Lloyds Banking Group Annual Review 2018 About us Our purpose is to Help Britain Prosper. We are the largest UK retail financial services provider with around 26 million customers and a presence in nearly every community. We are transforming the business into The Group’s main business activities are retail and commercial banking, general a digitised, simple, low risk, financial insurance and long-term savings, provided under well recognised brands including Lloyds Bank, Halifax, Bank of Scotland and services provider whilst creating a Scottish Widows. Our shares are quoted on the London responsible business that focuses on and New York stock exchanges and we are one of the largest companies in the customers’ needs. This is key to our FTSE 100 index. long-term success and to fulfilling Reporting Just as we operate in an integrated way, our aim to become the best bank for we aim to report in an integrated way. customers, colleagues and shareholders. We have taken further steps towards this goal this year. As well as reporting our Business model on financial results, we also report on our pages 10 to 11 approach to operating responsibly and take into account relevant economic, political, social, regulatory and environmental factors. This Annual Review contains forward looking statements with respect to certain of the Group’s plans and 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 45.

This icon appears throughout Inside this year’s Annual Review this report highlighting how we are Helping Britain Prosper. Read more online at Strategic report lloydsbankinggroup.com Group highlights 01 Chairman’s statement 02 View our Annual Report and Group Chief Executive’s review 04 Accounts and other information Key performance indicators 06 about Lloyds Banking Group at Our external environment 08 lloydsbankinggroup.com Our business model 10 Our strategic priorities 12 Reflecting the needs of our stakeholders 16 Responsible Business 19 Helping Britain Prosper Plan 20 Divisional overview 27 Risk overview 30 Summary of Group results 36 Board of Directors 38 Directors’ remuneration report 40 Shareholder information 44 This Annual Review incorporates the Strategic Report which forms part of the 2018 Annual Report and Accounts along with some information about the Board of 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 2019 Lloyds Banking Group Annual Review 2018 01

Group highlights Strong financial and strategic performance 2018 has been a successful year for the Group in which we have continued to Help Britain Prosper, economically, socially and environmentally. In February 2018, we launched the next phase of our strategic plan and have made strong strategic progress with significantly improved financial performance. £6.0bn £8.1bn 5.5p >£3bn +13% +6% +27% Statutory profit before tax Underlying profit increased, Earnings per share increased Strategic investment spend over increased significantly, further driven by higher income, and in the year, largely due to the three year plan period closing the gap between lower costs the significant increase in (2018 to 2020), significant increase statutory and underlying profit statutory profit on prior plan 3.21p 11.7% 49.3% 15.7m +5% +2.8pp (2.5)pp Ordinary dividend per share Group delivering a market Cost:income ratio including Digitally active customers, the including interim and final leading return on tangible equity remediation further improved largest digital bank in the UK dividend. In addition the Group intends to implement a share buyback of up to £1.75bn

Key performance Strategic priorities on indicators on pages 06 to 07 pages 12 to 15

HOW WE’VE HELPED BRITAIN PROSPER IN 2018

Helping Britain Tackling social Building capability Championing Britain's get a home disadvantage across Britain and digital skills diversity £12.4bn >3,000 >700,000 35.3% in lending to first charities supported, one of of individuals, SMEs and of senior roles held time buyers the largest corporate donors charities trained in digital skills by women in the UK

Find out more about our Helping visit lloydsbankinggroup.com/ Britain Prosper Plan on page 20 prosperplan 02 Lloyds Banking Group Annual Review 2018

Chairman’s statement Transforming the Group for success in a digital world

At the heart of our success is our purpose to Help Britain Prosper and we are playing a vital role in supporting people, businesses and communities across the UK. Lord Blackwell Chairman

Overview and strategy One important component of this to a more sustainable low carbon economy. opportunity is the potential to provide a We recognise that the success of the Group is The Group once again delivered strong deeper range of financial planning, wealth inextricably linked to the health of the UK and financial performance in 2018 while making management and retirement solutions to our in this uncertain economic environment we are major strides in executing our strategic bank customers, drawing on the capabilities working hard to support the whole economy; transformation. Nevertheless I am conscious and expertise within Scottish Widows. During and to help businesses take advantages of it was a frustrating year for shareholders, 2018, as well as completing the acquisition the continuing opportunities we have to build with a disappointing share price performance of the UK workplace pensions and savings a prosperous future for the nation. Given despite this progress. While external factors business from Zurich Financial Services, the UK’s ongoing competitive advantages affecting UK investments are outside of we were delighted to announce a strategic as an open, innovative economy we remain our control, the Board are determined to partnership with Schroders in October with optimistic about the long-term prospects. continue building value for shareholders the aim of creating a market leading wealth by maintaining our focus on delivering In line with these objectives I am delighted management proposition. continued improvement in our results whilst that we have been named as a Top Ten simultaneously investing in the transformation Capital return Employer for Working Families, Responsible required to serve our customers and Business of the Year, and also The Times’ Top operate effectively in a digital world. We At each year end the Board makes an 50 Employer for Women – showing that we’re are committed to building a successful and assessment of the strength of the Group’s leading the way on gender equality too. sustainable Group we can all be proud of. balance sheet and future prospects relative to uncertainties in the external environment. Customers and communities The Board has been actively involved in the In addition to the increased investment of development and ongoing review of the more than £3 billion over the plan period, Over the course of the year I have travelled strategy and last year we announced the I am pleased to announce that, as a result across Britain to meet with colleagues, next phase of our strategic plan. We outlined of the financial progress in the year, the customers and communities. These visits our four transformation priorities focused Board has recommended an increased final enable me to see first-hand the work we do on the financial needs and behaviours of the ordinary dividend of 2.14 pence per share, to support our customers and respond to customer of the future: further enhancing bringing the total ordinary dividend for their changing needs. Being truly customer our leading customer experience; further 2018 to 3.21 pence per share, an increase of focused is a prerequisite for success and I am digitising the Group; maximising Group 5 per cent on last year. In line with the Group’s always impressed by the fact it is an aspiration capabilities; and transforming ways of policy to deliver a progressive and sustainable and commitment shared by everyone I meet working. This programme of change and ordinary dividend, whilst distributing surplus in the Group. renewal is all embracing, and our strong capital, the Board also intends to implement Our focus on customers also continues to be capital build is enabling us to invest more than a share buyback of up to £1.75 billion. More recognised through various awards which £3 billion in these strategic initiatives over the information on the intended share buyback this year included being awarded Bank of the current three year plan period (2018 to 2020), is provided on page 40 of our 2018 Annual Year for the sixth year running at The Banker a significant increase over the prior period. Report and Accounts. awards; and for the third year in a row Scottish During 2018, the Board were excited to see Widows won five stars at the Financial Adviser the excellent progress that had been made Our purpose Service Awards, a reflection on how financial within the first year of this plan. We are now At the heart of our success is our continued advisers rate our products and services. operating in an industry which is experiencing focus on Helping Britain Prosper. The Group During the year our colleagues raised close more change through digitisation than in its plays a vital role in supporting the prosperity to £4 million for Mental Health UK, our charity entire history. Our aim is not just to maintain of people, businesses and communities partner, bringing our total to over £8 million our position as Britain’s biggest digital bank by across the UK, and in doing so builds deep, since the partnership began in 2017. Seeing competing more effectively, but also to seize long-term customer relationships. It is also first-hand how our Foundations and colleague opportunities to create more value from the important to the Board that our strategy is fund raising is helping charities all over the wider and deeper relationships we can build fully consistent with our commitments as a UK really brings perspective to the positive with our customers through digital channels responsible business and during the year impact we are having in keeping with our and service capabilities. we have committed to becoming a leader in purpose to Helping Britain Prosper. supporting the UK to transition successfully Lloyds Banking Group Annual Review 2018 03

HELPING BRITAIN PROSPER OUR CONTRIBUTION TO THE UK

As the UK’s leading financial Communities Tax Investment services provider we are £56 million to help £2.6 billion paid in 2018 More than £3 billion making a significant positive communities in 2018 The UK’s largest corporate strategic investment spend impact on the UK economy More than 200,000 tax payer over the plan period hours volunteered Colleagues Lending Dividends  One of the largest Payments £64 billion SME and Mid £2.3 billion paid in dividends employers in the UK £15 trillion of payments Markets lending portfolio to 2.4 million shareholders processed in 2018 = Biggest mortgage lender 7 x UK GDP in UK with c.£290 billion portfolio

There is of course much more to do, but welcoming him to the executive team and found in the Directors’ remuneration report I know we will do even greater good in the the Board. on pages 84 to 104 of our 2018 Annual Report year ahead. Remuneration and Accounts. Directors During the year we were disappointed Outlook to receive a 20.78 per cent advisory vote We review the Board composition and against our remuneration report, having As we look ahead to 2019, the UK continues to diversity regularly and are committed to previously had 98 per cent of votes support face uncertainty around the near-term outlook ensuring we have the right balance of skills the Directors' remuneration policy in 2017. for the economy reflecting both EU exit and experience within the Board. During the We have listened carefully to our shareholders negotiations and wider global economic year we have announced a number of Board and other key stakeholders and have made risks. However we have a strong and resilient changes, as outlined below. a number of changes to simplify our process business and, as we accelerate into the second year of our strategic transformation, In October, Amanda Mackenzie joined the for determining bonus awards for Executive we believe that our customer focus and simple Board as a Non-Executive Director, and Directors and to enhance our disclosures. business model with its multi-brand, multi- will serve as a member of the Board Risk We continue to align our remuneration channel proposition will continue to provide Committee, Remuneration Committee principles to the Group’s strategic objectives the best opportunities for competitive and Responsible Business Committee. to ensure we reward performance and ensure advantage and future success. Further biography details can be found our approach to remuneration is aligned to on page 39. At the end of December 2018, the interests of our shareholders. I would like to thank all of our colleagues Deborah McWhinney stepped down as for their contribution to making 2018 such a Despite the Group’s strong financial a Non-Executive Director of the Group successful year. It is the commitment, support performance, the annual Group Performance for personal reasons and Stuart Sinclair and dedication from all of them that enables Share (GPS) award for Executive Directors succeeded Anita Frew as Chairman of the us to succeed. has decreased relative to last year. As set Board Remuneration Committee. Anita will out in the Remuneration Report, this reflects continue to be a member of the Committee, the assessed performance against other alongside her roles as the Group’s Deputy stretching operational and strategic goals, Chairman and Senior Independent Director. which, while strong in 2018, was a step down In addition, we’re also pleased to announce from the higher rating achieved in 2017. Lord Blackwell that Nigel Hinshelwood, Sarah Bentley and Total GPS outcome remains a small Chairman Brendan Gilligan joined as independent proportion of underlying profit at 5.1 per cent Non-Executive Directors of the Group’s Ring- and an even smaller proportion of overall Fenced Banks on 1 January 2019 where they revenues. Cash GPS awards are capped at serve alongside the Group Board Directors. £2,000 with additional amounts paid in shares More information on the ring-fencing and subject to deferral and performance restructure is provided on page 58 of our 2018 adjustment to ensure their ultimate value Annual Report and Accounts. reflects sustained performance. More In October George Culmer announced that information on how we ensure our approach he would be retiring in the third quarter to remuneration supports our strategy can be of 2019, having served the Group so well since joining in 2012. I want to pay tribute to George’s tremendous contribution and We believe that our customer to thank him on behalf of the Board, our focus and simple business colleagues and our shareholders. model will continue to provide In February 2019, the Group was pleased to announce that William Chalmers will succeed the best opportunities for George Culmer as Executive Director and competitive advantage and Chief Financial Officer. I look forward to future success. 04 Lloyds Banking Group Annual Review 2018

Group Chief Executive’s review Another year of strong strategic and financial performance

Our continued strong performance positions us well to succeed in a digital world. António Horta-Osório Group Chief Executive

In 2018 the Group has again delivered and grow our leading digital bank whilst 5 per cent on 2017 and is in line with our significant benefits for our customers delivering strong financial performance and progressive and sustainable ordinary dividend and a strong financial performance, with market leading returns. policy. In addition, the Board has announced increased profits and returns. As a result its intention to implement a share buyback of this performance, we have been able Financial performance programme of up to £1.75 billion, equivalent to recommend an increased dividend and to 2.46 pence per share, up 76 per cent from Statutory profit after tax of £4.4 billion share buyback. Our differentiated, customer last year. was 24 per cent higher than 2017 and focused, UK business model continues to earnings per share at 5.5 pence per share position us well for sustainable success and was 27 per cent higher. This was driven by Strategic progress continuing to deliver our purpose of Helping improved underlying profit including lower In February 2018, we launched the third Britain Prosper. remediation charges and we continue to stage of our strategic plan with an increased I am clearly proud of our customer focus narrow the gap between underlying and strategic investment of more than £3 billion and financial performance. To deliver this statutory profit, a trend we expect to continue over the three year plan period, building sustainable success in the long-term we need as statutory profits increase further. As a on our unique competitive advantages, to ensure we remain focused on enhancing result of this performance the Group has to transform the Group to succeed in a customer experience. With this in mind, in delivered a further increase to our return digital world. February 2018 we announced our ambitious on tangible equity, which is now a market Over the first year of the plan we have strategy to transform the Group for success leading 11.7 per cent. Underlying profit of delivered significant progress against our in a digital world, with a significant increase in £8.1 billion increased 6 per cent, reflecting strategic priorities of Leading customer strategic investment. We have already made growth in income and lower costs, partly experience, Digitising the Group, Maximising a great start in implementing the strategic offset by the expected increase in the the Group's capabilities and Transforming initiatives which will further digitise the Group, impairment charge. Our relentless focus on ways of working as outlined on the next page. enhance customer experience, maximise our cost efficiency led to a reduction in operating capabilities as an integrated financial services costs despite increased strategic investment, Helping Britain Prosper Plan provider and transform the way we work. and our cost:income ratio improved further In addition, towards the end of the year we to 49.3 per cent. Asset quality remains strong The Group’s success is intertwined with the also announced a strategic partnership with with the Group’s gross asset quality ratio UK’s prosperity and we acknowledge we have Schroders to create a market leading wealth remaining flat at 28 basis points, while the net a responsibility to help address the economic, proposition. Continued delivery against our asset quality ratio increased to 21 basis points, social and environmental challenges the strategic priorities positions us well for future from 18 basis points, driven by expected lower country faces. We do this through our Helping success and our confidence is reflected in releases and write-backs. Britain Prosper Plan, which was simplified our guidance. and updated in 2018 to support our three The Group’s loans and advances were year strategy and focus on metrics that have Given our UK focus, our performance is stable at £444 billion with growth in targeted the most impact on people, businesses inextricably linked to the health of the UK segments including SME, Mid Markets and and communities. economy. Over 2018, economic performance consumer lending offset by the sale of the has remained resilient with record £4 billion Irish mortgage portfolio in the first During 2018 we lent over £12 billion to first employment and continued GDP growth and, half of 2018. The Group’s capital position time buyers and increased lending to SME whilst the near-term outlook remains unclear, remains strong with a pro forma CET1 ratio of and Mid Market businesses by £3 billion to particularly given the ongoing EU withdrawal 13.9 after allowing for ordinary dividends and Help Britain Prosper and have committed to negotiations, our strategy will continue to the share buyback. lending up to £18 billion in 2019 to businesses deliver for our customers. Our strategy is as part of our continued support for the UK Given the Group’s capital build of framed by our purpose of Helping Britain economy. We have also provided digital skills 210 basis points in the year, the Board has Prosper, being the bank with the largest retail training for more than 700,000 individuals, recommended a final ordinary dividend and commercial presence throughout the SMEs and charities, and supported over of 2.14 pence per share, bringing the total country. Our unique business model and 3,000 charities through our independent ordinary dividend for the year to 3.21 pence market leading efficiency will ensure we can charitable Foundations. per share. This represents an increase of continue to invest in customer propositions Lloyds Banking Group Annual Review 2018 05

STRATEGIC PROGRESS

Significant progress has been made against our strategic priorities since the launch of our strategic plan in February 2018 15.7m 24% >3m >1m Digitally active customers Year-on-year increase in customers with access to of future skills training technology spend Single Customer View hours delivered Leading customer Digitising Maximising the Transforming experience the Group Group’s capabilities ways of working We are building a market leading We have increased investment in In 2018 we launched Single We recognise that our colleagues digital experience, and in 2018 technology which now represents Customer View; a unique are critical to the success of launched API-enabled Open 16 per cent of operating costs, capability already enabling over our transformation and are Banking aggregation functionality with over two-thirds relating to 3 million customers to view in one therefore making our biggest ever as well as enhanced security and enhancing existing capabilities place the pension and insurance investment in our people. anti-fraud features. As part of and creating new ones. This has products they hold with the Group In 2018 we have increased our multi-channel model we also driven operational efficiencies alongside their banking products. training hours by over remain committed to maintaining and improved the experience of We have expanded our workplace 50 per cent, including more than the UK’s largest branch network, customers and colleagues. pensions and savings offering 1 million hours dedicated to with one out of five branches in the We are adopting new to over 2 million customers and developing skills of the future. country, whilst tailoring it to meet technologies, introducing have seen net inflows of £13 billion We have also introduced more customers’ complex needs more machine learning and creating into our financial planning and modern collaborative working effectively. In the year we opened approximately 780,000 hours of retirement propositions. environments, simplified people our flagship Halifax branch, additional colleague capacity We have also strengthened our processes by replacing several HR increased our mobile branch fleet through the use of robotics for client relationship model and systems with a single platform and to 44 and extended our remote simple repetitive tasks. We have improved online functionality for developed a new performance advice coverage to 270 branches. also made targeted investments in Commercial Banking clients. Our management system ‘Your Best’ We are also delivering increasingly public and private cloud solutions, Schroders partnership announced which launched in January 2019. targeted customer propositions. which will deliver more efficient in October is a key part of our We are also transforming the way The success of our multi-channel, and scalable infrastructure going strategy to accelerate growth in in which change is delivered with multi-brand approach is reflected forward, whilst collaborating Wealth by leveraging our multi- 15 per cent of teams now using in our net promoter score which with fintechs to accelerate the channel customer reach and Agile methodologies. increased to 62 in the year and is digital transformation of the Schroders’ investment expertise, up c.50 per cent from 2011. business, as part of our broader with the aim of becoming a innovation strategy. top three UK financial planning Strategic priorities and focus for business within five years. 2019 on pages 12 to 15

In 2018, the Group became the first FTSE 100 We are already delivering a market leading Summary company to set a public target to increase return on tangible equity and expect further Framed by our purpose to Help Britain representation of Black, Asian and Minority improvement in 2019 to 14 to 15 per cent Prosper, the Group has again delivered a Ethnic (BAME) colleagues, committing Capital build is expected to remain strong customer experience and financial to 8 per cent of senior management and strong at 170 to 200 basis points per performance in 2018 whilst making significant to 10 per cent of the total workforce by year with the Board's view of our CET1 progress in building new capabilities to 2020. At the end of the year 6.4 per cent of capital requirement remaining at around transform the Group to succeed in a digital senior management and 9.5 per cent of all 13 per cent plus a management buffer of world. While the year ahead will bring its own colleagues were from BAME backgrounds. around 1 per cent. As a result we continue challenges, given the ongoing economic and In recognition of the importance the Group to expect to deliver progressive and political uncertainty, I continue to believe that places on helping the UK transition to a low sustainable ordinary dividends whilst our simple, low risk business model is the carbon economy, in 2019 we have included a maintaining the flexibility to return surplus right one. Our current strategic plan for 2018 specific sustainability metric in our Plan. This capital to shareholders to 2020, with continued strong investment, signals our commitment and is supported Our net interest margin is expected to be will further improve customer propositions by a detailed sustainability strategy. More c.2.90 per cent in 2019 and, as previously and grow our leading digital bank as part of information on the sustainability strategy is guided, remain resilient through the our multi-channel strategy, while continuing provided on pages 24 and 25. plan period to provide leading and sustainable returns to Outlook Our market leading efficiency continues our shareholders. to be a competitive advantage and we Over 2018 the UK economy has proven itself now expect operating costs to be less to be resilient with record employment and than £8 billion in 2019, a year ahead of the continued GDP growth. Whilst the near term original target. We also continue to expect outlook for the UK economy remains unclear, a cost:income ratio, including remediation António Horta-Osório we continue to believe that our simple, low costs, in the low 40s as we exit 2020, with Group Chief Executive risk business model will deliver strong financial improvements in this ratio every year performance and market leading returns with a resilient net interest margin, lower operating Credit quality remains strong and, given our costs enabling increased investment, strong low risk business model and the significant asset quality and lower remediation costs. Our portfolio improvements in recent years, we guidance demonstrates our confidence in the expect an asset quality ratio of less than business model and the future prospects of 30 basis points in 2019 and the rest of the the Group: plan period 06 Lloyds Banking Group Annual Review 2018

Key performance indicators Our strategy has delivered strong performance

Delivering for all Financial our stakeholders The Board has been actively involved in the development and ongoing review of Underlying profit before tax Statutory profit before tax strategy with regular reviews of progress £m £m and priorities. Following the launch of the 2018 8,066 2018 5,960 next phase of our strategic plan in early 2018, 1 and in addition to the regular management 2017 7,628 2017 5,275 progress updates, a comprehensive Board 20161 6,782 2016 4,238 review process has been implemented 20151 7,275 2015 1,644 which includes formal quarterly updates and 20141 6,831 2014 1,762 selective deep dives on topical issues. In addition strategy days were held in June and Underlying profit increased in 2018, largely due to Statutory profit before tax increased significantly, November to consider market dynamics and higher income, and lower costs whilst asset quality largely driven by strong underlying performance the strategic challenges and opportunities the remains strong. and lower charges below the line. Group is likely to face going forward. Board 1 Restated to include remediation. members have also made a number of site visits to understand how the strategy is being implemented and perceived at a local level. Key performance indicators are regularly reviewed by the Board with the measures outlined on this page identifying the most effective output measures for assessing Ordinary dividend Statutory return on tangible equity financial performance and progress towards p per share % becoming the best bank for customers, colleagues and shareholders. 2018 3.21 2018 11.7 As a result of significant strategic progress in 2017 3.05 2017 8.9 2018, we have reported increased statutory 2016 2.55 2016 6.6 and underlying profits, strong capital 2015 2.25 2015 2.6 generation and have announced an increased ordinary dividend and our intention to 2014 0.75 2014 4.4 implement a share buyback. An increased ordinary dividend of 3.21 pence per The statutory return on tangible equity increased Customer relationships are key to our strategy share, in line with our progressive and sustainable reflecting the increase in statutory profit after tax, and we specifically measure customer dividend policy. In addition, the Board intends to and slightly lower average tangible equity. implement a share buyback of up to £1.75 billion. satisfaction and complaint levels. We also 2019 TARGET track our performance against the targets of Statutory return on tangible equity our Helping Britain Prosper Plan, about which 14-15% you can read more on page 20. Pay for performance across the Group Key performance indicators that are directly linked to remuneration are marked with this symbol. Cost:income ratio % Common equity tier 1 ratio (CET1) To ensure our employees act in the best Including remediation Excluding remediation % interests of customers and shareholders, 2018 49.3 46.0 1 13.9 remuneration at all levels of the organisation 2018 is aligned to the strategic priorities and 2017 51.8 46.8 20171 13.9 financial performance of the business 2016 55.3 48.7 20161 13.0 and also takes into account specific risk 1 2015 54.2 49.3 20151 13.0 management controls. 1 55.3 49.8 The remuneration awarded to Executive 2014 2014 12.8 Directors is heavily weighted towards Our cost:income ratio, including remediation, Our common equity tier 1 ratio remains strong. The the delivery of long-term, sustainable further improved to 49.3 per cent and remains the Board's view of the level of capital required to grow performance that aligns with shareholder lowest of our major UK banking peers. the business, meet regulatory requirements and experience. For the variable awards made cover uncertainties remains around 13 per cent plus 2020 TARGET 2019 TARGET (NEW) under the Group Performance Share and a management buffer of around 1 per cent. In the Cost income ratio Operating costs last two years we have reduced this to 13.9 per cent Group Ownership Share plans in respect including remediation <£8bn through dividend payments and buybacks. of performance in 2018, over 95 per cent is Low 40s awarded in shares, and 70 per cent is subject CURRENT TARGET to performance conditions applying over 1 Excluding TSB. Capital build three years. 170-200bps per annum with a regulatory capital requirement of around 13% and a management buffer of around 1% Performance at a divisional level 1 Pro forma, reflecting Insurance dividend. Also includes on pages 27 to 29 ordinary dividend and share buyback. 2016 reflects MBNA. Lloyds Banking Group Annual Review 2018 07

Non-Financial

Earnings per share Customer satisfaction Digitally active customers p (net promoter score) m

2018 5.5 2018 61.8 2018 15.7 1 2017 4.4 20171 61.2 2017 13.4 2016 2.9 20161 61.8 20161 12.5 2015 0.8 20151 58.5 20151 11.5 2014 1.7 20141 58.3 20141 10.4

Earnings per share increased in the year, largely due Our net promoter score is the measure of customer Reflecting the pace of digital adoption, the number to the significant increase in statutory profit. service at key touch points and the likelihood of of active digital customers increased in the year. customers recommending us. Customer satisfaction The number of mobile banking users also increased slightly increased in 2018. in the year, to 11.4 million, many of whom use our award winning Lloyds Bank app. Link to strategic priorities Link to strategic priorities Leading customer experience Digitising the Group 1 Restated to reflect changes in measurement approach. 1 Excludes MBNA.

Economic profit Our values and behaviours Customer complaints1 £m % favourable FCA reportable complaints per 1,000 accounts

2018 3,291 2018 79 H1 2018 3.9 2017 3,987 2017 80 H2 2017 4.2 2016 3,377 20161 78 H1 2017 4.1 2015 2,233 2015 78 H2 2016 4.3 2014 2,094 2014 72

Economic profit, a measure of profit taking into Our values and behaviours index comprises metrics Overall FCA reportable complaints excluding PPI account expected losses, tax and a charge for related to continuous improvement, collaboration, and claims management companies have continued equity utilisation. In 2018, the equity charge and tax innovation, inclusiveness with a strong focus on to reduce in 2018. charge increased. customers. We continue to see high numbers of colleagues believing we are demonstrating these The FCA changed the approach to complaint values. The survey in 2018 was completed by reporting in June 2016 and historic data is presented more than 57,000 colleagues (83 per cent of the since this date. Group headcount). Link to strategic priorities Link to strategic priorities Leading customer experience Leading customer experience 1 New baseline score introduced to tie in with new 1 Excluding PPI. Group behaviours.

Total shareholder return Colleague engagement index Helping Britain Prosper Plan % % favourable targets achieved 2018 (20) 2018 73 2018 20/22 2017 14 2017 76 2017 21/22 2016 (10) 2016 71 2016 20/24 2015 (2) 2015 71 2015 27/28 2014 (4) 2014 60 2014 20/25

Despite the strong financial performance our Colleague engagement remains strong despite Since we launched the Plan in 2014 we have made share price fell by 24 per cent in 2018 in line a slight decline since 2017 (our highest ever strong progress. In 2018, we achieved 20 out of with many other financial services companies. score). Both the engagement and performance 22 targets, helping to address some of the social, After including dividends paid in the year, total excellence indices are above UK high performing economic and environmental challenges the UK shareholder return was (20) per cent. norms with colleagues scoring pride, advocacy and faces. Find out more on page 20. teamwork favourably.

Link to strategic priorities Link to strategic priorities Transforming ways of working Maximising the Group's capabilities Leading customer experience 08 Lloyds Banking Group Annual Review 2018

Our external environment We operate in an increasingly dynamic market

Economy Operational impacts of the UK’s exit Regulation from the EU present risks for some of our Highlights customers’ businesses. With the future trading Highlights arrangements between the UK and EU Given our UK focus, the Group’s prospects unlikely to become finalised for a few years, The UK financial services sector is expected are closely linked to the fortunes of the UK businesses’ investment decisions are more to remain highly regulated economy difficult and postponement of investment There is increasing clarity on impending The economy faces significant uncertainty may weigh on future growth capacity of the regulation although new regulation and around the UK’s departure from the EU. economy. Uncertainty is also challenging market reviews continue to be issued With the expectation that the UK leaves in the UK’s attractiveness to foreign investors, an orderly fashion, the economy should be although many qualities that have attracted Market dynamics able to grow in 2019 at a similar pace to 2018 investors in the past remain. A number of key regulatory changes have More widely, the global economy is been implemented in the last 12 months Our low risk business model and focus on transitioning away from the exceptionally including ring-fencing and GDPR. The key efficiency positions us well irrespective of low interest rates in place in most advanced areas of focus for 2019 are as below: macro conditions, but if the UK economy economies since the financial crisis. This sees significant sustained deterioration this process will not always be constant, with Open banking is likely to impact Group performance different countries at different stages of Open Banking regulation was implemented in January 2018 with the aim of increasing Overview their economic cycle, and unwinding of ‘quantitative easing’ may increase volatility in competition by enabling customers to As the largest provider of UK banking financial markets. The widespread trend to view personal financial data from different services, our prospects are closely aligned increasingly populist politics, of which the providers in one place. Although currently just to the outlook for the UK economy. In the US-China trade war is a prime example, poses relating to current accounts it will be extended period following the decision to leave the a challenge to appropriate economic policy. to other products in 2019 and beyond. EU, the economy has been resilient. Growth Customer data protection is integral to this has slowed only slightly below its trend rate, Barring sudden shocks stemming from these with new EU wide technical standards (PSD2) the unemployment rate has continued to fall challenges, the UK economy is expected due to be implemented by September 2019. to a 43 year low, and property prices have to grow through 2019 to 2021 at a pace continued to rise slowly. This resilience is similar to that of the past three years, around Customer treatment expected to continue in 2019 and the next 1.5 per cent. The unemployment rate is A number of specific product reviews are few years, barring any sudden shocks to expected to rise only a little from its current currently being undertaken by the regulators business or consumer confidence particularly 43 year low, and further mild increases to ensure product clarity and pricing in connection with the UK’s exit from the EU in house prices are expected. The Bank transparency. These include reviews of the during 2019. Rate is expected to rise only slowly, as the mortgage market, overdraft charging and uncertainty drag on the economy fades. savings accounts. Market dynamics Growth in many of our markets is expected Households’ spending power has been to pick up, although the consumer credit Capital regulation improving in recent months as pay growth has market should continue to slow after its strong The Group continues to prepare for a begun to pick up and outpace inflation, which growth through 2014 to 2017. Impairments are number of regulatory capital developments is falling back towards the medium term target expected to increase in 2019 as we continue with uncertainty remaining around the of 2 per cent. Inflation adjusted pay is now to see lower write-backs and recoveries but implementation and impact of the final slightly above its previous peak in early 2016. remain at relatively low levels. Basel III reforms. This improvement is expected to continue through 2019, supported by a reduction in Our response Other planned fiscal tightening announced in the Given our UK focus, the Group’s prospects are A number of other regulatory initiatives 2018 Budget in November and the end of closely linked to the performance of the UK are currently in the pipeline, which seek to the cap to public sector pay growth. The economy. Our low risk, stable business model address, among other things, vulnerability, improvement in spending power should help and focus on efficiency positions us well to access to services, customer treatment and support growth in consumer spending and continue to support customers irrespective of choice, and competition. borrowing, whilst also increasing growth in macro conditions. households’ savings. Our response As a Group we always seek to comply with all The UK housing market has been broadly Link to principal risks related regulation. flat in 2018 in aggregate, although weakness Credit has been centred around London and the Capital Given the Group’s simple, low risk business South East where high prices are constraining Funding and liquidity model, it is well placed to meet these affordability. Improved households’ spending Market requirements and welcomes the positive power should support the housing market effect that they will have on the industry, its in 2019, as would resolution of uncertainty Link to strategic priorities customers and other stakeholders. about the immediate political and Maximising the Group’s capabilities economic concerns. Link to principal risks Conduct Governance Operational Regulatory and Legal Capital

Link to strategic priorities Delivering a leading customer experience Lloyds Banking Group Annual Review 2018 09

Customer Technology Competition

Key messages Key messages Key messages Customer behaviours continue to change, The pace of digital adoption continues to Competition within UK financial services with an increasing focus on personalised surpass expectations and is likely to increase remains high customer experiences and convenient, further in the coming years The competitive landscape is changing instantly accessible services, with these Harnessing new technology is enabling with new entrants such as fintechs and tech developments enabling customers to exert us to respond to customers' needs more giants continuing to increase disruption greater control over their finances than rapidly and efficiently through innovation, while incumbent banks ever before Cyber security and the protection of continue to re-focus Evolving demographics and life patterns customer data are increasingly important are changing the financial needs of our factors in retaining customer trust Market dynamics customers, in particular increasing focus on Our competitive landscape continues to financial planning for retirement Market dynamics evolve. A number of domestic incumbents The pace of digital adoption continues are intensifying their focus on the UK market, Market dynamics to surpass expectations and this trend is as a result of restructuring post-financial The needs and expectations of our customers likely to accelerate further, transforming crisis and ongoing regulatory changes. continue to evolve, driven by changing the way in which customers interact with In addition we are seeing increasing demographics and life patterns along with banks. New entrants to the financial services competition from smaller non traditional increased choice, both in terms of provider market are increasing disruption through and technology focused companies, and channel. The increasing use of digital has the innovative use of technology and data, some of whom are partnering with large, provided more brand choice for the customer often specifically targeting small, profitable traditional banks to build scale and drive across a number of sectors, with technology niches. These new entrants have also been efficiency. Tech giants also remain a future developments also raising customer increasingly collaborating with incumbent threat to the financial services sector, given expectations for control of their finances, both banks, while established peers have more strong brand loyalty, access to significant in terms of seeing their accounts in one place recently launched their own standalone customer data and a focus on delivering great and monitoring transactions. propositions designed to increase disruption. customer experiences. As we continue to see in a number of other Security and resilience remain important Looking ahead, competition is likely to remain industries, incumbents who do not respond factors, with the ability to respond to high, increasing focus on innovation and to changing customer preferences and heightened cyber and fraud risks key placing pressure on earnings across the sector. behaviours are at the greatest risk. to retaining customer trust in a digital environment, particularly given the introduction Our response Our response of Open Banking and API-enabled propositions With customers becoming more empowered We have a proven track record of providing which are changing the manner in which as a result of greater choice than ever before, products and services that our customers customers are able to share their data. we must continue to be responsive to their value but it is imperative that we keep pace changing expectations and ensure that we with market developments in order to Our response continue to offer products and services they maintain relevance with our customer base. As the UK's largest digital bank, we are value. These expectations are likely to be Our multi-channel offering, including the embracing technological developments to increasingly influenced by non-traditional largest branch network and digital bank in enhance customer experience. The increasing competitors in other industries as they the UK, enables customers to interact with use of intelligent systems provides an continue to raise the bar for innovation. opportunity to respond to customers growing us in whichever way they prefer. In addition, Our leading cost position, combined with expectations for personalisation, relevance our customer data provides the Group with our simple business model, provides us and control, while the automation of simple a wealth of information that we are now with the operational flexibility to compete transactions increases our capacity to focus using to facilitate greater personalisation, effectively. However, we are going further on complex, value adding transactions. In while ensuring we meet all of our customers to respond to these threats and our current addition, the use of technology provides evolving banking and insurance needs. strategic plan should equip us well to combat organisational benefits in terms of efficiency, Changes to customer expectations and these challenges. our ability to respond quickly to an evolving behaviour, demographics and life patterns operating environment, as well as aiding risk While greater competition increases choice mean that we cannot be complacent. taking decisions and mitigating fraud. for consumers and reinforces the need to While we have a number of competitive We remain focused on further enhancing the further improve the customer experience, the advantages in the current environment, customer experience and building on our breadth of our multi-brand and multi-channel including our differentiated multi-channel market leading efficiency position through the offering along with our market leading and multi‑brand propositions, securing use of technology, supported by a significant efficiency and customer focused business and enhancing the relationships with increase in investment over this strategic plan. model means we continue to compete from a our customers will be paramount to our In doing this, we must ensure that we continue position of strength. future success. to respond to innovation and meet the needs of our diverse customer base whilst ensuring Link to principal risks Link to principal risks system resilience and security. Regulatory and legal Regulatory and legal Conduct Conduct Link to principal risks Operational Operational Conduct People Link to strategic priorities Operational Regulation and legal Link to strategic priorities Delivering a leading customer experience Delivering a leading customer experience Link to strategic priorities Maximising the Group’s capabilities Delivering a leading customer experience Digitising the Group 10 Lloyds Banking Group Annual Review 2018

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

We are a simple, low-risk, ...with several evolving, customer focused UK financial distinctive competitive services provider... strengths...

OUR PURPOSE UK’s largest digital bank, branch reach and Helping Britain Prosper customer franchise with leading integrated Our success is interwoven with the UK’s prosperity and we aim propositions to Help Britain Prosper through creating a responsible business Our scale and reach across the UK means that our customer that focuses on customers’ needs, and delivering long-term franchise extends to around 26 million customers, with 15.7 million sustainable success. digitally active customers. We are uniquely positioned to deal with customers' banking and investment needs. OUR AIM Best bank for customers, colleagues Prudent, low risk participation choices and shareholders with strong capital position Doing the right thing for our customers, colleagues and Being low risk is fundamental to our business model. Our low risk shareholders by meeting their financial needs, helping them appetite is reflected through the low level of non-performing loans succeed, improving our service proposition and creating value and run-off assets, as well as our relative credit default swap spread. for them, is fundamental to our business model and the Our financial strength has been transformed in recent years with our long-term sustainability of the business. capital position amongst the strongest in the sector worldwide.

OUR PRODUCTS Our product range is driven by our customers’ needs and is Market leading efficiency through tech-enabled informed through comprehensive customer analysis and insight. productivity improvements Our simpler operating model and focus on operational Lending Mortgages, credit cards, motor finance, personal and efficiency provide a cost advantage, which benefits both business loans customers and shareholders. Deposit taking Current accounts and savings accounts Insurance Home insurance, motor insurance and protection Rigorous execution and management discipline focusing on key skills of the future Investment Pensions and investment products Experience of delivering change and transformation in recent Commercial financing Term lending, debt capital markets and years provides benefit as we further transform the business. private equity Risk management Interest rate hedging, currency and liquidity Multi-brand, multi-channel customer proposition with data driven customer experience OUR BUSINESS AREAS Operating in an integrated way through a range of distribution Our business areas are structured according to the products channels ensures our customers can interact with us when and and the services we provide to best serve our customers' how they want. financial needs. We currently have three business areas: Offering our services through a number of recognised brands Retail enables us to address the needs of different customer segments more effectively. Commercial Banking Insurance and Wealth

pages 27 to 29

As a large, UK focused financial EXTERNAL As previously discussed on pages 08 to 09, the main external challenges we face are: services provider we face several Evolving and uncertain economic environment, including EU exit uncertainty external and internal challenges High levels of regulation Evolving customer needs Responding to technology innovations Managing pressure from increased competition Lloyds Banking Group Annual Review 2018 11

...that underpin our clear strategy to transform the Group for success in a digital world...

In February 2018, we launched our new three year strategy to transform the Group for success in a digital world. We identified four strategic priorities focused on the financial needs and behaviours of the customer of the future and are investing more than £3 billion in these strategic initiatives over the plan period. OUR STRATEGIC PRIORITIES pages 12 to 15 Leading customer Maximising the

M experience Group’s capabilities E A IS X Driving stronger customer relationships Aligning the Group’s capabilities as the T I I M through best-in-class propositions while UK's sole integrated financial services G I I S

E continuing to provide our customers provider to deepen customer relationships D LEADING CUSTOMER with brilliant servicing and a seamless and grow in targeted segments. EXPERIENCE experience across all channels. Digitising the Group Transforming ways TR Deploying new technology to improve of working ANSFORM our efficiency and make banking simpler Enhancing colleague skills and processes, and easier for customers. investing in agile working practices and embracing new technology to drive better outcomes for customers.

...enabling us to Help Britain Prosper and deliver for all our stakeholders. Successful implementation of our strategy will ensure we Help Britain Prosper and deliver sustainable success for all stakeholders including customers, colleagues and shareholders.

KEY STAKEHOLDER OUTCOMES Customers Shareholders Colleagues Market leading digital proposition with Sustainable and low risk growth Enhanced customer focus culture UK’s largest branch network Market leading efficiency Transformed ways of working Single home for our customers’ banking Superior returns and lower cost of equity Enhanced colleague skills and capabilities and insurance needs Strong capital generation and attractive Compelling colleague proposition Personalised customer propositions distribution policy Better experience across channels

pages 16 to 18

INTERNAL We also face a number of internal challenges: Operating as efficiently as possible while remaining the best bank for customers Ensuring we have the right people and culture to meet evolving customer needs Ensuring IT systems are effective and resilient and that we are prepared for the threat of cyber risk 12 Lloyds Banking Group Annual Review 2018

Our strategic priorities Leading customer experience

In order to be the best bank for customers, Progress in 2018 directly to dedicated mortgage advisers, and we recognise that we must continue to enhancements that have enabled branch In 2018 we have made significant progress adapt to changes in customer behaviour, colleagues to spend more time meeting in enhancing our digital propositions technology-driven competition and customers’ complex needs. and branch network to reflect changing regulation. Our propositions must be customer preferences, while also reflective of heightened customer Personalising our customer proposition increasing personalisation. expectations for ease of access, Given our extensive insight, we are well personalisation and relevance, as well as the positioned to meet the growing demand Building a market leading digital experience needs created by changing life patterns. for personalised customer propositions. As In a year in which we met more of our part of our overall response to this significant customers’ simple needs via mobile than any opportunity, we recently launched our Lend other channel for the first time, we have made KEY OBJECTIVES FOR 2018 TO 2020 a Hand mortgage proposition that meets a number of functionality enhancements the needs of borrowers without a deposit Remain number 1 UK digital bank with Open designed to put customers more in control of Banking functionality to get onto the housing ladder, while also their finances digitally. offering market leading savings rates to Unrivalled reach with UK’s largest branch network, We were the first large UK bank to meet the serving complex needs family members or other supporters who regulatory deadline for Open Banking. We are willing to provide this deposit on their Data-driven and personalised customer have built on this success, launching our behalf. In addition, the strength of our Club propositions API-enabled aggregation functionality in the Lloyds proposition has enabled strong fourth quarter. Through this customers are deposit growth. These and other initiatives MEASURING PERFORMANCE now able to view their current accounts with us have enabled us to increase personalisation alongside those held outside of the Group. and to achieve growth of over £4 billion in We have also launched enhanced security underrepresented segments. 15.7 million and anti-fraud features including location Digitally active customers based transaction searches and the ability Focus for 2019 to freeze and unfreeze cards via mobile, with We will build on these strong foundations by other functionality enhancements including continuing to enhance our digital functionality improved statement searches, smart alerts to meet customers’ simple needs, while also >£4 billion and upcoming payment notifications. Balance growth in underrepresented segments ensuring that our branch network continues to meet complex needs effectively. In 2019, #1 branch network, serving complex needs we have already made our Open Banking Customers continue to prefer face-to-face capability available to all our Lloyds, Halifax contact for more complex needs. We and Bank of Scotland mobile app customers, therefore remain committed to maintaining with the significant broadening of the range the UK’s largest branch network as part of of products they are able to aggregate later our multi-channel proposition, while tailoring in the year putting them more in control of it to continue meeting these complex needs their finances . In addition we will retain our effectively. Highlights include the opening focus on using our significant data insight to of our flagship Halifax branch in London’s develop products that are more tailored to Oxford Street, 16 additional routes for our our customers’ specific needs. mobile branch fleet, which now serves over 210 locations, the roll-out of remote advice functionality, with 270 branches now linking Our Remote Advice Video Interviewing service is an important element of how we are improving the customer 270 experience, providing our customers branches now live with with greater flexibility and convenience Remote Advice in how they can discuss and meet their complex needs. In 2018, this service has gone from strength to strength, with an initial focus on our customers’ mortgage needs. Approximately 38,000 customers have already taken the opportunity to discuss their mortgage needs in one of our 270 branch locations that currently offer this service or from the comfort of their own home through our home to hub offering. Lloyds Banking Group Annual Review 2018 13

Our strategic priorities Digitising the Group

Our market leading cost position and Progress in 2018 solutions, with around 100 applications customer franchise are sources of migrated to private cloud. These investments We have made a strong start against our competitive advantage. However, we must will deliver a more efficient, scalable and strategic objectives of driving additional not be complacent and must further digitise flexible infrastructure going forward and act operational efficiencies that will make banking the Group to drive additional operational as enablers for further investment in 2019 simpler and easier for customers. We have efficiencies, improve the experience of our and beyond. This leaves us well positioned to embraced technology developments, with customers and colleagues and allow us to deliver further enhancements for the benefit increasing levels of investment underpinning invest more for the future. In addition, we of customers, colleagues and shareholders. the progress made in modernising our IT and must continue to simplify and progressively data architecture and improving processes for transform our IT architecture in order to Delivering for our customers the benefit of both customers and colleagues. use data more efficiently, enhance our The launch of our Open Banking aggregation multi‑channel customer engagement and Increasing investment in technology capability and multiple functionality create a scalable and resilient infrastructure. To position the Group for success in a developments throughout the year were digital world, we have embarked on one made possible by the replatforming of our of the largest transformation programmes mobile app during 2018. This replatforming KEY OBJECTIVES FOR 2018 TO 2020 in financial services. Consistent with this, placed our Lloyds, Halifax and Bank of Deeper end-to-end transformation targeting we have increased our investment in Scotland banking brands on the same 70 per cent of our cost base technology by 24 per cent, placing us in the platform and has enabled us to react faster top quartile amongst peers. Over two-thirds to change, doubling the frequency of new Simplification and progressive modernisation releases to the market. This supported the roll of our data and IT infrastructure of this spend related to enhancing existing capabilities and creating new ones, in line out of a number of new features for customers Technology enabled productivity improvements with our chosen approach of simplifying and including push notifications and virtual across the business modernising our IT and data architecture in a assistants, both of which have been positively progressive manner. received by customers to date, with strong satisfaction and adoption rates. MEASURING PERFORMANCE Adopting new technologies In order to improve processes and deliver Focus for 2019 24% better outcomes for customers, we are We will further embrace technology while Year-on-year increase in technology spend increasingly adopting new technologies. Key continuing to build our innovation pipeline highlights in the year include the introduction and collaborate with fintechs to accelerate of robotics for simple, repetitive tasks such as our transformation. We will also make better c.100 performing customer rectifications, with the use of our extensive customer data, creating Applications migrated to private cloud resultant release of approximately 780,000 a single record for each of our customers colleague hours creating additional capacity that allow us to deliver better insight driven to improve processes and propositions for propositions. As a result, we will make customers. In addition, we have introduced ongoing improvements to our customer machine learning capabilities in a number offering, leveraging our mobile app to deliver of areas, which has also led to significant new functionality to customers in a timely improvements to back office processes and manner and providing greater control and further operational efficiencies. insight to customers than ever before. In 2018, the Group also made targeted investments in both public and private cloud

When you first hear Digital Champions are colleagues who of being a Digital pledge to improve the digital skills and financial capability of at least two Champion, you individuals or organisations each year. assume that you have Thousands of colleagues have already to be a computer signed up. Digital Champions are one way whizz but, in reality, it’s we are committed to Help Britain Prosper. just doing the things Numman Miah volunteered at his local we all do every day, community centre at a session supporting without realising. those with limited IT skills. Many of the attendees were unemployed – improving Numman Miah their digital capabilities helps them in Digital champion their job searches. Working as a Group Digital Champion is a source of joy for Numman, providing him with the opportunity to >23,000 give something valuable back to his Digital Champions own community. 14 Lloyds Banking Group Annual Review 2018

Our strategic priorities Maximising the Group’s capabilities

To better address our customers’ banking Progress in 2018 leading wealth proposition that will better and insurance needs as an integrated serve customer needs and accelerate the In 2018 we have continued to enhance and financial services provider and improve their development of our financial planning and leverage the Group’s capabilities to meet overall experience, we will make better use retirement business. our customers’ banking and insurance needs of our competitive strengths and unique more effectively. We are excited by the potential that the business model. combination of our significant customer Meeting our customers’ growing financial base, multi-channel distribution and digital planning and retirement needs capabilities with Schroders’ investment KEY OBJECTIVES FOR 2018 TO 2020 As the UK’s sole integrated financial services and wealth management expertise and +£50 billion growth in financial planning and provider we are unique in being able to show technology brings and have consequently retirement open book assets under administration and serve all of our customers’ financial needs set an ambitious target of becoming a top >1 million new pensions customers in one place. In the year we have begun the three UK financial planning business within roll out of a Single Customer View capability, five years. +£6 billion of additional net lending to start-ups, with over 3 million customers now able to SMEs and Mid Market customers view in one place the insurance and pension Improving the experience of our products they hold with the Group alongside Commercial Banking clients In Commercial Banking we have increased MEASURING PERFORMANCE their more traditional banking products. This single home for banking and insurance needs net lending by £3 billion and have exceeded builds on our Open Banking aggregation start-ups, SMEs and Mid Market clients £3 billion capability and is supported by levels of digital our sustainability target through support for renewable energy projects capable Net lending to starts ups, SME and Mid Market engagement that significantly surpass those customers of standalone insurers. of powering over 2.6 million homes. We have also delivered improvements to the We have also made a number of client experience by simplifying our client improvements to our customer propositions, relationship model and enhancing our online including the expansion of our workplace >3 million functionality, with SME clients now able to pensions and savings offering following the Customers with access to Single Customer View check instantly whether they will be approved Zurich acquisition in 2017. These and other for loans or overdrafts of up to £25,000 before developments have enabled us to achieve net they apply. inflows of £13 billion open book assets under >£13 billion administration in the year. Focus for 2019 Open book assets under administration net We embrace innovation and are working with In 2019 we will extend the roll out of Single customer inflows external parties to develop potential solutions Customer View, with the expectation of that will enable customers to consolidate their reaching over 9 million customers by the end pension pots from multiple providers digitally, of the plan period, with other areas of focus making it quicker and easier for them to review including the further development and formal their retirement savings in one place. launch of our wealth partnership, Schroders Leveraging our partnership with Schroders Personal Wealth. We will also improve the to accelerate our Wealth strategy digital banking experience of our Commercial In October, we announced a strategic Banking clients, including significantly partnership with Schroders to create a market reducing the time to cash for unsecured lending to less than two hours.

The Group is uniquely placed in the UK to help customers throughout their whole life. Single Customer View helps our customers see everything that is important to them, including their bank account, pension and other insurance products, in one place, whether that is online, in branch or over the phone. 2018 saw us help over 3 million customers engage with their I had to stop making insurance and pension products more contributions to my simply, alongside their banking. In 2019 we pension, so seeing this want to reach many more customers and help them to do more with us, like make online alongside my a top up to their pension or start a home bank account now has insurance claim. reminded me I need to take some action and start saving again. Lloyds Banking Group customer Lloyds Banking Group Annual Review 2018 15

Our strategic priorities Transforming ways of working

Our colleagues are crucial to the success Progress in 2018 Embracing new ways of working of our business. In order to deliver our We are embracing new ways of working We recognise that our colleagues play a transformation during the current strategic and transforming the way in which change critical role in our transformation and have plan and beyond, our colleagues will require is delivered. In particular, 15 per cent of made significant progress in providing them new skills and capabilities to reflect the change is now delivered using Agile, with the skills they will need in the future as changing needs of the business as it adapts with 6,600 colleagues trained in these well as an improved working environment and to the evolving operating environment. At methodologies. This allows us to build cross tools to deliver change more effectively. At the the same time, colleague expectations of functional teams and increase collaboration, same time, we are simplifying and improving their employers are changing. As a result, efficiency and expertise in our decisions and, our colleague proposition, responding to we are making our biggest ever investment through this, deliver products and services changing expectations towards employers. in colleagues to ensure that we continue to that our customers really want, at a pace that attract, develop and retain these skills and ensures these remain relevant and timely. Investing in our people capabilities, while fostering a culture that The ongoing improvement in the capabilities We are making the biggest ever investment in supports a way of working that is agile, trust- of our people and the methods in which our people. As part of this, we have increased based and reinforces the Group’s values. we work will drive a continued cultural shift training hours by over 50 per cent to 4.3 million across the organisation and will help us deliver hours, with over 1 million of these relating to our significant strategic transformation. In developing key skills for the future. We are KEY OBJECTIVES FOR 2018 TO 2020 addition, this will improve satisfaction and on course to deliver our target of cumulative make it easier to do business, while also 50 per cent increase in training and development to 4.4 million training hours relating to skills for 4.4 million hours per year delivering a leading customer experience. the future by 2020. Up to 30 per cent change efficiency improvement In addition, we have brought our teams closer Focus for 2019 together, improving productivity and bringing We will continue to roll out Agile as we MEASURING PERFORMANCE further benefits to our colleagues’ working experience. Over 32 per cent of colleagues move towards our target of more than are now located in modern, collaborative 50 per cent of change delivered through >1 million working environments, as we continue to these methodologies by the end of this Future skills training hours delivered move to six strategic hubs across the UK. strategic plan. This combined with changes that will bring our colleagues closer together, We are also reducing complexity to allow our boosting innovation and increasing simplicity, colleagues to spend more time focusing on will make it easier for our people to focus on decisions that really matter. Consistent with 15% delivering greater value for customers. We will this focus, we have started the migration of Change delivered using Agile also further up-skill our colleagues alongside 60 people processes and systems onto a targeted recruitment to ensure our colleagues single HR platform, leveraging cloud based have the required capabilities to deliver our technology, and completely redesigned transformation. The attraction, retention and our performance management process, development of talent will be supported one of our key colleague journeys, reducing by further improvements to our colleague management time, bureaucracy and process, proposition, ensuring that this remains and focusing on meaningful colleague compelling and aligns to our culture. feedback and development. 32% of colleagues are now in co-located teams, moving from 39 locations to 6 strategic hubs I genuinely feel much more valued as a colleague than before the move. It’s great to see Lloyds Banking Group making such an investment in colleagues and it’s just a much more pleasant experience coming into the office. Lloyds Banking Group colleague 16 Lloyds Banking Group Annual Review 2018

Reflecting the needs of our stakeholders Our Board actively engages with our stakeholders

Our aim is to be the best bank for customers, Customers Shareholders colleagues and shareholders. As the UK’s leading financial services provider we We aim to treat our customers fairly, making The Group has the largest shareholder operate in, and support, communities it easy for them to find, understand and base in the UK and we undertake a across the country and help British people access products that are right for them, comprehensive shareholder engagement and businesses prosper. We have around whatever their circumstances. programme with regular feedback to 26 million customers, 2.4 million shareholders management and the Board. and around 65,000 colleagues. Engaging The Group is focused on doing the and responding to all our stakeholders right thing for customers and the Board Investor Relations has primary responsibility is fundamental to the way we operate receives regular updates and reports on for managing and developing the Group’s and maintaining the highest standards of progress. In particular the Board reviews external relationships with existing and business conduct is vital to our corporate the Customer Dashboard results on a potential institutional equity investors culture and the long-term success of the quarterly basis, and approves the annual and analysts. With support from senior Group. This therefore remains a major focus customer plans management, they achieved this through for senior management and the Board. more than 400 meetings in 2018, covering The Group also looks to benchmark approximately 800 institutions in various One of the primary tasks of the Board is to performance among customers and uses locations including the UK, North America, develop a strategy which can achieve this insight from a range of internal and Europe and Asia long-term success and generate sustainable external research, including net promoter returns and this is only possible if we engage, scores (NPS) and the GFK customer index, The meetings were primarily aligned to consult and act on the needs of stakeholders. to improve services results and included discussions on strategic progress and financial and operational To enable this and ensure stakeholder Our new strategy launched in February 2018 performance. Feedback from meetings is considerations are at the heart of all corporate with the aim of meeting customers’ passed directly to senior management decision making, various papers relating to needs more effectively in a digital world. different stakeholder groups are presented The Board was heavily engaged in its During 2018 senior management increased regularly at Board. In addition all Board papers development and ensuring the customer their investor engagement with over submitted are required to consider the impact was at the heart of strategic investment 300 investors seen during the year. of proposals on key stakeholder groups. In addition to the Group Chief Executive The real focus on customers is not just On occasion, some decisions may not provide and Chief Financial Officer, an increasing evidenced by the regularity of presentations a positive outcome for all stakeholders number of other executive committee but also by the existence of the Group however we aim to act in the best interests of members undertook investor meetings in Customer First Committee. This is a the Group and all stakeholders and be fair and the year sub-committee of the Group Executive balanced in our approach. Committee which focuses on Group Various members of the Board have engaged We engage with stakeholders in many customer experience, customer targets and with shareholders through the year, including different ways and this section outlines the key plans and best practice externally the Chairman, the Senior Independent stakeholder Groups, how we are interacting Director and the Remuneration Committee To ensure Board members truly understand with them and how they inform strategic Chair. The Remuneration Committee Chair, the needs of customers, a series of branch decision making. in particular, held numerous meetings with visits and customer events were undertaken investors to gain feedback following the during 2018 enabling direct feedback remuneration resolution outcome at the We aim to treat all customers fairly and have 2018 Annual General Meeting (AGM) specifically looked to ensure vulnerable – More information on the 2018 AGM customers are not disadvantaged. advisory vote can be found on page 03 Our websites and mobile banking apps are being accessibility accredited by In October, the Chairman and a number AbilityNet and we have provided more of Non-Executive Directors hosted a than 90,000 hours of vulnerable customer governance lunch with various major training this year. We are the UK’s largest institutional investors covering key topics provider of basic bank accounts, opening such as responsible business, remuneration around 33 per cent of all basic bank and risk enabling us to provide an update accounts in 2018. We also work with many on progress whilst enabling investors to support organisations to remove the provide feedback on these subjects barriers to accessing banking services In addition to these meetings the Group In January 2019 we launched Lend a Hand, We recognise the importance to customers communicates with its shareholders specifically designed to help address the of both their data and their money being through regular results and strategy biggest challenges that first time buyers face safe, and we use advanced technology announcements and has a comprehensive whilst getting onto the property ladder. Lend to protect them, including systems that website on which detailed company a Hand mortgage removes the need for a first prevent fraud and detect fraudulent information is available. To ensure effective time buyer deposit - with this instead coming payments in real time. We are continuously communication with all shareholders, the from savings from family or other supporters. improving our cyber defences and also Group Chief Executive specifically writes Owning a home remains the number one life educate customers to improve their own to all shareholders, updating them on goal for 18 to 35 year olds, but half say saving security by championing public awareness progress every six months for a deposit is the biggest barrier. campaigns, including Take Five. Colleagues also receive appropriate, ongoing training and support, such as anti-bribery training to £30bn help them protect our customers lending to first time buyers by 2020 Lloyds Banking Group Annual Review 2018 17

Investor Relations also provides regular Colleagues We hosted regular breakfasts and informal reports and feedback to the executive dinners with the Chairman and Group Chief team and the Board on key market issues Our colleagues take pride in working for an Executive. These took place in various hub and shareholder concerns. This includes inclusive and diverse bank and with their locations and invitations were extended to a six monthly update on reputation and support we are building a culture in which contingent workers and suppliers working an annual presentation by our corporate everyone feels included, empowered and within these locations brokers on market dynamics and inspired to do the right thing for customers. The Group held its biggest ever live corporate perception communication event, Helping Britain We are committed to making the Group The AGM is an opportunity for shareholders Prosper LIVE, which was attended by a great place to work and believe that our to hear directly from the Board on the 4,000 colleagues. This event, hosted by colleagues are crucial to the long-term Group’s performance and strategic the Group Chief Executive, Chairman and success of our business. We believe it is direction, and importantly, to ask questions. key members of the executive leadership important that the Board engages actively In 2018 team, provided the opportunity for our with colleagues and understands the views colleagues to see first-hand how we are – over 200 shareholders attended of the Group’s diverse workforce and does Helping Britain Prosper every day. Speeches – over 70 per cent of total voting this in a variety of ways, as outlined below were broadcast live on our intranet and rights voted Ensuring all colleagues act in the right way is sessions were run in five key hub locations to provide opportunities for members All institutional shareholder letters are key to embedding a customer focus culture. of our colleagues in those locations to discussed at the Board Nomination and Our Code of Responsibility outlines the experience the event Governance Committee to ensure Board values and behaviours which colleagues members are aware of investor sentiment should follow. Colleagues review the We held meetings throughout the year and concerns code annually during mandatory training, with our recognised unions, attended by alongside Anti-Bribery training based on the Chair of the Remuneration Committee The Group has a significant retail our Anti-Bribery Policy. We have a zero and the Group Chief Executive. Key topics shareholder base and a team dedicated tolerance approach to bribery, and expect included the Living Wage, which applies to engaging with retail shareholders who, the same from all colleagues and third to our whole workforce with support from the Company’s registrar parties providing services for, and on behalf Equiniti Limited, deliver the Group’s of the Group. Any non-compliance with The Board participated in the transforming shareholder service strategy, including codes, policies or standards will result in ways of working labs, providing them the AGM. Further work is progressing colleagues facing disciplinary action with the opportunity to see first hand the activity underway in support of changing to enhance engagement with retail During the year we communicated directly shareholders in 2019. Group Secretariat the way we work and improving the with colleagues detailing the Group's colleague experience provide feedback to the Board and performance, changes in the economic appropriate Committees to ensure the and regulatory environment and updates The Board reviewed the results from annual views of retail shareholders are received on our key strategic initiatives. We also surveys; Banking Standards Board (BSB) and considered hosted regular Ask Me Anything sessions survey and cultural assessment colleague providing the opportunity for colleagues engagement survery, and agreed specific and contingent workers to ask questions actions as a result and receive real time responses directly We are committed to improving the from members of the Board and senior transparency of workforce disclosure and colleagues across all departments for the first time in 2018 participated in the Members of the Board visited several Workforce Disclosure Initiative Group offices, including our new Halifax During 2018, the Board discussed how flagship branch in London, and the best to engage with the wider workforce; MBNA offices in Chester, providing permanent employees, contingent workers the opportunity to meet key functions and third party suppliers that work on the in our supply chain supporting our IT Group’s premises. From the second quarter and transformation labs and customer of 2019, the Board will receive quarterly call handling insight into workforce related activity and support key decision making We offer a competitive and fair reward package. Colleagues are eligible to participate in HMRC approved share plans which promote share ownership by giving Helping Britain Prosper LIVE employees an opportunity to invest in Group shares. Further information can was a fantastic experience, be found on page 98 in the Directors’ which I felt lucky and grateful to Remuneration Report of our 2018 Annual be involved with. I left the day Report and Accounts. feeling inspired and excited to see how the Group will evolve in the next three years. Lloyds Banking Group colleague 4,000 colleagues attended Helping Britain Prosper LIVE with around 14,000 watching remotely 18 Lloyds Banking Group Annual Review 2018

Reflecting the needs of our stakeholders continued

Communities and environment Regulators and government Suppliers

As the largest retail and commercial bank We have a good relationship with our Given the size of our organisation we are in the UK, we have representation across regulators and other government authorities reliant on external suppliers for a number of the country. We specifically invest in local and liaise regularly. key services. Dealing with suppliers in the communities across Britain to help them right way is important for future success. prosper economically and build social During 2018 we had regular meetings cohesion by tackling disadvantage. with our various regulators at different Our supply chain is crucial to the way levels of the organisation from Board to we serve our customers, and through Board members are directly involved with senior management it our reach is considerable. We use a our considerable community engagement multi brand approach to deliver specific Individual meetings took place between the and environmental focus. Our Responsible products and services. We work with PRA and members of the Board during the Business Committee, a committee of the around 3,500 suppliers of varying sizes, year to discuss subjects such as the Audit Board, provides oversight and support for most in professional services sectors such and Risk Committees, IT Resilience and the Group’s Helping Britain Prosper Plan, and as IT, cyber, operations, management Cyber and ring-fencing the plans for delivering the aspirations to be consultancy, legal, HR, marketing and seen as a trusted and responsible business FCA contact during the year with members communication. In 2018 our supplier of the Board focused on governance, expenditure was £5.8 billion with 95 per cent The Group’s Helping Britain Prosper Plan culture and strategy of our direct suppliers located in the UK is reviewed and approved annually by the Board to ensure it focuses on what The newly appointed ring-fenced bank All material contracts are subject to rigorous matters most to people, businesses and Directors went through a rigorous approval cost management governance and updates communities in the UK process including interviews with the PRA on key supplier risks are provided to ahead of appointment to ensure they met the Board The Responsible Business Committee is regulatory requirements also responsible for overseeing the Group’s We assess how significant each supplier approach to responding to global issues From a tax perspective in 2018, we paid is to our operations across the various of environmental sustainability, including £2.6 billion in tax, one of the largest components of our extended supply chain measurement and reporting. Following contributors to UK tax revenues. We are also and we conduct an annual programme a 2018 Board review of our sustainability a major tax collector, gathering £2 billion of assurance reviews based on the risk approach we have developed a new in 2018. We have a clear Tax Policy which criticality the supplier represents. We sustainability strategy, read more on is part of our Board-approved Group Risk require suppliers to adhere to relevant page 24 and 25 Management Framework. We comply Group policies and comply with our Code with HMRC Code of Practice on Taxation of Supplier Responsibility. This defines our Our four independent charitable for Banks and the Confederation of British expectations of responsible business and Foundations are key to our vision of Industry’s Statement of Tax Principles. You behaviour, underpinning our efforts to share tackling social disadvantage. Sara Weller, can read more about our Tax Strategy and extend best practice Non-Executive Director and Chair of the online www.lloydsbankinggroup.com/ Responsible Business Committee joined The Group supports the UN Declaration our-group/responsible-business/reporting- the Lloyds Bank Foundation for England of Human Rights, and the International centre/ and Wales as trustee during 2018 for an Labour Organisation (ILO) Fundamental initial term of three years Conventions, whilst complying with all relevant laws. We also support several We recognise the importance of supporting voluntary standards, including the UN communities beyond our own banking Guiding Principles on Business and services, and over five years we have Human Rights invested £5 million to support the Credit Unions sector. We signpost to local credit This year we made further enhancements unions when we cannot support customers’ to address the risk of Modern Slavery in borrowing needs our supply chain and provided training on human trafficking and modern slavery for In partnership with Macmillan, our Cancer specialist colleagues Support Team has helped support 3,100 customers and identified £411,000 in In 2019, we will lend up to benefits from a range of products and £18 billion to businesses services, to help them reduce the financial impact of a cancer diagnosis. We are also across the UK. During raising awareness of financial and domestic these uncertain times, it is abuse through our ‘Acknowledge, Respond, important that our customers Refer’ campaign, developed with support have financial support and from the Lloyds Bank Foundation for expert guidance to navigate England & Wales, and working closely with the challenges they may face. Business in the Community and UK Finance Whatever the future brings, Read more on Responsible Business, our we will continue to support Helping Britain Prosper Plan targets and UK businesses as part of how we have supported the UK on page 20 our commitment to Help Britain Prosper. António Horta-Osório, £18bn Group Chief Executive lending to UK businesses in 2019 Lloyds Banking Group Annual Review 2018 19

Responsible Business We have served Britain through our products and services for more than 250 years, across every community, and millions of households. Our success is interwoven with the UK’s prosperity and we aim to Help Britain Prosper by operating as a responsible, sustainable and inclusive Group. This underpins our purpose and the way we deliver our strategy.

We recognise that we have a responsibility We are one of the UK’s largest corporate to help address the economic, social and donors and use our scale and reach to environmental challenges that the UK faces. tackle some of society’s more complex Our approach to responsible business ensures challenges through our independent that colleagues are equipped to make the charitable Foundations right decisions supported by our values-based We have taken a leading role in culture, and the way we embed responsible championing diversity and mental health, business in our policies, processes and training. setting public goals for increasing Black, Asian & Minority Ethnic (BAME) Our areas of focus representation at all levels We can only help with the unprecedented Each year we gather stakeholder views Our ambition is to take a leading role levels of change in Britain today by staying through a dedicated materiality study. In 2018, in supporting the UK’s transition to a true to our purpose of Helping Britain Prosper. they identified demonstrating responsibility sustainable low carbon economy Operating responsibly is fundamental to at our core as a key priority, including how we everything we do, from lending to first time keep customers’ data safe, support vulnerable buyers to tackling disadvantage in areas such customers, lend responsibly, support Responsible business as mental health. Every colleague has a part businesses and work with suppliers. Read of the year to play, and every part of the Group has its more on our stakeholders on pages 16 to 18. own action plan for supporting customers, Lloyds Banking Group has been voted while involving colleagues in our work Stakeholders also identified building Responsible Business of the Year 2018 in communities. capability and digital skills as a key issue, by Business in The Community, which alongside tackling social disadvantage, highlighted our Helping Britain Prosper We believe we can make a substantial inclusion and diversity and sustainability. Plan, commitment to delivering social contribution to Britain’s social and economic We believe that the way we are addressing benefits through digital transformation prosperity. We’re developing a Skills these issues places us in a unique position to and support for the lower carbon Academy, initially focusing on Digital Skills, Help Britain Prosper: economy. Euromoney magazine has also in pilot in the North West of England. Through ranked us Best Bank in Western Europe for our charitable Foundations we support We are using our own capabilities in digital Corporate Responsibility 2018. thousands of charities working with groups banking to help develop the skills of people, on issues such as domestic abuse and businesses and charities homelessness. As sustainability becomes more of a priority for us all, we have a role to play in supporting a lower carbon economy, the UN's Sustainable Development Goals and the UK Government's Clean Growth strategy. Sara Weller Non-Executive Director and Chair, Responsible Business Committee

We are working with thought leaders to build our understanding of operating responsibly, and to help drive change across industry, in how responsible business is considered. We are in the early stages of this The Centre for Responsible Business exciting collaboration between Lloyds (CFRB) is a unique joint venture between Lloyds Banking Group and the University of Banking Group and the University Birmingham’s Business School. This initiative of Birmingham. Moving from an combines research with business, exploring initial idea, to challenge-centred how all businesses can work in an ever research and engagement, exploring The Lloyds Banking more responsible and ethical manner. The how businesses can be ‘rewired outputs of this approach will have impacts responsibly’ to inform, shape and Group Centre for across a range of industries, benefitting the energise Responsible Business. It’s a entire economy. unique opportunity to explore best Responsible Business The CFRB’s work aligns with our purpose to practice, and inform the evolution Help Britain Prosper, and our support for the of responsible business decision UN’s Sustainable Development Goals. The Centre was established to help learn lessons making, underpinning Lloyds Banking from the past and to help us and others Group’s pioneering initiative, ‘Helping work in a different way going forward. It will Britain Prosper’. It has been some play a pivotal role in ensuring the worlds of journey so far, laying down the academia, business and policy-making work foundations for future success. together more effectively to drive change. One area of focus will be exploring the Professor Ian Thomson, Director regulatory, operational and ethical barriers to Lloyds Banking Group Centre the implementation of artificial intelligence. for Responsible Business 20 Lloyds Banking Group Annual Review 2018

Responsible Business Helping Britain Prosper Plan As part of Helping Britain Prosper, we believe we have a responsibility to help address some of the social, economic and environmental challenges that the UK faces. We manage this through our Helping Britain Prosper Plan.

Launched in 2014 and revised annually, the Plan focuses on the areas in which we can As a UK focused retail and make the biggest difference. commercial financial services In 2018 we set specific targets aligned to our company, we recognise our 3 year strategy. It continues to unite and responsibility to help address the inspire our colleagues and for 2019, we have economic, social and environmental included a specific sustainability metric, challenges that the UK faces. We alongside the six existing priority metrics, remain fully committed to Helping highlighted in bold below. Britain Prosper.

visit lloydsbankinggroup.com/ António Horta-Osório prosperplan Group Chief Executive

ICONS ICONS 49

HELPING BRITAIN PROSPER PLAN 2019 17 ICONS: BLACK/WHITE VERSION NO ZERO GOOD HEALTH QUALITY GENDER CLEAN WATER 49 POVERTY HUNGER AND WELLBEING EDUCATION EQUALITY AND SANITATIONICONS Area of focus 2018 2019 2020ICONS1 UN Sustainable achieved targets targets Development Goals

17 ICONS: BLACK/WHITEAFFORDABLE AND VERSION DECENT WORK AND INDUSTRY, INNOVATION page REDUCED 21 SUSTAINABLE CITIES RESPONSIBLE Helping Britain get a home £12.4bn £10bn £30bn CLEAN ENERGY ECONOMIC GROWTH AND INFRASTRUCTURE INEQUALITIES AND COMMUNITIES CONSUMPTION AND PRODUCTION NO ZERO GOOD HEALTH QUALITY GENDER CLEAN WATER Amount of lending committed to help people buy their first home ICONSICONS 4949 ICONSICONSPOVERTY HUNGER AND WELLBEING EDUCATION EQUALITY AND SANITATION

CLIMATE LIFE BELOW LIFE PEACE AND JUSTICE PARTNERSHIPS ACTION WATER ON LAND STRONG INSTITUTIONS FOR THE GOALS 2 1717 ICONS: ICONS: BLACK/WHITE BLACK/WHITEAFFORDABLE AND VERSION VERSION DECENT WORK AND INDUSTRY, INNOVATION page REDUCED 21 SUSTAINABLE CITIES RESPONSIBLE Helping people save for the future £ 7.4bn £32bn £50bn CLEAN ENERGY ECONOMIC GROWTH AND INFRASTRUCTURE INEQUALITIES AND COMMUNITIES CONSUMPTION AND PRODUCTION THE GLOBAL GOALS NONO ZEROZERO GOODGOOD HEALTH HEALTH QUALITYQUALITY GENDERGENDER For SustainableCLEANCLEAN WATER WATERDevelopment Growth in assets that we hold on behalf of customers in retirement POVERTYPOVERTY HUNGERHUNGER ANDAND WELLBEING WELLBEING EDUCATIONEDUCATION EQUALITYEQUALITY ANDAND SANITATION SANITATION and investment products When an icon is on a square, that square must be proportional 1 x 1.

The white icon should be contained by its defined colour, or black PEACE AND JUSTICE background. CLIMATE LIFE BELOW LIFE PARTNERSHIPS ACTION WATER ON LAND STRONG INSTITUTIONS FOR THE GOALS 2 AFFORDABLEAFFORDABLE AND AND DECENTDECENT WORK WORK AND AND INDUINDUSTSRTYR, YINNO, INNOVAVTIONATION REDUCEDREDUCED SUSTAINABLESUSTAINABLE CITIES CITIES RESPONSIBLERESPONSIBLE page 21 49 Supporting businesses to start up and grow £3bn £5bn £6bn CLEANCLEAN ENERGY ENERGY ECONOMICECONOMIC GROWTH GROWTH ANDAND INFR INFRASATRUSTRUCTURECTURE INEQUALITIESINEQUALITIESICONS ANDAND COMMUNITIES COMMUNITIES CONSUMPTIONCONSUMPTION ANDAND PRODUCTION PRODUCTION THE GLOBAL GOALS Increased amount of net lending to start-up, SME and ICONS ICONS 49 For Sustainable Development Mid Market businesses ICONS When an icon is on a square, that square must be proportional 1 x 1. 17 ICONS: BLACK/WHITE VERSION The white icon should be contained by its defined colour, or black PEACEPEACE AND AND JUSTICE JUSTICE background. CLIMATECLIMATE LIFELIFE BELOW BELOW LIFELIFE PARTNERSHIPSPARTNERSHIPS ACTIONACTION WATERWATER ONON LAND LAND STRONGSTRONG INSTITUTIONS INSTITUTIONS FORFOR THE THE GOALS GOALS 17 ICONS: BLACK/WHITENO VERSION ZERO GOOD HEALTH QUALITY GENDER CLEANpage WATER 21 Building capability and digital skills 700,232 600,000POVERTY HUNGER1.8m AND WELLBEING EDUCATION EQUALITY AND SANITATION THETHE GLOBAL GLOBAL GOALS GOALS NO ZERO GOOD HEALTH QUALITY GENDER CLEAN WATER ForFor Sustainable Sustainable Development Development Number of individuals, SMEs and charities trained in digital skills, POVERTY HUNGER AND WELLBEING EDUCATION EQUALITY AND SANITATION including internet banking WhenWhen an an icon icon is is on on a asquare, square, that that square square must must be be proportional proportional 1 1x x1. 1.

DECENT WORKTheThe white AND white icon icon should shouldINDUS beT RbeY ,contained INNO containedVATION by by its its defined defined colour, colour, or orblack black RESPONSIBLE AFFORDABLE AND background.background. REDUCED SUSTAINABLE CITIES CLEAN ENERGY ECONOMIC GROWTH AND INFRASTRUCTURE INEQUALITIES AND COMMUNITIES CONSUMPTION AND PRODUCTION AFFORDABLE AND DECENT WORK AND INDUSTRY, INNOVATION REDUCED SUSTAINABLE CITIES RESPONSIBLE ICONS 49page 22 Tackling social disadvantage across Britain 3,113 2,500CLEAN ENERGY ECONOMIC2,500 GROWTH AND INFRASTRUCTURE INEQUALITIES AND COMMUNITIES CONSUMPTION AND PRODUCTION Number of charities we support as a result of our £100m ICONS commitment to the Group’s independent charitable Foundations CLIMATE LIFE BELOW LIFE PEACE AND JUSTICE PARTNERSHIPS ACTION WATER ON LAND STRONG INSTITUTIONS FOR THE GOALS 17 ICONS: BLACK/WHITE VERSION CLIMATE LIFE BELOW LIFE PEACE AND JUSTICE PARTNERSHIPS ACTION WATER ON LAND STRONG INSTITUTIONS FOR THE GOALS NO ZERO GOOD HEALTH QUALITY GENDER CLEAN WATER THE GLOBAL GOALS For Sustainablepages Development Championing Britain’s diversity 35.3% POVERTY 36.7%HUNGER AND WELLBEING40% EDUCATION EQUALITY AND SANITATION THE GLOBAL22–23 GOALS ICONS For Sustainable49 Development ICONS 49 Percentage of senior roles held by women When an icon is on a square, that square must be proportional 1 x 1. ICONS The white icon should be contained by its defined colour, or black ICONS Whenbackground. an icon is on a square, that square must be proportional 1 x 1.

Percentage of roles held by Black, Asian and Minority 9.5% AFFORDABLEThe AND white9.7% icon shouldDECENT be WORK contained AND by its definedINDUSTR10%Y , INNOcolour,VATION or black REDUCED SUSTAINABLE CITIES RESPONSIBLE CLEAN ENERGYbackground. ECONOMIC GROWTH AND INFRASTRUCTURE INEQUALITIES AND COMMUNITIES CONSUMPTION AND PRODUCTION Ethnic colleagues 17 ICONS: BLACK/WHITE VERSION 17 ICONS: BLACK/WHITE VERSION

NO ZERO GOOD HEALTH QUALITY GENDERNO CLEANZERO WATER GOOD HEALTH QUALITY GENDER CLEAN WATER Percentage of senior roles held by Black, Asian and Minority 6.4% POVERTY 7.2%HUNGER AND WELLBEING8% EDUCATION EQUALITYPOVERTY ANDHUNGER SANITATION AND WELLBEING EDUCATION EQUALITY AND SANITATION CLIMATE LIFE BELOW LIFE PEACE AND JUSTICE PARTNERSHIPS Ethnic colleagues ACTION WATER ON LAND STRONG INSTITUTIONS FOR THE GOALS

2 THE GLOBAL GOALS AFFORDABLE AND DECENT WORK AND INDUSTRY, INNOVATION REDUCED SUSTAINABLEAFFORDABLE CITIES AND For SustainableDECENTRESPONSIBLE DevelopmentWORK AND INDUSTRY, INNOVATION REDUCED SUSTAINABLE CITIES RESPONSIBLE Helping the transition to a sustainable low carbon 2.6m CLEAN ENERGY 3.5mECONOMIC GROWTH AND INFR5mASTRUCTURE INEQUALITIES ANDCLEAN COMMUNITIES ENERGY ECONOMICCONSUMPTION GROWTH ANDpages INFRASTRUCTURE INEQUALITIES AND COMMUNITIES CONSUMPTION AND PRODUCTION 24–25 AND PRODUCTION economy When an icon is on a square, that square must be proportional 1 x 1.

The white icon should be contained by its defined colour, or black Average number of homes that could be powered as a result background. of our support of UK renewable energy projects CLIMATE LIFE BELOW LIFE PEACE AND JUSTICE PARTNERSHIPSCLIMATE LIFE BELOW LIFE PEACE AND JUSTICE PARTNERSHIPS ACTION WATER ON LAND STRONG INSTITUTIONS FORACTION THE GOALS WATER ON LAND STRONG INSTITUTIONS FOR THE GOALS

THE GLOBAL GOALS THE GLOBAL GOALS For Sustainable Development For Sustainable Development 1 Figures are all cumulative excluding tackling social disadvantage across Britain and championing Britain's diversity. 2 Figures are cumulative from 2018. When an icon is on a square, that square must be proportional 1 x 1. When an icon is on a square, that square must be proportional 1 x 1. The white icon should be contained by its defined colour, or black The white icon should be contained by its defined colour, or black background. background. Lloyds Banking Group Annual Review 2018 21

Helping Britain get a home Partnering for progress As the largest lender to the UK housing sector, we In 2018 we led a consultation on the new are committed to supporting home ownership Essential Digital Skills Framework for the across the UK and are working to make it an Department for Education as their sole affordable reality for millions of people, lending evaluation provider. This work provided the £12.4 billion to first time buyers in 2018. business case for the Government’s Digital Skills Entitlement; free digital skills training for Helping people all adults from 2020. We are a leading member of the UK save for the future Government’s Digital Skills Partnership, We recognise the importance of savings advisors to the Secretary of State for Digital, to build financial resilience and help to and chair the Department for Digital, Culture, tackle disadvantage, so we’re making Media and Sport’s Digital Enterprise Delivery saving for the future as easy as possible by Group. We have played a central role in improving choice, flexibility and control. In implementing a Charity Digital Code of 2018 we grew the assets we hold on behalf Practice, with local authorities now adopting of customers in retirement and investment our Digital Champions model. We have products by £7.4 billion. also worked closely with national and local governments like Greater Manchester Supporting business Combined Authority and Welsh Assembly to start up and grow to drive change. Supporting UK businesses of all types is Lloyds Bank Academy key to Helping Britain Prosper. In 2018, we In November we launched the Lloyds Bank helped more than 124,000 businesses start Academy. Initially piloted in Manchester, the up, increased the amount of net lending to Academy provides basic and workplace skills Developing Britain’s start up, SME and Mid Market businesses through online and face-to-face courses. by £3 billion and doubled our financial Developed with our charitable Foundations, investment at the Lloyds Bank Advanced academia, industry and Government, the manufacturing talent Manufacturing Training Centre (AMTC). Academy will scale nationally in 2019 and our existing initiatives will be closely aligned to Britain is renowned for its manufacturing extend our reach and impact. Building capability expertise. The sector accounts for 10 per cent of UK GDP, for 44 per cent of all and digital skills UK exports and directly creates 2.7 million Our ambition is to enhance capability and jobs. Yet there is a lack of qualified workers. digital skills, helping 1.8 million people with The shortfall could reach 220,000 by 2020 skills training by 2020 alongside investing so it is vital to train new talent. in apprenticeship schemes. Working with over 50 partners, in 2018 we provided digital We are helping to address this. In 2018, skills training to over 700,000 individuals we doubled our financial investment at and organisations. the Lloyds Bank Advanced Manufacturing Training Centre in Coventry to £10 million Digital skills over 10 years and committed to train Using a blend of transactional and attitudinal 3,500 apprentices, graduates and data we provide the UK's largest study of the Inspiring the next engineers by 2024. We have already digital capability of individuals, SMEs and created 178 apprenticeships and trained charities. The Lloyds Bank Consumer Digital digital generation 80 graduates and 295 engineers, including Index 2018 shows that 21 per cent of the UK lack basic digital skills, including 10 per cent of many women and individuals from a Black, We are building digital talent through our Asian and Minority Ethnic background. the working population. A further 8 per cent #ReDiscover initiative. Launched in July are entirely offline. 42 per cent of SMEs and 2018 #ReDiscover brings a new digital More than 250 Lloyds Bank customers 48 per cent of charities lack the skills to benefit edge to learning, helping children aged 11 have been supported through our from the time and costs savings associated with to 14 to think and explore, meet digital partnership with the Manufacturing digital capability. The Lloyds Bank Business and professionals, undertake work placements, Technology Centre (MTC), with around Charity Digital Index 2018 revealed that the UK and build future digital needs into their 70 of them undertaking a bespoke loses £84.5 billion in annual revenue due to a programme to improve efficiency and lack of SME digital capability. studies. By holding school events and co- creating lesson plans we have inspired over productivity or adopt new technology. To combat these challenges we have several 800 students to date. key initiatives: 23,000 colleagues volunteered to become Digital Champions supporting local communities; we delivered Digital Knowhow A career at the MTC has allowed workshops to over 3,000 organisations Having a 5 minute chat with a me to work on high profile and covering fraud and digital marketing with an student today has changed her challenging manufacturing online toolkit signposting key resources; we outlook on the future. That’s what projects, applying all the skills I’ve co-created a digital curriculum and delivered makes #ReDiscover so worthwhile. learnt, and also learn new ones. events in schools to inspire over 800 students and teachers with our ReDiscover programme; Rachel Rishi Chohan and colleague volunteers hosted over Colleague volunteer MTC Graduate 2018 1,000 code clubs in schools. 22 Lloyds Banking Group Annual Review 2018

Responsible business continued

Tackling social Ethnicity We have a comprehensive Ethnicity Strategy disadvantage across Britain to help us meet our goals, which focus on As one of the UK’s largest corporate attracting and retaining talented BAME donors, we use our scale to reach millions of colleagues; building cultural awareness people and help tackle social disadvantage at all levels; and increasing visibility of in communities across the UK. Our four authentic role models from a wide range of independent charitable Foundations are ethnic backgrounds. By the end of the year fundamental to our vision of tackling social 6.4 per cent of senior managers were BAME disadvantage. They cover the UK and the colleagues, compared with 5.6 per cent Channel Islands, partnering with small and in 2017, while BAME colleagues made up local charities to help people overcome 9.5 per cent of our total workforce, compared complex social issues and rebuild their lives. with 8.3 per cent in 2017. Our total community investment in 2018 was To achieve this, activities in 2018 included: £56 million . This includes our colleagues’ developing our Authentic Leadership time, direct donations, and the money we Programme for BAME senior managers give to our Foundations, which receive a and our Career Development Programme share of the Group’s profits annually. The for BAME middle managers; actively Taking a joined up Foundations supported over 3,000 charities promoting our Race, Ethnicity and Cultural in 2018, providing help for some of the Heritage Network, which now has around approach to tackling most disadvantaged and vulnerable 4,000 members; and promoting our Ethnicity people in Britain. Role Models List. In October, we signed domestic abuse In addition to funding, we support the the UK Government’s Race at Work Charter Foundations through volunteering, and and already meet and exceed its principle more than 370 colleagues are also active as requirements. In 2018 we won the overall In partnership with our independent mentors to charities supported by each of Outstanding Employer Award at the inaugural charitable Foundations, we’re providing the Foundations. This year, we ran a pilot with Investing in Ethnicity Awards. more than just traditional funding. Our the Lloyds Bank Foundation for England and Foundations are helping us work with Gender diversity Wales to recruit some of our senior leaders as charities they support to develop a deeper We remain committed to having women charity trustees and launched a Community understanding of the challenges faced fill 40 per cent of our senior management Forum through which colleagues support by customers affected by complex and roles by 2020 and have been included in charities. Through these initiatives, our sensitive issues. The Times ‘Top 50 employers for women’ in Foundations help us better understand some 2018, for the seventh year running. This year The charity Behind Closed Doors (BCD) of the social issues people may be facing we continued sponsoring Women of the helps people in Leeds exit harmful and we use these insights to help shape Future Ambassadors, connecting successful situations relating to domestic abuse. effective responses. women with female students, and launched Lloyds Bank Foundation for England our Sponsoring Leaders programme, and Wales provides financial support to Championing Britain’s enabling women in senior roles to champion help them deliver their vital services to the potential of women in more junior roles. vulnerable people. To deepen the support diversity The promotion rate for the 100 colleagues they can provide, the Foundation matched We champion inclusion and diversity (I&D) who completed the programme in 2018 was BCD with a senior Group colleague, Dave to reflect the diverse communities we serve. around five times that of non-participants. Moore, who has joined them as a charity We were the first FTSE100 company to set From January 2019, the Group will be included mentor and valued Board member, helping a public goal on gender diversity and this in the Bloomberg Gender-Equality Index for them become sustainable, develop their year became the first FTSE100 company to the first time. offering and reach more people in need. set public goals to increase Black, Asian and Minority Ethnic (BAME) representation at all For more information about Gender Pay see pages 82 to 104 of our 2018 Annual levels. Additionally, this year we enhanced Report and Accounts our focus on mental health, as this is key to economic prosperity and social inclusion, We were a top ten Trans-Inclusive employer Dave is dynamic and energetic, and therefore to Helping Britain Prosper. and he’s motivated the Board to and fifth employer overall in the Stonewall Top 100 2018, the highest ranked financial services become more proactive. He’s We know that the most inclusive organisations are the most successful, so we welcome and company in the UK. Through our Rainbow encouraged a business-like value the unique difference of every colleague. network colleagues raised almost £100,000 to approach, where we can more 2018 has been a year of significant progress support key charities and we continued our easily consider the long-term against our I&D objectives, which we know is sponsorship for Stonewall Young Campaigners, future, setting clear goals and a source of pride for our colleagues; this year empowering young people aged 16 to 21 a strategy for achieving them, 88 per cent of them agreed in our annual survey to become campaigners for Lesbian, Gay, Bisexual and Transgender equality. and he’s supported the Board to that the Group is an inclusive place to work. Around 50 per cent of colleagues also belong become more strategic in their to or support one of our five diversity networks. Supporting people with disabilities governance role. It’s been great Traditionally, employment of people with having his support. Indicator is subject to Limited ISAE3000 (revised) disabilities has focused on making changes assurance by Deloitte LLP for the 2018 Annual to physical infrastructure or working Louise Tyne Responsible Business Reporting. Deloitte’s 2018 assurance statement and the 2018 Reporting Criteria practices. We are moving the debate from Operational Director, BCD are available online at accommodating disabilities to developing www.lloydsbankinggroup.com/our-group/responsible- talent and careers. We offer bespoke business/ training, career development programmes Lloyds Banking Group Annual Review 2018 23

and recruitment process adjustments for colleagues and applicants with disabilities, including those who have become disabled while employed. Training includes courses run with external disability consultants, which have been described as life changing by attendees. We give full and fair consideration to applications from all candidates, offering guaranteed interviews for candidates declaring a disability, and meeting minimum role requirements. We are unbiased in our assessment, selection, appointment, training and promotion of people. In 2018 we retained our Business Disability Forum (BDF) Gold The Mental Health and Money Advice Service Standard, and hold Disability Confident Leader More than £8 million raised since 2017 has helped our status with the Department for Work and charity partner, Mental Health UK, open the Mental Health Pensions. The BDF considers our workplace and Money Advice Service – the UK’s first dedicated adjustment process for disabled colleagues to advice service for people with mental health and money be ground breaking, creating a best practice I know I still have a way to problems. These two issues are often inter-related, so the go, but thanks to Mental case study that they have shared with around new service is urgently needed. 400 other BDF member organisations. We Health and Money It comprises a public website providing information across are set to achieve Autism Friendly Bank and a number of issues including benefits, debt problems and Advice I have improved Employer accreditation from the National managing mental health. It also operates a referral only my confidence and built Autistic Society in mid-2019. telephone advice service. up some skills to better Mental health & wellbeing Since its launch in November 2017, the website manage my situation. has received around 180,000 views and more than As a Group we believe that a shift in mindset is Stephen 1,000 people have been referred for confidential advice. needed amongst UK employers when it comes Mental Health and Money More than 2,400 cases have been handled, with each to mental health. We all have mental health Advice Service user as well as physical health and our approach client on average about £1,000 better off as a result. By focuses on removing the stigma attached to November 2018 a total annual saving of over £1.3 million mental ill health, addressing it in the same way had been delivered. as we would any physical condition; through a culture of conversation and support. Our mental health strategy supports colleagues Our Inclusion and Diversity data and leaders through a mental health resource centre and this year we stepped up mental 2018 20171 health training for colleagues at all levels. Gender To date more than 40,000 colleagues have Board Members Male 9 9 completed training on mental health and Female2 4 3 we are training 2,500 colleagues to become Senior Managers3 Male 4,701 4,939 mental health advocates by 2020. We enrolled 200 leaders in our new Optimal Resilience Female 2,573 2,544 Leadership Programme, which covers personal, Colleagues3 Male 30,458 31,216 mental and physical wellbeing and are now Female 42,372 42,956 working on extending this to the next level of Ethnic Background 2,000 senior managers. Percentage of colleagues from a BAME background 9.5% 8.3% Through a targeted communication campaign BAME managers 9.0% 8.3% and personal stories shared at all levels, we have encouraged colleagues to freely discuss BAME senior managers 6.4% 5.6% mental health, with the number of those who Disability tell us they have mental health issues up by Percentage of colleagues who disclose they have a disability4 1.7% 2.6% 22 per cent over the past three years. Sexual Orientation We also extended the focus on mental Percentage of colleagues who disclose they are lesbian, gay, health to our colleague wellbeing resources, bisexual or transgender 2.0% 1.7% increasing private medical benefit cover for 1 2017 reporting scope excludes MBNA colleagues, who became part of Lloyds Banking Group plc in June 2017, as their mental health to match that of physical health. separate grading structure could not be aligned to LBG grades at that point. Our employee assistance programme now 2. Data as at 31 December 2018. Amanda Mackenzie joined the Board on 1 October 2018, and Deborah McWhinney retired from the Board on 31 December 2018. provides colleagues with access to counselling 3 Reporting scope: payroll headcount includes established and fixed term contract colleagues, parental leavers, MBNA and cognitive behavioural therapy, and colleagues and Internationals. Excludes Leavers, Group Non-Executive Directors, contractors, temps, and agency staff. our workplace adjustments programme 4 Percentage disclosure for disability has reduced due to the implementation of a new HR system in Nov 2018, with differing increasingly offers support for mental as well categories. Not all disability data could be directly mapped across into the new system. as physical types of disability. Diversity scope: Payroll headcount including parental leavers. Excludes contractors, temps and agency staff. Gender information includes International colleagues and MBNA. All other diversity information is UK Payroll only. Senior Recognition that mental health is an issue for Managers: Grades F+. Managers: Grade D-E. Data source: HR system (Workday). Apart from gender data, all diversity information is based on colleagues’ voluntary self-declaration. As a result this data is not 100 percent representative; our our customers and the communities we serve, systems do not record diversity data for the proportion of colleagues who have not declared this information. inspired us to create our ‘Get the Inside Out’ advertising campaign to challenge mental health stereotypes. 24 Lloyds Banking Group Annual Review 2018

Responsible business continued

Helping the transition to Our ambition 2010. To ensure this plan supports the UK’s Our goal is to be a leader in supporting climate change priorities and our long term a sustainable low carbon the UK to successfully transition to a more strategy, we have a set of market leading economy sustainable, low carbon economy. We have targets to improve the sustainability of our own set ourselves seven ambitions anchored to the operations and supply chain. These include Following a Board level review of our goals laid out in the UK Government’s Clean reducing our operational waste by 70 per cent approach to environmental sustainability, we Growth Strategy, as these align closely to our by 2020 and 80 per cent by 2025 (compared to have developed a new sustainability strategy business priorities: 2014/15), and reducing our CO2e emissions by which focuses on the opportunities and 60 per cent by 2030 and 80 per cent by 2050 Business: become a leading UK commercial threats related to climate change and the (compared to 2009) www.lloydsbankinggroup. bank for sustainable growth, supporting our need for the UK to transition to a sustainable com/our-group/responsible-business/ clients to transition to sustainable business low carbon economy. sustainability-in-lloyds-banking-group. We models and operations, and to pursue new anticipate achievement of the 2050 target well This strategy supports the Task Force on clean growth opportunities Climate Related Financial Disclosures (TCFD) before this date, driven by both our energy recommendations and incorporates an Homes: be a leading UK provider of efficiency improvements, direct investment implementation plan to address them and customer support on energy efficient, in renewable energy on our sites and through achieve full disclosure within five years. The sustainable homes purchasing Renewable Energy Guarantees of Origin (REGOs) to cover our UK electricity strategy maps to the key headings used Vehicles: be a leading UK provider of low consumption. We are now able to state that in the TCFD framework. emission/green vehicle fleets 100 per cent of our UK electricity comes Strategy Pensions & investments: be a leading UK from renewable sources and to show our pension provider that offers our customers commitment to supporting the transition Our commitment and colleagues sustainable investment to the low carbon economy, we have joined The UK is committed to the vision of a choices, and challenges companies we the RE100 campaign, a collaborative, global sustainable, low carbon economy, and invest in to behave more sustainably initiative uniting businesses committed to has placed clean growth at the heart of its and responsibly 100 per cent renewable energy. industrial strategy. This will require a radical Insurance: be a leading UK insurer in Environmental section within Directors’ reinvention of the way people, work, live and Report see page 81 of our 2018 Annual improving the resilience of customers’ Report and Accounts do business. lives against extreme weather caused We have a unique position within the UK by climate change Governance economy with our purpose of Helping Green bonds: be a leading UK bank in the We have established a dedicated governance Britain Prosper. The successful transition green/sustainable bonds market process to provide oversight and ownership to a sustainable, low carbon economy that of the sustainability strategy. This includes is resilient to climate change impacts and Our own footprint: be a leading UK bank the Responsible Business Committee sustainably uses resources is of strategic in reducing our own carbon footprint and (RBC), a sub-committee of the Board, which importance to us. We support the aims challenging our suppliers to ensure our meets quarterly and provides Board level of the 2015 Paris Agreement on Climate own consumption of resources, goods and oversight. This committee is chaired by Change, and the UK Government’s Clean services is sustainable Sara Weller, Group Non-Executive Director Growth Strategy. For each ambition we will consider the and includes the Chairman, Lord Blackwell Government’s targets and current plans. as a member. At Executive level, we have Our approach We will use forward looking scenarios to established a Group Executive Sustainability To meet our commitment, we will: identify risks and opportunities over short, Committee (GESC), which is a sub-committee Take a strategic approach to identifying new medium and long term time horizons and of our Group Executive Committee (GEC) opportunities to support our customers assess how they impact the resilience of and provides oversight and recommends and clients and to finance the UK transition our strategy. We are developing a series decisions to the GEC. The RBC, GEC and to a sustainable low carbon economy, of propositions against each ambition and GESC have all been informed on key climate embedding sustainability into Group have defined an implementation plan to related issues by external industry experts. strategy across all activities achieve a leadership position within three We have created a Group sustainability years. We will work with Government and Identify and manage material sustainability team, supported by divisional Governance other stakeholders on thought leadership to and climate related risks across the Group, Forums and working groups led by divisional help inform the creation of the policies and disclosing these and their impacts on the Managing Directors. This enables us to have market conditions required for large scale Group and its financial planning processes a coordinated approach to oversight, delivery investment in the transition to a sustainable, in line with the TCFD recommendations and reporting of the Group sustainability low carbon economy. To support these strategy to the GESC, along with a mechanism Use our scale and reach to help drive propositions, we are equipping our business for keeping management and the Board progress towards a sustainable and relationship managers and other colleagues updated on climate related issues impacting resilient UK economy, environment and with training and tools to have more informed the Group. society through our engagement with conversations on climate related issues. As industry, Government, investors, suppliers part of our TCFD implementation plan, we will For the implementation of the TCFD and customers also develop a forward looking approach to recommendations across the Group, we have established a senior executive group TCFD Embed sustainability into the way we do systematically reporting material financial risk and opportunity aggregated across the Group. forum. We aim to expand the consideration of business and manage our own operations sustainability and climate related issues into in a more sustainable way Improving our own environmental footprint relevant Board and governance committees is an important foundation for our activity. including processes to monitor and oversee We’ve consistently reduced our environmental progress against goals and targets related impacts, thanks to the ambitious to climate issues. We will also consider how Environmental Action Plan we launched in sustainability might be incorporated into our remuneration policies. Lloyds Banking Group Annual Review 2018 25

Risk management Metrics and targets Each division within the Group is responsible As part of our TCFD implementation plan we for identifying and prioritising relevant climate are developing our approach to reporting related risks and opportunities and integrating metrics and targets. This will include a them into their risk management processes, long term reporting framework, enabling which determine materiality and classify risks us to track our performance against our into traditional risk categories. This includes sustainability strategy, and disclose the identifying potential risks through horizon financial impact of climate change related scanning of changes in regulation, technology risks and opportunities. We will define metrics and consumer demand. Risks are classified linked to our green finance propositions and in terms of whether they impact the Group the carbon exposure of our activities. Our in the short, medium or long term. Examples targets will have specific time horizons against include possible changes in the sustainability defined baseline years and will consider of homes, how vehicles are powered, changes the level of historical and forward looking in UK energy mix, through to changes in the projections that can be made available. We frequency and severity of extreme weather aim to develop this new reporting framework events. The Group sustainability team in the first half of 2019 and will start to facilitates collaboration across divisions to include key quantified metrics in our next increase understanding of consistent issues, annual report. as well as our risk, opportunities and financial We have made sustainability a focus area in impact on an aggregated basis. our Helping Britain Prosper Plan and have During 2018, we reviewed our external sector defined metrics for it. We disclose our in- statements to confirm that they align to our house greenhouse gas emissions, as shown sustainability strategy and consider appropriate below, with supporting commentary detailed climate related risk. We introduced a position in the directors report Environmental section Clean Growth statement for coal and revised statements within Directors’ Report see page 81 of our for defence, mining, oil and gas, power, and 2018 Annual Report and Accounts and our forestry. For more information on our sector set of in house environmental targets on our Finance Initiative statements www.lloydsbankinggroup.com/ website www.lloydsbankinggroup.com/our- our-group/responsible-business/sustainability- group/responsible-business/sustainability-in- In 2018 we launched a £2 billion Clean in-lloyds-banking-group. In 2019, we will lloyds-banking-group. Growth Finance Initiative (CGFI) to review these statements again, and consider help British businesses reduce their Environmental section within Directors’ developing statements for other sectors environmental impacts and benefit from and topics. We will review ways to embed Report see page 81 of our 2018 Annual Report and Accounts the transition to a low carbon economy. sustainability in the Group’s key policies. The CGFI aims to be the most inclusive Find out more about our set of in-house Forward looking scenario analysis environmental targets at www.lloydsbanking. UK green funding proposition available, incorporating physical and transition risk will com/our-group/responsible-business/ incentivising all types of businesses be utilised across the Group to systematically sustainabilityinlloyds-banking-group to invest in low carbon projects by identify risks and opportunities. During 2018, providing discounted financing for Commercial Banking undertook forward capital expenditure or investment with looking scenario analyses including business a green purpose. as usual and low carbon transition scenarios, identifying sectors with a higher level of climate related risk and opportunity. Detailed assessments are now being undertaken on higher risk sectors to understand the CO2e emissions (tonnes) potential financial impact to our customers Oct 17-Sept 18 Oct 16-Sept 17 Oct 15-Sept 161 and to the Group. We will be completing Total CO e (market-based) 115,467 303,065 340,2612 further reviews of higher risk sectors in 2019 2 to inform portfolio analytics, counterparty Total CO2e (location-based) 244,407 286,892 340,261 risk and financial product development, Total Scope 1 48,461 51,419 53,023 while increasing the scope to also include Total Scope 2 (market-based) 1,976 178,771 202,3192 other divisions. Total Scope 2 (location-based) 130,916 162,598 202,319 Total Scope 3 65,030 72,876 84,918 1 Restated 2017/2016 and 2016/2015 emissions data to improve the accuracy of reporting, using actual data to replace estimates. 2 Note our market based emissions are equal to location based for 2016/15. This is in accordance with GHG protocol guidelines in absence of appropriate residual factors.

Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004). We are now reporting to the revised Scope 2 guidance, disclosing a market-based figure in addition to the location-based figure. The measure and reporting criteria for Scope 1, 2, 3 emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at www.lloydsbankinggroup.com/ResponsibleBusiness Scope 1 emissions include mobile and stationary combustion of fuel and operation of facilities. Scope 2 emissions have been calculated in accordance with GHG Protocol guidelines, in both location and market based methodologies. Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2018 Annual Responsible Business Reporting. Deloitte’s 2018 assurance statement and the 2018 Reporting Criteria are available online at www.lloydsbankinggroup.com/our-group/responsible-business 26 Lloyds Banking Group Annual Review 2018

Responsible business continued

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.

Reporting requirement Policies and standards which govern our approach Information necessary to understand our business and its impact, policy due diligence and outcomes

Environmental matters Environmental statement Reflecting the needs of our stakeholders: Communities and environment, page 18 Helping the transition to a sustainable low carbon economy, pages 24 to 25

Employees Ethics and Responsible Business Policy1 Reflecting the needs of our stakeholders: Colleagues, page 17 Ethical Policy Statement Championing Britain’s diversity, pages 22 to 23 Colleague Policy1 Code of Responsibility Health and Safety Policy1 Respect for Human rights Human Rights Policy statement Reflecting the needs of our stakeholders: Colleague Policy1 Suppliers, page 18 Pre-Employment vetting standards1 Championing Britain’s diversity, pages 22 to 23 Data Privacy Policy1 Anti-Slavery and Trafficking Statement Information and Cyber Security Policy Social matters Volunteering standards1 Reflecting the needs of our stakeholders: Customers, page 16 Matched giving guidelines1 Reflecting the needs of our stakeholders: Communities and environment, page 18 Helping Britain Prosper Plan, page 20 Helping Britain get a home, Helping people save for the future, Supporting business to start up and grow, Building capability and digital skills, page 21 Tackling social disadvantage across Britain, page 22 Anti-corruption Anti-bribery Policy1 Reflecting the needs of our stakeholders: and anti-bribery Anti-bribery policy statement Customers, page 16 Anti-money laundering and counter terrorist Reflecting the needs of our stakeholders: financing Policy1 Colleagues, page 17 Fraud Risk Management Policy1 Description of principal risks and impact of business activity Helping the transition to a sustainable low carbon economy: Risk management, page 25 Risk overview 2018 themes, page 31 Our principal risks, pages 32 to 35 Description of the business model Our Business Model, Page 10

Non-financial key performance indicators Key performance indicators, pages 6 to 7 Our strategic priorities, pages 12 to 15 Helping Britain Prosper Plan, page 20

1 Certain Group Policies and internal standards and guidelines are not published externally. 2. 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 2018. Lloyds Banking Group Annual Review 2018 27

Divisional overview Retail

Retail offers a broad range of financial Progress in 2018 Maximising the Group’s capabilities service products to personal and business Helping Britain Prosper with over banking customers, including current Leading customer experience £12 billion of gross mortgage lending to accounts, savings, mortgages, credit cards, Launched API-enabled Open Banking first time buyers and over 120,000 start-up unsecured loans, motor finance and leasing aggregation capability, providing businesses supported solutions. Its aim is to be the best bank for customers with more control and the ability Halifax was the first UK bank to reach customers in the UK, by building deep and to view in one place the current accounts 1 million switchers since the Current enduring relationships that deliver value, and they hold with us alongside those held Account Switching Service began in 2013 by providing them with choice and flexibility, outside the Group Transforming ways of working with propositions increasingly personalised Maintained position as UK’s largest Delivered around 25,000 training hours to their needs. Retail operates a multi-brand digital bank with 15.7 million digitally to Group Customer Services colleagues, and multi-channel strategy and continues active customers enabling them to better support to simplify its business and provide more Maintained the UK’s largest branch vulnerable customers transparent products, helping to improve network, while tailoring it to meet service levels and reduce conduct risks, customers’ complex needs more effectively. Financial performance whilst working within a prudent risk appetite. Opened a new flagship Halifax branch and Underlying profit at £4,272 million increased 41 micro branches, while also introducing 13 per cent 16 new mobile branches, with the enlarged Net interest income increased 4 per cent fleet helping serve customers in more reflecting an 8 basis point improvement in £4,272m remote and rural communities across more net interest margin with the benefits of a Underlying profit increased by 13% than 210 locations full year of MBNA and lower funding costs Expanded Remote Advice video service, more than offsetting ongoing mortgage with approximately 38,000 customers pricing pressure having already discussed their mortgage Other income was 2 per cent lower needs with remote advisers in one of the following implementation of a simpler >£12bn 1m 270 branches that offer this service or from overdraft fee structure Lending to first time Halifax was the first UK their own homes buyers bank to reach 1 million Operating lease depreciation reduced Increased personalisation, with the switchers since the 3 per cent reflecting improved used car recent launch of Lend a Hand mortgage current account switching market prices service began in 2013 expanding support to first time buyers Operating costs of £4,915 million increased Reduced complaints (excluding PPI) by 1 per cent, as increased investment in the 10 per cent in 2018 UK’s largest digital bank business was partly offset by efficiency Active online users (m) Digitising the Group savings. Remediation reduced to £267 million, Rolled out Voice ID technology to make driven by lower provision charges 2018 15.7 banking quicker and easier for customers, Impairment increased 21 per cent reflecting 20171 13.4 whilst providing added protection. Since full year inclusion of MBNA and non-repeat 20161 12.5 launch, over 770,000 registered customers of UK mortgages write-backs

1 have used this functionality, completing Loans and advances include the increase 2015 11.5 4 million verifications in Business Banking balances and growth 20141 10.4 Continued to improve mobile banking in Black Horse offset by reductions in the 1 Excludes MBNA. experience, giving customers greater closed mortgage book. Open mortgage control and choice: book balances were broadly flat at – First UK bank to use location based £267 billion reflecting continued focus on payment tracking, enabling customers to the trade-off between volume and margin identify fraudulent transactions in a highly competitive market – Launched card controls increasing Customer deposits included average customer security with functionality to current account growth of 6 per cent and cancel or temporarily freeze card use continued reduction in tactical savings – Introduced cheque image clearing, Risk-weighted assets increased to £94 billion providing customers with the ability to pay reflecting changing asset mix, along with in cheques remotely model refinements

Taking a prime position on London’s busy Oxford Street, and with 13,500 square feet of floor space, the Halifax Flagship branch is one of the largest in the UK. It offers a relaxed, comfortable space open to everyone. Customers and non-customers alike are Banking is often quick and encouraged to explore at their leisure. transactional but we know At the heart of the branch, the Halifax Home Hub will help customers with all aspects of the home buying that some financial decisions and moving process, with colleagues available without appointment. In the travel zone, customers need more thought and will be able to order and exchange over 50 currencies that’s why branches remain Creating warm and get advice on saving for their next trip, or how to pay for things while they are away. In the kids’ savings vitally important. zone, children can learn about good savings habits, informal spaces to meet, using the coin counting machine to see how much Lloyds Banking Group colleague they have saved up. On the lower ground floor, a state-of-the-art safe deposit facility using biometric work and learn fingerprint technology will store customers’ possessions securely. 28 Lloyds Banking Group Annual Review 2018

Divisional overview continued Commercial Banking

Commercial Banking has a client-led, Progress in 2018 Transforming ways of working low risk, capital efficient strategy, and Restructured our Commercial Banking is committed to supporting UK-based Leading customer experience operations teams to align processing clients and international clients with a link Successful launch of Lloyds Bank Corporate activity with the changing ways that to the UK. Through its segmented client Markets, the Group’s non ring-fenced bank, customers consume our services coverage model, it provides clients with enabling us to continue meeting our clients’ Over 94,000 colleague training hours a range of products and services such broad range of needs while helping to create completed, helping us to develop the skills as lending, transaction banking, working a safer, more secure financial services industry and capabilities of the future capital management, risk management and Further simplified the client coverage model debt capital markets services. Continued to better reflect the changing needs of our Financial performance investment in capabilities and digital clients. Coverage model now based on propositions enables the delivery of a Return on risk-weighted assets of three segments – SME and Mid Corporates, leading customer experience, supported 2.50 per cent, up 6 basis points with lower Large Corporates and Financial Institutions by increasingly productive relationship risk-weighted assets driven by continued managers, with more time spent on value- Awarded Business Bank of the Year at balance sheet optimisation more than adding activity. the FDs’ Excellence Awards for the 14th offsetting a reduction in underlying profit consecutive year, with an overall satisfaction Net interest income was slightly lower rating of nine out of ten at £3,004 million, with the net interest margin slightly lower at 3.27 per cent, Digitising the Group and marginally higher average interest £2,160m Launched a digital eligibility and pricing earning assets Underlying profit decreased by 3% tool, enabling SME clients to understand instantly how likely they are to be approved Other income of £1,653 million was for a loan or overdraft of up to £25,000 8 per cent lower reflecting challenging before they apply market conditions leading to lower levels of client markets activity. 2017 included a Expanded the online servicing functionality £3bn 2.50% number of significant one-off refinancing available to SME customers, including the growth in net lending to Return on risk weighted and hedging transactions start-ups, SMEs and assets, up 6bps ability for sole traders to digitally add or Mid Market clients remove a party onto their business account Operating lease depreciation significantly in less than 24 hours lower given accelerated depreciation of legacy assets in 2017 Funding for UK manufacturers Maximising the Group’s capabilities Operating costs 3 per cent lower, with £bn Increased net lending to start-ups, SMEs efficiency savings more than offsetting and Mid Market clients by £3 billion, 2018 1.5 increased investment having provided over £18 billion of gross Improved asset quality ratio of 9 basis 2017 1.1 new lending to businesses in the year and points reflecting good credit quality committed to the same level in 2019 2016 1.2 across the portfolio Exceeded the commitment to provide 2015 1.4 Continued lending growth in SME of £750 million of funding to support social 1.0 3 per cent including loans and advances 2014 housing projects in the UK now transferred to Business Banking as part Provided £1.5 billion of funding to the UK of the client re-segmentation manufacturing sector, supporting increased Increased customer deposits of £149 billion, production capacity, investment in plant and reflecting continued success in attracting machinery and research and development, high quality transactional deposits with allowing clients to remain innovative improved current account mix and competitive Exceeded sustainability targets through support for renewable energy projects capable of powering over 2.6 million homes and the financing of energy efficiency improvements across 1.4 million square feet of real estate

Green Loans In 2016 Commercial Banking announced the first green loans designed to help global corporate >5m commercial real estate clients improve the energy We have committed to a efficiency of their estates. By the end of 2017, more further one million square than £500m had been lent under the initiative, feet in 2018, and five million improving over five million square feet of real estate. square feet by 2020. We have committed to a further one million square feet in 2018, and five million square feet by 2020. Helping clients improve the energy efficiency of their estates Lloyds Banking Group Annual Review 2018 29

Insurance and Wealth

Insurance and Wealth offers insurance, Progress in 2018 Ongoing collaboration with Commercial investment and wealth management Banking to provide long duration loans products and services. It supports Leading customer experience primarily to finance housing, infrastructure around 10 million customers with assets Successfully completed first stage of Zurich and education while backing the growing under administration of £141 billion and transfer and on track to conclude transfers annuity portfolio, with £1.1 billion new loans annualised annuity payments in retirement in the second half of 2019 written in 2018 of over £1 billion. The Group continues to Commenced roll out of a new suite of annual Transforming ways of working invest significantly in the development of benefit statements to over 50 per cent of Involved customers and colleagues in the business, with the aims of capturing longstanding customers, making it simpler developing and launching a new simple to considerable opportunities in pensions for them to understand their products, as understand protection product and financial planning, offering customers well as the options available to them a single home for their banking and Simplifying systems and processes through Financial performance insurance needs, and driving growth across our long-term partnership with Diligenta. Strong growth in life and pensions sales, intermediary and relationship channels Good progress towards initial systems up 45 per cent, driven by increases in new through a strong distribution model. migration in first half of 2019, enabling members in existing workplace schemes, customers to better manage their policies increased auto enrolment workplace with Scottish Widows contributions and bulk annuities £927m Scottish Widows won 5 star service awards New underwritten household premiums at the Financial Adviser Service Awards for increased 27 per cent, reflecting progress Underlying profit increased by 3% the third consecutive year of Direct and Corporate Partnership propositions; total underwritten premiums Digitising the Group decreased 6 per cent driven by a Successful pilot allowing customers to competitive renewal market register and manage home insurance Significant growth in life and pensions claims online now being followed up with >0.6m 87% new business income, up 87 per cent to new pension customers increased new business introduction of new technology, enabling £526 million partly offset by £26 million income customers to upload digital media to decrease in total general insurance income accelerate settlement net of claims, including around £60 million Maximising the Group’s capabilities impact from higher weather related claims. Strong open book AUA customer net inflows Launched Single Customer View; a unique Lower experience and other items primarily £bn capability, already enabling over 3 million due to non recurrence of £170 million income customers to view in one place the pension from the addition of death benefits in 2017 1 2018 8 5 13 and insurance products they hold with the Underlying profit increased by 3 per cent 2017 2 Group alongside their banking products. to £927 million. Net income increased by 2016 1 Announced strategic partnership with £9 million to £1,988 million whilst operating Schroders to create a market leading wealth costs decreased by £19 million, with 2015 2 management proposition. Target for the cost savings more than offsetting higher 2014 3 partnership, Schroders Personal Wealth, investment in the business 1 Underlying customer net inflows £5 billion and Zurich to become a top 3 UK financial planning transfer £8 billion. business within five years Good progress towards the target of growing open book assets under administration by £50 billion by the end of 2020, with strong customer net inflows of £13 billion achieved in the year, partly offset by £5.5 billion of negative market movements, mainly in the fourth quarter Strong progress towards one million new pension customers by end 2020, with over 630,000 new customers in 2018

The Scottish Widows pensions bus travelled around the country in 2018, helping members of the public with their retirement plans and visiting 7,000 25 employers that have their workplace pensions people helped across with Scottish Widows. 37 locations Starting in Edinburgh, the bus finished the first week on National Pensions Awareness Day at London Kings Cross Station before travelling the length of the country once more helping people understand their Scottish Widows workplace pension. The Group left Helping people a trail of happy customers behind them. Our pensions experts provided free guidance, whether they were just thinking about starting a plan for their future pension or perhaps coming to the end of their working career and are about to retire, all questions were welcomed, big or small – ensuring people feel happy and confident when thinking about their future. 30 Lloyds Banking Group Annual Review 2018

Risk overview Effective risk management and control

Our approach to risk Risk as a strategic differentiator The Board is responsible for approving the Group’s risk appetite statement at As a Group, managing risk effectively is Risks are identified, managed and mitigated least annually. Group Board-level metrics fundamental to our strategy and future using our comprehensive Risk Management are cascaded into more detailed business success. We are a simple, low risk, UK-focused Framework, and our well-articulated risk appetite metrics and limits. financial services provider with a culture appetite provides a clear framework for founded on strong risk management and decision-making. The principal risks we face, Business focus and accountability a prudent through the cycle risk appetite. which could significantly impact the delivery Risk management is an integral feature of These are at the heart of everything we do, of our strategy, are discussed on pages 32 how we measure and manage performance and ensure constructive challenge takes to 35. – for individuals, businesses and the Group. place across the business and underpins We believe effective risk management can In the first line of defence, business units are sustainable growth. be a strategic differentiator, in particular: accountable for managing risk with oversight Our approach to risk is founded on an effective from a strong and independent second line Prudent approach to risk control framework, which guides how our of defence Risk division. Being low risk is fundamental to our business colleagues work, behave and the decisions Effective risk analysis, management they make. As part of this framework, risk model and drives our participation choices. and reporting appetite – the amount and type of risk that Strategy and risk appetite are developed in the Group is prepared to seek, accept or tandem and together outline the parameters Regular close monitoring and tolerate in delivering our Group Strategy – is within which the Group operates. comprehensive reporting to all levels of management and the Board ensures embedded in policies, authorities and limits Strong control framework across the Group. appetite limits are maintained and subject The Group’s Risk Management Framework to stressed analysis at a risk type and Our prudent risk culture and appetite, along is the foundation for the delivery of effective portfolio level, as appropriate. with close collaboration between Risk division risk control and ensures that the Group and the business, supports decision‑making risk appetite is continually developed and has enabled us to continue to deliver and controlled. against our strategic priorities in 2018. Our approach to risk plays a key role in the Group’s strategy of becoming the best bank for customers, colleagues and shareholders.

Our risk management framework The diagram below outlines the framework in place for risk management across the Group.

Accountability for ensuring risk is managed Confirmation of the effectiveness of consistently within the Risk Management the Risk Management Framework and Framework approved by the Board underlying risk and control

Setting risk appetite and strategy. Approval of the Risk Management Framework and Group-wide Board Board authorities risk principles role

Review risk appetite, frameworks and principles Through Board-delegated executive authorities to be recommended to the Board. Be exemplars Senior there is effective oversight of risk management of risk management management role consistent with risk appetite

Determined by the Board and senior management. The risk appetite framework ensures our risks are Business units formulate their strategy in line with Risk appetite managed in line with our risk appetite the Group’s risk appetite Supporting a consistent approach to Group-wide behaviour and risk decision-making. Consistency Supports a consistent approach to enterprise-wide is delivered through the policy framework and risk Governance framework behaviour and decision-making committee structures Maintains a robust control framework, Monitoring, oversight and assurance ensure Three lines of defence identifying and escalating emerging risks and effective risk management across the Group supporting sustainable growth

Defined processes exist to identify, measure and Risk and control cycle Carried out by all three lines of defence and is an control our current and emerging risks from identification to reporting integral part of our control effectiveness assessment

In line with our code of responsibility. Culture Risk Risk resources Processes and infrastructure are being invested in to ensures performance, risk and reward are aligned culture and capabilities further improve our risk management capabilities

Risk-specific needs defined in detail for Primary risk categories Risk type specific sub-frameworks e.g. credit risk implementation by each business Lloyds Banking Group Annual Review 2018 31

2018 themes Data We are simplifying and modernising our IT architecture, alongside deploying Our priorities for risk management have Our Group is trusted with large volumes technologies such as cloud computing which continued to evolve, alongside progression of data, which must be protected, whilst offer greater levels of resilience, capacity of the Group’s strategy and development of providing customers with ease of access management and speed of processing. external factors. through our multi-channel model. Data is our most valuable asset and so we must ensure We are a member of the UK’s Cyber Defence Our principal risks are outlined over the next that the information we hold is accurate, Alliance, where a number of UK-based banks few pages but a number of themes have secure and managed appropriately. We meet and law enforcement agencies collaborate been particularly prevalent in 2018. the requirements of the General Data in the fight against cyber-attacks, sharing EU exit Protection Regulation (GDPR) that came into expertise, intelligence and knowledge. Given the vast majority of our business is in force in May 2018. The Group has taken this Within Lloyds Banking Group, our Chief the UK, the direct impact on the Group from opportunity to implement new governance Security Office engenders a culture whereby leaving the EU is relatively small and we are structures and demonstrate increased colleagues are considered to be our first line well prepared to ensure continuity of our levels of accountability and transparency, of defence. Vigilance and training are key to limited EU business activities. as establishing trust is critical to our vision preventing cyber-attacks. Given our UK focus, our performance is of being the best bank for customers. Sustainability We have created a Group Data Protection inextricably linked to the health of the UK The Group has been developing its Office (GDPO) to independently oversee economy. Economic performance has sustainability strategy, to address more compliance, reporting on this to Group remained resilient in recent years and broadly the opportunities and threats and Board Risk Committees. whilst the near term outlook for the UK related to climate change, and the need for economy remains unclear given the ongoing The Group drives a culture of compliance the UK to transition to a sustainable, lower EU withdrawal negotiations, we have through its Data Privacy policy and control carbon economy. This is in line with our contingency plans in place. framework and has implemented robust commitment to implement the Task Force We have also taken a prudent approach to governance to oversee compliance with for Climate-related Financial Disclosures’ our balance sheet, increasing the amount of GDPR, as well as enhanced staff training. recommendations. For risk management, liquidity held and pre funding some issuance. During 2019 the Group will continue to drive addressing the potential impacts of climate Irrespective of the outcome, our customer enhancements to the maturity of our data change plays a key role in our approach to focused strategy remains the right one. control environment. sustainability, and this year we have identified We will continue to support our personal Cyber climate change as a top emerging risk. and business customers and have already Cyber threats are increasingly complex and announced that we will lend up to £18 billion like all financial services providers, attempts to UK businesses in 2019, reaffirming our are made on a regular basis to attack our Emerging risks page 108 of our 2018 Annual support for the UK economy. systems and services, and to steal customer Report and Accounts Guided by the overriding principle of Helping and bank data. Given the significant threat Operational risk page 136 of our 2018 Annual Britain Prosper, we will seek to minimise the we continue to strengthen the resilience Report and Accounts impact on our customers. We have also been of our IT systems and invest in our cyber Sustainability strategy page 24 working hard to ensure we are well prepared control framework. to provide customers with effective and Environmental risk management page 135 of our 2018 Annual Report and Accounts timely support.

Risk management – enhancing the customer experience We recognise that the primary role of risk management is to protect our customers, colleagues and the Group, whilst enabling sustainable growth. We are able to fulfil this purpose whilst also supporting the Group’s strategic priorities and delivering better outcomes for customers. Here are some of the ways we have contributed to the Group’s strategic priorities and enhancing the customer experience this year.

Credit risk Operational risk

Leading customer experience Maximising the Group’s Digitising the Group Transforming ways of working We are committed to adapting to capabilities Deploying new technology to Our nationwide Fraud analytics changing customer expectations. We remain committed to make banking simpler and safer and insight team looks after the With increasing competition and supporting our customers and for customers is a key priority for systems which detect fraud for digital propositions in the market, their businesses across the the Group. the Group. customers expect great service country. We have already implemented The team has embraced agile and a frictionless experience. Within Commercial Banking we a number of significant working due to the nature of its This year Risk division increased look specifically at how industry enhancements across various role: at short notice they might the use of automated property risks impact success, and tailor products and services. For be called upon to respond to valuations for the mortgage advice and lending based on example, from a risk perspective a new fraud attack, which can application process through the dynamics of a segment or we have changed how we require working long hours or Halifax, reducing the time it sector. One such example is in authenticate suspicious into the night. The team also takes for us to offer customers our SME dairy sector which has transactions across personal supports a large number of the a mortgage to buy a property experienced significant pressures debit and credit cards. Rather Group’s change programmes, by an average of one week. By due to falling milk prices. than decline the payment and often working outside regular speeding up this part of the Our relationship managers and request that the customer hours. To meet the needs of process and removing an extra risk teams have been working contact us, we send a text with the colleague, the team and the step, our customers have more together to understand each a unique code which enables Group, working patterns are time to focus on what matters client’s farm and its changing our customer to quickly and agreed on an individual basis. most during life‑changing events needs so we can provide the easily verify that the transaction There has been a strong such as buying a home. best support possible. This may is genuine. This has helped reduction in fraud losses over the be through extending working to protect our customers and last five years; while some of this capital or restructuring facilities, made the experience simpler is due to investment in systems, in order to drive better outcomes by communicating in a method we place great reliance on having for the businesses we serve. convenient to them. well trained, engaged and Strategic priorities pages 12 to 15 motivated teams. 32 Lloyds Banking Group Annual Review 2018

Risk overview continued Our principal risks The most significant risks which could impact the delivery of our long-term strategic objectives and our approach to each risk are detailed below.

There remains continued uncertainty Credit Regulatory and legal around both the UK and global political and The risk that parties with whom we have The risk that the Group is exposed to financial macroeconomic environment. The potential contracted, fail to meet their financial loss, fines, censure, or legal or enforcement impacts of external factors have been obligations (both on and off balance sheet). action; or to civil or criminal proceedings in considered in all principal risks to ensure the courts (or equivalent) and/or the Group any material uncertainties continue to be Example is unable to enforce its rights due to failing monitored and are appropriately mitigated. to comply with applicable laws (including Observed or anticipated changes in the As part of the Group’s ongoing assessment codes of practice which could have legal economic environment could impact of the potential implications of the UK implications), regulations, codes of conduct profitability due to an increase in delinquency, leaving the European Union, the Group or legal obligations, or a failure to adequately defaults, write-downs and/or expected continues to consider the impact to its manage actual or threatened litigation, credit losses customers, colleagues and products – as including criminal proceedings. well as legal, regulatory, tax, financial and Key mitigating actions capital implications. Example Credit policy, incorporating prudent lending Principal risks and uncertainties are reviewed Failure to deliver key regulatory changes or to criteria, aligned with Board-approved risk and reported regularly. As part of a review of comply with ongoing requirements the Group’s risk categories, the secondary risk appetite, to effectively manage risk categories of Change, Data management and Robust risk assessment and credit sanctioning Key mitigating actions Operational resilience have been elevated to ensure we lend appropriately and Implementation of compliance and legal risk to primary risk categories, and Strategic responsibly risk has been included as a new primary risk management policies and procedures to category, in the Group’s Risk Management Extensive and thorough credit processes and ensure appropriate controls and processes Framework. These changes will be embedded controls to ensure effective risk identification, are in place to comply with legislation, rules during 2019 and reflected within the Group’s management and oversight and regulation principal risks. During the year we strengthened affordability Embedding Group-wide processes to monitor Full analysis of risk categories page 114 of our buffers and improved controls to restrict ongoing compliance with new legislation, 2018 Annual Report and Accounts lending to consumers with higher risk of rules and regulation over-indebtedness Continued investment in people, processes, Effective, well-established governance training and IT to help meet our legal and process supported by independent credit risk regulatory commitments oversight and assurance Ongoing engagement with regulatory Early identification of signs of stress leading to authorities and industry bodies on prompt engagement with the customer forthcoming regulatory changes, market reviews and investigations, ensuring Key risk indicators programmes are established to deliver new regulation and legislation £937m £9,215m Ongoing horizon scanning to identify changes Impairment charge Stage 3 assets1 in regulatory and legal requirements 2017: £795m 1 Jan 2018: £9,055m Key risk indicators Alignment to strategic priorities and future focus £993m Maximising the Group’s capabilities Mandatory, legal and regulatory investment spend 2017: £886m We seek to support sustainable growth in our targeted segments. We have a conservative Alignment to strategic priorities and well-balanced credit portfolio, managed and future focus through the economic cycle and supported by strong credit portfolio management. Delivering a leading customer experience We are committed to better addressing our We are committed to operating sustainably customers’ banking needs through consistent, and responsibly, and commit significant fair and responsible credit risk decisions, resource and expense to ensure we meet our aligned to customers’ circumstances, whilst legal and regulatory obligations. staying within prudent risk appetite. We respond as appropriate to impending Impairments remain below long-term levels legislation, regulation and associated and are expected to increase as the level consultations and participate in industry of write-backs and releases reduces and bodies. We continue to be proactive in impairments normalise. responding to significant ongoing and new 1 Underlying total gross lending. legislation, regulation and court proceedings. Read more pages 115 to 135 of our 2018 Annual Read more page 135 of our 2018 Annual Report Report and Accounts and Accounts Lloyds Banking Group Annual Review 2018 33

Conduct Operational People The risk of customer detriment due to poor We face significant operational risks which Key people risks include the risk that we fail design, distribution and execution of products may disrupt services to customers, cause to maintain organisational skills, capability, and services or other activities which could reputational damage, and result in financial resilience and capacity levels in response to undermine the integrity of the market or loss. These include the availability, resilience organisational, political and external market distort competition leading to unfair customer and security of our core IT systems, unlawful change and evolving business needs. outcomes, regulatory censure and financial or inappropriate use of customer data, theft and reputational loss. of sensitive data, fraud and financial crime Example threats, and the potential for failings in our Inability to attract or retain colleagues with Example customer processes. key skills could impact the achievement of The most significant conduct cost in recent Example business objectives years has been PPI mis-selling The dynamic threat posed by cyber risk to the Key mitigating actions Key mitigating actions confidentiality and integrity of electronic data Focused action to attract, retain and develop or the availability of systems Conduct policies and procedures are in place high calibre people. Delivering initiatives to to ensure appropriate controls and processes Key mitigating actions reinforce behaviours which generate the best that deliver fair customer outcomes outcomes for customers and colleagues Investing in enhanced cyber controls to Conduct risk appetite metrics provide a Managing organisational capability and protect against external threats to the granular view of how our products and capacity to ensure there are the right skills and confidentiality or integrity of electronic data, services are performing for customers through resources to meet our customers’ needs or the availability of systems, and to ensure the customer lifecycle effective third-party assurance Effective remuneration arrangements to Product approval, continuous product review promote appropriate colleague behaviours Enhancing the resilience of systems that support processes and customer outcome testing in and meet regulatory expectations critical business processes with independent place (across products and services) verification of progress on an annual basis During 2018 we enhanced our colleague Learning from past mistakes through root wellbeing strategies to ensure support is Significant investment in compliance with cause analysis in place to meet colleague needs, and to General Data Protection Regulation and Basel help achieve the skills and capability growth Clear customer accountabilities for Committee on Banking Supervision standards required to build a workforce for the colleagues, with rewards driven by customer- Working with industry bodies and law ‘Bank of the Future’ centric metrics enforcement agencies to identify and combat Further enhancements and embedding of our fraud and money laundering Key risk indicators framework to support all customers, including those in vulnerable circumstances Key risk indicators 79% 1 Key risk indicators Values and behaviours index 99.97% 2017: 80% Availability of core systems 92.5% 2017: 99.98% Alignment to strategic priorities Conduct risk appetite metric performance-Group and future focus 2017: 92.3% Alignment to strategic priorities and future focus Transforming ways of working Alignment to strategic priorities Regulatory requirements relating to personal and future focus Delivering a leading customer experience accountability and remuneration rules could Delivering a leading customer experience We recognise that resilient and secure affect the Group’s ability to attract and retain technology, and appropriate use of data, the calibre of colleagues required to meet As we transform our business, minimising is critical to delivering a leading customer changing customer needs. We recognise the conduct risk is critical to achieving experience and maintaining trust across the challenges in delivering the Group’s strategic our strategic goals and meeting wider industry. priorities and we will continue to invest in regulatory standards. The availability and resilience of IT systems the development of colleague capabilities We have senior committees that ensure our remains a key strategic priority and the Cyber and agile working practices. This investment focus on embedding a customer‑centric programme continues to focus on enhancing will deliver a leading customer experience culture and delivering fair outcomes across cyber security controls. Internal programmes and allow the Group to respond quickly to the Group. Further enhancements to ensure that data is used correctly, and the customers’ rapidly changing decision-making our conduct risk framework continue to control environment is regularly assessed in a digital era. support this through robust and effective through both internal and third-party testing. 1 Formerly known as Best bank for customers index. management of conduct risk. Together Read more pages 136 to 138 of our 2018 Read more page 138 of our 2018 Annual Report these support our vision of being the best Annual Report and Accounts and Accounts bank for customers, enabling the delivery of a leading customer experience through effective root cause analysis and learning from customer feedback. Read more page 136 of our 2018 Annual Report and Accounts 34 Lloyds Banking Group Annual Review 2018

Risk overview continued

Insurance underwriting Capital Funding and liquidity Key insurance underwriting risks within the The risk that we have a sub-optimal quantity or Funding risk is the risk that we do not have Insurance business are longevity, persistency quality of capital or that capital is inefficiently sufficiently stable and diverse sources of and property insurance. Longevity risk is deployed across the Group. funding. Liquidity risk is the risk that we have expected to increase as our presence in the insufficient financial resources to meet our bulk annuity market increases. Example commitments as they fall due.

Example A worsening macroeconomic environment Example could lead to adverse financial performance, Uncertain property insurance claims impact which could deplete capital resources A deterioration in either the Group’s or Insurance earnings and capital, e.g. extreme and/or increase capital requirements due to a the UK’s credit rating, or a sudden and weather conditions, such as flooding, can deterioration in customers’ creditworthiness significant withdrawal of customer deposits, result in high property damage claims would adversely impact our funding and Key mitigating actions liquidity position Key mitigating actions A comprehensive capital management Key mitigating actions Strategic decisions made consider the framework that includes setting of capital risk maintenance of the current well-diversified appetite and dividend policy Holding liquid assets to cover potential cash portfolio of insurance risks and collateral outflows and to meet regulatory Close monitoring of capital and leverage requirements. In addition, maintaining a Processes for underwriting, claims ratios to ensure we meet regulatory further pool of assets that can be used to management, pricing and product design requirements and risk appetite access central bank liquidity facilities seek to control exposure. Experts in Comprehensive stress testing analyses to demographic risk (for example longevity) Undertaking daily monitoring against a evidence capital adequacy support the propositions number of market and Group-specific early warning indicators Reinsurance and other risk transfer Key risk indicators arrangements are actively reviewed for their Maintaining a contingency funding plan efficacy, including monitoring the strength of detailing actions and strategies available in third-parties with whom the risk is shared 13.9% 5.6% stressed conditions Common equity tier 1 UK leverage ratio1 ratio1,2 2017: 5.4% Key risk indicators 2017: 13.9% Key risk indicators

£14,384m £690m Alignment to strategic priorities £129bn 107% Insurance (Life and Pensions General Insurance and future focus LCR eligible assets Loan to deposit ratio present value of new underwritten 2017: £121bn 1 Jan 2018: 107% business premiums) total gross written Maximising the Group’s capabilities 2017: £9,951m premiums Ensuring we hold an appropriate level Alignment to strategic priorities 2017: £733m of capital to maintain financial resilience and future focus and market confidence underpins our Alignment to strategic priorities Maximising the Group’s capabilities strategic objectives of supporting the UK and future focus economy, and growth in targeted segments We maintain a strong funding position in line Delivering a leading customer experience through the cycle. with our low risk strategy, and the loan to 1 Pro forma. deposit ratio remains within our target range. We are committed to meeting the changing 2 CET1 ratio after ordinary dividends and share buyback. Our funding position allows the Group to needs of customers by working to provide grow targeted business segments, and better Read more pages 139 to 147 of our 2018 Annual a range of insurance products via multiple address our customers’ needs. channels. The focus is on delivering a leading Report and Accounts Read more pages 147 to 152 of our 2018 Annual customer experience by helping customers Report and Accounts protect themselves today whilst preparing for a secure financial future. Strategic growth initiatives within Insurance are developed and managed in line with a defined risk appetite, aligned to the Group risk appetite and strategy. Read more pages 138 to 139 of our 2018 Annual Report and Accounts Lloyds Banking Group Annual Review 2018 35

Governance Market Model Against a background of increased The risk that our capital or earnings profile is The risk of financial loss, regulatory censure, regulatory focus on governance and affected by adverse market rates, in particular reputational damage or customer detriment, risk management, the most significant interest rates and credit spreads in the as a result of deficiencies in the development, challenges arise from ensuring that the Group banking business, equity and credit spreads in application and ongoing operation of models continues to demonstrate compliance with the Insurance business, and credit spreads in and rating systems. the requirements to ring-fence core UK the Group’s defined benefit pension schemes. financial services and activities, the potential Example impact of EU exit and further requirements Examples The consequences of inadequate models under the Senior Manager & Certification Earnings are impacted by our ability to could include: inappropriate levels of capital Regime (SM&CR). forecast and model customer behaviour or impairments; inappropriate credit or pricing Examples accurately and establish appropriate decisions; and adverse impacts on funding or hedging strategies liquidity, or the Group’s earnings and profits Inadequate or complex governance The Insurance business is exposed indirectly arrangements to address ring-fencing Key mitigating actions to equity risk through the value of future requirements and the potential impact management charges on policyholder A comprehensive model risk of EU exit could result in a weaker control funds. Credit spread risk within the Insurance management framework environment, delays in decision-making and business primarily arises from bonds and loans lack of clear accountability Defined roles and responsibilities, with clear used to back annuities ownership and accountability Non-compliance with, or breaches of SM&CR Narrowing credit spreads will increase the cost requirements could result in lack of clear Principles regarding the requirements of of pension scheme benefits accountability, and legal and regulatory data integrity, development, validation, consequences Key mitigating actions implementation and ongoing maintenance Regular model monitoring Key mitigating actions Structural hedge programmes implemented to manage liability margins Independent review of models To meet ring-fencing requirements, core UK and margin compression financial services and activities have been Periodic validation and re-approval of models ring-fenced from other activities of the Group Equity and credit spread risks are closely and an appropriate control environment monitored and, where appropriate, asset and Key risk indicators and governance structures are in place to liability matching is undertaken ensure compliance The Group’s defined benefit pension schemes N/A A dedicated change programme is in place and continue to monitor their credit allocation as Alignment to strategic priorities addressing the additional SM&CR requirements well as the hedges in place against nominal and future focus which will come into force during 2019 rate and inflation movements Digitising the Group A dedicated programme is in place to assess Key risk indicators and address the potential impacts of EU exit The Group’s models play a vital role in on the Group’s operations in Europe. The supporting Group strategy to ensure Group is in close and regular contact with £1,146m profitable growth in targeted segments regulators to develop and deploy our planned IAS 19 Pension surplus and the Group’s drive toward automation 2017: £509m operating and legal structure to mitigate the and digital solutions to enhance customer potential impacts of EU exit outcomes. Model risk management helps Alignment to strategic priorities ensure these models are implemented in Evolving risk and governance arrangements and future focus to ensure they continue to be appropriate to a controlled and safe manner for both the comply with regulatory objectives Maximising the Group’s capabilities Group and customers. We actively manage our exposure to Read more page 159 of our 2018 Annual Report and Accounts Key risk indicators movements in market rates, to drive lower volatility earnings and offer a comprehensive N/A customer proposition with hedging strategies to support strategic aims. Mitigating actions Alignment to strategic priorities are implemented to reduce the impact of and future focus market movements, resulting in a more stable capital position. Effective interest rate and Delivering a leading customer experience inflation hedging has kept volatility in the Ring-fencing ensures that we are safer and Group’s defined benefit pension schemes continue to deliver a leading customer low. This combined with improved market experience by providing further protection conditions has helped keep the schemes in to core retail and SME deposits, increasing IAS 19 surplus in 2018. This allows us to more transparency of our operations and facilitating efficiently utilise available capital resources the options available in resolution. to better enable the Group to maximise its Our governance framework and strong culture capabilities. of ownership and accountability enabled Read more pages 154 to 159 of our 2018 effective, on time, compliance with the SM&CR Annual Report and Accounts requirements and enable us to demonstrate clear accountability for decisions. Read more page 153 of our 2018 Annual Report and Accounts 36 Lloyds Banking Group Annual Review 2018

Summary of Group results

Income statement – underlying basis

2018 2017 Change £ million £ million % Net interest income 12,714 12,320 3 Other income 6,010 6,205 (3)‌‌‌‌ Operating lease depreciation (956)‌‌ (1,053)‌‌‌‌ 9 Net income 17,768 17,472 2 Operating costs (8,165)‌‌ (8,184)‌‌‌‌ – Remediation (600)‌‌ (865)‌‌‌‌ 31 Impairment (937)‌‌ (795)‌‌‌‌ (18)‌‌‌‌ Underlying profit 8,066 7,628 6 Volatility and other items (1,356)‌‌ (703)‌‌‌‌ (93)‌‌‌‌ PPI provision (750)‌‌ (1,650)‌‌‌‌ 55 Statutory profit before tax 5,960 5,275 13 Tax expense (1,560)‌‌ (1,728)‌‌‌‌ 10 Profit for the year 4,400 3,547 24 Earnings per share 5.5p 4.4p 27 Dividends per share – ordinary 3.21p 3.05p 5 Share buyback 2.46p 1.40p 76 Share buybackvalue £1.75bn £1bn 75

Summary consolidated balance sheet

At 31 Dec At 31 Dec 2018 2017 £ million £ million Assets Cash and balances at central banks 54,663 58,521 Financial assets at fair value through profit or loss 158,529 162,878 Derivative financial instruments 23,595 25,834 Financial assets at amortised cost 496,379 482,752 Financial assets at fair value through other comprehensive income 24,815 Available-for-sale financial assets 42,098 Other assets 39,617 40,026 Total assets 797,598 812,109 Liabilities Deposits from banks 30,320 29,804 Customer deposits 418,066 418,124 Financial liabilities at fair value through profit or loss 30,547 50,877 Derivative financial instruments 21,373 26,124 Debt securities in issue 91,168 72,450 Liabilities arising from insurance and investment contracts 112,727 118,860 Subordinated liabilities 17,656 17,922 Other liabilities 25,542 28,805 Total liabilities 747,399 762,966 Total equity 50,199 49,143 Total equity and liabilities 797,598 812,109 Lloyds Banking Group Annual Review 2018 37

Underlying basis – segmental analysis

Commercial Insurance Central Retail Banking and Wealth items Group 2018 £m £m £m £m £m Net interest income 9,066 3,004 123 521 12,714 Other income 2,171 1,653 1,865 321 6,010 Operating lease depreciation (921)‌‌ (35)‌‌ – – (956)‌‌ Net income 10,316 4,622 1,988 842 17,768 Operating costs (4,915)‌‌ (2,167)‌‌ (1,021)‌‌ (62)‌‌ (8,165)‌‌ Remediation (267)‌‌ (203)‌‌ (39)‌‌ (91)‌‌ (600)‌‌ Total costs (5,182)‌‌ (2,370)‌‌ (1,060)‌‌ (153)‌‌ (8,765)‌‌ Impairment (862)‌‌ (92)‌‌ (1)‌‌ 18 (937)‌‌ Underlying profit 4,272 2,160 927 707 8,066

Banking net interest margin 2.68% 3.27% 2.93% Average interest-earning banking assets £342.3bn £91.2bn £0.8bn £1.7bn £436.0bn Asset quality ratio 0.25% 0.09% 0.21% Return on risk-weighted assets 4.59% 2.50% 3.86% Loans and advances to customers1 £340.1bn £100.4bn £0.9bn £3.0bn £444.4bn Customer deposits2 £252.8bn £148.6bn £14.1bn £0.8bn £416.3bn Risk-weighted assets £94.3bn £86.0bn £1.2bn £24.9bn £206.4bn

Commercial Insurance Central Retail3 Banking3 and Wealth items3 Group 2017 £m £m £m £m £m Net interest income 8,706 3,030 133 451 12,320 Other income 2,221 1,798 1,846 194 6,059 Vocalink gain on sale – – – 146 146 Operating lease depreciation (947)‌‌ (105)‌‌ – (1)‌‌ (1,053)‌‌ Net income 9,980 4,723 1,979 790 17,472 Operating costs (4,866)‌‌‌‌ (2,230)‌‌‌‌ (1,040)‌‌‌‌ (48)‌‌‌‌ (8,184)‌‌‌‌ Remediation (633)‌‌ (173)‌‌ (40)‌‌‌ (19)‌‌ (865)‌‌ ‌‌ Total costs (5,499)‌‌ (2,403)‌‌ (1,080)‌‌ (67)‌‌ (9,049)‌‌ Impairment (711)‌‌ (89)‌‌ – 5 (795)‌‌ Underlying profit4 3,770 2,231 899 728 7,628

Banking net interest margin 2.60% 3.28% 2.86% Average interest-earning banking assets £338.5bn £91.1bn £0.8bn £4.5bn £434.9bn Asset quality ratio 0.21% 0.10% 0.18% Return on risk-weighted assets4 4.18% 2.44% 3.55% Loans and advances to customers1 £340.7bn £102.8bn £0.8bn £11.4bn £455.7bn Customer deposits2 £253.1bn £148.3bn £13.8bn £0.3bn £415.5bn Risk-weighted assets £91.4bn £88.1bn £1.3bn £30.1bn £210.9bn

1 Excludes reverse repos of £40.5 billion (31 December 2017: £16.8 billion). 2 Excludes repos of £1.8 billion (31 December 2017: £2.6 billion). 3 Restated to include run-off. 4 Prior period restated to include remediation.

Alternative performance measures The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. Further information is provided on page 288 of our 2018 Annual Report and Accounts.

Underlying basis In order to allow a comparison of the Group’s underlying performance, the results are adjusted for certain items including restructuring, severance related costs, the costs of implementing regulatory reform including ring-fencing, the rationalisation of the non-branch property portfolio, the integration of MBNA and Zurich’s UK workplace pensions and savings business, volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group’s own debt and hedging arrangements and that arising in the insurance businesses, insurance gross up, the unwind of acquisition‑related fair value adjustments and the amortisation of purchased intangible assets and payment protection insurance (PPI) provisions.

Report of the Auditor The auditor’s report on the full accounts for the year ended 31 December 2018 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. 38 Lloyds Banking Group Annual Review 2018

Board of Directors1 Comprising Directors with the right mix of skills and experience, the Board is collectively responsible for overseeing delivery of the Group’s strategy.

1 2 3 4

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

5 62 73 8

A Ri Re RB Ri A NG Ri Re RB Ri

9 10 11 12

NG Re RB Ri

13 A Member of Audit Committee NG Member of Nomination and RB Member of Responsible Governance Committee Business Committee

Re Member of Remuneration Ri Member of Board Risk Committee Chairman Committee Committee

1 Deborah McWhinney served as a Director throughout the year and retired from the Board on 31 December 2018. 2 Amanda Mackenzie is to be appointed to the Remuneration Committee with effect from 1 March 2019. 3 Nick Prettejohn is to be appointed to the Nomination and Governance Committee with effect from 1 March 2019.

1. Lord Blackwell Chairman Experience across a range of sectors, 4. Simon Henry Independent Director including banking, asset and investment Appointed: June 2012 (Board), April 2014 Appointed: June 2014 management, manufacturing and utilities (Chairman) Skills and experience: Extensive experience as chairman in a range Skills and experience: of industries Deep international experience in board level Deep financial services knowledge including strategy and execution Strong board governance experience, insurance and banking including investor relations and remuneration Extensive knowledge of financial markets, Significant experience with strategic planning treasury and risk management Anita was previously Chairman of Victrex and implementation plc, the Senior Independent Director of Qualification as an Audit Committee Financial Regulatory and public policy experience Aberdeen Asset Management and IMI plc, an Expert gained from senior positions in Downing Street, Executive Director of Abbott Mead Vickers, Strong board governance experience, Regulators and a wide range of industries a Non-Executive Director of Northumbrian including investor relations and remuneration Credibility with key stakeholders Water and has held various investment and Simon was formerly Chief Financial Officer Strong leadership qualities marketing roles at Scottish Provident and the and Executive Director of Royal Dutch Shell Lord Blackwell is an experienced Chairman Royal Bank of Scotland. plc. He was also previously Chair of the and Non-Executive Director within the External appointments: Chairman of Croda European Round Table CFO Taskforce and financial services sector having previously International Plc and a Non-Executive Director a Member of the Main Committee of the been Chairman of Scottish Widows Group. He of BHP Billiton. 100 Group of UK FTSE CFOs. was previously Senior Independent Director External appointments: Non-Executive and Chairman of the UK Board for Standard 3. Alan Dickinson Independent Director Director of Rio Tinto plc and Rio Tinto Life and Director of Group Development at Appointed: September 2014 Limited, Independent Director of PetroChina NatWest Group. His past Board roles have Skills and experience: Company Limited, Member of the Defence also included Chairman of Interserve plc, and Highly regarded retail and commercial banker Board and Chair of the Defence Audit Non-Executive Director of Halma plc, Dixons Strong strategic, risk and core Committee, UK Government, Member of the Group, SEGRO and Ofcom. He was Head of banking experience Advisory Panel of CIMA and of the Advisory the Prime Minister’s Policy Unit from 1995 to Regulatory and public policy experience Board of the Centre for European Reform. 1997 and was appointed a Life Peer in 1997. Alan has 37 years’ experience with the Royal 5. Lord Lupton CBE Independent Director Governor of the External appointments: Bank of Scotland, most notably as Chief and Chairman of Lloyds Bank Corporate Yehudi Menuhin School and a member of the Executive of RBS UK. More recently, Alan was Markets plc Governing Body of the Royal Academy of Music. a Non-Executive Director of Willis Limited Appointed: June 2017 2. Anita Frew Deputy Chairman and and Chairman of its Risk Committee. He Skills and experience: was formerly Chairman of Brown, Shipley Senior Independent Director Extensive international corporate experience, & Co. Limited, a Non-Executive Director Appointed: December 2010 (Board), especially in financial markets of Nationwide Building Society where he May 2014 (Deputy Chairman), May 2017 Strong board governance experience, (Senior Independent Director) was Chairman of its Risk Committee and a Governor of Motability. including investor relations and remuneration Skills and experience: External appointments: Chairman of Regulatory and public policy experience Significant board, financial and general Urban&Civic plc. Significant experience in strategic planning management experience and implementation Lloyds Banking Group Annual Review 2018 39

Lord Lupton was Deputy Chairman of Significant experience in strategic planning and member of the Group’s Management Baring Brothers, co-founded the London and implementation Committee. He was a Non-Executive Director office of Greenhill & Co., and was Chairman Experience in consumer analysis, marketing of Santander UK and subsequently its of Greenhill Europe. He was previously and distribution Chief Executive. He is also a former Chairman of Trustees of Dulwich Picture Stuart is a former Non-Executive Director Non-Executive Director of the Court of the Gallery, a Trustee of the British Museum, of TSB Banking Group plc, TSB Bank plc, Bank of England. Governor of Downe House School and a LV Group, Virgin Direct and Vitality Health External appointments: Non-Executive member of the International Advisory Board (formerly Prudential Health). Until recently he Director of EXOR N.V., Fundação of Global Leadership Foundation. He became was the Interim Chairman of Provident Financial Champalimaud and Sociedade Francisco a Life Peer in October 2015 and is a former plc. He was also a former Senior Independent Manuel dos Santos in Portugal, a member of Treasurer of the Conservative Party. He served Director of Swinton Group Limited. In his the Board of Stichting INPAR Management/ on the House of Lords Select Committee executive career, he was President and Chief Enable and Chairman of the Wallace Collection. on Charities. Operating Officer of Aspen Insurance after 11. George Culmer Executive Director External appointments: Senior Advisor to spending nine years with General Electric as and Chief Financial Officer Greenhill Europe and Chairman of the Chief Executive Officer of the UK Consumer Trustees of the Lovington Foundation. Finance business then President of GE Capital Appointed: May 2012 (Board) China. Before that he was Chief Executive Skills and experience: 6. Amanda Mackenzie OBE Independent Officer of Tesco Personal Finance and Extensive operational and financial expertise Director Director of UK Retail Banking at the Royal including strategic and financial planning and Appointed: October 2018 Bank of Scotland. He was a Council member control Skills and experience: of The Royal Institute for International Affairs Worked in financial services in the UK and Extensive experience in responsible business (Chatham House). overseas for over 25 years Considerable customer External appointments: Senior Independent George was an Executive Director and Chief engagement experience Director and Chair of the Risk & Capital Financial Officer of RSA Insurance Group, the Strong digital technology experience Committee at QBE UK Limited (formerly QBE former Head of Capital Management of Zurich Significant marketing and brand background Insurance (Europe) Limited). Financial Services and Chief Financial Officer of its UK operations as well as holding various Amanda was a member of Aviva’s Group 9. Sara Weller CBE Independent Director Executive for seven years and Chief Marketing senior management positions at Prudential. He Appointed: February 2012 and Communications Officer. Prior to her is a Non-Executive Director of Scottish Widows. current role, Amanda was seconded from Aviva Skills and experience: External appointments: None. as Executive Adviser to Project Everyone, to Background in retail and associated sectors, 12. Juan Colombás Executive Director help launch the United Nations Sustainable including financial services and Chief Operating Officer Development Goals. She has over 25 years’ of Strong board governance experience, commercial business practice, including director including investor relations and remuneration Appointed: November 2013 (Board), January roles at British Airways AirMiles, BT, Hewlett Passionate advocate of customers, the 2011- September 2017 (Chief Risk Officer), Packard Inc, British Gas and Mothercare plc. community, financial inclusion and the September 2017 (Chief Operating Officer) External appointments: Chief Executive of development of digital skills Skills and experience: Business in the Community – The Prince’s Considerable experience of boards at both Significant banking and risk management Responsible Business Network, a Life Fellow executive and non-executive level experience of the Royal Society of Arts and Fellow of the Sara’s previous appointments include International business and management Marketing Society. Managing Director of Argos, various senior experience positions at J Sainsbury including Deputy Juan is responsible for leading a number 7. Nick Prettejohn Independent Director Managing Director, Chairman of the Planning of critical Group functions and driving the and Chairman of Scottish Widows Group Inspectorate, Lead Non-Executive Director at transformation activities across the Group Appointed: June 2014 the Department of Communities and Local in order to build the Bank of the Future. He Skills and experience: Government, a Board member at the Higher was previously the Chief Risk Officer and an Deep financial services experience, Education Funding Council, a Non-Executive Executive Director of Santander’s UK business. particularly in insurance Director of Mitchells & Butlers as well as a Prior to this, he held a number of senior risk, In-depth regulatory knowledge number of senior management roles for control and business management roles and experience Abbey National and Mars Confectionery. across the Corporate, Investment, Retail Governance experience and strong External appointments: Non-Executive and Risk Divisions of the Santander Group. leadership qualities Director of United Utilities Group and He was previously the Vice Chairman of the International Financial Risk Institute. Significant experience in strategic planning Chair of their Remuneration Committee and implementation and a member of their Nomination External appointments: None. Committee, Lead Non-Executive Director Nick has served as Chief Executive of Lloyd’s 13. Malcolm Wood Company Secretary at the Department for Work and Pensions, a of London, Prudential UK and Europe and Appointed: November 2014 Chairman of Brit Insurance. He is a former Non- Governing Council Member of Cambridge Skills and experience: Executive Director of the Prudential Regulation University and Trustee of Lloyds Bank Authority and of Legal & General Group Plc Foundation for England and Wales. Malcolm was previously General Counsel as well as Chairman of the Financial Services and Company Secretary of Standard Life 10. António Horta-Osório Executive Director after a career as a corporate lawyer in private Practitioner Panel and the Financial Conduct and Group Chief Executive Authority’s Financial Advice Working Group. practice in London and Edinburgh. He has a Appointed: January 2011 (Board), March 2011 wealth of experience in governance, policy He was previously a Member of the BBC Trust (Group Chief Executive) and Chairman of the Britten-Pears Foundation. and regulation. He is a Fellow of the Institute Skills and experience: of Chartered Secretaries and Administrators External appointments: Chairman of Reach Extensive experience in, and understanding and a Member of the Corporate Governance plc (formerly Trinity Mirror plc) and of their of, both retail and commercial banking built Council and the GC100. Malcolm is an Nomination Committee. He is also Chairman over a period of more than 30 years, working attendee of the Group Executive Committee. of the Royal Northern College of Music and a both internationally and in the UK member of the Board of Opera Ventures. Drive, enthusiasm and commitment 8. Stuart Sinclair Independent Director to customers Appointed: January 2016 Proven ability to build and lead strong Skills and experience: management teams Extensive experience in retail banking, António previously worked for Citibank, insurance and consumer finance Goldman Sachs and held various senior Governance and regulatory experience management positions at Grupo Santander before becoming its Executive Vice President 40 Lloyds Banking Group Annual Review 2018

Directors’ remuneration report Remuneration Committee Chairman’s statement

The Committee is particularly mindful of its obligation to ensure that reward for Executive Directors is clear and transparent, is encouraging strong and sustainable performance, and that the variable components of remuneration are truly variable.

KEY MESSAGES Dear Shareholder remuneration report. It became clear in these discussions that, while disclosure Underlying profit increased 6 per cent On behalf of the Board, I am pleased to levels were generally considered good, to £8,066 million present our Directors’ remuneration report the way we determined bonus awards for for the year ended 31 December 2018. This Executive Director single figure Executive Directors was perceived to be too is my first report to you, and on behalf of remuneration outcomes are approximately complex, and we could make clearer both the Board I would like to thank Anita Frew 2 per cent lower than prior year how the annual awards were calculated and for her chairmanship of the Committee in where judgement or discretion had been Gender pay gap reduced 1.3 per cent to the period to September 2018, when I took applied by the Committee. This report has 31.5 per cent – better than the average over. I hope to continue the excellent work been designed in part to respond to that for Financial Services Anita did in ensuring that remuneration feedback and I believe we have listened to, is actively debated and transparent to all Pay budget increase of 2.6 per cent for and addressed, the concerns raised. I have relevant stakeholders. all colleagues – increases for Executive summarised the key changes below. Directors and other senior colleagues set This report covers the information required We are not seeking to make any changes lower at 2 per cent to meet the Group’s regulatory disclosures, to the Directors’ Remuneration Policy for but also provides additional context and Minimum full time salary for all colleagues 2019, however we will consult widely on detail on the Group’s broader remuneration now exceeds National Living Wage by policy changes ahead of the Annual General framework, its alignment with our strategy 7 per cent Meeting in 2020. and other factors considered relevant by Financial and strategic performance in 2018 the Committee. delivered a Group Balanced Scorecard Our performance and outcome of 83 per cent of maximum Responding to feedback remuneration philosophy Group Performance Share outcome is down We were disappointed that our report We continue to operate four core 3 per cent year-on-year when adjusted for for 2017 did not receive the high level of reward principles: changes to eligible population. The total support from shareholders at the 2018 AGM Customer alignment pool for 2018 is £464.5 million. that we had previously experienced. We Simple, affordable and motivating 2016 Long Term Incentive Plan is vesting place great importance on the opinions of at 68.7 per cent our shareholders and other stakeholders Shareholder alignment when considering our remuneration policy and its implementation. Competitive, performance-driven and fair

Composition of Executive Director Remuneration During 2018, I took the opportunity to These principles underpin all our decisions meet a broad selection of shareholders and ensure that our remuneration approach 30% 70% and other key stakeholders, to obtain and outcomes are aligned to the Group’s feedback on our approach. This included Fixed Variable purpose and priorities. Salary, Fixed Share Group Performance shareholders who opposed the 2017 Award, Pension, Share, Group Benefits Ownership Share What we have changed in response to your feedback Variable Reward Components To provide greater clarity on the process for In this report we have published details c.70% c.30% determining variable remuneration for of our CEO pay ratio, which can be found Long-term Short-term Executive Directors, on page 87 of our on page 95 of our 2018 Annual Report 3+ years 1 year 2018 Annual Report and Accounts we have and Accounts. We have also provided provided a step-by-step walk-through of an overview of activity that the Board will 95% 5% the approach to bonus awards. This shows undertake with regard to understanding the Shares Cash how we determine the proportion of profit views of the wider workforce on page 64 of allocated to variable pay for on target our 2018 Annual Report and Accounts. We performance, which remained at 5.1 per cent anticipate that the role of the Committee will for 2018, and the mechanical approach to evolve and develop during 2019 and intend determining individual awards. to provide full details in 2020. Other aspects The Committee is also mindful of the the Committee intends to focus on in 2019 changes to corporate governance and include post employment shareholding and reporting regulations which take effect from pension contributions of Executive Directors next year and has begun to prepare for their relative to the majority of the workforce. formal introduction and reporting. Lloyds Banking Group Annual Review 2018 41

As in previous years, we believe any 2018 remuneration in the addition to his existing responsibility as Group remuneration awarded to Executive Directors Chief Executive, it has been determined that the must be supported by strong performance context of business performance Fixed Share Award for António Horta-Osório achieved with the interests of all our and the perspective of our wider should be increased to £1.05 million. At the same stakeholders in mind. stakeholders time, the Group Chief Executive has agreed The remuneration awarded to Executive We have taken on board feedback received to reduce his Pension Allowance to bring this Directors is heavily weighted towards the in 2018 that suggests our approach to closer to that of the majority of the colleagues. delivery of long-term, sustainable performance measurement of Group performance was overly His Pension Allowance will reduce from its that aligns with shareholder experience. complex. For 2018, we operated a scorecard current contractual level of 46 per cent of base For the variable awards made under the Group with 20 measures across five blocks (as set out salary to 33 per cent of base salary. This results Performance Share and Group Ownership in full on page 86 of our 2018 Annual Report in a decrease in total remuneration and greater Share plans in respect of performance in and Accounts), but have reduced this to value delivered in shares subject to a longer- 2018, over 95 per cent is awarded in shares, 15 measures and four blocks for 2019. We have term release schedule. Details are provided and 70 per cent is subject to performance weighted the scorecard measures to provide on page 93 of our 2018 Annual Report and conditions applying over three years. a balance of performance expectations across Accounts. financial, customer and colleague related Variable remuneration for Executive Directors Delivery through collective outcomes. We will disclose details of the 2019 and other senior colleagues is weighted heavily success targets in 2020, but the revised balance of toward long‑term performance, ensuring our measures is summarised as follows: colleagues build an ownership interest in the We believe it is important that all our Group and are motivated by delivering superior colleagues share in the collective success 33% and sustainable returns for shareholders. of the Group when we deliver at our best. 33% 33% Colleague All colleagues, including Executive Directors, Therefore for 2019, significant changes are Financial Customer and participate in the Group Performance Share being made to the Group’s performance Conduct plan. This single approach to bonus awards management framework. Our new approach, ensures there is a fair and transparent link which we are calling Your Best, is a simpler between individual remuneration outcomes approach to performance management, The ‘Remuneration Overview’ section on the and Group performance. with a stronger emphasis on teamwork and a following pages provides a summary of the greater focus on personal growth, skills and 2018 remuneration outcomes and policy for The approach to determining awards for development. This is highly relevant to all Executive Directors. Executive Directors is as follows: colleagues in this fast changing economy. The Committee places great importance Evaluation of performance: The Our colleagues are the stewards of the on ensuring there are clear links between Committee reviews financial and Group’s future. We are therefore investing remuneration and delivery of both financial non-financial performance against the significantly in transforming ways of working to and strategic objectives aligned to the Balanced Scorecard objectives. Judgement enhance our colleagues’ skills and capabilities. long‑term sustainable success of the Group. may then be used to ensure that mechanical All eligible colleagues in the Group will receive In 2018, the Group made significant scorecard outcomes are aligned to a Colleague Group Ownership Share award business progress, providing a strong platform individual contribution, including how in 2019, continuing our practice of promoting for the Group’s strategic development and Executive Directors have performed. long-term ownership and alignment delivery of key priorities. The Group delivered Full details are provided on page 86 of to shareholder interests. 99 per cent of strong financial performance in a period our 2018 Annual Report and Accounts. colleagues hold shares in the Group. of political and economic uncertainty. This Determination of Group Performance To ensure that the Committee understands uncertainty weighed heavily on the Group’s Share award: The performance assessment the views of a broad range of stakeholders, share price during 2018; however, the Group’s determines the maximum opportunity I have consulted with the Group’s recognised resilient and low risk business model enabled and the range that judgement can be unions who represent the interests of around strong underlying performance. Underlying Profit applied within. increased by 6 per cent and the Group’s capital 30,000 colleagues. I am pleased to confirm Full details are provided on page 87 of position strengthened. The Group’s cost:income that the unions have agreed our pay approach our 2018 Annual Report and Accounts. for 2019 receiving overwhelming support ratio remains market leading at 49.3 per cent. Final awards: To ensure fairness with all from their members. The total pay budget Reflecting the Group’s performance in 2018, other colleagues, awards are adjusted to of 2.6 per cent for 2018 for all colleagues the Committee determined that the total reflect the final pool funding. has been allocated such that higher pay Group Performance Share funding should increases are made to colleagues who are be 3 per cent down year-on-year (adjusted Full details are provided on page 87 of positioned lower in the pay range for their for changes in eligible population). Individual our 2018 Annual Report and Accounts. role, supporting a policy of real wage growth awards for Executive Directors reduced on In 2018, the Committee did not exercise any and pay progression. Increases range from average by 12 per cent year-on-year. Awards discretion over remuneration outcomes. 0.25 per cent to 9.9 per cent. The proposed for Executive Directors were determined Further details on how the use of discretion salary increases for Executive Directors for at 67.6 per cent of maximum. was considered can be found on page 89 2019 have been set at 2 per cent, in line with The value of the 2016 Long Term Incentive of our 2018 Annual Report and Accounts in other senior colleagues but lower than the Plan awards has vested at 68.7 per cent in respect of the 2016 LTIP vesting outcome overall colleague population. respect of the three-year performance period and page 87 of our 2018 Annual Report From April 2019, all full-time colleagues in the ending 31 December 2018. This reflects the and Accounts in respect of the 2018 Group Group will be paid a minimum salary of £17,510, significant progress made by the Group Performance Share awards. 7 per cent above the National Living Wage, towards its strategic and financial goals, I hope you find the additional explanation in and where eligible will receive a minimum while reflecting the fall in share price over this report helpful in clarifying our approach. pay increase of £600 in 2019. This reflects the the performance period. Group’s commitment to offering colleagues How we determine 2019 Annual General Meeting a competitive reward package, which remuneration for Executive Together with my Committee members, aims to reward all colleagues fairly for their I look forward to hearing your views on the contribution. The Group has been recognised Directors and our wider remuneration arrangements outlined in this as a Living Wage employer since 2015. colleague population report, and to welcoming you to the 2019 The Group has also made progress in The Committee seeks to be transparent in its AGM where I hope you will support the reducing the Gender Pay Gap by 1.3 per cent, approach to setting and delivering remuneration. resolution relating to remuneration. with the median gap reducing from Our policy for 2019 and the implementation 32.8 per cent to 31.5 per cent, lower than report for 2019 can be found on pages 97 and 93 the average for Financial Services, through of our 2018 Annual Report and Accounts. a combination of targeting our salary As a result of taking on the role of Chief Executive increases and our efforts to increase female Stuart Sinclair of the Ring-Fenced Bank from 1 January 2019 in representation at senior levels in the Group. Chairman, Remuneration Committee 42 Lloyds Banking Group Annual Review 2018

Directors’ remuneration report continued Remuneration overview How we pay in line with performance and our strategic goals

Total Remuneration for Executive Directors 2017 vs 2018 The charts below summarise the Executive Directors’ remuneration for the 2017 and 2018 performance years. Full details are provided on page 88 of our 2018 Annual Report and Accounts. Fixed pay Group Performance Share Long term incentive/Group Ownership Share

António Horta-Osório George Culmer Juan Colombás Group Chief Executive (GCE) Chief Financial Officer (CFO) Chief Operating Officer (COO)

46% 19% 35% £000 47% 16% 37% £000 47% 16% 37% £000 2018 6,270 2018 3,274 2018 3,273 2,876 1,178 1 2,216 2 1,524 527 1 1,223 2 1,540 527 1 1,206 2 67.6% 68.7% 67.6% 68.7% 67.6% 68.7% of max of max of max of max of max of max

44% 21% 35% £000 45% 18% 37% £000 46% 18% 36% £000 2017 6,434 2017 3,328 2017 3,320 2,842 1,323 2,269 1,501 599 1,228 1,510 599 1,211 77% 66.3% 78% 66.3% 80% 66.3% of max of max of max of max of max of max

1 2018 Group Performance Share, awarded in March 2019. 2 The 2016 LTIP vesting and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 14 February 2019. The average share price between 1 October 2018 and 31 December 2018 (56.04 pence) has been used to indicate the value. The shares were awarded in 2016 based on a share price of 72.978 pence. How Executive Director remuneration is composed1

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Implementation

For 2019: The Group has applied a total pay budget of 2.6 per cent for the Base wider colleague population. Salary GCE: £1,269,288 (1 January 2019) (2 per cent) CFO: £779,351 COO: £794,938 (1 January 2019) (2 per cent). Award

20% For 2019: GCE: £1,050,000 Fixed share 20% CFO: £504,000 award 20% COO: £497,000 Awards are released in shares in equal tranches over 20% a five year period.

Award 20% FIXED For 2019: GCE: 33 per cent of base salary Pension CFO: 25 per cent of base salary COO: 25 per cent of base salary Award

Benefits remain unchanged from 2018. Executive Directors receive a flexible benefits allowance in line with colleagues, Benefits (4 per cent of salary). This can be used to select benefits including life assurance and critical illness cover. Other benefits include car allowance, transportation and private medical cover. Award

For 2018, the following awards were made: 40% GCE: £1,177,70 0 2018 Group 1 yr hold CFO: £526,841 Performance COO: £526,841 Share 40% £2,000 is paid in cash in March 2019, with the balance of the 1 yr hold upfront 40 per cent delivered in shares. Half of this is delivered in June 2019 and the remainder subject to holding until March 20% 2020. The remaining 60 per cent is deferred into shares with 1 yr hold 40 per cent vesting in 2020 and 20 per cent in 2021. Half of each deferral is also subject to holding for one year.2 See page 93 of Performance period our 2018 Annual Report and Accounts.

VARIABLE 20% 2 yr hold For 2019 the following awards are being made: GCE: 300 per cent of base salary. 2019 Group 20% 1 yr hold CFO: No award Ownership Share 20% 1 yr hold COO: 275 per cent of base salary. Awards will be subject to a

three year performance period with vesting between the third and 20% 1 yr hold seventh anniversary of award. Any shares released are subject to a further holding period in line with regulatory requirements and 20% 1 yr hold market practices.2 Individual Individual performance determines 2019 award Performance period See page 94 of our 2018 Annual Report and Accounts. 1 All references to CFO refer to George Culmer in role on 1 January 2019. 2 Variable remuneration is subject to malus and clawback. See page 94 of our 2018 Annual Report and Accounts. Lloyds Banking Group Annual Review 2018 43

How our reward emphasises long term performance and is aligned to our strategic priorities Financial targets that form the basis of the outcomes for both short term and long term awards are directly linked to the Group’s Four Year Operating Plan. Variable remuneration awards are subject to a balance of financial and strategic measures as summarised below.

Performance Assessment Short Term Variable Remuneration Year 1 Year 2 Year 3 Group Performance Financial Performance Underlying Profit Share measures

c. 30% Strategic Performance Group Balanced measures Scorecard

Long Term Variable Remuneration

Group Ownership Financial Performance Cost: income ratio / Total Shareholder return / Economic profit Share measures

c. 70% Strategic Performance Customer satisfaction / Digital active customer growth / Customer complaints measures Colleague engagement

Shareholding requirements are in line with FTSE 100 practice and actual Executive Director shareholdings are significantly above the required levels as can be seen on page 91 of our 2018 Annual Report and Accounts.

How we performed against the key performance indicators which directly For details of all Group KPIs, impact remuneration outcomes and support the delivery of our reward principles see pages 6 to 7

How we have performed over one year Financial performance £8,066m +6% Underlying profit

How we have performed over three years (2016 LTIP measures) – see page 89 of our 2018 Annual Report and Accounts.

Cost:income ratio1 Total shareholder return Economic profit (10% weighting) (2016–2018) (30% weighting) (25% weighting) Actual: 44.7% Actual: (4.8%) Actual: £3,291m

100% 0% 94.8%

47.3% or less 46.1% or less 8% p.a. or more 16% p.a. or more £2,507m £3,308m or more 25% payout 100% payout 25% payout 100% payout 25% payout 100% payout

Customer satisfaction Digital active customer growth2 Customer complaints per 1,000 (10% weighting) (7.5% weighting) (5% weighting) Actual: 1st Actual: 14.1m Actual: 3.04

100% 100% 100%

3rd place 1st place 13.4m 14.0m 4.18 3.78 25% payout 100% payout 25% payout 100% payout 25% payout 100% payout

Colleague engagement Customer complaints FOS change (7.5% weighting) rate Actual: 73 (5% weighting) Actual: 18%

100% 100% 66 72 =<29% =<25% 25% payout 100% payout 25% payout 100% payout

1 Adjusted total costs, excluding remediation. 2 Excludes MBNA. 44 Lloyds Banking Group Annual Review 2018

Shareholder information

Annual report and accounts Individual Savings Accounts (ISAs) This Annual Review summarises information from the Lloyds There are a number of options for investing in Lloyds Banking Group Banking Group Annual Report and Accounts. As such, there is shares through an ISA. For details of services and products provided insufficient information to provide a full understanding of the results by the Group please contact Bank of Scotland Share Dealing, and state of affairs of Lloyds Banking Group. A copy of our Halifax Share Dealing or Lloyds Bank Direct Investments using the Annual Report and Accounts can be obtained from our registrar, contact details opposite. Equiniti Limited (see below) and is available on our website at www.lloydsbankinggroup.com American Depositary Receipts (ADRs) Our shares are traded in the USA through a New York Stock Annual general meeting (AGM) Exchange-listed sponsored ADR facility with The Bank of New York The AGM will be held at the Edinburgh International Conference Centre, Mellon as the depositary. The ADRs are traded on the New York The Exchange, Edinburgh EH3 8EE on Thursday 16 May 2019 at 11am. Stock Exchange under the symbol LYG. The CUSIP number is Further details about the meeting, including the proposed resolutions 539439109 and the ratio of ADRs to ordinary shares is 1:4. and where shareholders can stream the meeting live, can be found in For details contact: our Notice of AGM which will be available shortly on our website at www.lloydsbankinggroup.com BNY Mellon Shareowner Services, 462 South 4th Street Suite 1600, Louisville KY 40202. Share dealing facilities Telephone: 1-866-259-0336 (US toll free), We offer a choice of three share dealing services for our UK international callers: +1 201-680-6825. shareholders and customers. To see the full range of services Alternatively visit www.adrbnymellon.com or available for each, please use the contact details below: email [email protected] Bank of Scotland Share Dealing Security – share fraud and scams www.bankofscotland.co.uk/sharedealing 0345 606 1188 Shareholders should exercise caution when unsolicited callers offer the chance to buy or sell shares with promises of huge returns. If it Halifax Share Dealing sounds too good to be true, it usually is and we would ask that www.halifax.co.uk/sharedealing 03457 22 55 25 shareholders take steps to protect themselves. We strongly Lloyds Bank Direct Investments recommend seeking advice from an independent financial adviser www.lloydsbank.com/share-dealing.asp 0345 60 60 560 authorised by the Financial Conduct Authority (FCA). Shareholders can verify if a firm is authorised via the Financial Services Register Note: All internet services are available 24/7. Telephone dealing services are available between which is available at www.fca.org.uk 8.00 am and 9.15 pm, Monday to Friday and 9.00 am to 1.00 pm on Saturday. To open a If a shareholder is concerned that they may have been targeted by share dealing account with any of these services, you must be 18 years of age or over and be resident in the UK, Jersey, Guernsey or the Isle of Man. such a scheme, please contact the FCA Consumer Helpline on 0800 111 6768 or use the online ‘Share Fraud Reporting Form’ Share dealing for the Lloyds Banking Group available from their website (see above). We would also recommend contacting the Police through Action Fraud on 0300 123 2040 or see Shareholder Account www.actionfraud.org.uk for further information. Share dealing services for the Lloyds Banking Group Shareholder Account are provided by Equiniti Shareview Dealing, operated by Head office Equiniti Financial Services Limited. Details of the services provided 25 Gresham Street, London EC2V 7HN can be found either on the Shareholder Information page of our Telephone +44 (0)20 7626 1500 website at www.lloydsbankinggroup.com, or by contacting Equiniti using the contact details provided below. Registered office The Mound, Edinburgh EH1 1YZ Registered in Scotland No. SC95000

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 (from here you will be able to email your step 1 query securely to Equiniti, our registrar) Register at www.shareview.co.uk/info/register

Registrar step 2 Equiniti Limited Receive activation code in post Aspect House, Spencer Road, Lancing West Sussex BN99 6DA step 3 Log on Shareholder helpline 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. Lloyds Banking Group Annual Review 2018 45

Forward looking statements 

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

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