Lloyds Banking Group Performance

Conduct risk has remained stable in 2023, however there are several areas of emerging risks due to regulatory changes and areas of focus.

The Group’s focus is on supporting customers impacted by the rising cost of living, culture and diversity, mindset shift to embed the FCA’s Consumer Duty requirements and ensuring good customer outcomes, amid the transformation of its business and technology.

We are also continuing to liaise closely with the FCA and FOS on historical motor commission arrangements.

The Group delivers good outcomes for its customers.

The Group continuously adapts to market developments that could pose heightened conduct risk, and actively monitors for early signs of financial difficulties driven by pressures from a rising cost of living and rising interest rates.

To articulate its conduct risk appetite, the Group has Conduct Risk Appetite Metrics (CRAMs) and tolerances that aim to indicate where it may be operating outside its conduct risk appetite.

The Group’s CET1 capital ratio reduced from 15.1 per cent at 31 December 2022 to 14.6 per cent at 31 December 2023.

The Group’s total capital ratio increased to 19.8 per cent at 31 December 2023 (31 December 2022: 19.7 per cent) primarily reflecting AT1 and Tier 2 issuance.

The minimum requirement for own funds and eligible liabilities (MREL) ratio increased to 31.9 per cent at 31 December 2023 (31 December 2022: 31.7 per cent) reflecting the increase in both total capital resources and other eligible liabilities, largely offset by the increase in risk-weighted assets.

The Group’s UK leverage ratio increased to 5.8 per cent (31 December 2022: 5.6 per cent) reflecting the increase in the total tier 1 capital position.

Capital risk is defined as the risk that an insufficient quantity or quality of capital is held to meet regulatory requirements or to support business strategy, an inefficient level of capital is held or that capital is inefficiently deployed across the Group.

The Group’s capital management approach is focused on maintaining sufficient and appropriate capital resources across all regulated levels of its structure in order to prevent such exposures while optimising value for shareholders.

Impairment was a net charge of £303 million in 2023 (2022: £1,522 million).

Asset quality remains strong with credit performance across portfolios relatively stable and remaining broadly at, or favourable to pre-pandemic experience.

The Group’s credit portfolio continued to be resilient with only modest evidence of deterioration to date.

UK Mortgages new to arrears were relatively stable throughout 2023, having increased slightly at the start of the year, with other unsecured portfolios performing broadly at or favourable to pre-pandemic levels.

Impairment was a net charge of £303 million, compared to £1,522 million for 2022 and includes a significant write-back following the full repayment of debt from a single name client in the fourth quarter and improvements in the Group’s macroeconomic outlook.

The Group’s expected credit loss allowances have decreased to £4,039 million (2022: £4,841 million).

In addition to the risk-based capital framework outlined above, the Group is also subject to minimum capital requirements under the UK Leverage Ratio Framework.

The leverage ratio is calculated by dividing tier 1 capital resources by the leverage exposure which is a defined measure of on-balance sheet assets and off-balance sheet items.

The minimum tier 1 leverage ratio requirement under the UK Leverage Ratio Framework is 3.25 per cent.

As at 31 December 2023 the CCLB for the Group was 0.6 per cent.

An additional leverage ratio buffer (ALRB) requirement of 0.7 per cent applies to the RFB sub-group and is determined by multiplying the RFB sub-group O-SII buffer by 35 per cent.

At Group level an equivalent buffer of 0.6 per cent applies.

The requirements for IFRS segmental reporting are set out in IFRS 8 Operating Segments which mandates that an entity’s segmental reporting should reflect the way in which its operations are viewed and judged by its chief operating decision maker.

As a consequence, the Group’s statutory segmental reporting follows the underlying basis as explained below (see also note 4 to the financial statements).

The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group’s internal reporting based around these segments (which reflect the Group’s organisational and management structures) in order to assess performance and allocate resources.

The internal reporting is on an underlying profit before tax basis.

The Group Executive Committee believes that this basis better represents the underlying performance of the Group.

IFRS 8 requires that the Group presents its segmental profit before tax on the basis reviewed by the chief operating decision maker that is most consistent with the measurement principles used in measuring the Group’s statutory profit before tax.

The Group undertakes a wide-ranging programme of stress testing, providing a comprehensive view of the potential impacts arising from the risks to which the Group and its key legal entities are exposed.

One of the most important uses of stress testing is to assess the resilience of the operational and strategic plans of the Group and its legal entities to adverse economic conditions and other key vulnerabilities.

As part of this programme the Group participated in the delayed 2022 Annual Cyclical Scenario stress test run by the Bank of England, which was submitted to the regulator in January 2023.

This assesses the Group’s resilience to a severe economic shock where the House Price Index (HPI) falls by 31 per cent, Commercial Real Estate (CRE) falls by 45 per cent, unemployment peaks at 8.5 per cent and the Base Rate peaks at 6 per cent.

The results of this exercise were published by the Bank of England on 12 July 2023.

The Group also continues to internally assess vulnerabilities to adverse economic conditions.

During 2023, the Board has overseen the executive’s continued delivery of the Group’s strategic transformation and has focused on sound risk management, including a review of operational resilience.

Operational resilience remained stable in 2023.

Enhancing the Group’s resilience for serving customers has been a key focus.

The Group has used operational resilience scenario testing to shape a programme to deliver enhanced resilience of important business services by 2025.

The Group recognises the prominence of cyber security protection and the role that resilience of our suppliers plays in delivering resilient customer experiences.

Technology resilience remains a focus area, with dedicated programmes to address key risks.

The business transacted by the insurance companies within the Group comprises both life insurance business and general insurance business.

Life insurance comprises unit-linked, non-profit and With-Profits business.

Scottish Widows Limited (SW Ltd) holds the only With-Profits funds managed by the Group.

The Solvency II regime for insurers and insurance groups came into force from 1 January 2016 and was most recently updated in December 2023 as part of the Solvency UK framework.

Insurance is required to calculate solvency capital requirements and available capital on a risk-based approach.

All minimum regulatory requirements of the insurance companies have been met during the year.

Both assessments have been modelled across two climate scenarios consistent with the Network for Greening the Financial System (NGFS), Net Zero 2050 (Orderly) and Divergent Net Zero (Divergent).

The results across both assessments are broadly in line with each other, highlighting that high emitting sectors, such as coal mining and oil and gas, are expected to face a substantial adverse impact, with considerable effects in other sectors, such as automotive and transport.

Scenario analysis is a key tool for understanding the potential impacts on the Group.

The Group continues to develop its climate scenario analysis capabilities to inform analysis of climate risks, as well as to help shape the Group’s strategy to reflect climate opportunities and assess its resilience, building on lessons learned from the Bank of England’s 2021 Climate Biennial Exploratory Scenario (CBES).

The subsequent analysis has focused on understanding the areas of the Group most impacted by climate change, as well as assessing the impact from key climate-related risks.

Change and execution risk is defined as the risk that, in delivering its change agenda, the Group fails to ensure compliance with laws and regulation, maintain available and effective customer and colleague services, and/or operate within the Group’s risk appetite.

Change and execution risks arise when the Group undertakes activities which require products, processes, people, systems or controls to change.

The Group currently measures change and execution risk against defined risk appetite metrics which are a combination of leading, quality and delivery indicators across the investment portfolio.

The Group takes a range of mitigating actions with respect to change and execution risk.

Change and execution risks are monitored and reported through to the Board and Group Governance Committees in accordance with the Group’s enterprise risk management framework.

The Group continues to focus on horizon scanning activity to inform and support identification of the most pertinent internal and external trends and developments.

Many emerging and horizon risk topics are reviewed on a recurring basis, alongside ongoing activity addressing their impacts.

However, it is acknowledged that the nature of the emerging risks will evolve and could drive future trends in the long term which the Group will need to prepare for.

The 2023 emerging risk landscape has been simplified, combining emerging and strategic risks into a single view (see below), enabling greater management concentration on developing the appropriate responses.

The Group will continue to monitor emerging and horizon risks, exploring how they may impact its future strategy, and how it can continue to best protect its customers, colleagues and shareholders.

Responsible for providing direction and oversight of the Group’s environmental sustainability strategy, including particular focus on the net zero transition and nature strategy.

Oversight of the Group’s approach to meeting external environmental commitments and targets, including but not limited to, progress in relation to the requirements of the Net Zero Banking Alliance (NZBA).

The Group has set ambitions to reduce emissions across four key areas of activity.

We aim to monitor progress against these targets through the Group Net Zero Committee on a quarterly basis.

The 2023 Group climate transition plan sets out the steps it will take to reduce emissions to net zero for its own operations and supply chain, as well as specific activities happening in relation to the Group’s lending and investments.