Lloyds Bank Corporate Markets plc Report and Accounts 2020 Member of Lloyds Banking Group Lloyds Bank Corporate Markets plc Contents Strategic report 2 Directors’ report 12 Directors 17 Forward looking statements 18 Independent auditors’ report 19 Group consolidated income statement 26 Statements of comprehensive income 27 Balance sheets 28 Statements of changes in equity 29 Cash flow statements 31 Notes to the financial statements 32 Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England no 10399850 Lloyds Bank Corporate Markets plc Strategic report The directors present their Strategic report on Lloyds Bank Corporate Markets plc (the Bank) and its subsidiary undertakings (the Group) for the year ended 31 December 2020. The Bank and the Group provide a wide range of banking and financial services through branches and offices in the UK, the Crown Dependencies, the USA, Singapore and Germany. The Bank was established in response to the Financial Services (Banking Reform) Act 2013 for the purpose of carrying on elements of the commercial banking business of Lloyds Banking Group plc (also referred to herein as LBG) along with the banking business of LBG in territories outside the EEA. The Group contributes to the financial results of the Commercial Banking Division of LBG. Principal activities The Group supports a diverse range of customers and provides a broad range of banking products to help them achieve their financial goals. The Group’s revenues are earned through the provision of financing and risk management solutions to commercial customers; and current accounts, savings accounts, mortgages, car finance and personal loans in the Retail market in our Crown Dependencies businesses. The target market for these products and services in the UK and internationally is made up of large corporates, financial institutions, commercial customers plus, in the Crown Dependencies, retail customers and includes the following product propositions: – Commercial lending (including fixed rates loans, revolving credit facilities, variable loans and business mortgages) – Trade and working capital management (including trade services, trade finance, supply chain finance and asset finance) – Bonds and structured finance (including bonds, structured lending and asset securitisation) – Risk management (including FX, rates, credit, commodities and liabilities management) – Retail banking services (including mortgages, personal current accounts, personal loans and motor finance) in the Crown Dependencies Key performance indicators The Group’s strategic purpose as part of LBG is to Help Britain Recover as part of Helping Britain Prosper through operating a responsible business that focuses on delighting our customers and delivering long-term sustainable success. Key to the success of the Group’s strategy is the focus on delighting our customers and success is measured via customer focussed objectives such as customer satisfaction and complaint levels monitored through a range of customer insight and feedback. Our ongoing commitment to treat customers fairly and consistently delivering great service is central to our ways of working. Our customer focused business model continues to provide a competitive advantage with the diversity and strength of our client franchise enabling scalable business propositions, relative cost efficiencies and sustainable returns on capital deployed. We have developed a culture to attract, retain and develop the right capability for the future. The Group has a diversified and high quality balance sheet and is Helping Britain Prosper through a simple digitised business underpinned by a strong brand, credit rating and capital position. The shared service model we utilise leverages LBG capabilities to meet the needs of our customers and we are transforming the business to deliver a leading customer experience. The Bank’s Board of Directors (the Board) regularly monitors key performance indicators which include business performance, appropriate levels of capital, funding and liquidity, and delighting our customers. The Board notes the following with regard to strategic process and indicators of performance: – Appropriate levels of capital, liquidity and funding have been maintained and metrics are noted in tables 1 and 2 on page 4 – Support provided to our customers during COVID-19. Despite the disruption encountered during 2020, the Group has continued to support customers and provide assistance – Continued targeted investment in a number of areas across the period to benefit both customers and colleagues, including investing in our markets proposition and technology roll out in our Crown Dependencies business to enhance capability and grow the commercial franchise – Mortgage growth in our Retail business with now over £1 billion lent in our Crown Dependencies – Build out of our Frankfurt subsidiary Lloyds Bank Corporate Markets Wertpapierhandelsbank GmbH to enable securities trading in the Eurozone after the UK exit from the European Union – The seamless continuity of operations across our business both in the UK and internationally with most colleagues moving to home working in the period (both within the Group and our shared service provider teams) – The wellbeing of team members throughout our businesses with measures taken to ensure our branch based customer facing colleagues were able to operate in a safe way in addition to the provision of IT and other equipment to facilitate office based colleagues working from home – Development of new ways of working across our teams to support home working, caring and schooling responsibilities and the deployment of online collaboration technologies and applications – Colleague development, learning hours and engagement measured through our annual survey – Decisive management action to reduce controllable costs and funding and liquidity risk. This included the delivery of optimisation activity in our lending business in the USA where the Group has strategically exited certain facilities, including the sale of a portfolio of eligible facilities to Lloyds Bank plc – Successful divestment of the Group’s Jersey based investment management business to Brooks MacDonald, enabling the Group to focus on core service propositions (the Group will no longer operate in this particular market). A subsidiary of the Group, Lloyds Investment Fund Managers Limited was sold along with the customers and assets under management from Lloyds Bank International Limited – Good progress towards IBOR transition Future developments The Group’s long term customer and strategic priorities remain unchanged. We will grow the business in core Retail and Commercial franchises through product and service enhancements; in Markets we will continue to respond to the industry pace of change to remain competitive and meet our customers’ evolving needs. Further digitisation will simplify our operating model, increase efficiency and deliver a stronger proposition for customers. Focus continues on having optimal levels of funding, capital and costs to deliver sustainable returns on equity. In the short to medium term, we will also continue to support our customers through COVID-19 and the recovery of the UK economy and the international territories in which the Group operates. Financial performance Overall, 2020 has seen a very resilient performance of the Group’s diversified business despite the difficult environment and challenging market conditions. Although COVID-19 has impacted the Group’s results, the Board considers the decisive actions taken in response to the global pandemic as a key measure of performance in the year. The Group’s expected credit loss (ECL) on loans and commitments, calculated under IFRS 9, requires the use of a range of possible future outcomes. The projected impacts on the markets in which we operate has resulted in significant increases in ECL charges recognised through the impairment line of the Income Statement. This along with fair value write downs on derivatives recognised through net trading income, has impacted profitability, despite diligent management of costs and capital. During the year ended 31 December 2020, the Group recorded a profit before tax of £45 million compared with £368 million in 2019. Regulatory capital adequacy remains strong with a common equity tier 1 (CET1) capital ratio of 14.8%, reflecting the stability of the business and strength of the Group’s client franchise. 2 Lloyds Bank Corporate Markets plc Strategic report Income Total income was £544 million compared to £819 million in 2019, comprising net interest income of £74 million compared to £221 million in 2019, net fee and commission income of £191 million compared to £188 million in 2019 and net trading income of £279 million compared to £410 million in 2019. The COVID-19 pandemic has had an effect on the global economy and financial markets with net interest income being adversely impacted through increased costs of funding and a continued low interest rate environment. Within the 2020 net trading income of £279 million, the Group has taken a fair value write down of £88 million on derivative positions. This was concentrated in a single counterparty that has only derivative exposure with the Group entering administration during the pandemic. Net fee and commission income has shown a resilient performance year on year. Operating expenses & tax Operating expenses were £428 million compared to £462 million in 2019, predominantly consisting of management charges relating to the Intra