimisation of the Commercial portfolio, Earnings per share 3.5p 5.5p (3 6)‌‌ as well as continued reductions in the closed Dividends per share – ordinary 3.37p 3.21p 5 mortgage book. The Group’s capital position Share buyback value – £1.1bn remains strong with a pro forma CET1 ratio of 15.0 per cent pre dividend accrual and 13.8 per cent post dividend. Banking net interest margin 2.88% 2.93% ( 5 )‌‌b p The Group is strongly capital generative Average interest-earning banking assets £435bn £436bn – and although this has been impacted by Cost:income ratio 48.5% 49.3% ( 0 . 8 )‌‌p p PPI in 2019, the Board has recommended Asset quality ratio 0.29% 0.21% 8bp a final ordinary dividend of 2.25 pence per share, making a total ordinary dividend of Underlying return on tangible equity 14.8% 15.5% (0.7)‌‌pp 3.37 pence per share, an increase of 5 per cent Return on tangible equity 7.8% 11.7% ( 3 .9 )‌‌p p on 2018 and in line with our progressive and sustainable ordinary dividend policy. Key balance sheet metrics

At 31 Dec At 31 Dec Change 2019 2018 % Loans and advances to customers2 £440bn £444bn (1)‌‌‌‌ Customer deposits3 £412bn £416bn (1)‌‌‌‌ Loan to deposit ratio 107% 107% – Capital build4 86bp 210bp (124) Pro forma CET1 ratio5 13.8% 13.9% (0.1)pp Pro forma transitional MREL ratio5 32.6% 32.6% – Pro forma UK leverage ratio5 5.2% 5.6% (0.4)pp Pro forma risk-weighted assets5 £203bn £206bn (1) Tangible net assets per share 50.8p 53.0p (2.2)p

1 2018 restated to reflect amendments to IAS 12, see basis of presentation on page 206 of our Annual Report and Accounts. 2 Excludes reverse repos of £54.6 billion (31 December 2018: £40.5 billion). 3 Excludes repos of £9.5 billion (31 December 2018: £1.8 billion). 4 Capital build is reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period and is also reported before accruing for ordinary dividends, the cancellation of the remaining 2019 share buyback and the acquisition of Tesco Bank’s UK prime residential mortgage portfolio. 5 The CET1, MREL, leverage ratios and risk-weighted assets at 31 December 2019 and 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The pro forma CET1 ratio at 31 December 2018 incorporates the effects of the share buyback announced in February 2019 and is reported post dividend accrual. Report of the Auditor The auditor’s report on the full accounts for the year ended 31 December 2019 was unqualified, and their statement under section 496 (whether the Strategic Report and the Directors’ Report are consistent with the accounts) of the Companies Act 2006 was unqualified. Lloyds Banking Group Annual Review 2019 37

Retail

Retail offers a broad range of Progress in 2019 Completed the integration of MBNA, financial service products to realising a return on investment of personal and business banking Leading customer experience 18 per cent, ahead of original target customers, including current UK’s largest digital bank with 16.4 million active digital customers and 10.7 million Renewed the successful Jaguar Land accounts, savings, mortgages, Rover relationship1 credit cards, unsecured loans, mobile banking app customers, with motor finance and leasing average customer logons at 23 times per Transforming ways of working solutions. month and 75 per cent of new products Continued progress in 'skills of the future' now originated digitally training delivered to colleagues with over Its aim is to be the best bank for Maintained the largest UK branch network 750,000 additional hours in 2019 customers in the UK, by building while trialling new branch formats with the Financial performance deep and enduring relationships latest flagship Bank of Scotland branch Net interest income was 3 per cent lower that deliver value, and by in , and Home by Halifax, an due to a 5 basis point reduction in net providing customers with choice innovative store dedicated to supporting interest margin with continued pressure on and flexibility, with propositions customers purchase a property mortgages margin, partly offset by lower increasingly personalised to funding costs and a benefit from aligning their needs. Branch net promoter score up 5 points with around 50 per cent of customer facing time terms Retail operates a multi-brand being spent on complex needs Other income reduced 4 per cent reflecting and multi-channel strategy. It Supporting first time buyers with further a lower Lex fleet size. Operating lease continues to simplify its business £13.8 billion of lending, building on success depreciation includes an associated benefit, and provide more transparent of Lloyds Lend a Hand mortgage, launched more than offset by some weakening in products, helping to improve Halifax Family Boost mortgage, providing used car prices through the first three service levels and reduce customers' financial supporters with quarters of 2019 conduct risks, whilst working enhanced savings rates Operating costs reduced 3 per cent, as within a prudent risk appetite. Encouraging customers to talk more openly increased investment in the business was about their finances, through the launch of more than offset by efficiency savings. the M Word campaign earlier this year and Remediation decreased 11 per cent to £3,839m £238 million Underlying profit decreased by 9% co-funding a brand new television series with Channel 4 called ‘Save Well, Spend Better’ Impairment increased 21 per cent, with £13.8bn Reduced complaints (excluding PPI) by some weakening in used car prices, Lending to first time buyers 13 per cent in 2019 and mobile app NPS methodology refinements and lower cash increased 3 per cent since 2017 recoveries following prior year debt sales, while underlying drivers remain strong, £3.5bn Digitising the Group particularly in the mortgage book Acquired Tesco’s Bank UK prime Recognised for innovations by being first in residential mortgage portfolio the Business Insider mobile banking study, Customer lending increased by 1 per cent supporting 23,000 new customers with recent updates including with the acquisition of Tesco Bank's – Push notification alerts helping to plan mortgage portfolio and growth in UK #1 ahead with upcoming payment reminders Motor Finance, partly offset by closed Maintained the largest branch and confirmations book mortgages. Organic open mortgage network in UK balances remained flat year on year – Statement search helping customers find transactions quicker and easier, with Customer deposits include current account +5pts growth, stable relationship savings and Improvement in branch net c.300,000 searches per week promoter score at 66pts Remote mortgage applications up 30 per reduced low margin tactical savings cent, with re-mortgage applications starting Risk-weighted assets increased digitally up 50 per cent in value by 5 per cent mainly driven by UK’s largest digital bank Maximising Group capabilities mortgage model refinements and the Active online users (m) Acquired Tesco Bank’s UK prime Tesco acquisition residential mortgage portfolio supporting 1 Subject to contract. 23,000 new customers 2019 2018 15.7 Following the successful launch of the Lloyds 2017 13.4 Bank campaign, Lend a Hand, Halifax launched 2016 12.5 the Family Boost mortgage, to help first time 2015 11.5 buyers without a deposit onto the property ladder by using savings from family members to provide 10 per cent of the loan. In Peterlee, County Durham, one customer visited his local Halifax branch to enquire about the Family Boost scheme. The customer was very Providing a reluctant to rent, as he wanted to make a home family boost for his son and himself. Within 48 hours of applying, the customer secured a mortgage offer meaning that now with the help of his brother, he has bought a home to put down roots in an area he wanted his son to grow up in. It also enabled the customer’s brother to get a better return on his savings whilst supporting a family member. 38 Lloyds Banking Group Annual Review 2019

Financial performance overview continued

Commercial Banking

Commercial Banking has a Progress in 2019 Transforming ways of working client-led, low risk, capital Completed rollout of the SME Business efficient strategy, committed to Leading customer experience Lending Tool, freeing up relationship supporting UK based clients and 95 per cent of SME and Mid Market clients manager time for increased client international clients with a link migrated onto Commercial Banking Online engagement, and new auto-credit to the UK. platform with customers now having 24/7 decisioning capability with around 25 per access to their accounts, and 5 years of cent of SME annual renewals now automated Through its segmented client transaction history. The platform sees around coverage model, it provides 130,000 payments processed every day and Continued progress in developing clients with a range of products around 1.2 million log ons per month colleagues with the skills and capabilities needed for the future, with 210,000 colleague and services such as lending, Awarded ‘Business Bank of the Year’ at transaction banking, working training hours completed in 2019, exceeding the FDs’ Excellence Awards for the 15th the year-end target capital management, risk consecutive year management and debt Financial performance capital markets. Digitising the Group In challenging market conditions, maintained Cash management and payments API a strong focus on risk-weighted asset (RWA) Continued investment in launched, allowing clients to send faster optimisation and actively addressed low capabilities and digital payments directly from their systems without returning client relationships, delivering a propositions enables the human intervention and reducing payment significant reduction in RWA of over £9 billion delivery of a leading customer times to 1.5 seconds experience, supported by Net interest income of £2,918 million reduced Launched Asset Finance Broker API, linking increasingly productive 3 per cent, reflecting asset margin pressure new business proposals directly from broker relationship managers, with to Group, reducing manual intervention Other income of £1,422 million was more time spent on value by 87 per cent, enabling quicker and 15 per cent lower than in 2018, driven by adding activity. more accurate credit decisions with real- lower levels of client activity in challenging time updates market conditions in Global Corporates and Financial Institutions Improved eTrading capability, enabling £1,777m Operating costs of £2,081 million reduced Underlying profit decreased by 19% larger clients to undertake foreign exchange trades electronically 24 hours per day across 5 per cent, as increased investment in the multiple geographies and supporting clients business was more than offset by continued 2.14% focus on efficiency savings Return on risk weighted assets, in automating their businesses Asset quality ratio of 30 basis points was down 36bps Maximising Group capabilities 24 basis points higher, largely driven by Achieved the committed £18 billion gross material charges raised against two corporate 19% new lending to UK businesses; a further cases, with stable underlying portfolio trends Market share in SME and small £18 billion committed for 2020 business lending balances Return on risk-weighted assets of 2.14 per cent On track to meet the Group’s target was 36 basis points lower, despite the of £3 billion of investment in the UK acceleration of risk-weighted asset manufacturing sector by the end of 2020 Funding for UK manufacturers optimisation in the second half, driven by two £bn Over 900 manufacturing apprentices, material corporate impairment charges graduates and engineers trained since SME lending balances up c.1 per cent, 2018 as a result of the £1 million annual continuing to grow slightly ahead of investment in the Lloyds Bank Advanced the market 2019¹ Manufacturing Centre 2018 1.5 Customer deposits at £145.1 billion, down Beat the sustainability target of supporting 2017 1.1 2 per cent, reflecting funding optimisation energy efficient improvements for a further 2016 1.4 activity including a reduction in short-term 2015 1.0 one million square feet of commercial real financial institutions deposits with growth in estate in 2019 and have supported renewable 1 Figures are cumulative from 2018. current accounts of 3 per cent in the second energy projects capable of powering half of the year 5 million homes by the end of 2019

In a £4 million project supported by Bank of Scotland and the Scottish Government’s Low Carbon Infrastructure Programme, ice cream maker, Mackie’s of Scotland, is set to have one of the most sophisticated refrigeration systems

in Europe. The results will see CO2 emissions cut by 80 per cent and energy costs by up to 80 per cent, supporting Mackie’s ambition of becoming the greenest company in the UK. Supporting With Bank of Scotland’s support we are realising green our green ambitions and, in the long run, we hope that our new system will set a precedent ambitions and make the energy-intensive food and drink sector more sustainable. Gerry Stephens, Finance Director, Mackie’s of Scotland Lloyds Banking Group Annual Review 2019 39

Insurance and Wealth

Insurance and Wealth offers Progress in 2019 of £37 billion since the start of the current insurance, investment and strategic plan in 2018 Leading customer experience wealth management products Sourced £0.6 billion of new long-term assets and services. Scottish Widows now offers its standard annuities on the open market allowing a in collaboration with Commercial Banking Our wealth management wider range of customers to access the to support five bulk annuity transactions, joint venture with Schroders product and secure income for retirement. generating over £2 billion of new harnesses the unique strengths Aiming to achieve a 15 per cent market share business premiums of two of the UK’s strongest by end of 2020 Financial performance financial services businesses. Successful migration of around 400,000 Strong growth in life and pensions sales, The Group continues to invest policies from a number of legacy systems to up 22 per cent, driven by increases in new significantly in the business, a single platform managed by the Group’s members in existing workplace schemes, with the aims of capturing partner Diligenta, enabling customers increased auto enrolment workplace considerable opportunities in to better manage their policies with contributions and bulk annuities. On track pensions and financial planning Scottish Widows to achieve 15 per cent market share of workplace business by end of 2020 compared whilst driving growth across New ‘Plan and Protect’ life and critical illness to 10 per cent market share at start of 2018 intermediary and relationship cover launched in 2019 helps create financially channels through a strong resilient families by understanding their New underwritten household premiums distribution model, offering needs and protecting what matters most, increased 19 per cent, resulting in number customers a single home for their providing a safety net if the worst happens one market share for new business earlier than expected; total underwritten premiums banking and insurance needs. Scottish Widows won 5 star service awards at decreased 3 per cent driven by a competitive the Financial Adviser Service Awards for the renewal market fourth consecutive year £1,101m Life and pensions new business income up Underlying profit increased by 19% Digitising the Group 19 per cent to £628 million. Lower existing Significant progress on Single Customer View, business income due to equity hedging >1m with home insurance and individual pension strategy to reduce capital and earnings new pension customers customers added in 2019. Over 5 million volatility. Higher experience and other items customers now able to access their insurance includes one-off benefit from the change in 19% products alongside their bank account investment management provider. General increased new business income Addressing an underserved customer need insurance benefitted from benign weather for home contents insurance for renters in 2019 14% through a partnership with the fintech Wealth income and operating costs Market share in workplace pensions firm Trov. New online low cost product impacted by the transfer of assets to offers a flexible on-demand monthly Schroders Personal Wealth in October 2019 subscription policy Strong open book AUA Underlying profit increased by 19 per cent customer net inflows Maximising Group capabilities to £1,101 million. Net income increased by £bn Schroders Personal Wealth launched with £145 million to £2,133 million, whilst operating ambition of becoming a top 3 financial costs decreased by £39 million with cost planning business by end of 2023 savings offsetting higher investment in Provided new functionality and customer the business 2019 choice in general insurance with full rollout Insurance capital 2018 13 in the last quarter of a flexible, multi-channel Estimated pre final dividend Solvency II ratio 2017 2 home insurance product offering to the of 170 per cent. The rise in the ratio over 2019 2016 1 branch network includes the impact of an equity hedge partly 2015 2 Continued progress towards target offset by lower long term interest rates. A of growing open book assets under final dividend of £250 million and a special administration by £50 billion by the end dividend of £185 million related to the gain on of 2020, with strong customer net inflows the establishment of the Schroders Personal of £18 billion (including Zurich transfer) in Wealth joint venture were paid to the Group 2019. Cumulative net inflows of £30 billion in February 2020, with total dividends paid in and market movements give overall growth respect of 2019 performance of £535 million

In September 2019, Scottish Widows launched Helping our its standard annuity into the open market customers enabling a wider range of customers to access secure an the product. Through significant investment in technology income we are able to support customers looking to for life secure income for life with their pension savings. Helping people save for the future is just one way in which we support the UK through our Helping Britain Prosper Plan. 40 Lloyds Banking Group Annual Review 2019

Risk overview Effective risk management and control

Our approach to risk Risk as a strategic Strong control framework Risk management is at the heart of our Our enterprise risk management strategy to become the best bank for differentiator framework is the foundation for the customers. Risks are identified, managed, mitigated delivery of effective risk control and and monitored using our comprehensive Our mission is to protect our customers, ensures that the Group risk appetite is enterprise risk management framework, colleagues and the Group, whilst enabling continually developed and controlled and our well-articulated risk appetite sustainable growth in targeted segments. The Board is responsible for approving provides a clear framework for This is achieved through informed the Group’s risk appetite statement decision‑making. The principal risks we risk decision-making and robust risk annually. Board-level metrics are face, which could significantly impact the management, supported by a consistent cascaded into more detailed business delivery of our strategy, are discussed on risk-focused culture. appetite metrics and limits pages 139 to 187 of our Annual Report This risk overview provides a summary of risk and Accounts. Business focus and accountability management within the Group, with a prudent Risk management is an integral feature We believe effective risk management can approach and rigorous controls to support of how we measure and manage be a strategic differentiator, in particular: sustainable business growth and minimise performance – for individuals, businesses losses. Through a strong and independent Prudent approach to risk and the Group. In the first line of risk function, a robust control framework is Being low risk is fundamental to defence, business units are accountable maintained to identify and escalate current our business model and drives our for managing risk with oversight from a and emerging risks, support sustainable participation choices. Strategy and risk strong and independent second line of growth within Group risk appetite, and to appetite are developed in tandem and defence Risk division drive and inform good risk reward decisions. together outline the parameters within which the Group operates Effective risk analysis, The risk management section from management and reporting pages 129 to 187 of our Annual Report and Regular close monitoring and Accounts provides a more in-depth picture of comprehensive reporting to all levels how risk is managed within the Group, detailing of management and the Board ensures the Group’s emerging risks from pages 133 appetite limits are maintained and to 134 of our Annual Report and Accounts, subject to stress analysis at a risk type approach to stress testing, risk governance, and portfolio level, as appropriate committee structure, appetite for risk and a full analysis of the principal risk categories, the framework by which risks are identified, managed, mitigated and monitored.

Our enterprise risk management framework 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 regulations, law, corporate governance and industry good practice. Governance is maintained through delegation of authority from the Board down to individuals through the management hierarchy. Senior executives are supported by The Board delegate executive authorities a committee based structure which is designed to ensure Board to ensure there is effective oversight of open challenge and enable effective decision-making. and senior management risk management. Our risk management framework outlines the framework in place for risk management across the Group. During 2019, we updated this framework to be more succinct and to Risk culture The appropriate culture ensures better ensure it is accessible to all colleagues. and the customer performance, risk and reward are aligned. A number of key components support the delivery of effective risk management, with four overarching objectives: Risk appetite The framework ensures our risks are Define a robust and consistent approach managed in line with our risk appetite. to risk governance to be applied across the Group and its legal entities The identification, measurement and control Articulate individual and collective Risk and control self assessment of our risks form an integral part of our Risk accountabilities for risk appetite, and Control Self Assessment. oversight and assurance Establish a common approach to The governance framework supports a categorise risks to support assessment, Risk governance consistent approach to enterprise-wide aggregation and reporting behaviour and decision-making. Provide colleagues and stakeholders with a single point of reference for risk The robust approach to monitoring, management understanding, and Three lines of defence oversight and assurance ensures effective supporting reference sources risk management across the Group. Lloyds Banking Group Annual Review 2019 41

Risk culture and the customer Tone from the top Senior leaders set a clear tone from the top The effectiveness of our risk management and lead by example, reflecting our Group approach relies upon a culture of transparency values; putting customers first, keeping it Managing risk means and openness that is encouraged by both the simple, and making a difference together, Board and senior management. encouraging a culture of intellectual curiosity making the right Based on the Group’s conservative and proactive risk management amongst decisions and doing the business model, prudent approach to risk all colleagues. management, and guided by the Board, right thing for customers. senior management articulate the core Accountability It is at the heart of our risk values to which the Group aspires, Risk management is a team effort with all and set the tone from the top, with a colleagues playing their part and taking full Code of Responsibility strong focus on building and sustaining individual responsibility for their actions. and supports our aim long-term relationships with customers Effective communication and challenge through the economic cycle. The Group’s As a Group we are open, honest and to be the best bank for Code of Responsibility reinforces colleague transparent with risk colleagues working in customers accountability for the risks they take collaboration with business areas to: and their responsibility to prioritise their António Horta-Osório customers’ needs. Support effective risk management Group Chief Executive Understand root causes when things go wrong Share lessons learned Tone from the top Provide constructive challenge

Incentives Remuneration, performance management and succession planning that support our core Customer Incentives focused Accountability values and put the customer at the heart of risk culture everything we do.

Effective communication and challenge

2019 themes EU exit Change / execution risk Given the vast majority of our business is Delivering change is a key part of how the Our priorities for risk management have in the UK, the direct impact on the Group Group continues to serve our customers, continued to evolve, alongside progression from leaving the EU is relatively small and fulfil our strategic objectives, and deliver of the Group’s strategy and development we have taken the necessary steps to our aim of Helping Britain Prosper. of external factors. Our principal risks are ensure continuity of our limited EU business outlined over the next few pages but some activities, where permitted. During 2019 key change initiatives included themes have been particularly prevalent continued digitisation of the Group and in 2019. Our UK focus means our performance transforming ways of working. There has is inextricably linked to the health of the also been significant delivery of regulatory Climate risk UK economy. Economic performance change in order to adapt to the changing Climate change is a key global risk, has remained resilient in recent years and regulatory landscape. impacting our customers, our investors whilst the near term outlook for the UK and our business in making the required economy remains unclear given UK/EU trade The Group continues its drive to deliver transition towards a low carbon economy. agreement negotiations, we continue to a leading customer experience whilst We are committed to delivering the monitor closely. We are also taking a prudent managing a varied change portfolio. Focus Task Force for Climate-Related Financial approach to our balance sheet, accelerating on improvements to the control environment Disclosures by 2022 and we are taking steps issuance where appropriate. and managing within risk appetite has to fully integrate climate risk into our existing enabled the safe delivery of change. Enterprise Risk Management Framework, Our customer focused strategy remains the including our policies, risk appetite, controls right one. Guided by the overriding principle The need to protect existing processes and and disclosures. of Helping Britain Prosper, we continue minimise adverse impact on colleagues and to focus on customer needs and support clients will support the delivery of a leading We continue to invest in supporting this our personal and business customers. customer experience. activity as part of the wider sustainability We have delivered on our commitment to strategy (see Responsible business section lend £18 billion to UK businesses in 2019, on pages 26 to 34), and are also active reaffirming our support for the UK economy. participants in a number of external initiatives to help drive consistency across the industry. 42 Lloyds Banking Group Annual Review 2019

Risk overview continued

Our principal risks Principal risks and uncertainties are reported regularly to the Board Risk Committee. Change/execution, data and operational resilience have been elevated from existing risks to principal risks during 2019, and strategic added as a new principal risk

NEW NEW NEW

CHANGE/EXECUTION DATA OPERATIONAL RESILIENCE

The risk that, in delivering our change agenda, The risk that we fail to effectively govern, The risk that we fail to design resilience into we fail to ensure compliance with laws and manage, and control our data (including data business operations, underlying infrastructure regulation, maintain effective customer processed by third party suppliers) leading to and controls (people, process, technology) so service and availability, and/or operate within unethical decisions, poor customer outcomes, that it is able to withstand external or internal our approved risk appetite. loss of value and mistrust. events which could impact the continuation of operations, and fails to respond in a way Example Example which meets customer and stakeholder Ineffective change/execution risk The loss of trust from customers, colleagues, expectations and needs when the continuity management could lead to increased periods business partners or regulators arising from a of operations is compromised. of time where we cannot serve our customers, failure to manage and control our data. and could lead to impacts associated with Example Risk Appetite other risk types such as regulatory censure. Ineffective risk management could lead to We have limited appetite for material events vital services not being available to customers Risk Appetite or losses that occur due to the inappropriate and stakeholders. We have limited appetite for negative impacts use of data. on customers, colleagues, or the Group as a Risk Appetite Mitigation result of change activity. We have a limited appetite for disruption to Significant investment has been made services to customers and stakeholders from Mitigation to enhance the maturity of data risk significant unexpected events. Continued focus on strengthening the management in recent years control environment, maturation of the In addition to the General Data Protection Mitigation change policy and associated policies and programme which delivered the necessary The Group has increased its focus on procedures, which set out the principles and infrastructure to achieve compliance with operational resilience and has updated its key controls that apply across the business the new regulations in May 2018, a number strategy to reflect changing priorities of and are aligned to the Group risk appetite. of other large investments have been made both customers and regulators Senior Management continue to drive Further detail on principal risk, including Further detail on principal risk, including improvements to Change and Execution mitigation on page 140 of our Annual Report mitigation on page 139 of our Annual Report Risk metrics, in particular those affecting and Accounts customers and colleagues and Accounts Alignment to strategic priorities Businesses assess the potential impacts Alignment to strategic priorities and future focus of undertaking any change activity on and future focus their ability to execute effectively, and the Delivering a leading Delivering a leading potential consequences for the existing customer experience risk profiles customer experience End-to-end resilience of our critical The quality of the data that the Group holds Further detail on principal risk, including processes is a key strategic priority and the and the choices we make in how it is used mitigation on page 139 of our Annual Report Group operational resilience programmes is a key strategic enabler to future business and Accounts continue to invest in improving our control growth, delivering a leading customer environment and resilience. We continue Alignment to strategic priorities experience and Helping Britain Prosper and future focus to exercise, test and improve our resilience We recognise that lawful, fair and through scenario testing as well as learning Delivering a leading transparent collection and appropriate use from real events (those impacting ourselves customer experience of data, is critical to delivering a leading but also those impacting others) through customer experience and maintaining trust understanding the root cause We recognise the importance of delivering across the wider industry the Group’s strategic priorities and will We recognise the importance of the Group’s Internal programmes ensure that data is continue to invest in the transformation of operational resilience to our customers, used correctly, and the control environment the Group to deliver a leading customer markets and the wider financial sector is regularly assessed through both internal experience and third-party testing

New principal risk Change/execution risk was elevated from a secondary risk to a principal risk in recognition of the significant volumes of complex change the Group is currently undertaking to deliver its strategy. This includes key change initiatives, digitising the New principal risk New principal risk Group and transforming ways of working Data was elevated from a secondary risk to Operational resilience was elevated from a which will help to future-proof against the a principal risk as one of our most valuable secondary risk to a principal risk as our ability to heightened risks associated with the use of assets. It is critical to our business and is the continue operations when subject to internal new technologies and manage regulatory subject of significant regulatory oversight and or external incidents, safeguarding our most requirements and expectations. The media focus. Our Group is trusted with large critical processes and assets, protecting decision aligns with the Group’s progress in volumes of data, and we must ensure that the our colleagues, continuing to service our developing and embedding its change and information we hold is accurate, secure and customers and minimising any impact on the execution risk management capabilities managed appropriately banking systems is crucial Lloyds Banking Group Annual Review 2019 43

NEW

STRATEGIC CREDIT REGULATORY AND LEGAL

The risks which result from strategic plans The risk that parties with whom we have The risk of financial penalties, regulatory which do not adequately reflect trends in contracted fail to meet their financial censure, criminal or civil enforcement action external factors, ineffective business strategy obligations (both on or off balance sheet). or customer detriment as a result of failure execution, or failure to respond in a timely to identify, assess, correctly interpret, Example manner to external environments or changes comply with, or manage regulatory and/or Observed or anticipated changes in stakeholder behaviours and expectations. legal requirements. in the economic environment could Example impact profitability due to an increase in Example The financial services sector operates delinquency, defaults, write-downs and/or Failure to deliver key regulatory changes or in evolving regulatory and competitive expected credit losses. to comply with ongoing requirements. environments with an increased pace, scale Risk Appetite Risk Appetite and complexity of change which creates a We have a conservative and well balanced We interpret and comply with all relevant risk to the Group’s strategic plans credit portfolio through the economic regulation and all applicable laws (including Shareholder expectations continue to cycle, generating an appropriate return on codes of conduct which could have legal evolve potentially impacting the Group’s equity, in line with our target return on equity implications) and/or legal obligations. role in society in aggregate. Mitigation Greater competition for specialist skill sets Mitigation Group policies and procedures set out (such as data science and engineering), Prudent, through the cycle credit principles, the principles and key controls that should alongside demographic challenges in the risk policies and appetite statements apply across the business which are aligned working population, may result in a skills to the Group risk appetite shortage impacting delivery of key strategic Robust models and controls initiatives Business units identify, assess and Further detail on principal risk, including implement policy and regulatory Risk Appetite mitigation on page 142 of our Annual Report requirements and establish local controls, We have business plans that are responsive and Accounts processes, procedures and resources to internal and external factors including Alignment to strategic priorities to ensure appropriate governance changes to the regulatory, macroeconomic and future focus and compliance and competitive environments. Maximising Group capabilities Further detail on principal risk, including Mitigation mitigation on page 162 of our Annual Report Continued digitisation of customer We seek to support sustainable growth and Accounts journeys, thereby enabling the delivery of in our targeted segments. We have a market leading customer experiences that conservative and well-balanced credit Alignment to strategic priorities are seamless, accessible and personal portfolio, managed through the economic and future focus Robust operating and contingency planning cycle and supported by strong credit Delivering a leading to ensure potential impacts of strategic portfolio management customer experience initiatives and external drivers are mitigated We are committed to better addressing our customers’ banking needs through We are committed to operating sustainably Further detail on principal risk, including consistent, fair and responsible credit and responsibly, and commit significant mitigation on page 141 of our Annual Report risk decisions, aligned to customers’ resource and expense to ensure we meet and Accounts circumstances, whilst staying within our legal and regulatory obligations Alignment to strategic priorities prudent risk appetite We respond as appropriate to impending and future focus Portfolios have benefited from relatively legislation, regulation and associated favourable economic conditions and a consultations and participate in industry Delivering a leading prolonged period of low interest rates. bodies. We continue to be proactive in customer experience Underlying impairments remain below responding to significant ongoing and new legislation, regulation and court The Group’s forward looking approach to long-term levels, but are expected to proceedings managing strategic risk will help the Group increase as impairments normalise identify new risks and opportunities, and allow the Group to be better prepared to respond to changes in the regulatory and competitive environments Key risk indicators New principal risk £1,291m Strategic risk is a new principal risk in Impairment charge acknowledgment of the increasing rate of 2018: £937m change in customer expectations, regulatory and competitive environments along with 1.8% the demands for specialist skills to meet Stage 3 loans and advances as a % of total these evolving needs. This aligns with our 2018: 1.9% strategic priorities to deliver a leading customer experience by digitising the Group, maximising Group capabilities and transforming ways of working 44 Lloyds Banking Group Annual Review 2019

Risk overview continued

CONDUCT OPERATIONAL PEOPLE

The risk of customer detriment across The risk of loss from inadequate or failed The risk that we fail to provide an appropriate the customer lifecycle including: failures internal processes, people and systems, colleague and customer-centric culture, in product management, distribution or from external events. supported by robust reward and wellbeing policies and processes; effective leadership and servicing activities; from other risks Example materialising, or other activities which could to manage colleague resources; effective Ineffective risk management could lead talent and succession management; and undermine the integrity of the market to adverse customer impact, reputational or distort competition, leading to unfair robust control to ensure all colleague-related damage and financial loss, across all of our requirements are met. customer outcomes, regulatory censure, principal risks. reputational damage or financial loss. Example Risk Appetite Inability to attract or retain colleagues with Example We have robust controls in place to manage The most significant conduct cost in recent key skills could impact the achievement of operational losses, reputational events and business objectives. years has been PPI mis-selling. regulatory breaches. We identify and assess Risk Appetite emerging risks and act to mitigate these. Risk Appetite We deliver fair outcomes for our customers. We lead responsibly and proficiently, manage Mitigation people resource effectively, support and Mitigation The Group continues to review and invest develop colleague talent, and meet legal and Simplified and enhanced conduct policies in its control environment to ensure it regulatory obligations related to our people. and procedures in place to ensure addresses the inherent risks faced appropriate controls and processes The Group employs a range of risk Mitigation that deliver fair customer outcomes, management strategies, including: Focusing on leadership and colleague and support market integrity and avoidance, mitigation, transfer (including engagement, through delivery of strategies competition requirements insurance) and acceptance to attract, retain and develop high calibre people together with implementation of Active engagement with regulatory Further detail on principal risk, including rigorous succession planning bodies and other stakeholders to develop mitigation on page 164 of our Annual Report Continued focus on the Group’s culture understanding of concerns related to and Accounts customer treatment, effective competition by developing and delivering initiatives and market integrity, to ensure that the Alignment to strategic priorities that reinforce the appropriate behaviours Group’s strategic conduct focus continues and future focus which generate the best possible long-term to meet evolving stakeholder expectations outcomes for customers and colleagues Delivering a leading Further detail on principal risk, including customer experience Further detail on principal risk, including mitigation on page 163 of our Annual Report mitigation on page 165 of our Annual Report and Accounts The Group continues to manage and Accounts operational risk within the appetite Alignment to strategic priorities articulated by the Board and in compliance Alignment to strategic priorities and future focus with legal and regulatory requirements to and future focus insurance a robust control environment and Transforming ways of working Delivering a leading a positive customer experience customer experience Regulatory requirements relating to As we transform our business, minimising personal accountability and remuneration conduct risk is critical to achieving rules could affect our ability to attract and our strategic goals and meeting retain the calibre of colleagues required regulatory standards to meet changing customer needs. We recognise the challenges in delivering the We have senior committees that ensure our Group’s strategic priorities and we will focus on embedding a customer-centric continue to invest in the development of culture and delivering fair outcomes across colleague capabilities and agile working the Group. Our conduct risk framework practices. This investment will deliver a continues to support this through robust leading customer experience and allow the and effective management. This supports Group to respond quickly to customers’ our vision of being the best bank for rapidly changing decision-making in a customers, enabling the delivery of a digital era leading customer experience through effective root cause analysis and learning from customer feedback Lloyds Banking Group Annual Review 2019 45

INSURANCE UNDERWRITING CAPITAL FUNDING AND LIQUIDITY

The risk of adverse developments in the The risk that we have a sub-optimal quantity or Funding risk is the risk that we do not have timing, frequency and severity of claims for quality of capital or that capital is inefficiently sufficiently stable and diverse sources of insured/underwritten events and in customer deployed across the Group. funding or the funding structure is inefficient. behaviour, leading to reductions in earnings Liquidity risk is the risk that we do not have and/or value. Example A worsening macroeconomic environment sufficient financial resources to meet our Example could lead to adverse financial performance, commitments when they fall due, or can only Uncertain property insurance claims impact which could deplete capital resources and/ secure them at excessive cost. Insurance earnings and capital, e.g. extreme or increase capital requirements due to a Example weather conditions, such as flooding, can deterioration in customers’ creditworthiness A deterioration in either our or the UK’s credit result in high property damage claims. Alternatively a shortage of capital could rating, or a sudden and significant withdrawal Risk Appetite arise from an increase in the amount of of customer deposits, would adversely impact We have robust controls in place to manage capital that needs to be held our funding and liquidity position. the insurance underwriting risk inherent in Risk Appetite Risk Appetite the products our Insurance business offers to We maintain capital levels commensurate We maintain a prudent liquidity profile and a meet customer needs. with a prudent level of solvency and aim to balance sheet structure that limits our reliance Mitigation deliver consistent and high quality returns to on potentially volatile sources of funding. shareholders. General Insurance exposure to Mitigation accumulations of risk and possible Mitigation The Group manages and monitors catastrophes is mitigated by reinsurance The Group has a capital management liquidity risks and ensures that liquidity risk arrangements broadly spread over framework that includes the setting of management systems and arrangements different reinsurers capital risk appetite are adequate with regard to the internal Insurance processes on underwriting, claims T he Group maintains a recovery plan which risk appetite, Group strategy and management, pricing and product design sets out a range of potential mitigating regulatory requirements Further detail on principal risk, including actions that could be taken in response to The Group’s funding and liquidity position mitigation on page 166 of our Annual Report a stress is underpinned by its significant customer and Accounts deposit base, and is supported by strong Further detail on principal risk, including relationships across customer segments Alignment to strategic priorities mitigation on page 167 of our Annual Report and future focus and Accounts Further detail on principal risk, including mitigation on page 175 of our Annual Report Delivering a leading Alignment to strategic priorities and Accounts customer experience and future focus. Alignment to strategic priorities We are committed to meeting the changing Maximising Group capabilities and future focus needs of customers by working to provide Ensuring we hold an appropriate level of Maximising Group capabilities a range of insurance products via multiple capital to maintain financial resilience and channels. The focus is on delivering a market confidence underpins our strategic We maintain a strong funding position leading customer experience by helping objectives of supporting the UK economy, in line with our low risk strategy, and the customers protect themselves today whilst and growth in targeted segments through loan to deposit ratio remains within our preparing for a secure financial future the cycle target range Strategic growth initiatives within Insurance Our funding position allows us to grow are developed and managed in line with a targeted business segments, and better defined risk appetite, aligned to the Group address our customers’ needs risk appetite and strategy

Key risk indicators Key risk indicators Key risk indicators £17,515m 13.8%1 £118bn Life and pensions present value CET1 ratio LCR eligible assets of new business premiums 2018: 13.9%1,2 2018: £129bn 2018: £14,384m 5.2%1 107% £671m UK leveraged ratio Loan to deposit ratio General insurance underwritten 2018: 5.6%1 2018: 107% total gross premiums 1 Pro forma basis 2018: £690m 2 Incorporates the effects of the share buyback announced in February 2019. 46 Lloyds Banking Group Annual Review 2019

Risk overview continued

GOVERNANCE MARKET MODEL

The risk that our organisational infrastructure The risk that our capital or earnings profile is The risk of financial loss, regulatory censure, fails to provide robust oversight of decision affected by adverse market rates, in particular reputational damage or customer detriment, making and the control mechanisms to ensure interest rates and credit spreads in the as a result of deficiencies in the development, strategies and management instructions are banking business, equity, credit spreads and application and ongoing operation of Models implemented effectively. interest rates in the Insurance business, and and Rating Systems. credit spreads in the Group’s defined benefit Example Examples pension schemes. Inadequate or complex governance The consequences of inadequate models arrangements to address ring-fencing Examples could include: inappropriate levels of capital requirements and the potential impact Earnings are impacted by our ability to or impairments; inappropriate credit or pricing of EU exit could result in a weaker control forecast and model customer behaviour decisions; and adverse impacts on funding or environment, delays in decision making accurately and establish appropriate liquidity, or the Group’s earnings and profits. and lack of clear accountability hedging strategies The Insurance business is exposed Risk Appetite Non-compliance with, or breaches of indirectly to equity risk through the Material models are performing in line SMCR requirements could result in lack value of future management charges on with expectations. of clear accountability, and legal and policyholder funds. Credit spread and regulatory consequences Mitigation interest rate risk within the Insurance The model risk management framework, Risk Appetite business primarily arises from bonds and established by and with continued oversight We have governance arrangements that loans used to back annuities from an independent team in the Risk support the effective long-term operation of Narrowing credit spreads will increase the division, provides the foundation for the business, maximise shareholder value and cost of pension scheme benefits managing and mitigating model risk within meet regulatory and societal expectations. Risk Appetite the Group We have robust controls in place to manage Mitigation Further detail on principal risk, including our inherent market risk and do not engage in Defining individual and collective mitigation on page 187 of our Annual Report any proprietary trading, reflecting the customer accountabilities for risk management, risk and Accounts oversight and risk assurance through a three focused nature of the Group’s activities lines of defence model which supports the Mitigation Alignment to strategic priorities discharge of responsibilities to customers, Structural hedge programmes and future focus implemented to manage liability margins shareholders and regulators Digitising the Group Outlining governance arrangements which and margin compression articulate the enterprise-wide approach to Equity and credit spread risks are closely Our models play a vital role in supporting risk management monitored and, where appropriate, asset our Group strategy to ensure profitable and liability matching is undertaken growth in targeted segments and the drive Further detail on principal risk, including The Group’s defined benefit pension toward automation and digital solutions to mitigation on page 181 of our Annual Report schemes continue to monitor their credit enhance customer outcomes. Model risk and Accounts allocation as well as the hedges in place management helps ensure these models against nominal rate and inflation movements are implemented in a controlled and safe Alignment to strategic priorities manner for both ourselves and customers. and future focus Further detail on principal risk, including mitigation on page 183 of our Annual Report Delivering a leading and Accounts customer experience Alignment to strategic priorities Ring-fencing ensures that we are safer and and future focus continue to deliver a leading customer Maximising Group capabilities experience by providing further protection to core retail and SME deposits, increasing We actively manage our exposure to transparency of our operations and movements in market rates, to drive facilitating the options available in resolution lower volatility earnings and offer a comprehensive customer proposition with Our governance framework and strong hedging strategies to support strategic culture of ownership and accountability aims. Mitigating actions are implemented enabled effective, on time, compliance to reduce the impact of market movements, with the SMCR requirements and enable resulting in a more stable capital position us to demonstrate clear accountability Effective interest rate and inflation hedging for decisions has kept volatility in the Group’s defined benefit pension schemes low. This combined with improved market conditions has helped The Group’s Viability statement can be keep the schemes in IAS 19 surplus in 2019. found on pages 95 to 96 of our Annual This allows us to more efficiently utilise Report and Accounts. available capital resources The Group’s emerging risks are shown Key risk indicators on pages 133 to 134 and a full analysis of the Group’s risk categories is on £550m pages 129 to 187 of our Annual Report IAS 19 pension surplus and Accounts. 2018: £1,146m Lloyds Banking Group Annual Review 2019 47

Shareholder information

Annual report and accounts Individual Savings Accounts (ISAs) This Annual Review summarises information from the Lloyds Banking There are a number of options for investing in Lloyds Banking Group Group Annual Report and Accounts. As such, there is insufficient shares through an ISA. For details of services and products provided by information to provide a full understanding of the results and state the Group please contact Bank of Scotland Share Dealing, Halifax Share of affairs of Lloyds Banking Group. A copy of our Annual Report and Dealing or Lloyds Bank Direct Investments using the contact Accounts can be obtained from our registrar, Equiniti Limited (see details above. below) and is available on our website at www.lloydsbankinggroup.com American Depositary Receipts (ADRs) Annual general meeting (AGM) Our shares are traded in the USA through a - The AGM will be held at the Edinburgh International Conference listed sponsored ADR facility with The Bank of New York Mellon as the Centre, The Exchange, Edinburgh EH3 8EE on Thursday 21 May 2020 depositary. The ADRs are traded on the New York Stock Exchange at 11am. Further details about the meeting, including the proposed under the symbol LYG. The CUSIP number is 539439109 and the ratio of resolutions and where shareholders can stream the meeting live, can ADRs to ordinary shares is 1:4. be found in our Notice of AGM which will be available shortly on our For details contact: BNY Mellon Shareowner Services, 462 South 4th website at Street, Suite 1600, Louisville KY 40202. www.lloydsbankinggroup.com Telephone: 1-866-259-0336 (US toll free), Share dealing facilities international callers: +1 201-680-6825. We offer a choice of four share dealing services for our UK shareholders Alternatively visit www.adrbnymellon.com or and customers. To see the full range of services available for each, email [email protected] please use the contact details below: Security – share fraud and scams Bank of Scotland Share Dealing Shareholders should exercise caution when unsolicited callers offer the www.bankofscotland.co.uk/sharedealing 0345 606 1188 chance to buy or sell shares with promises of huge returns. If it sounds too good to be true, it usually is and we would ask that shareholders Halifax Share Dealing take steps to protect themselves. We strongly recommend seeking www.halifax.co.uk/sharedealing 03457 22 55 25 advice from an independent financial adviser authorised by the Lloyds Bank Direct Investments Financial Conduct Authority (FCA). Shareholders can verify whether a www.lloydsbank.com/share-dealing.asp 0345 60 60 560 firm is authorised via the Financial Services Register which is available at www.fca.org.uk IWeb Share Dealing If a shareholder is concerned that they may have been targeted www.iweb-sharedealing.co.uk/share-dealing-home.asp 03450 707 129 by such a scheme, please contact the FCA Consumer Helpline Note: All internet services are available 24/7. Telephone dealing services are available on 0800 111 6768 or use the online ‘Share Fraud Reporting Form’ between 8.00 am and 9.15 pm, Monday to Friday and 9.00 am to 1.00 pm on Saturday. To open a share dealing account with any of these services, you must be 18 years of age available from their website (see above). We would also recommend or over and be resident in the UK, Jersey, Guernsey or the Isle of Man. contacting the Police through Action Fraud on 0300 123 2040 or visiting Share dealing for the Lloyds Banking Group www.actionfraud.org.uk for further information. Shareholder Account Head office Share dealing services for the Lloyds Banking Group Shareholder 25 Gresham Street, London EC2V 7HN Account are provided by Equiniti Shareview Dealing, operated by Telephone +44 (0)20 7626 1500 Equiniti Financial Services Limited. Details of the services provided can Registered office be found either on the Shareholder Information page of our website The Mound, Edinburgh EH1 1YZ at www.lloydsbankinggroup.com or by contacting Equiniti using the Registered in Scotland No. SC95000 contact details provided below.

Important shareholder and registrar information Company website Register today to manage your www.lloydsbankinggroup.com shareholding online Shareholder information Get online in just three easy steps: help.shareview.co.uk step 1 (from here you will be able to email your Register at www.shareview.co.uk/info/ query securely to Equiniti, our registrar) register Registrar step 2 Equiniti Limited Aspect House, Spencer Road, Lancing Receive activation code in post West Sussex BN99 6DA step 3 Shareholder helpline Log on 0371 384 2990* from within the UK +44 121 415 7066 from outside the UK *Lines are open from 8.30 am to 5.30 pm Monday to Friday, excluding English and Welsh public holidays. The company registrar is Equiniti Limited. They provide a shareholder service, including a telephone helpline and shareview which is a free secure portfolio service. 48 Lloyds Banking Group Annual Rview 2019

Board of Directors Comprising Directors with the right mix of skills and experience, the Board is collectively responsible for overseeing delivery of the Group’s strategy

11 22 32 4 5

NG Re RB Ri A NG Re RB Ri A NG Re Ri A Ri A Ri

6 7 8 9 10

RB Ri Re RB Ri A NG Ri Re RB Ri NG NG Re RB Ri

11 12 133 A Member of Audit Committee Ri Member of Board Risk Committee

Re Member of Remuneration RB Member of Responsible Committee Business Committee

NG Member of Nomination and Committee Chairman Governance Committee

1 Lord Blackwell has announced his plan to retire as Group Chairman at or before the AGM in 2021. 2 Alan Dickinson succeeded Anita Frew as Senior Independent Director on 1 December 2019 and will succeed her as Deputy Chairman when she retires from the Board at the AGM in May 2020. 3 Juan Colombás has announced his plan to retire from the Group in July 2020.

1. Lord Blackwell Chairman Strong board governance experience, Qualification as an Audit Committee including investor relations and remuneration Financial Expert Appointed: June 2012 (Board), April 2014 (Chairman) Anita was previously Chairman of Victrex Strong board governance experience, plc, the Senior Independent Director of including investor relations and remuneration Skills, experience and contribution: Aberdeen Asset Management and IMI plc, an Simon was formerly Chief Financial Officer Deep financial services knowledge including Executive Director of Abbott Mead Vickers, and Executive Director of insurance and banking a Non-Executive Director of Northumbrian plc. He was also previously Chair of the Significant experience with strategic planning Water and has held various investment and European Round Table CFO Taskforce and and implementation marketing roles at Scottish Provident and the a Member of the Main Committee of the Regulatory and public policy experience . 100 Group of UK FTSE CFOs. gained from senior positions in Downing External appointments: Chairman of Croda External appointments: Non-Executive Street, Regulators and a wide range International Plc and a Non-Executive Director Director of plc and Rio Tinto of industries of BHP Billiton. Limited and Chair of their Audit Committee, Credibility with key stakeholders Independent Director of PetroChina Strong leadership qualities 3. Alan Dickinson Senior Independent Company Limited, Member of the Defence Lord Blackwell is an experienced Chairman Director Board and Chair of the Defence Audit and Non-Executive Director within the Appointed: September 2014 (Board), Committee, UK Government, Member of the financial services sector having previously December 2019 (Senior Independent Director) Advisory Panel of CIMA and of the Advisory been Chairman of Scottish Widows Group. He Skills, experience and contribution: Board of the Centre for European Reform. was previously Senior Independent Director Highly regarded retail and commercial banker 5. Sarah Legg Independent Director and Chairman of the UK Board for Standard Strong strategic, risk and core banking Life and Director of Group Development at experience Appointed: December 2019 NatWest Group. His past Board roles have Regulatory and public policy experience Skills, experience and contribution: also included Chairman of Interserve plc, and Alan has 37 years’ experience with the Strong financial leadership skills Non-Executive Director of , Dixons Royal Bank of Scotland, most notably as Significant experience in financial and Group, and Ofcom. He was Head of Chief Executive of RBS UK. Alan was a regulatory reporting the Prime Minister’s Policy Unit from 1995 to Non-Executive Director of Willis Limited Strong transformation programme experience 1997 and was appointed a Life Peer in 1997. and Chairman of its Risk Committee. He Sarah has spent her entire career in financial External appointments: Governor of the was formerly Chairman of Brown, Shipley services with HSBC in finance leadership Yehudi Menuhin School and a member of the & Co. Limited, a Non-Executive Director roles. She was the Group Financial Controller Governing Body of the Royal Academy of Music. of Nationwide Building Society, where he and a Group General Manager of HSBC until was Chairman of its Risk Committee and a 2. Anita Frew Deputy Chairman early 2019 and previously Chief Financial Governor of Motability. Officer for HSBC’s Asia Pacific region. She also Appointed: December 2010 (Board), May 2014 External appointments: Chairman of spent 8 years as a Non-Executive Director (Deputy Chairman), May 2017 to December Urban&Civic plc and Non-Executive Director on the Board of Hang Seng Bank Limited, a 2019 (Senior Independent Director) of England and Wales Cricket Board. Hong Kong listed bank. Skills, experience and contribution: External appointments: Honorary Vice Significant board, financial and general 4. Simon Henry Independent Director President of The Hong Kong Society for management experience Appointed: June 2014 Rehabilitation and Chair of the Campaign Experience across a range of sectors, Skills, experience and contribution: Advisory Board of King’s College, including banking, asset and investment Deep international experience in board level Cambridge University. management, manufacturing and utilities strategy and execution Extensive experience as chairman in a range Extensive knowledge of financial markets, of industries treasury and risk management Lloyds Banking Group Annual Rview 2019 49

6. Lord Lupton CBE Independent Director Group Plc as well as Chairman of the Financial 11. António Horta-Osório Executive Director and Chairman of Lloyds Bank Corporate Services Practitioner Panel and the Financial and Group Chief Executive Conduct Authority’s Financial Advice Markets plc Appointed: January 2011 (Board), March 2011 Working Group. He was previously a Member Appointed: June 2017 (Group Chief Executive) of the BBC Trust and Chairman of the Britten- Skills, experience and contribution: Pears Foundation. Skills, experience and contribution: Extensive international corporate experience, External appointments: Chairman of Reach Extensive experience in, and understanding especially in financial markets plc (formerly Trinity Mirror plc) and of their of, both retail and commercial banking built Strong board governance experience, Nomination Committee. He is also Chairman over a period of more than 30 years, working including investor relations and remuneration of the Royal Northern College of Music and a both internationally and in the UK Regulatory and public policy experience member of the Board of Opera Ventures. Drive, enthusiasm and commitment to Significant experience in strategic planning customers and implementation 9. Stuart Sinclair Independent Director Proven ability to build and lead strong Lord Lupton was Deputy Chairman of Baring Appointed: January 2016 management teams Brothers, co-founded the London office Skills, experience and contribution: António previously worked for Citibank and of Greenhill & Co., and was Chairman of Extensive experience in , Goldman Sachs and held various senior Greenhill Europe. He was previously Chairman insurance and consumer finance management positions at Grupo Santander of Trustees of Dulwich Picture Gallery, a Governance and regulatory experience before becoming its Executive Vice President and member of the Group’s Management Trustee of the British Museum, Governor Significant experience in strategic planning Committee. He was a Non-Executive Director of Downe House School and a member of and implementation the International Advisory Board of Global of Santander UK and subsequently its Chief Experience in consumer analysis, marketing Leadership Foundation. He became a Executive. He is also a former Non-Executive and distribution Life Peer in October 2015 and is a former Director of the Court of the Bank of England. Treasurer of the Conservative Party. He served Stuart is a former Non-Executive Director External appointments: Non-Executive on the Select Committee of TSB Banking Group plc, TSB Bank plc, Director of EXOR N.V., Fundação on Charities. LV Group, Virgin Direct and Vitality Health Champalimaud and Sociedade Francisco (formerly Prudential Health). He was previously External appointments: Senior Advisor to Manuel dos Santos in Portugal, a member of the Interim Chairman of Provident Financial plc Greenhill Europe, Trustee of the Lovington the Board of Stichting INPAR Management/ and a former Senior Independent Director of Foundation and Chairman of the Board of Enable and Chairman of the Wallace Collection. Swinton Group Limited. In his executive career, Visitors of the Ashmolean Museum with effect he was President and Chief Operating Officer from 1 January 2020. 12. William Chalmers Executive Director and of Aspen Insurance after spending nine years Chief Financial Officer 7. Amanda Mackenzie OBE Independent with General Electric as Chief Executive Officer Appointed: August 2019 of the UK Consumer Finance business then Director Skills, experience and contribution: President of GE Capital China. Before that he Appointed: October 2018 was Chief Executive Officer of Tesco Personal Significant board level strategic and financial Skills, experience and contribution: Finance and Director of UK Retail Banking at leadership experience including strategic Extensive experience in responsible business the Royal Bank of Scotland. He was a Council planning and development, mergers Considerable customer engagement member of The Royal Institute for International and acquisitions, equity and debt capital experience Affairs (Chatham House). structuring and risk management Strong digital technology experience External appointments: Senior Independent Worked in financial services for over 25 years Significant marketing and brand background Director and Chair of the Risk & Capital William was previously Co-Head of the Global Financial Institutions Group at Morgan Amanda was a member of ’s Group Committee at QBE UK Limited (formerly QBE Stanley. Prior to that, he held a number of Executive for seven years and Chief Marketing Insurance (Europe) Limited). senior roles at Morgan Stanley, including and Communications Officer. Prior to 10. Sara Weller CBE Independent Director Head of EMEA Financial Institutions Group. her current role, Amanda was seconded Appointed: February 2012 Before joining Morgan Stanley, William from Aviva as Executive Adviser to Project worked for JP Morgan, again in the Financial Everyone, to help launch the United Nations Skills, experience and contribution: Institutions Group. Sustainable Development Goals. She has over Background in retail and associated sectors, 25 years’ of commercial business practice, including financial services External appointments: None. including director roles at British Airways Strong board governance experience, AirMiles, BT, Hewlett Packard Inc, British including investor relations and remuneration 13. Juan Colombás Executive Director and Chief Operating Officer Gas and as a Non-Executive Director of Passionate advocate of customers, the Mothercare plc. Amanda is a Life Fellow of community, financial inclusion and the Appointed: November 2013 (Board), January the Royal Society of Arts and Fellow and past development of digital skills 2011 to September 2017 (Chief Risk Officer), September 2017 (Chief Operating Officer) President of the Marketing Society. Considerable experience of boards at both External appointments: Chief Executive of executive and non-executive level Skills, experience and contribution: Business in the Community – The Prince’s Sara’s previous appointments include Significant banking and risk management Responsible Business Network. Managing Director of Argos, various senior experience positions at J Sainsbury (including Deputy International business and management 8. Nick Prettejohn Independent Director Managing Director), Chairman of the experience and Chairman of Scottish Widows Group Planning Inspectorate, Lead Non-Executive Juan is responsible for leading a number Appointed: June 2014 Director at the Department of Communities of critical Group functions and driving the Skills, experience and contribution: and Local Government, a Board member transformation activities across the Group Deep financial services experience, at the Higher Education Funding Council, a in order to build the Bank of the Future. He particularly in insurance Governing Council Member of Cambridge was previously the Chief Risk Officer and In-depth regulatory knowledge and University, a Non-Executive Director of an Executive Director of Santander’s UK experience Mitchells & Butlers as well as a number of business. Prior to this, he held a number of senior risk, control and business management Governance experience and strong senior management roles for roles across the Corporate, Investment, Retail leadership qualities and Mars Confectionery. External appointments: Non-Executive and Risk Divisions of the Santander Group. Significant experience in strategic planning He was previously the Vice Chairman of the and implementation Director of Group and Chair of their Remuneration Committee, Lead International Financial Risk Institute. Nick has served as Chief Executive of Lloyd’s Non-Executive Director at the Department for External appointments: Member of the FCA of London, Prudential UK and Europe and Work and Pensions, Chair of the Remuneration Practitioner Panel. Chairman of Brit Insurance. He is a former Committee of New College, Oxford and Non-Executive Director of the Prudential Trustee of Lloyds Bank Foundation for Regulation Authority and of Legal & General England and Wales. 50 Lloyds Banking Group Annual Review 2019

Directors’ remuneration Remuneration Committee Chairman’s statement

Our latest policy provides direct alignment between remuneration and the purpose of the Group, and is designed to be fair and consistent. We have thought carefully about the simplest and clearest way to reward the right behaviours and outcomes. Stuart Sinclair Chairman, Remuneration Committee

Remuneration Content While we were pleased to receive over Our new Policy Please find below the Remuneration 90 per cent support for our Annual Report on In approaching the refresh of the Directors’ Committee Chairman’s statement from Remuneration at the AGM in 2019, we heard Remuneration Policy, my committee the Annual Report and Accounts. This is an during that process a continued desire for colleagues and I thought carefully about what extract of the Directors’ remuneration report greater simplicity and transparency in our behaviours and outcomes we wanted to see with the full content available as below: approach. To that end, we started to make and how the remuneration structure could changes early in 2019, without waiting for our Chairman’s statement and support them. We approached the review full redesign to be finalised. remuneration policy overview with the following core aims: pages 98 to 102 of our Annual Report and In November 2019, we announced our Accounts decision, subject to AGM approval, to reduce Remuneration should be linked Purpose Annual report on remuneration pension allowances for Executive Directors to the Group’s purpose of pages 103 to 114 of our Annual Report to 15 per cent of salary in a single step in 2020 Helping Britain Prosper and Accounts with no offsetting adjustment in salary or Remuneration should reward other remuneration. Behaviours 2020 Remuneration Policy and drive the right behaviours pages 115 to 123 of our Annual Report We are also making improvements to and outcomes and reflect both and Accounts pensions for all the 50,000 colleagues who strategic (non-financial) and Other remuneration disclosures participate in Defined Contribution (DC) financial achievements Remuneration should be (Pillar III reporting) pages 124 to 128 of our arrangements (the majority of our workforce) Simplicity to make all members eligible for a maximum designed in a manner that is Annual Report and Accounts clear for all stakeholders and employer contribution of 15 per cent, and to reflects their expectations increase the employer contribution for our Dear Shareholder Remuneration should be lower paid colleagues by one per cent. Clarity On behalf of the Board I am pleased to easy to explain and be present the Directors’ Remuneration Report This represents a significant investment viewed as fair for the year ended 31 December 2019 and of approximately £20 million per annum the proposed Directors’ Remuneration Policy in our colleagues and aligns the employer (our Policy) for which we are seeking your contributions available to the wider workforce It was with these objectives in mind that we support and approval at our Annual General with those of Executive Directors. At the same designed the new Policy detailed on page 115 Meeting in May 2020. time, the Group supports the third largest and summarised on page 100 of our Annual private sector defined benefit (DB) scheme Report and Accounts. The key headlines are Our upcoming AGM marks the beginning of accruing benefits for a further 16,000 current as follows: our next remuneration policy cycle, which will colleagues. run until the end of 2022. This offered the The maximum pension allowance for Executive Directors is reduced to opportunity to take a fresh look at how We have listened to feedback and the external 15 per cent of salary we incentivise and reward our colleagues, sentiment around executive remuneration. and what values and outcomes we wish Some of the sentiments that resonated with We are introducing a new long-term to encourage. me and my Committee were that executive variable reward plan to align pay more remuneration should be re-evaluated in the closely to our business model of producing The timing coincided with a great deal of context of colleagues as a whole; be truly sustainable long-term returns public interest in matters of executive pay, variable, and not managed within a ‘corridor’ fairness, employee engagement and the pay As a result of the new Policy, the Group without being closely aligned with outcomes. gap between those at the top of organisations Chief Executive’s fixed pay will reduce We have tackled these sentiments head compared to other colleagues. We have by 8 per cent and his maximum total on with our proposals in the new Policy by been active participants in these discussions, remuneration opportunity by 29 per cent reducing the new maximum opportunity for through meetings with shareholders, our Executive Directors and by demonstrating Given the feedback we have received, we unions, the Investment Association and some with this year’s outcomes that performance hope you will support the aims and the members of Parliament, as well as through an and conduct do have material consequences, methods we outline, and vote accordingly at open dialogue with colleagues on a variety resulting in lower total remuneration. the AGM in May. of topics related to their pay and benefits. These talks have had a material impact on the priorities and recommendations of the Remuneration Committee throughout the last year. The proposals which have emerged from these discussions are laid out in detail in our Annual Report and Accounts. Lloyds Banking Group Annual Review 2019 51

Group performance and Executive Director total remuneration outcomes variable remuneration The information below summarises Executive Director remuneration for the 2018 and 2019 performance years. Full details are provided in the Single total figure of remuneration table on For 2019, the performance of the Group page 103 of our Annual Report and Accounts. was resilient in a challenging and uncertain economic environment. Despite a softening Director 2018 2019 of margins and income, continued discipline in operating costs enabled the Group to António Horta Osório Group Chief Executive £6.54m £4.73m 28% maintain its significant investment in digitising Juan Colombás Chief Operating Officer £3.42m £2.58m 25% and transforming the way we support customers, as well as to pay an increased William Chalmers Chief Financial Officer 1 Aug 2019 – £5.14m – dividend to shareholders. Financial results were however heavily impacted by the George Culmer Former Chief Financial Officer 1 Jan-1 Aug 2019 £3.43m £1.95m – PPI provision of £2.45 billion; therefore a significant downward adjustment was made to the Group Performance Share pool to reflect How we have responded to your feedback this along with other conduct-related costs. Executive remuneration should be When determining reward outcomes, The final 2019 Group Performance Share re-evaluated in the context of colleagues other factors outside of the scorecard pool is £310.1 million, which is a reduction of as a whole. are considered. Scores directly correlate 33 per cent compared to 2018. The vesting The proposed Policy for 2020 reduces to reward outcomes and, as can be seen of the 2017 Executive Group Ownership the maximum total compensation with this year’s awards, there is clear pay Share was similarly affected by financial opportunity for the Group Chief for performance alignment performance and shareholder returns, with a Executive by 29 per cent formulaic vesting outcome of 49.7 per cent. GPS award outcomes for 2019 show that The Group Chief Executive's pension No discretion was used to change the award outcomes are truly variable and reduced from 46 per cent to 33 per cent vesting outcome. that the structure of the plan ensures that of salary in 2018 and will now be performance and conduct will have a The performance and strategic progress 15 per cent with effect from 2020, direct impact on remuneration of the Group was however overshadowed a decrease of 67 per cent from 2018 by significant non-financial conduct issues to 2020 Your remuneration structure during the latter part of the year, not least the The ratio of CEO pay to the medium is overly complex findings of Sir Ross Cranston’s review into how employee has reduced by 24 per cent We recognise that our process for the Group has treated customers who were between 2018 and 2019 determining short-term variable (GPS) the victims of the HBOS Reading fraud. These We are very focused on addressing the outcomes has been perceived to be issues are reflected in the variable reward pay gap from the bottom up and not complex and the link between pay and outcomes for Executive Directors. just from the top down, in other words, performance is not easily understood by taking action to increase pay and We have taken steps to reduce Executive Director variable pensions for more junior colleagues complexity through reducing the rewards decisions In 2019 we have continued our number of measures in our Group commitment for pay progression Balanced Scorecard from 20 to 15 As a result of the overall performance of the with higher pay awards for lower paid grouped under three equally weighted Group and the issues faced during 2019, the colleagues and colleagues paid lower areas for 2019 and 2020. We believe Group Chief Executive and Chief Operating within their pay range this provides the optimum breadth of Officer independently requested that they The pay budget for colleagues this measures for a large and complex Group be withdrawn from consideration for Group year is 2.4 per cent, above the budget We’ve focused on simplifying the Performance Share awards for 2019. The of 2 per cent for executives and we allocation to our overall Group Committee exercised its discretion to accept will once again make an award of free Performance Share pool by agreeing to this request and welcomed the judgement shares worth £200 to every permanent use a fixed 5 per cent of underlying profit shown in volunteering it as a consequence of colleague in the Group. All these actions as the starting position. The Committee the non-financial conduct issues mentioned are intended to reduce the gap between will retain discretion to ensure that 5 per above. No downward adjustment has been executives and the wider workforce cent remains appropriate made to the overall Group Performance Share pool as a result of these individual decisions, To support colleagues understanding Variable pay should be truly variable and of the approach to determine Group which was therefore distributed to other not managed within a corridor without colleagues outside the executive team. Performance Share awards across the being closely aligned with outcomes. Group, including for Executive Directors, For the newly appointed Chief Financial The Balanced Scorecard is made up we have used internal media channels Officer, overall performance for 2019 was of an appropriate balance of financial to explain the process in a clear and assessed at 3.12 out of 5 with a corresponding and non-financial measures. Targets are transparent way and to emphasise the Group Performance Share award of £195,528. determined at the beginning of the year link between pay and performance An award of 250 per cent of salary will be and my Committee and I discuss them awarded under the final Executive Group thoroughly to ensure they are stretching Ownership Share to the Group Chief Executive and 237.5 per cent for Chief Financial Officer. No Group Ownership Share award is being made to the Chief Operating Together with my Committee members, On behalf of the Board Officer who has announced his retirement. I look forward to hearing your views on the Further details of awards are provided on remuneration arrangements outlined in the pages 105 and 111 of our Annual Report report and we hope the new Policy alongside the resolutions relating to remuneration will and Accounts. Stuart Sinclair receive your support at the upcoming AGM. Chairman, Remuneration Committee 19 February 2020 Lloyds Banking Group plc Registered in Scotland, No. SC095000 52 Lloyds Banking Group Annual Review 2019

Forward looking statements 

This document contains certain forward looking statements within the downgrade or other sovereign financial issues; political instability including meaning of Section 21E of the US Securities Exchange Act of 1934, as as a result of any UK general election; technological changes and risks to amended, and section 27A of the US Securities Act of 1933, as amended, the security of IT and operational infrastructure, systems, data and with respect to the business, strategy, plans and/or results of Lloyds information resulting from increased threat of cyber and other attacks; Banking Group plc together with its subsidiaries (the Group) and its current natural, pandemic and other disasters, adverse weather and similar goals and expectations relating to its future financial condition and contingencies outside the Group’s control; inadequate or failed internal or performance. Statements that are not historical facts, including statements external processes or systems; acts of war, other acts of hostility, terrorist about the Group's or its directors' and/or management's beliefs and acts and responses to those acts, geopolitical, pandemic or other such expectations, are forward looking statements. events; risks relating to climate change; changes in laws, regulations, practices and accounting standards or taxation, including as a result of the Words such as ‘believes’, ‘anticipates’, ‘estimates’, ‘expects’, ‘intends’, exit by the UK from the EU, or a further possible referendum on Scottish ‘aims’, ‘potential’, ‘will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘estimate’ and independence; changes to regulatory capital or liquidity requirements and variations of these words and similar future or conditional expressions are similar contingencies outside the Group’s control; the policies, decisions intended to identify forward looking statements but are not the exclusive and actions of governmental or regulatory authorities or courts in the UK, means of identifying such statements. the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation together with any resulting Examples of such forward looking statements include, but are not limited impact on the future structure of the Group; the ability to attract and retain to: projections or expectations of the Group’s future financial position senior management and other employees and meet its diversity including profit attributable to shareholders, provisions, economic profit, objectives; actions or omissions by the Group's directors, management or dividends, capital structure, portfolios, net interest margin, capital ratios, employees including industrial action; changes to the Group's post- liquidity, risk-weighted assets (RWAs), expenditures or any other financial retirement defined benefit scheme obligations; the extent of any future items or ratios; litigation, regulatory and governmental investigations; the impairment charges or write-downs caused by, but not limited to, Group’s future financial performance; the level and extent of future depressed asset valuations, market disruptions and illiquid markets; the impairments and write-downs; statements of plans, objectives or goals of value and effectiveness of any credit protection purchased by the Group; the Group or its management including in respect of statements about the the inability to hedge certain risks economically; the adequacy of loss future business and economic environments in the UK and elsewhere reserves; the actions of competitors, including non-bank financial services, including, but not limited to, future trends in interest rates, foreign lending companies and digital innovators and disruptive technologies; and exchange rates, credit and equity market levels and demographic exposure to regulatory or competition scrutiny, legal, regulatory or developments; statements about competition, regulation, disposals and competition proceedings, investigations or complaints. Please refer to the consolidation or technological developments in the financial services latest Annual Report or Form 20-F filed by Lloyds Banking Group plc with industry; and statements of assumptions underlying such statements. the US Securities and Exchange Commission for a discussion of certain factors and risks together with examples of forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or Lloyds Banking Group may also make or disclose written and/or oral may occur in the future. forward looking statements in reports filed with or furnished to the US Securities and Exchange Commission, Lloyds Banking Group annual Factors that could cause actual business, strategy, plans and/or results reviews, half-year announcements, proxy statements, offering circulars, (including but not limited to the payment of dividends) to differ materially prospectuses, press releases and other written materials and in oral from forward looking statements made by the Group or on its behalf statements made by the directors, officers or employees of Lloyds Banking include, but are not limited to: general economic and business conditions Group to third parties, including financial analysts. in the UK and internationally; market related trends and developments; fluctuations in interest rates, inflation, exchange rates, stock markets and Except as required by any applicable law or regulation, the forward looking currencies; any impact of the transition from IBORs to alternative reference statements contained in this document are made as of today's date, and rates; the ability to access sufficient sources of capital, liquidity and funding the Group expressly disclaims any obligation or undertaking to release when required; changes to the Group’s credit ratings; the ability to derive publicly any updates or revisions to any forward looking statements cost savings and other benefits including, but without limitation as a result contained in this document to reflect any change in the Group’s of any acquisitions, disposals and other strategic transactions; the ability to expectations with regard thereto or any change in events, conditions or achieve strategic objectives; changing customer behaviour including circumstances on which any such statement is based. The information, consumer spending, saving and borrowing habits; changes to borrower or statements and opinions contained in this document do not constitute a counterparty credit quality; concentration of financial exposure; public offer under any applicable law or an offer to sell any securities or management and monitoring of conduct risk; instability in the global financial instruments or any advice or recommendation with respect to financial markets, including Eurozone instability, instability as a result of such securities or financial instruments. uncertainty surrounding the exit by the UK from the European Union (EU) and as a result of such exit and the potential for other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating Designed and produced by Friend www.friendstudio.com

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