Lloyds Bank plc Report and Accounts 2017 Member of Lloyds Banking Group Lloyds Bank plc Contents Strategic report 2 Directors’ report 7 Directors 10 Forward looking statements 11 Independent auditors’ report 12 Consolidated income statement 21 Statements of comprehensive income 22 Balance sheets 24 Statements of changes in equity 26 Cash flow statements 28 Notes to the accounts 29 Subsidiaries and related undertakings 146 Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England no 2065 Lloyds Bank plc Strategic report Principal activities Lloyds Bank plc (the Bank) and its subsidiary undertakings (the Group) provide a wide range of banking and financial services through branches and offices in the UK and overseas. The Group’s revenue is earned through interest and fees on a broad range of financial services products including current and savings accounts, personal loans, credit cards and mortgages within the retail market; loans and capital market products to commercial, corporate and asset finance customers; life, pensions and investment products; general insurance; and private banking and asset management. Business review As a result of the requirements of the ring-fencing regulations, the Bank expects to sell its subsidiary, Scottish Widows Group Limited, to its ultimate holding company during 2018. At the time of preparation of the 2016 report and accounts this sale had been expected to take place during 2017, however due to external factors the Group currently expects the transaction to complete in 2018. This is only an internal reorganisation within the Lloyds Banking Group, but due to the significance of the Scottish Widows entities they have been classified as discontinued operations for the purposes of the Bank’s consolidated statutory reporting. Continuing operations During the year ended 31 December 2017, the Group recorded a profit before tax from its continuing operations of £5,035 million compared with a profit before tax in 2016 of £1,977 million. The results in 2016 were particularly impacted by a loss of £993 million arising on transactions related to Lloyds Banking Group’s tender offers and redemptions in respect of its Enhanced Capital Notes which completed in March 2016 and a loss of £1,026 million which arose pursuant to a restructuring of the Bank’s capital instruments in June 2016. Excluding these items from the comparative, the Group’s continuing operations recorded a profit before tax of £5,035 million in 2017, which was £1,039 million, or 26 per cent, higher than the profit before tax in 2016 of £3,996 million. Total income increased by £2,872 million, or 20 per cent, to £17,352 million in 2017 compared with £14,480 million in 2016, comprising a £1,170 million increase in net interest income together with an increase of £1,702 million in other income. Net interest income was £12,364 million in 2017; an increase of £1,170 million, or 10 per cent compared to £11,194 million in 2016. Average interest-earning assets fell as a result of decreases in average UK mortgage balances, lending to global corporates and in the portfolio of assets which are outside of the Group’s risk appetite, more than offsetting the impact of the acquisition of MBNA. However, this was more than offset by the impact of an improvement in net interest margin as a result of lower deposit and wholesale funding costs and a positive impact from the acquisition of MBNA, more than offsetting continued pressure on asset margins. Other income was £1,702 million, or 52 per cent, higher at £4,988 million in 2017 compared to £3,286 million in 2016, reflecting the liability management losses of £2,019 million in 2016 discussed above. Fee and commission income was £58 million, or 2 per cent, lower at £2,786 million compared to £2,844 million in 2016 as increased levels of card fees, reflecting both the acquisition of MBNA and higher levels of card usage, were more than offset by lower current account fees, reflecting reduced volumes of added-value accounts and changes in pricing structure, and lower levels of other fees receivable. Fee and commission expense increased by £81 million, or 9 per cent, to £1,024 million compared with £943 million in 2016. Net trading income decreased by £169 million, or 18 per cent, to £773 million in 2017 compared to £942 million in 2016; this decrease reflected the change in fair value of interest rate derivatives and foreign exchange hedges in the banking book not mitigated through hedge accounting. Other operating income was £2,010 million higher at £2,453 million in 2017 compared to £443 million in 2016 , as a result of the liability management losses of £2,019 million in 2016 discussed above. Operating expenses decreased by £121 million, or 1 per cent to £11,630 million in 2017 compared with £11,751 million in 2016; reflecting the £149 million reduction in charges for redress payments to customers in respect of PPI and other conduct related matters from £2,271 million in 2016 to £2,122 million in 2017 (for further details on these charges see note 32 to the financial statements). Excluding these charges from both years, operating expenses were £28 million higher at £9,508 million in 2017 compared to £9,480 million in 2016 as operating expenses of £172 million arising in MBNA since acquisition have been largely offset by the impact of underlying cost reductions. Staff costs were £210 million, or 5 per cent, lower at £4,418 million in 2017 compared with £4,628 million in 2016; increases in pension charges were more than offset by headcount related reductions in salaries and lower levels of severance costs. Premises and equipment costs were £23 million or 3 per cent, higher at £690 million in 2017 compared with £667 million in 2016. Other expenses were £215 million, or 11 per cent, higher at £2,100 million in 2017 compared with £1,885 million in 2016. Depreciation and amortisation costs were £8 million lower at £2,292 million in 2017 compared to £2,300 million in 2016, as increased charges in respect of property, plant and equipment were more than offset by reduced charges relating to intangible assets, reflecting the fact that the core deposit intangible arising from the HBOS acquisition became fully amortised in the early part of 2017. Impairment losses decreased by £65 million, or 9 per cent, to £687 million in 2017 compared with £752 million in 2016; this reflects the fact that in 2016 there was an impairment charge of £173 million in respect of certain equity investments in the Group’s available-for-sale portfolio which was not repeated in 2017. Impairment losses in respect of loans and advances to customers were £104 million, or 18 per cent, higher at £696 million in 2017 compared with £592 million in 2016; this includes a charge of £118 million in the MBNA business since acquisition and there were lower levels of releases and write-backs than in 2016. There was a credit of £9 million in respect of undrawn commitments in 2017, compared to a credit of £13 million in 2016. In 2017, the Group’s continuing operations recorded a tax expense of £1,602 million compared to a tax expense of £947 million in 2016, an effective tax rate of 32 per cent, compared to the standard UK corporation tax rate of 19.25 per cent, principally as a result of the banking surcharge and restrictions on the deductibility of conduct provisions. Discontinued operations During the year ended 31 December 2017, the Group’s discontinued operations recorded a profit before tax of £943 million compared with a profit before tax in 2016 of £579 million. Total income decreased by £6,534 million, or 27 per cent, to £17,516 million in 2017 compared with £24,050 million in 2016, comprising a £7,368 million decrease in other income only partly offset by an improvement of £834 million in net interest income. Net interest income was a deficit of £1,313 million in 2017; an improvement of £834 million compared to a deficit of £2,147 million in 2016, reflecting a positive impact of £622 million in 2017 from a decrease in the amounts payable to unit holders in those Open-Ended Investment Companies (OEICs) included in the consolidated results of the Group, reflecting different levels of investment returns on the assets held by the OEICs. 2 Lloyds Bank plc Strategic report Other income was £7,368 million, or 28 per cent, lower at £18,829 million in 2017 compared to £26,197 million in 2016. Fee and commission income was £92 million lower at £373 million compared to £465 million in 2016 and fee and commission expense decreased by £123 million to £553 million compared with £676 million in 2016, together leading to an improvement of £31 million in net fee and commission income from a deficit of £211 million in 2016 to a deficit of £180 million in 2017. Net trading income decreased by £6,613 million, or 38 per cent, to £10,977 million in 2017 compared to £17,590 million in 2016; this decrease reflected a reduction in gains on policyholder investments as a result of market conditions over 2017 relative to those in 2016. Insurance premium income was £138 million, or 2 per cent, lower at £7,930 million in 2017 compared with £8,068 million in 2016; there was a decrease of £23 million in life insurance premiums and a £115 million decrease in general insurance premiums. The decrease in life insurance premiums reflects the fact that good growth in corporate pensions business has been offset by a lower level of bulk annuity deals, compared to the activity in 2016.