2 - Presentation - Lloyds Banking Group · 30.06.2011 · Combined Businesses results over the next few years. • The cost savings will enable an additional £2 billion of investment

Presentation to Analysts & Institutional Investors30 June 2011

Strategic Review

Lloyds Banking Group plc Outcome of Strategic Review 30 June 2011

FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to the business, strategy and plans of the Lloyds Banking Group, its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the Group or the Group’s management’s beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. The Group’s actual future business, strategy, plans and/or results may differ materially from those expressed or implied in these forward looking statements as a result of a variety of risks, uncertainties and other factors, including, without limitation, UK domestic and global economic and business conditions; the ability to derive cost savings and other benefits, as well as the ability to integrate successfully the acquisition of HBOS; the ability to access sufficient funding to meet the Group’s liquidity needs; changes to the Group’s credit ratings; risks concerning borrower or counterparty credit quality; market related trends and developments; changing demographic trends; changes in customer preferences; changes to regulation, accounting standards or taxation, including changes to regulatory capital or liquidity requirements; the policies and actions of governmental or regulatory authorities in the UK, the European Union, or jurisdictions outside the UK, including other European countries and the US; the ability to attract and retain senior management and other employees; requirements or limitations imposed on the Group as a result of HM Treasury’s investment in the Group; the ability to complete satisfactorily the disposal of certain assets as part of the Group’s EU state aid obligations; the extent of any future impairment charges or write-downs caused by depressed asset valuations; exposure to regulatory scrutiny, legal proceedings or complaints, actions of competitors and other factors. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of such factors together with examples of forward looking statements. The forward looking statements contained in this announcement are made as at the date of this announcement, and the Group undertakes no obligation to update any of its forward looking statements.

LLOYDS BANKING GROUP PLC

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OUTCOME OF STRATEGIC REVIEW: KEY HIGHLIGHTS

“Our aim is to become the best bank for customers. We have around 30 million customers, iconic brands, including Lloyds TSB, Halifax, Bank of Scotland and Scottish Widows, and high-quality, committed people. We will unlock the potential in this franchise over time by creating a simpler, more agile and responsive organisation, and by making substantial investments in better-value products and services for our customers, to deliver strong, stable and sustainable returns for our shareholders.”

António Horta-Osório Group Chief Executive

SERIES OF RAPID, FOCUSED ACTIONS TAKEN SINCE MARCH • New, more agile organisation in place, governance structures and leadership team strengthened. • Balance sheet further strengthened, with further non-core asset reduction enabling material paydown of

government and central bank facilities. • Renewed focus on customer satisfaction, including commitment to reducing complaints significantly and

active support for SME lending. • Accelerated EU mandated sale programme (‘Project Verde’), with information memorandum now issued to

prospective purchasers. • Detailed preparation to transform the business, using the resource and expertise created through the

integration (which will be substantially completed in Q3 2011). OUR STRATEGY TO DELIVER FOR CUSTOMERS AND SHAREHOLDERS • Refocus our business portfolio to fit our assets, capabilities and risk appetite. We will focus on attractive

UK customer segments, reduce our international presence, and continue our disciplined reduction of non-core assets, to ensure sustainable, predictable returns on equity above our cost of equity.

• Simplify the Group to improve service and deliver £1.5 billion of annual savings in 2014 (£1.7 billion of run-rate savings by end 2014), through better end-to-end processes and IT platforms, a delayered management structure and simpler legal structure, centralised support functions, and a reduction of 15,000 roles. The total cost of the programme will be approximately £2.3 billion (including capital expenditure), of which around £1.5 billion will be expensed through the income statement and reported outside of the Group’s Combined Businesses results over the next few years.

• The cost savings will enable an additional £2 billion of investment over the period 2011 to 2014 to grow our core customer franchise. The annual income statement charge will increase to around £500 million by 2014, equivalent to approximately one-third of the annual expenses benefit from the simplification programme. These investments will include:

– In Retail, we will revitalise Halifax as a leading challenger brand in UK retail banking and invest behind Lloyds TSB and Bank of Scotland as leading relationship brands. We will also make a commitment to keep total branch numbers at the same levels (excluding the EU mandated branch sale) through the period, and not to offshore further UK permanent operational roles.

– Wholesale’s focus will be on developing deeper client relationships and building transactional banking and fixed income capabilities to support our UK customers.

– Commercial will continue to focus on SME lending, whilst broadening its offering, on a business and individual basis, across a wider product range to include Wealth and Insurance.

– Bancassurance will be a core part of our proposition, through our multi-brand retail strategy, with a compelling product range and specialised advisor teams to better address our customers’ needs.

– In Wealth, we will build our UK proposition for mass affluent, affluent and high net worth customers, and refocus our international business.

• Streamline our International presence, from 30 countries to less than half that number, by 2014. • Continue to strengthen the Group’s balance sheet, funding and liquidity position to ensure a robust core

tier 1 capital ratio and a stable funding base, to meet the challenges of economic and regulatory uncertainty. • Commitment to recommence progressive dividend payments after the EU restriction expires, as soon as

the financial position of the Group and market conditions permit, and after regulatory capital requirements are defined and prudently met.


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2014 FINANCIAL TARGETS

We have today set the following financial targets on a combined businesses basis for delivery by the end of 2014:

Customer-driven diversified income • Additional discretionary investment in core customer franchise of £2 billion over the period 2011 to

2014, resulting in an annual income statement charge increasing to around £500 million per annum by 2014. • Core income to grow faster than nominal GDP growth, primarily driven by Other Operating Income growth.

• Other Operating Income (net of insurance claims) to increase to approximately 50 per cent of total income.

• Net interest margin improvement to between 2.15 per cent and 2.30 per cent; core business net interest margin is expected to be higher than Group margin.

Positive operating jaws • Incremental sustainable cost savings of £1.5 billion per annum in 2014 from simplification programme,

(£1.7 billion of run-rate savings by end 2014), additional to integration run-rate savings of £2 billion by end 2011.

• Cost:income ratio improved to 42 to 44 per cent (equivalent to 39 to 41 per cent when adjusted to include the net of operating lease income and depreciation in Group Income). Operating expenses on a Combined Businesses basis are expected to be approximately £10 billion in 2014.

Capital allocated to core business

• Non-core run-off and disposals to be net capital generative over the period 2012 to 2014. • Non-core assets reduced to less than or equal to £90 billion, accounting for less than or equal to £65 billion

of risk weighted assets.

Prudent risk appetite • Asset quality ratio improved to 50 to 60 basis points (as a percentage of average gross loans and advances

to customers); Core business charge expected to be at the bottom end of this range.

Strong, stable funding • Loan-to-deposit ratio equal to or below 130 per cent for the Group and 120 per cent for Core business.

• Liquidity Coverage Ratio and Net Stable Funding Ratio requirements met ahead of regulatory implementation dates.

Disciplined, high-return investing • Sustainable statutory return on equity of 12.5 to 14.5 per cent.

• Core tier 1 capital ratio prudently in excess of 10 per cent in 2013 when transition to Basel 3 commences.

2011 GUIDANCE

Our current expectations for our 2011 performance remain broadly unchanged to those given at our Q1 2011 Interim Management Statement on 5 May. We have today given the following additional commentary on our expectations for 2011. We currently expect:

• Margin: net interest margin just above 2 per cent for the 2011 full year.

• Income: non-core reductions to further reduce balance sheet size and therefore income. Core income to be slightly down as a result of increased margin pressures and the reduction in the size of the balance sheet given the effects of continued customer deleveraging and subdued new lending demand.

• Costs: a slight decline in costs in 2011, due to the simplification cost actions already being taken.

• Impairments will reduce in 2011, based on our current economic assumptions for the UK and Ireland, including unemployment and property valuations.

In addition, although there will be a negative effect on income, the non-core asset reductions in the first half have enabled material further repayment of liquidity support from government and central bank facilities, which have been reduced from £97 billion at 31 December 2010 to £37 billion at 30 June 2011.


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OUTCOME OF STRATEGIC REVIEW INTRODUCTION Lloyds Banking Group is holding a presentation in London today, 30 June 2011, hosted by António Horta-Osório, Group Chief Executive. The presentation will describe the actions taken since he became Group Chief Executive in March and the outcome of his strategic review. It will set out the Group’s UK-focused strategy to support its core customers and the key actions to deliver strong, stable and sustainable returns for shareholders. SERIES OF RAPID, FOCUSED ACTIONS TAKEN SINCE MARCH Since the appointment of António Horta-Osório as Group Chief Executive on 1 March, we have taken a series of rapid, focused actions, including a number of strategic initiatives, improving the Group’s organisational structure, further strengthening the Group’s balance sheet, and refocusing the Group’s franchise on a multi-brand retail strategy, active support for small and medium-sized enterprises (SMEs), and on improvement in customer satisfaction. We have accelerated the divestiture (‘Project Verde’) required by the EU, and issued an Information Memorandum to potential buyers in mid-June. In addition, the Group has provided clarity on the likely potential costs of customer contact and/or redress in relation to Payment Protection Insurance complaints, making a provision of £3.2 billion. We have also put in place a new, more agile organisation to support the implementation of our strategy. The new organisation is a flatter structure, which results in the leadership team being closer to customers and improved co-operation between businesses. As part of this new organisation, the heads of the Lloyds TSB and Halifax community banks, and Retail Products and Marketing, now report directly to the Group Chief Executive, and in order to ensure that the Group provides greater focus on SMEs, the Commercial business, previously part of Wholesale, now also reports directly to the Group Chief Executive. Alongside this new structure, we have strengthened businesses and functions with additions to the senior team, delivered improved control, efficiency and service through the centralisation of support functions, and introduced new governance to ensure better, faster decisions on pricing, costs, investments and the non-core businesses. In renewing our focus on improving customer satisfaction, we publically committed to reducing the level of complaints we receive, and we are revitalising Halifax as a leading challenger brand in the marketplace. We are also actively supporting SMEs. As reported in our Q1 2011 Interim Management Statement, of our committed gross lending to UK businesses in the first quarter, £3.3 billion has been to SMEs, which represented a year-on-year growth in net advances to SMEs of over 2 per cent which compared favourably with a decline in SME lending across the industry reported in Bank of England market statistics. We continued this strong support to our SME customers in the second quarter of 2011 with continuing year-on-year growth, against a market that we estimate has shrunk over the same period. Actual data for the first six months of 2011 will be reported in our half-year results announcement. We are on schedule to substantially complete our integration programme in the third quarter of this year, and to deliver run-rate cost synergies and other operating efficiencies of £2 billion per annum by the end of 2011. We have also continued to strengthen the Group’s balance sheet, further reducing government and central bank facilities, by accelerating our disciplined reduction in non-core assets.


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OUR STRATEGY TO DELIVER FOR SHAREHOLDERS AND CUSTOMERS Introduction and strategic context Our strategy for Lloyds Banking Group is built on being the best bank for customers, and to create value by investing where we can make a real difference for these customers, with the objective of delivering strong, stable and sustainable returns for our shareholders. We have formulated our strategy in the context of a cautious, although improving, outlook for the UK economy, with GDP growth of 1.5 per cent in 2011 and then normalising above 2 per cent in 2012, UK base rates increasing from the second half of 2011, unemployment improving from 2011, and property values stabilising. We expect continued customer deleveraging, and for inflation to remain high for some time to come. Our strategy also recognises our customers’ needs for product simplicity and transparency, access to credit, help in planning and saving for retirement, and will respond to their demands for access through multiple channels, and for value-for-money products and services. We also expect increasing clarity on regulation, including the final recommendations of the Independent Commission on Banking by September. We expect regulators to continue to promote competition, and ensure consumer protection and financial stability. We anticipate that, inter alia, this will result in stringent capital and liquidity standards and definitions of risk-weighted assets, in Solvency II increasing demands on insurance risk management and capital, and the implementation of Living Wills and the potential ring-fencing of some retail activities. We expect our markets to remain competitive, with additional challengers emerging, and for customers to benefit from improved switching of accounts between banks. We have advocated an industry-wide personal current account switching system, and will increase customer focus through a multi-brand strategy, with Halifax positioned as a challenger brand which is developing new, market-leading, products such as the ISA Promise. We have also accelerated the EU mandated branch disposal to ensure that we comply with our obligations within what we consider to be a tight timetable. Our distinctive assets and capabilities include our valuable customer franchise and market position, well-recognised and respected brands, proven change management skills and high-quality committed people. These assets and capabilities will support us in the challenges we continue to face from our ongoing exposure to non-core assets, our funding position, our required divestitures, as well as an inefficient organisation with higher costs, and limited recent investment in growth. A UK-focused strategy to be the best bank for customers which will deliver for shareholders Our strategy will create shareholder value through simplifying processes, systems, products and policies, by investing a portion of the savings realised from this simplification in growth initiatives targeted at high-return areas of our business, and by ensuring that capital is primarily allocated to core businesses. We intend to realise cost savings and to reduce our cost:income ratio to ensure that we have a strong and stable funding base and that we lend within our conservative risk appetite. As part of delivering value to shareholders, it is also our intention to recommence dividend payments with a progressive policy after the EU restriction expires, as soon as the financial position of the Group and market conditions permit, and after regulatory capital requirements are defined and prudently met.


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Our strategy is designed around our distinctive capabilities in serving individual, commercial and corporate customers across the UK, with a focused product range of banking, insurance, investments, debt financing and risk management products to meet those customers’ needs. In delivering these products to our customers, we intend to capitalise on our strong customer relationships, our iconic and distinct brands, our broad, multi-channel distribution, our customer-focused people, and the clear operating model we are creating. Our action plan to deliver our strategy The four key elements of our action plan to deliver our strategy are as follows: I: Reshape our business portfolio to fit our assets, capabilities and risk appetite. II: Simplify the Group to improve agility and efficiency. III: Invest to be the best bank for our customers. IV: Strengthen the Group’s balance sheet and liquidity position. These are addressed in order below: I: Reshape our business portfolio to fit our assets, capabilities and risk appetite. We will focus on attractive UK customer segments and their product needs, to target an outcome of sustainable, predictable returns on equity above our cost of equity. By the end of 2014, we are targeting a sustainable statutory return on equity of between 12.5 per cent and 14.5 per cent, despite ongoing poor returns from non-core assets, and still with positive earnings momentum into 2015. In reshaping our business, we will invest behind core areas which offer strong returns and attractive growth. These are businesses which are capital and liquidity efficient, with sustainable competitive advantage, and which are central to our core customer strategy. a) Continued reduction in non-core assets We will continue to divest or run off non-core assets, with a goal of reducing assets in the non-core portfolio by at least half over the four years to the end of 2014. These are businesses which deliver below-hurdle returns, which are outside our risk appetite or are distressed, are subscale or have an unclear value proposition, or have a poor fit with our customer strategy. We will continue to take a disciplined approach to managing and reducing our non-core assets, and ensure that we continue to have adequate impairment provision coverage ratios for all non-core assets. Our non-core commercial real estate and corporate loans will be managed on a day-to-day basis by a dedicated workout unit reporting to our Risk function, while non-strategic activities will be managed by dedicated teams until run-off or sold. Each team will have balanced scorecards and individual incentives based on the objectives for the portfolio. We are targeting a reduction in our non-core assets to less than or equal to £90 billion by the end of 2014, and for them to account for less than or equal to £65 billion of risk weighted assets by that time. We are also targeting non-core run-off and disposals to be net capital generative over the period 2012 to 2014. b) A prudent appetite for risk We have now fully embedded across the business a conservative approach to, and prudent appetite for, risk, and have in place disciplined controls over the risk profile of all new business. We have also reviewed our existing portfolios and confirmed them as adequately provisioned. We are targeting the reduction of non-core assets and the prudent management of risk to result in an improvement in the Group’s asset quality ratio (as a percentage of average gross loans and advances to customers) to 50 to 60 basis points by the end of 2014, with the core business expected to be at the bottom end of this range.


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II: Simplify the Group to improve agility and efficiency. We are targeting our cost saving and investment initiatives to result in an improvement in our cost:income ratio to 42 per cent and 44 per cent (equivalent to 39 per cent to 41 per cent when adjusted to include the net of operating lease income and depreciation in Group income) by the end of 2014. a) Integration on track to realise £2 billion of run-rate cost savings by end 2011 Our integration programme will deliver a single platform for the Group, and will be substantially completed in Q3 2011, within the original three year target. We remain on track to deliver a run-rate of £2 billion per annum of cost synergies and other operating efficiencies by the end of 2011 from the integration programme. b) Further £1.5 billion of annual cost savings in 2014 from our simplification initiatives As integration completes, we have commenced a programme to deliver further cost savings, which we are targeting to amount to £1.5 billion in 2014. By the end of 2014, we are targeting the run-rate of these cost savings to be £1.7 billion per annum. The total cost of these simplification initiatives, which will leverage our proven execution capabilities from our integration programme, is expected to be approximately £2.3 billion (including capital expenditure), of which £1.5 billion will be expensed through the income statement and reported outside of the Group’s Combined Businesses results over the next few years. Progress in delivering these savings, which will be realised from the four areas set out below, is already under way. The four areas of cost savings are:

• Operations and processes: We will conduct an end-to-end redesign of our processes, which will include significant process automation, and will materially reduce the number of IT applications. This will improve the customer experience (for example through accelerating the fulfilment of requests and reducing errors and complaints), increase productivity, and reduce risk, complexity and costs.

• Distribution and channels: We intend to create a highly efficient distribution platform, through streamlining our product suite and migrating products to digital distribution channels, encompassing the internet, mobile applications and telephony.

• Sourcing: We will optimise our demand management, simplify specifications and further strengthen our supplier relationships, reducing the number of suppliers to the Group from around 17,000 to under 10,000, and further focusing on a core group of lead suppliers, to achieve approximately a 15 per cent saving on addressable spend.

• More agile organisation: We will create a more agile organisation through further delayering our management structure, centralising control functions, and creating a simpler legal structure. Our focus will be on reduction in middle management, bringing our top team closer to the customers and front-line staff, and are today committing to keeping total branch numbers at the same levels excluding the EU mandated sale (‘Verde’) through the period, and to the present policy of no further offshoring of UK permanent operational roles. We expect a reduction of 15,000 roles as a result of the simplification programme over the period. Where colleagues may be affected, we will use natural attrition and internal redeployment rather than redundancy where possible.


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III: Invest to be the best bank for our customers.

Annual reinvestment of £500 million by 2014 to grow core income We intend to invest approximately £2 billion in the period 2011 to 2014 to grow our core customer business in order to deliver strong, stable, high-quality earnings streams. This investment will result in an annual income statement charge increasing to approximately £500 million per annum by 2014, which is equivalent to approximately one-third of the savings from our simplification initiatives. This investment will be additional to our business-as-usual investment, and is expected to result in core income growth above nominal UK GDP growth, primarily driven by growth in Other Operating Income. We expect Other Operating Income (net of insurance claims) to increase to approximately 50 per cent of total income by the end of 2014 built on deepening customer relationships and our focus on less capital intensive products. Our investment will be subject to disciplined tests, including the financial returns, the fit with our risk appetite and with our strategy to be the best bank for customers. The key elements of our investment are as follows: a) Investing to be the best bank for personal customers In Retail, we will revitalise the Halifax brand to be a leading challenger brand in UK retail banking. We will aim to deliver a simple, efficient and fair customer experience and innovative products such as the ISA Promise, Clarity Card and Reward Current Account, and to be a value-for-money leader, maintaining high visibility on the Best Buy list, supported by a new positioning campaign, to be launched in September, to attract new customers. We will also invest behind our Lloyds TSB and Bank of Scotland brands as leading relationship brands in UK retail banking, leveraging the commitment of our colleagues who have on average 18 years’ banking experience, to deliver a customer experience of which we can be proud. We will be focused on recognising and rewarding our customers’ loyalty, and we will invest in our branches, in new channels such as mobile banking, and services like Money Manager. In Wealth, our goal is to be the primary Wealth advisor to our UK mass affluent, affluent and high net worth customers, with a goal to more than triple the number of in-proposition customers, and to increase income per customer by more than 50 per cent by 2014. To deliver this, we will invest in new coverage models to better meet our customers’ service needs, electronic capabilities such as an improved on-line channel and an execution-only service, and a new investment platform incorporating Scottish Widows’ and third-party products. We will also refocus our International business on UK expatriates and others with UK connections. b) Invest to be the best through-the-cycle partner for our business customers Our goal is to be the best through-the-cycle partner for our business customers, both through our Commercial Banking operations, which serve Small and Medium-sized Enterprises (SMEs), and our Wholesale Banking business, which addresses the needs of UK companies and institutions. In both businesses, our goal will be to increase our share of capital-light services, including risk and cash management, general insurance, pensions and wealth for SMEs, and transaction banking, debt financing, and rates business for UK corporates and institutions. In Commercial Banking, we are an integral part of our customers’ communities and have taken a leading role in supporting the UK economic recovery. In supporting SMEs, we intend to deliver the full range of the Group’s products and advice from our Retail, Insurance and Wealth businesses to SMEs and their owners, and to invest behind the creation of a new relationship and service model, improved skills for our customer facing people and better on-line and phone support, which will deliver efficiency gains and better customer value.


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In Wholesale Banking, to meet our goal of being a trusted advisor meeting the full range of customers’ needs, by investing in our payments, accounting, cash management and on-line banking platform, and by enhancing our debt capital markets, fixed income and rates offer. c) Bancassurance is a core part of our proposition Bancassurance will be a core part of our proposition, through our multi-brand retail strategy. We aim to maximise the conversion of our retail banking customers to bancassurance through offering them affordable and relevant advice, taking advantage of the advice and distribution gap we see as being created by the Retail Distribution Review. We expect our Scottish Widows manufacturing platform to enable us, as a vertically-integrated provider, to provide a wide range of products to customers in an integrated manner, benefiting us in terms of both product innovation and development and in the delivery of products to our customers. We will also invest behind specialised advisor models for both protection and investments, simple self-service propositions with integrated planning tools, and behind a wide range of delivery channels, including branches, e-commerce and telephony, to meet the needs of different customer segments. We expect our new, more agile organisation to facilitate our aims, with our leadership teams committed to working together to realise the potential in our bancassurance proposition. We expect this to result in an increase in bancassurance customer numbers of approximately 50 per cent by 2014 (compared to 2010), and a doubling of sales and profit before tax from bancassurance over the same period. IV: Strengthen the Group’s balance sheet and liquidity position. We will continue to strengthen the Group’s balance sheet and liquidity position to ensure a robust core tier 1 capital ratio and a stable funding base. a) Robust core tier 1 capital ratio We are targeting a core tier 1 capital ratio prudently in excess of 10 per cent in 2013 when the transition period to Basel 3 commences. We expect the implementation of Basel 2.5/Basel 3 together to have a negative effect of approximately 0.8 per cent on our core tier 1 ratio by the end of 2013. The phasing in of new core tier 1 deductions over five years, which commences in January 2014 is expected to further affect our core tier 1 capital ratio in relation to our insurance operations, excess expected loss, and any residual deferred tax assets relating to trading losses that may still be on the Group’s balance sheet at that time. In the second half of 2011, we will complete further capital restructurings which will reduce the total core tier 1 deduction under Basel 3 relating to our insurance operations by just over £2 billion. This significant mitigation is equivalent to approximately 50 basis points of core tier 1 ratio under Basel 3 and will reduce the transitional rules impact from insurance to approximately 20 basis points per annum. The other transitional adjustments are likely to have a similar annual effect to the insurance impact. Non-core asset disposals, and the EU mandated branch disposal (which is required to complete by November 2013), are expected to reduce risk weighted assets, and therefore benefit our capital ratios, over this period.


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b) Exceeding regulatory liquidity requirements We expect to meet the requirement for our Liquidity Coverage Ratio and our Net Stable Funding Ratio to be in excess of 100 per cent by 2014, in advance of regulatory requirements. This will require us to increase our holdings of primary liquid assets to a level broadly equivalent to our wholesale funding with a maturity of less than one year, although the quantum of this will be lower than currently as we reduce the levels of wholesale funding. The cost of holding these incremental liquid assets will be reflected in our Net Interest Margin. c) A stable funding base We continue to make excellent progress in wholesale funding against our previous guidance of public issuance of £20 to £25 billion this year. We expect to issue new funding of £5 to £10 billion over the rest of this year across all public and private issuance programmes. Alongside our non-core asset reductions, the strength of our term issuance has facilitated a further reduction in government and central bank facilities, from £96.6 billion at 31 December 2010 to £37.1 billion at 30 June 2011. Current plans assume that the remaining facilities will be repaid in line with contractual maturity dates, the last of which is in October 2012. Our annual wholesale term issuance requirement has now fallen, and we expect a public term issuance requirement of £15 to £20 billion as part of a total private and public programme of approximately £25 billion per annum in the future. d) Group loan-to-deposit ratio to improve to 130 per cent or below by end 2014 With a reduction in our overall wholesale funding requirement and in our non-core assets, and further growth in our relationship customer deposits, we are targeting an improvement in our Group loan-to-deposit ratio from approximately 146 per cent currently to 130 per cent or below by the end of 2014, and our core business loan-to-deposit ratio to be 120 per cent or below by the same time. Clear milestones and individual performance goals to track progress on our strategy We have set clear milestones to track our progress. We have ensured that each initiative under our strategy has a sponsor drawn from our senior management team who will be accountable for progress, and we have created balanced scorecards for those in the leadership team based on Group financial, simplification programme, and customer satisfaction targets, as well as transformation programme milestones and colleague engagement. Net interest margin improvement to between 2.15 per cent and 2.30 per cent by end of 2014 For the full year 2011, we expect our net interest margin to be just above 2 per cent, based on current assumptions. By the end of 2014, we are targeting a net interest margin of between 2.15 per cent and 2.30 per cent, based on our current business and macro-economic assumptions, including that base rates will be lower for longer than we previously anticipated, whilst the core business net interest margin is expected to be higher than Group net interest margin. We also assume that over time we will benefit from UK base rate increases, but recognise that the competition for deposits is currently strong. We also expect our reduced wholesale issuance needs to facilitate greater control over our funding costs in the future, with our improved funding position allowing greater flexibility over mix of funding sources, resulting in tighter issuance spreads. As already mentioned, we expect a negative effect on our net interest margin from increased liquidity requirements.


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Good progress on Project Verde We have made good progress following the announcement that we would accelerate the start of the divestiture as required by the EU (‘Project Verde’), and have now issued an information memorandum to prospective buyers, with indicative offers expected by mid-July. We expect to identify a purchaser by the end of this year, and to complete a transaction at the end of 2013, given the separation and integration issues that will need to be resolved, as per the EU mandated timetable. The Verde business comprises 632 branches, and the TSB and IF brands, and serves approximately 5.5 million customers. The table below shows an illustration of the effects of the Verde disposal on the Lloyds Banking Group financials, based on current financial information, although the final profile at the time of expected legal completion in 2013 will be different.

Income statement Income c£1.2 billion Expenses c£0.5 billion Impairment charge c£0.2 billion Profit before tax c£0.5 billion

Balance sheet Risk weighted assets c£16 billion Assets c£64 billion Liabilities c£32 billion

The implementation costs of the disposal will vary depending on the nature of the buyer, but could be up to £1 billion. These costs will be excluded from our combined businesses results.


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CONTACTS

For further information please contact:

INVESTORS AND ANALYSTS Kate O’Neill

Managing Director, Investor Relations 020 7356 3520

email: kate.o’[email protected]

CORPORATE AFFAIRS Matthew Young

Director of Corporate Affairs 020 7356 2231

email: [email protected]

Registered office: Lloyds Banking Group plc, The Mound, Edinburgh EH1 1YZ Registered in Scotland no. 95000

Strategic Review June 2011 0

30 June 2011London

STRATEGIC REVIEWPresentation to Analysts & Investors

30 June 2011

António Horta-OsórioGroup Chief Executive

STRATEGIC REVIEWStrategy & Guidance

2

AGENDA

Sir Win BischoffOpening

Tim TookeyFinance

António Horta-OsórioStrategy & Guidance

Mark FisherSimplification

Q&A


3

ICONIC BRANDS WITH RICH HISTORY AND IMMENSE POTENTIAL TO DELIVER FOR BOTH CUSTOMERS AND SHAREHOLDERS

4

AGENDA

Strategy

First 100 Days

Action Plan

Guidance

5

Strengthened executive leadership team

New, more agile organisation in place

Accelerated pay down of government and central bank funding

Disciplined sale of non-core assets

Accelerating EU/HMT-mandated branch sale programme

Renewed focus on and improvement in customer satisfaction

Committed to Halifax as a leading challenger brand

Actively supporting SME lending

Provided clarity on PPI provisioning

On schedule to substantially complete Integration in Q3 2011

Completed 100 day strategic review

Rapid, focused actions taken since MarchFIRST 100 DAYS


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WHOLESALE GROUP FINANCE GROUP RISKGROUP HRINSURANCEWEALTH &

INTERNATIONAL

GROUP OPERATIONS

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OLD ‘FEDERAL’ MANAGEMENT STRUCTURE DUPLICATED RESOURCES WITH TOO MANY LAYERS

CEO

InternationalUK Wealth & Private Banking

Products & MarketingOperations

RiskFinance

HRAudit

Comms

CommercialCorporateTreasury

Wholesale MarketsAsset

FinanceOperations

RiskFinance

HRAudit

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Lloyds/Bank of ScotlandHalifax

Products & MarketingOperations

RiskFinance

HRAudit

Comms

L, P & IGI

Products & Marketing

OperationsRisk

FinanceHR

AuditComms

RiskFinance

HRAudit

Comms

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AuditComms

RiskHR

AuditComms

FinanceHR

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RETAIL BANKING

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A new, more agile organisation in place – creating a high performance culture

FIRST 100 DAYS

CEO

LLOYDS TSB & BANK OF SCOTLAND

COMMUNITY BANK

HALIFAX COMMUNITY

BANK

PRODUCTS AND

MARKETING

WEALTH&

INTERNATIONALCOMMERCIAL WHOLESALE INSURANCE

Operations and IT

Finance

Risk Management

Other functions (HR, Internal Audit, Legal, Corporate Affairs, Strategy)

Flatter Organisation – Top team closer to customersAdditions to Top Team – Higher visibility for business units and stronger control functionsCentralised Support Functions – Improved control, efficiency and serviceNew Governance for Pricing, Cost, Investment, Non-Core – Weekly committees, cross-functional, faster decisionsNew Performance Culture – Clear accountability and individual goalsInternational Business Reshaped – Clear downsizing from 30 to <15 countries, split between Wealth and Wholesale

Retail Banking

8

AGENDA

Strategy

First 100 Days

Action Plan

Guidance


9

Key trends shaping strategic context

INCREASING CUSTOMER

EXPECTATIONS

Want simplicity and transparency Demand a quality, multi-channel customer service experienceGrowing demand for advice to plan/save for retirementIncreasingly demand better value for their money

1

Stringent UK capital and liquidity standardsMore focus on consumer protection and transparencyRecovery and resolution mechanisms and Retail ring-fencingAwaiting ICB final recommendations in SeptemberAlready-competitive market with new challengers and more switching

INCREASING CLARITY ON REGULATION

2

CHALLENGING OPERATING

ENVIRONMENT

Continued cautious outlook on prospects for the UK economyDe-leveraging combined with inflation, so cost efficiency imperativeManaging and correctly pricing risk a major differentiatorHealthy returns across segments, though lower than pre-crisis

3

STRATEGY

ACTIONS ACCELERATED IN RESPONSE TO CHALLENGING ENVIRONMENT

10

STRATEGYToday, the Group has unique assets but faces some important challenges

UNIQUE ASSETS KEY CHALLENGES

Valuable customer franchise and market position

Well-recognised and respected brands in all markets

Broad, multi-channel distribution

High quality, committed people

Change management capability, proven through Integration

State Aid and associated sales

Addressing funding structure

Limited investment for growth over a number of years

Inefficient organisation and processes, resulting in higher cost structure than necessary

Continued exposure to non-core assets

CLEAR PRIORITY TO SUPPORT CUSTOMERS, DRIVE EFFICIENCY AND INVEST FOR GROWTH

11

STRATEGYThe Group’s strategy fits with our distinctive assets and capabilities

THE BEST BANK FOR CUSTOMERSCreate shareholder value by simplifying the way we work

and investing where we can make a real difference

~30million

customers

STRONGCUSTOMERRELATION-

SHIPS

#1brand for customer

consideration

STRONGICONIC

BRANDS

27%year on year

growth in Internetbanking usage

BROADMULTI-

CHANNELDISTRIBUTION

80% colleague

engagement

CUSTOMERFOCUSEDPEOPLE

£2bnintegration

savings nearing

completion

INTEGRATEDPLATFORM


12

CUSTOMER-DRIVEN,

DIVERSIFIED INCOME

POSITIVE OPERATING

JAWS

DISCIPLINED HIGH-RETURN

INVESTING

CAPITAL ALLOCATED

TO CORE BUSINESS

PRUDENT RISK

APPETITE

STRONG STABLE

FUNDING

This strategy will deliver shareholder value

THE BEST BANK FOR SHAREHOLDERSReinstate dividend after regulatory capital requirements

are defined and prudently met, and return to full private ownership

STRATEGY

13

AGENDA

Strategy

First 100 Days

Action Plan

Guidance

14

OUR ACTION PLAN WILL ENSURE STRONG, STABLE RETURNS FOR OUR SHAREHOLDERS OVER THE NEXT 3 YEARS AND BEYOND

RobustCORE TIER 1 RATIO and

stable funding base

RESHAPE our business portfolio to fit our assets, capabilities

and risk appetite

Continue to STRENGTHENour balance sheet and

liquidity position

SIMPLIFY the Groupto improve agility, service,

and efficiency

INVESTto grow our core

customer businesses

Strong, stable,high quality

EARNINGS streams

Sustainable, predictable RoE,in excess of our CoE

Significantcost savings and positive

operating JAWS


15

CORE

Strong, above-hurdle returnsAttractive growth prospectsLiquidity/capital efficientSustainable competitive advantageFits with core customer strategy

Below-hurdle returnsOutside risk appetite &/or distressedUnclear value propositionSubscale market positionPoor fit with core customer strategy

SME lendingCA and SavingsTransaction bankingDebt financing, Fixed Income & ratesBancassuranceMass affluentWealth

IrelandRetail self-certified mortgagesShippingAerospaceInternational footprint cut in half

DECISION CRITERIA ACTIONS

NON-CORE

We will focus investments on attractive UK customer segments andthe products they need

RESHAPE OUR PORTFOLIO

16

Disciplined approach to manage and reduce non-core assets

Adequate coverage ratios for all non-performing assets

Organisational model:– Dedicated workout unit under Risk for non-performing CRE and corporate

loans– Other non-strategic activities managed in a dedicated way within Retail,

Wholesale and Wealth until run off or sold

Senior management oversight by Group Asset Review Forum

Experienced transactions team focused on asset sales

Balanced scorecards and individual incentives tied to portfolio objectives


17

We will invest to be the best bank for personal customers

RET

AIL

BA

NK

ING

Leading relationship brands in UK retail bankingFocused on recognising and rewarding customer loyaltyCommitted, experienced customer-facing colleaguesInvesting in branches, new channels and services like Money Manager to deliver a customer experience we can be proud of

Aspire to become a wealth advisor to our existing UK customers – in mass affluent, affluent and HNW segmentsRefocusing International on UK customers, expats and other anglophile wealth customers - reducing locations by halfCreating new service models, electronic capabilities and investment platforms with SWIP and others’ products

A leading challenger brand on the High StreetRecognised by industry and media as a value for money leader(e.g. ‘Moneyfacts’ Best ISA and Best Current Account Provider 2011)Game-changing products, like the new ISA PromiseSimple, efficient and fair customer experience

LLOYDS & BANK OF

SCOTLAND

HALIFAX


WEALTH MANAGEMENT


18

We will invest to be the best through-the-cycle partner for business customers


A leader in fuelling UK economic recovery and integral to our customers’communities Best through-the-cycle banking partner to UK SMEsNew relationship and service model, better on-line and phone support, delivering efficiency and better customer valueDelivering the whole Group – Retail, Insurance, and Wealth products and advice

Leading through-the-cycle partner to UK companies & institutions (e.g. Voted by UK FDs as the Leading Corporate Bank 7 years running)Two major investments– Transaction banking– DCM, Fixed Income and RatesSelective international presence and products to support corporates with UK connectivity

COMMERCIALBANKING

WHOLESALEBANKING

19

Bancassurance is a core part of our strategy and a solid financial contributor to the Group

Scottish Widows – the UK’s most trusted and preferred brandTop 3 provider in Life, Pensions & Investments with 10% market share43% of new business with existing bank customersNew sales model and propositions to take advantage of Retail Distribution Review Industry-leading cost performance, recognised for top quality products and service

GENERALINSURANCE

Top 3 provider in Home Insurance with 5% market share across all personal lines82% of new business with existing bank customersInvesting in our proposition for and distribution to SMEsIndustry-leading combined ratio, with sophisticated underwriting and claims management

BANCASSURANCE OFFERS A DISTINCTIVE OPPORTUNITY TO GENERATE DIVERSIFIED HIGH RETURNS, LIQUIDITY-FREE EARNINGS AND CASH RELEASE FOR THE GROUP


LIFE, PENSIONS & INVESTMENTS

20

Post-integration, simplify the Group to improve service and reduce costs by £1.5bn annually

£1.5bn in annual cost savings in 2014 (on top of integration synergies)

Proven ability to execute, built through integration

Cost savings will enable:

– Investment in new channels, services and capabilities

– Best-in-market customer experience

– The right tools our colleagues need to do their jobs well

Using attrition and redeployment not redundancy where possible

ACTIONSTARGET OUTCOMES

OPERATIONS & PROCESSES

Implement workflow, automate, improve IT landscape, establish centres of excellence

SOURCING Improve demand management, simplify specification, strengthen supplier relationships

DISTRIBUTION &CHANNELS

Continue to innovate, reduce product variants, increase pricing flexibility

ORGANISATIONFlatten organisational structure, bringing top team closer to customers and front-line staff

Already in progress

SIMPLIFY THE GROUP


21

ACTIONS OUR CUSTOMERS WILL VALUETARGET OUTCOMES

Reinvest £500m annually to improve our customer proposition and grow core income

Simple retail product portfolioNew transaction banking, financing and risk management for corporatesBetter investment propositions

PRODUCTS THAT CUSTOMERS

NEED

FAIR, SIMPLE TO

UNDERSTAND PRICES

Low costs, enabling challenger pricingRewards for customer loyaltySimple pricing structures

TRUSTED ADVICE AND SERVICE

New models for bancassurance, mass affluent and affluentThrough-the-cycle partner to businessInsight from a single customer view

ACCESS THAT SUITS OUR

CUSTOMERS

SME e-portal and direct modelMulti-channel integration and mobileNew electronic platform for corporates and financial institutions

INVEST IN OUR CORE BUSINESS

Reinvest 1/3 of savings from Simplification– By 2014, invest £500m(1)

annually in core businesses– In addition to BAU,

Run-the-Bank, and mandatory investing

Investing in initiatives to grow income, especially OOIDisciplined investment tests– Fit with ‘the Best Bank for

Customers’ strategy– Attractive financial returns– Risk appetite– Ability to execute

(1) Investment over 2011 to 2014 of £2.0bn including capital expenditure will result in up to £0.5 million per annum expenses in the income statement

22

Case study: Halifax will be a market challenger for today’s high street INVEST IN OUR CORE BUSINESS

New challenger products, including radical new Savings offer, to drive increasing volume and profit

All branches open on Saturday

Active on-line customers grow from 3.1 - 5.4m to drive lower costs

Brand re-launch and exciting new marketing campaign

A leading alternative to the ‘Big-4’current account providers

Engaged colleagues who identify with their customers

23

CUSTOMERS

SALES

PROFIT BEFORE TAX

Case study: The UK’s leading Retail Bancassurance provider

+100%

20142010

Growing need for advice to plan/save for retirement/future

Specialised advisor teams better able to help customers meet their protection and investment needs

Ability to quickly develop products and services in response to identified customer need in an integrated manner

Low-cost and capital efficient manufacturing utilising a leading brand

Range of channels, including branch, e-commerce and telephony, to meet different customer segment needs

Improved customer insight with single customer view at an integrated level

>100%

20142010

+50%

20142010



24

Case study: Leading through-the-cycle partner to UK SMEs

Balance sheet-driven banking– Loans– Current A/C– Payments– Cards– Factoring

Capital-lightsolutions– Deposits– Protection/Pensions– FX/Hedging– Business insurance– Wealth

Our highly rated RM’s will have 100% more time with customers

Time-to-cash for loans reduced by over 50%

Targeted, informed propositions matched with customer life-stage

Direct Relationship Bank to align service with customer needs, value and preference

Delivering a comprehensive suite of products and services using unique customer insights

SUCCESSION

START-UP

GROWTH

MATURITY


STRENGTH

OPPORTUNITY

25

Case study: Developing our wholesale markets business to capitalise on our corporate lending relationships


Enhanced 'capital-light' offerings –Debt financing, Fixed Income and Rates to complement lending product and increase OOI

Deepen existing corporate relationships across new product suite and expand distribution to cover UK insurers and asset managers

More effective and efficient connectivity with customers via new Arena e-commerce platform (launching in September 2011)Estimated

MarketLloyds

BankingGroup

Corporate

Commercial

FinancialInstitutions

CUSTOMER-DRIVEN REVENUE BY SEGMENTREVENUE BY PRODUCT

EstimatedMarket

LloydsBankingGroup

Credit

Transaction Banking

Capital Markets

Sales & Trading

Structured Credit

26

Case study: New propositions will help affluent, HNW and mass affluent customers meet their financial goals


(1) AuM represents savings and investments

CURRENTLY LOW WALLET SHARE AMONGST

KEY SEGMENTS

GROW CUSTOMERS IN PROPOSITION AND

WALLET SHARE

Realigned segmentation, propositions and coverage to better serve customersImproved on-line channel and execution-only offerDeeper customer insight with more effective lead generationInvestment in infrastructure to deliver a holistic financial planning serviceEnhancements grow:– Ability to service wealth and

currently underserved mass affluent customers

– Share of investment wallet earned from existing clients

Segment share of customers and assets (%)

96

9

20+

MA Aff / HNW

AuMCustomer

Number of in-proposition customers

Income per customer

>3x

>50%


27

AGENDA

Strategy

First 100 Days

Action Plan

Guidance

28

Group Financial Targets, 2014 (1 of 2)GUIDANCE

42 - 44%(2)

£1.5 bn annual savings in 2014 (£1.7bn run-rate savings by end 2014)

£500m pa by 2014

c50% of Group income2.15 - 2.30%; core business higher than Group

Net capital generative over the period 2012 to 2014

≤£90bn in 2014, accounting for ≤65bn of RWA

Cost : income ratio

Sustainable cost savings (over and above £2bn integration savings and pre discretionary investment)

Additional discretionary investment to grow our core customer franchise

OOI as % of total income(1)

Net interest margin

Required capital for non-core

Non-core assets reduced

Core income growth > nominal GDP Growth

CAPITAL ALLOCATED

TO CORE BUSINESS

POSITIVE OPERATING

JAWS

CUSTOMER-DRIVEN

DIVERSIFIED INCOME

(1) OOI Net of Insurance claims(2) Following adjustments to include the net of operating lease income and depreciation in Group Income this would be 39-41%

Additional discretionary investment to grow our core customer franchise

OOI as % of total income(1)

Core income growthCUSTOMER-

DRIVEN DIVERSIFIED

INCOMENet interest margin

29

DISCIPLINED HIGH-RETURN

INVESTING

STRONG STABLE

FUNDING

PRUDENT RISK

APPETITEAverage AQR

50 - 60bps

Loan-to-deposit ratio

LCR & NSFR

≤130% Group, ≤ 120% Core

Requirements met ahead of regulatory implementation dates

Statutory return on equity 12.5 – 14.5%

Core tier 1 capital

Core business AQR expected to be at the bottom end of this range

Target core tier 1 capital ratio prudently in excess of 10% from 1 Jan 2013 when transition to Basel 3 commences

Group Financial Targets, 2014 (2 of 2)GUIDANCE


30

Delivering a strategy that is best for shareholders

Enhanced and resilient earningsStrong EPS progression will support share price growth

Simplifying the business will lower costs

Lower costs will create capacity for strategic investment

Focus on less capital intensive activities

Operating within the new risk appetite to drive less volatile earnings

Building a strong capital positionRatios in excess of regulatory requirements

Improved ability to withstand stress scenarios

Capacity to pay dividends

Lower wholesale funding requirements

Lower loan to deposit ratios

Focus on retail and commercial deposits

Improving the funding profile further

GUIDANCE


30 June 2011

Mark FisherDirector, Group Operations

STRATEGIC REVIEWIntegration & Simplification

1

MOVING FROM INTEGRATION TO TRANSFORMATION

Integration Programme will complete within the original three year targetRun rate benefits of £2bn well on trackIntegration was not transformation– Moved the Group to

a single platform– Single platform a

necessary first step to transformation

RUN-RATE SYNERGY BENEFITS (£bn)

June 2010

Dec2009

Mar 2011

Dec 2011

Dec 2010

2.0

1.61.4

1.1

0.8

2

SIMPLIFYING OUR BUSINESS

Improve customer service

Become more efficient

Capture scale benefits

Ensure transparency

Save to invest

Empower managers and colleagues

A permanent feature of the way we operate, not just another programme

SIMPLIFICATION IS AT THE HEART OF BECOMING THE BEST BANK FOR CUSTOMERS AND A HIGH PERFORMING ORGANISATION


3

WE HAVE MADE GREAT STRIDES ALREADY – BUT SIGNIFICANT POTENTIAL REMAINS

CURRENT LLOYDS BANKING GROUP POSITIONBEST IN CLASS

<5% rework in operational processes <7 days commercial loan ‘time to cash’

>20% rework in some operational processes 4 - 10 weeks commercial loan ‘time to cash’

END-TO-END PROCESSES

<20 UK ‘head office’premises ~170 office locationsLOCATION

FOOTPRINT

<1,500 IT applications ~2,500 IT applicationsIT APPLICATIONS

<100 products (eg 9 loan products, 6 mortgage products)

~2,000 legacy products remain post integration

PRODUCT OFFERING

<20 committees per functional area

100+ committees for RiskCOMMITTEES

~60% reduction in the number of office locations (from ~450 to ~170)

EXAMPLE INTEGRATION ACHIEVEMENT

4

SIMPLIFICATION WILL DELIVER £1.5BN SAVINGS IN 2014 AND A 2014 EXIT RUN RATE OF £1.7BN PER ANNUM

Invest significantly in technology, people and processes to deliver SimplificationDeliver £1.5bn savings in 2014

SourcingImprove demand management, simplify specification, strengthen supplier relationships

Total

Operations and ProcessesImplement workflow, automate, improve IT landscape, establish centres of excellence

OrganisationFlatten organisational structure, consolidate / rationalise international business

340.3

230.5

1.7

0.6

111

Distribution and ChannelsContinue to innovate, reduce product variants, increase pricing flexibility

0.3 29

25

4 KEY WORKSTREAMS

EXIT-RATE SAVINGS £BN

BY 2014

NUMBER OF

INITIATIVES

5

Simplification will deliver significant benefits to our colleagues and customers

OPERATIONS AND PROCESSES:

WHAT WILL THE PROGRAMME DELIVER?

BENEFITS

Simplify end-to-end processes– Automation– Image and workflow– First touch execution

Set up centres of excellence– Multi-skilled– Reduced handoffs– Redeployment

Accelerated fulfilment of requestsReduced errors and complaints

CUSTOMER IMPACT

FINANCIAL BENEFITS

Increased productivity Reduced risk Reduced complexityReduced cost

COLLEAGUE IMPACT

Eliminated highly manual tasksIncreased focus on skill buildingRedeployment


6

Structured approach across over 200 groups of services

WHAT WILL THE PROGRAMME DELIVER?

EXAMPLES

ACCOUNT SWITCHING

COMMERCIAL LENDING

OPERATIONS AND PROCESSES:

End-to-end redesign across over 200 groups of services

Structured and standard approach

Already underway

Reduced time to drawdown by over 50%25% increase in customer facing time for front office staff90%+ first-time right applicationsFewer, simpler customer forms Improved risk and credit analytics

Reduced end-to-end time by c30%Forms validated/submitted electronically, reducing input errors by c60%Automation leading to c70% reduction in manual re-entryOverall c68% reduction in operator touch time

7

Further real potential for simplification building on integration

SIMPLER SUPPLY CHAINS

APPROACH

SOURCING:

OUTCOME

BENEFITS

CURRENT POSITION

TARGET POSITION

1,000 suppliers with ~94% spend17,000 suppliers with ~6% spend

~100 lead suppliers<10,000 overall suppliers

~15% saving on addressable spend

Demand management -simpler specifications

Relationship restructure - deeper and closer working with preferred suppliers

Further volume concentration and supplier rationalisation

Improved market expertise and practices

PROCUREMENT

SPECIFICATION SIMPLIFICATION

DEMAND MANAGEMENT

8

REDUCE MANAGEMENT SPANS AND LAYERS

CONSOLIDATE AND RATIONALISE INTERNATIONAL BUSINESSES

Focus on middle management reduction

Stronger, more effective functions

From:8 LAYERS X SPAN OF 8

To:7 LAYERS X SPAN OF 10

ORGANISATION:Simplify organisation and governance structures


9

DISTRIBUTION AND CHANNELS:Actively manage distribution and channels, deliver an improved customer experience

BUILD ON STRENGTHS AND CONTINUE TO INNOVATE

Increased and enhanced functionality – Internet– Mobile– Telephony

Active managementof channel usage

Increase internet banking usage to 13 million

Product simplification and pricing flexibility

10

EXPERIENCED TEAM AND STRONG CAPABILITIES IN PLACE TO DELIVER SIMPLIFICATION

DELIVERY CONTROL

Strong control and co-ordination – as with integration Rigorous planning and milestone tracking

ACCOUNTABILITYAccountable Executives already in place, high-level plans developed for key initiatives, and quick wins started

Ramping up now – as integration completes

CLEAR PATH FORWARD

Quick-wins already being delivered (eg flattened organisation structure)Detailed planning and building delivery teams

WE WILL LEVERAGE OUR EXPERIENCE WITH INTEGRATION TO DELIVER THE BEST BANK FOR CUSTOMERS AND SHAREHOLDERS


30 June 2011

Tim TookeyGroup Finance Director

STRATEGIC REVIEWFinance

1

2011 GUIDANCE – BROADLY UNCHANGED

Previous guidance Additional comments

Net interest margin

2.07% in Q1 2011 with some headwinds for the year

Expect NIM to be just above 2% in 2011

IncomeTrends reflect customer deleveraging and subdued demand

Broadly unchanged but non-core reductions will further reduce the balance sheet size and thus income

Costs Broadly flat v. 2010 Down slightly due to new cost actions

Synergies On track for £2bn run rate by end 2011 Unchanged

Impairment Reductions in 2011 set out by book within Q1 IMS Unchanged

Funding N/A

Government and Central Bank debt materially reduced alreadyJune 2011 loan to deposit ratio c146% (Dec 2010: 154%)

2

THE BEST BANK FOR CUSTOMERS


3

ECONOMIC BACKDROP AND KEY ASSUMPTIONSA cautious outlook for the UK economy

NORMALISING REAL GROWTH RISING BASE RATES

IMPROVING UNEMPLOYMENT STABILISING PROPERTY VALUES

BANK OF ENGLAND BASE RATE (%)

HALIFAX PRICE INDEXILO(1) UNEMPLOYMENT RATE (%)

REAL GDP GROWTH (%)

(1) ILO – International Labour Organisation

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

4

2

0

-2

-4

-6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

10.0

5.0

0.0

-5.0

-10.0

-15.0

-20.0

-25.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

2005 2006 2007 2008 2009 2010 2011 201420132012

9.08.07.06.05.04.03.02.01.0

0

4

PERFORMANCE DRIVERS – EARNINGSFocus on relationship driven earnings

5

NII

PERFORMANCE DRIVERS – INCOMEDelivering sustainable, less capital intensive earnings

TotalIncome

TotalIncome

VERDE ANDNON COREDISPOSALS

NII

OOI c50%

c50%

2010 2014

BancassuranceDCM / Corporate cross salesAffluent and wealthy customersUK SMEs

Lower risk, less capital intensive balance sheetMargin impact from increased regulatory cost of liquidityFunding costs higher for longerBase rates lower for longer

FOCUS AND DRIVERS

CORE INCOME TO GROW FASTER THAN NOMINAL GDP, PRIMARILY DRIVEN BY OOI(1)

41%

59%

(1) OOI is shown net of insurance claims

OOI


6

PERFORMANCE DRIVERS – NET INTEREST MARGINTrends continue to be dominated by external factors

INTERNAL(‘Inside’ Management Control)

EXTERNAL(‘Outside’ Management Control)

Group NIM 215-230bps based on business and macro assumptionsCore business NIM will exceed Group margin 2014

NIM expected to be >200bps based on current assumptions2011

Base rate lower for longer

Wholesale funding costs remain higher for longer

Competition for deposits

Increasing regulatory liquidity requirements

Pricing of new business and repricing of existing book

Sharing of base rate rises benefit

Reduced wholesale funding issuance allows greater control over costs going forward

Improved funding position provides greater flexibility over mix of funding sources

7

Integration on track to complete with £2bn pa of savings by end of 2011

Simplification programme to achieve £1.5bn of savings before £0.5bn re-investment in growth initiatives by end of 2014

Target cost : income ratio (Group) 42 - 44% by end of 2014 (39 - 41% excluding operating leases(2))

Total costs of ‘simplification’initiatives expected to be c£2.3bn (including capex) of which c£1.5bn will be reported below the line over the next few years

PERFORMANCE DRIVERS – COSTSDriving efficiency through simplification whilst increasing investment

£11.1bn

(0.6)

(1.5)

c£10bn

2010 2014(1)BankLevy,VAT

Integrationcompletion

Simplification

(0.5)

Verde Otherincludinginflation

0.6

0.4

(1) Excludes additional run rate savings from simplification initiatives in 2015 of £0.2bn(2) Adjusted to include the net of operating lease income and depreciation in Group Income

0.5

Annualinvestment

in corebusiness

8

All portfolios reviewed and confirmed as adequately provisioned

Previous guidance for 2011 remains valid:– Retail – modest reduction– Wholesale – modest reduction– International – initial concerns

addressed with Q1 provisioning but downside risks remain

Heritage Lloyds TSB, more conservative approach to risk fully embedded

Disciplined controls over risk profile of all new business

Target normalised Group AQR range of 50 - 60bps with core business towards the lower end of the range

GROUP ASSET QUALITY RATIO

PERFORMANCE DRIVERS – IMPAIRMENTContinued reduction in impairment charge

2009 2010

201bps

325bps

50 - 60bps

2014


9

Portfolio changes as a result of the strategic review include:– Lex Autolease and social

housing now core– Selected overseas

businesses now non-coreNot separating business into good bank and bad bankNon-core disposals will continue to be considered on a value basis balancing:– Risk exposure– Capital– Liquidity– Income statement impacts

of rundownRun off satisfies EU requirements

£4.3bn £3.8bnIncome(1)

£9.1bn £9.2bnImpairment

£141bn £142bn ≤£65bnRWAs

£0.5bn

£1.9bn

£129bn

NON CORE PORTFOLIO – EXCLUDING VERDEContinued disciplined reductions in non core portfolio

Retail

International

OtherWholesale

CommercialReal Estate

Treasury Assets

(1) Underlying income

Total Assets

Dec 2010Original

49

27

Dec 2010Restated

End 2014Restated

£195bn

51

37

31

49

27

£194bn

36

51

31

≤£90bn

£173bn

Q1 2011Restated

35

25

34

49

30

10

NON CORE PORTFOLIO – VERDE PROFILEThe Verde disposal continues to progress at pace

c£0.5bnPBT

c£32bnLiabilities

c£64bnAssets

c£16bnRWAs

c£0.2bnImpairment

c£0.5bnExpenses

c£1.2bnIncome

Verde disposal process accelerated

The business is the seventh largest bank in the UK

Information Memorandum now issued to prospective buyers

Expect to identify purchaser by the end of 2011

Total implementation costs will vary depending upon the nature of the buyer but could be up to £1bn

FINANCIALS: INDICATIVE IMPACT OF VERDE DISPOSAL

(2011 illustration) on Lloyds Banking Group financials

based on EU term sheet agreement

11

THE BEST BANK FOR CUSTOMERSDelivers significant scope for prudent core business growth

SOURCES

Non core asset run off and disposals

Verde disposals

Growth in relationship customer deposits

Significant net new core business growth capacity

Increasing liquid assets to meet LCR and NSFR requirements

Prudent reduction in wholesale funding issuance (c£25bn pa)

Loan to deposit ratio ≤130% (Core: ≤120%)

APPLICATIONS RESULT

Prudent funding profile

Less capital intensive earnings

Slightly smaller balance sheet


12

FUNDINGAnnual wholesale issuance requirement continues to fall

Previous guidance of £20 - 25bn public pa over the next few years

Future public term issuance requirements now reduced toc£15 - 20bn pa for 2012 - 2014

Strength of funding facilitated an early paydown of central bank fundingFunding will be from a diverse range of funding products and sources:‒ Tenors‒ Structures‒ Currencies‒ Geographies

Public Private Public & Private

2010 2011

£30-35bn

£50bn

2012 - 2014

c£25bn pa

£20bn

£30bn

£7bn

£18bn

c5-10bn

Fore

cast

Act

ual

13

LIQUIDITYExceeding regulatory liquidity requirements

Increasing regulatory liquidity requirements

Meeting LCR and NSFR by 2014 (in advance of regulatory requirements)

71%

>100%

2010 2014

88%

>100%

2010 2014

LIQUIDITY COVERAGE

RATIO

NET STABLE FUNDING

RATIO

14

January 2013Basel 3-0.6% c£30bn

RWA increase largely from credit valuation adjustment, securitisation and insurance allowances(1)

December 2011Basel 2.5-0.2% c£10bn

RWA increase primarily from Market Risk in the trading book

2014 - 2018

Any residual deferred tax losses

Insurance deduction (-0.2%pa)Other transitional adjustments (-0.2%pa) Largely excess expected loss

Transitional rules

IMPLEMENTATION

OngoingNon-core run down and disposals

RWA Benefit

From disposal date (by November 2013)Verde RWA Benefit

CAPITAL: BASEL 2.5 / 3.0 IMPACTMaintaining modest but prudent capital reserves over regulatory requirements

(1) Securitisation partially offset by removal of core tier 1 deduction

TARGET CORE TIER 1 CAPITAL RATIO PRUDENTLY IN EXCESS OF 10% FROM 1 JANUARY 2013 WHEN TRANSITION TO BASEL 3 COMMENCES


15

12.5 – 14.5%Target core tier 1 capital ratio prudently in excess of 10% from 1 Jan 2013 when transition to Basel 3 commences

Statutory return on equityCore tier 1 capitalDISCIPLINED

HIGH-RETURN INVESTING

≤130% Group, ≤120% CoreRequirements met ahead of regulatory implementation dates

Loan-to-deposit ratioLCR & NSFR

STRONG STABLE

FUNDING

50 – 60bpsCore business AQR expected to be at the bottom end of this range

Average AQRPRUDENT RISK APPETITE

Net capital generative over the period 2012 to 2014≤£90bn in 2014, accounting for ≤£65bn of RWA

Required capital for non-core

Non-core assets reduced

CAPITAL ALLOCATED TO

CORE BUSINESS

£1.5bn annual savings in 2014 (£1.7bn run-rate savings by end 2014)

42 – 44%(2)

Sustainable cost savings (over and above £2bn integration savings and pre discretionary investmentCost : income ratio

POSITIVE OPERATING

JAWS

£500m pa by 2014

> nominal GDP growthc50% of Group income2.15 – 2.30%; core business higher than Group

Additional discretionary investment to grow our core customer franchiseCore income growthOOI as % of total income(1)

Net interest margin

CUSTOMER-DRIVEN

DIVERSIFIED INCOME

Group Financial Targets, 2014GUIDANCE

(1) OOI Net of Insurance claims(2) Following adjustments to include the net of operating lease income and depreciation in Group Income this would be 39-41%

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Smaller balance sheet, robust capital structure and stronger funding platform

Reduced capital intensity

Slimmer, more agile and efficient operating model

Earnings based on our ability to drive growth above nominal GDP

Lower volatility, lower risk, sustainable and more resilient earnings above the cost of equity

Earnings momentum to 2015 and beyond

Sustainable returns on equity of 12.5 – 14.5% by 2014 with positive momentum into 2015

Restarting dividends under a sustainable progressive dividend policy

Returning the Group to full private ownership

THE BEST BANK FOR CUSTOMERSDelivering strong, stable returns for shareholders

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FORWARD LOOKING STATEMENTS

This announcement contains forward looking statements with respect to the business, strategy and plans of the Lloyds Banking Group, its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the Group or the Group’s management’s beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. The Group’s actual future business, strategy, plans and/or results may differ materially from those expressed or implied in these forward looking statements as a result of a variety of risks, uncertainties and other factors, including, without limitation, UK domestic and global economic and business conditions; the ability to derive cost savings and other benefits, as well as the ability to integrate successfully the acquisition of HBOS; the ability to access sufficient funding to meet the Group’s liquidity needs; changes to the Group’s credit ratings; risks concerning borrower or counterparty credit quality; market related trends and developments; changing demographic trends; changes in customer preferences; changes to regulation, accounting standards or taxation, including changes to regulatory capital or liquidity requirements; the policies and actions of Governmental or regulatory authorities in the UK, the European Union, or jurisdictions outside the UK, including other European countries and the US; the ability to attract and retain senior management and other employees; requirements or limitations imposed on the Group as a result of HM Treasury’s investment in the Group; the ability to complete satisfactorily the disposal of certain assets as part of the Group’s EU State Aid obligations; the extent of any future impairment charges or write-downs caused by depressed asset valuations; exposure to regulatory scrutiny, legal proceedings or complaints, actions of competitors and other factors. Please refer to the latest Annual Report on form 20-F filed with the US Securities and Exchange Commission for a discussion of such factors together with examples of forward looking statements. The forward looking statements contained in this announcement are made as at the date of this announcement, and the Group undertakes no obligation to update any of its forward looking statements.

Documents

2 - Presentation - Lloyds Banking Group · 30.06.2011 · Combined Businesses results over the next few years. • The cost savings will enable an additional £2 billion of investment