2010 LBG Review

8/3/2019 2010 LBG Review

1/28

CREATING THE UKSBEST FINANCIALSERVICES PROVIDER

ANNUAL REVIEW 2010

We have a greatplatform for the futureand have established a

strong financial andoperational trajectory.

We are constantly strivingto build, deep, lastingcustomer relationships,that will create value forour customers andsubsequently value for usas a business.

Corporate responsibilityand our people areintegral to our businessstrategy.

8/3/2019 2010 LBG Review

2/28

View our Annual Report online

A full version of our Annual Report and Accountsand information relating toLloyds Banking Group is available at:

www.lloydsbankinggroup.com

GROUP PROFILE

LLOYDS BANKING GROUP IS ALEADING UK BASED FINANCIAL SERVICESGROUP PROVIDING A WIDE RANGEOF BANKING AND FINANCIAL SERVICES,PRIMARILY IN THE UK, TO PERSONALAND CORPORATE CUSTOMERS.

OUR GROUP

Lloyds Banking Group was formed inJanuary 2009 following the acquisition ofHBOS and our main business activities areretail, commercial and corporate banking,general insurance, and life, pensions andinvestment provision. The new Group alsooperates an international banking businesswith a global footprint in over 30 countries.

The Group is the UKs largest retail bank andhas a large and diversified customer base.Services are offered through a number of well

recognised brands including Lloyds TSB,Halifax, Bank of Scotland, Scottish Widows,Clerical Medical and Cheltenham & Gloucester,and a range of distribution channels includingthe largest branch network in the UK.

Lloyds Banking Group is quoted on boththe London Stock Exchange and theNew York Stock Exchange and is one of thelargest companies within the FTSE 100.

OUR DIVISIONS

There are four primary operating divisionswithin the Group: Retail, Wholesale,Wealth and International, and Insurance.

Their relative contribution to the Groups totalincome is presented below and a moredetailed analysis of their strategy, businessand performance can be found on pages8 to 15.

1Excludes Group Operations, Central items and insurance claims

Wholesale 36%

Wealth andInternational 10%

Insurance 8%

Retail 46%

Contributionto Groups

total income1

8/3/2019 2010 LBG Review

3/28

Lloyds Banking GroupAnnual Review 2010 1

KEY HIGHLIGHTS

OUR CORPORATE STRATEGY

STRATEGY AND PERFORMANCE

The Group returned to profitability on

a combined businesses basis with profitbefore tax of 2,212 million(2009: 6,300 million loss).

Statutory profit before tax was 281 million(2009: 1,042 million, including an 11,173 milliongain on the acquisition of HBOS); after chargingintegration costs of 1,653 million and otheradjusting net charges of 278 million includinga loss on disposal of businesses of 365 million.

Loss attributable to equity shareholders was320 million (2009: profit of 2,827 million);equivalent to a loss per share of 0.5 pence(2009: earnings per share of 7.5 pence),

after a charge for taxation of 539 million(2009: credit of 1,911 million) and a chargefor profit attributable to non-controllinginterests of 62 million (2009: 126 million).

Good trading performance against thebackdrop of modest growth in UK economy.

Continued active support for the UKseconomic recovery by providing 30 billionof gross mortgage lending (includingremortgages) and 49 billion of committedgross lending to businesses, of which 11 billionfor SMEs.

Underlying total income increased by

3 per cent to 23,641 million, including corebusiness income growth of 7 per cent.

Banking net interest margin improved to2.10 per cent (2009: 1.77 per cent) with themajority of the gain achieved in the first halfof the year.

Significant reduction in the impairmentcharge. Impairment charge was 45 per centlower at 13,181 million (2009: 23,988 million).

Strong cost performance with a 6 per centreduction in operating expensesto 10,928 million. Further improvement in the

underlying cost:income ratio to 46.2 per cent(2009: 50.7 per cent).

Continued strong progress with theintegration programme delivering annualrun-rate savings of 1,379 million. Confidentof delivering a run-rate of 2 billion per annumby the end of 2011.

Good progress on balance sheet reductionwith cumulative non-core asset reductionof 105 billion. On track to meet target of200 billion over the next three years.

Capital position significantly improved

with core tier 1 ratio increased to 10.2 per cent,primarily reflecting a reduction in riskweighted assets by 18 per cent to406.4 billion.

Excellent progress against term fundingobjectives with 50 billion of wholesale termissuance in the year.

Customer relationship deposits increasedby 3 per cent reflecting good growth inRetail and in Wealth and International.

Reduction in liquidity support fromgovernment and central bank facilities

of 61 billion to 97 billion.

Given the flexibility and capacity we havefor core business growth, we continueto believe that the Group has strongmedium-term prospects, notwithstandingthe economic and regulatory headwindsthat we face in 2011.

The Groups business model is focused on thedevelopment of customer relationships, whichare central to the strategy. We are constantlystriving to build deep, lasting customerrelationships, that will create value for ourcustomers and subsequently value for us asa business. Customer leadership driven bysuperior customer insight, tailored products,better service and relationship focus, supportedby industry leading efficiency and effectivenessand a prudent through the cycle approach to

risk is core to our strategy. It is this that will enableus to deliver on our vision of being recognised asthe best financial services company in the UK bycustomers, colleagues and shareholders.

Our corporate strategy identifies the keystrategic deliverables required to implementthe business model effectively and deliver ourGroup vision.

The strategy is focused on being a moreconservative, through the cycle relationshipbased business. The key objectives of ourstrategy are as follows.

Building a high performance organisationIn delivering a high performance organisation

the Group is focused on improving our costefficiency and utilising our capital moreeffectively whilst maintaining a prudentapproach to risk.

Developing strong customer franchises thatare based on deep customer relationshipsAll our core businesses are focused onextending our customer relationships, whilstenhancing product capabilities to buildcompetitive advantage. Ensuring weunderstand and effectively meet the needs ofour customers from basic banking products tothe more specialist services such as insurance,wealth management or corporate banking isat the heart of our business. It is also

fundamental to ensuring we are developinglong lasting customer relationships.

Managing our most valuable resource,our peopleExecuting our strategy effectively will only bepossible if we ensure deliverables areeffectively aligned with our corporate strategyand we manage our most valuable resource,our people, well. Our people have the skillsand capabilities to deliver the strategy but indriving performance it is important to ensurewe encourage, manage and develop our staffwhilst creating a great place to work.

The main focus for the Group remains the

financial services markets in the UK and ourstrategic position was strengthened through theacquisition of HBOS in January 2009. We are awell diversified UK financial services group andthe largest retail financial services provider in the

UK. We have leading positions in many of themarkets in which we participate, a comprehensivedistribution capability, well recognised brandsand a large customer base. We continue toinvest in products and services, systems andtraining that combined offer unparalleledchoice and service to our customers.

We see corporate responsibility as beingintegral to our business strategy. We need todemonstrate that we are running our businessin a responsible way; and are making a

sustained, positive contribution to theeconomy and to society; by playing our partin the UKs economic recovery and by investingin the communities of which we are a part.

8/3/2019 2010 LBG Review

4/28

Lloyds Banking GroupAnnual Review 20102

My second annual statement as Chairman ofLloyds Banking Group comes to you at the endof another challenging year, a year in which wehave turned the corner to profitability. In doingso, we made substantial progress towardscreating a strong and stable bank, one betterable to serve our customers. Only by focusingon their needs and offering them products and

services that address those needs, can we expectto be successful and deliver benefit to you ourshareholders and to our stakeholders at large.

Supporting the UKs economic recovery

Although 2010 brought some increase inglobal confidence and stability, the bankingindustry continued to operate amidstchallenging conditions.

As we emerge from the financial crisis and theeconomic downturn, we recognise the publicconcern surrounding the banking industry andknow we have much work to do as an industryto rebuild trust and understanding. We also

acknowledge the role that we at Lloyds BankingGroup must play in that process. We can onlyearn that trust by addressing the fundamentals,for all our stakeholders, and by being open,transparent and engaged in the broader debateabout the role of banking in the UK. We need todemonstrate that we are meeting our obligationsto customers and society by proactively andresponsibly channelling the deposits we gatherinto productive enterprises and households.

Banks have a central role in promoting andfuelling the economic recovery. We will continueto play our part in supporting UK growth byextending a significant amount of new lendingto businesses and households. We haveprovided nearly 80 billion of gross lending toUK homeowners and businesses in 2010 and, aspart of our SME charter, the Group is committedto helping 300,000 new start-up businesses bythe end of 2012. We have already helped over100,000 such enterprises during 2010. For theyear ended 28 February 2011 we will exceed the

mortgage and business lending commitmentsmade by the Group to the UK Government.

We have also recently announced, along withfour other major UK banks (and in the contextof an agreement with the UK Government), ourintent to help support the UK economic recoveryby jointly providing the capacity to support grossnew lending of 190 billion to creditworthy UK

businesses (including 76 billion to small andmedium sized businesses). As the largest UKfocused bank, we are determined to play a fullrole in supporting investment by UK businessesand households. Lending is one of our corebusiness functions and it is in our interest andthat of our shareholders that we make access toresponsible credit as easy as possible.

At the same time, as a responsible lender, wewill seek to ensure that we lend to customerswho can afford to repay their borrowing and tobusinesses that have a fundamentally soundbusiness model. These are principles to whichwe must adhere.

Regulation

The level of industry regulation and its speed ofchange has never been greater. Shareholders willbe aware of a number of strategic initiatives whichare likely to change the shape of our industry,including the changes to capital requirementsarising from Basel III and the fundamentalchanges to the regulatory environment in theUK, to highlight just a couple. Robust and stableregulation will be an important component inrebuilding confidence and trust and creating ahealthy and sound financial system. However,we need to ensure that banks are allowed tofulfil their core purpose in delivering a smoothflow of credit to the economy. That meansmeeting banks obligations to businesses, byhelping them to invest, expand, export, innovate,up-skill their workforce, win new contracts anddiversify their business models. For individuals,it means supporting their financial needs overtheir lifetime.

In 2010, the UK Government appointed TheIndependent Commission on Banking (ICB)to review structural measures to reform thebanking system and promote stability andcompetition. The ICB is not expected topublish its final report until September 2011although an important precursor of that will bethe interim report expected to be published in

April. It would be premature for me to seek topredict the outcome of the enquiry; however,discussions between ourselves and the ICB havebeen collaborative and constructive and we willwelcome the increased certainty that the reportsrecommendations should bring.

Our community

Through the financial services we provide toour customers and the support we give to thebusinesses that people work for, Lloyds BankingGroup plays a role in the lives of nearly everyonein the UK.

Our main contribution to society is the direct

economic impact on the economy we have asa major employer and purchaser of goods andservices. This economic contribution is supportedby our active investment in communitiesacross the country and our community givingprogramme. We invested 148 million incommunities across the UK in 2010 includingsupport for financial inclusion, sponsorship ofsports for young people and donations throughthe Groups charitable foundations.

Our partnership of the London 2012 Olympic andParalympic Games will bring the Games to life inthe heart of communities all over Britain and 2011will be an exciting year in the countdown to 2012.Since the launch of our Local Heroes programmewe have supported 600 athletes. We have alsopledged 1 billion of funding to help businessesbenefit from London 2012 Games associatedopportunities. In this way we have supportedone in three of all businesses who have wonLondon 2012 Olympic Games related contracts.

CHAIRMANS STATEMENT

We have a great platform for thefuture and have established a strongfinancial and operational trajectory.I am confident that we will be able togrow the business further over thecoming years.

8/3/2019 2010 LBG Review

5/28


Performance

As an organisation, we have made considerableprogress in 2010, delivering good growth inour core business, returning to profitabilityand reducing the risk in the business. Theintegration of the HBOS business continuesto progress well and we remain confident ofachieving our target of run-rate synergy benefitsof 2 billion per annum by the end of 2011, asubstantial achievement.

In working diligently to create long termsustainable shareholder value we aim to restoreour ability to pay dividends on ordinary sharesas soon as market conditions and the financialperformance of the Group permit. As you know

this intention is subject to the expiry in 2012of the restrictions arising from the EuropeanCommissions remedies.

Following the recapitalisation of the bankingsector, HM Treasury now holds approximately40.6 per cent of the equity capital of the Group.We are grateful and appreciative for the valuablesupport we have received from Government andthrough it the taxpayer, but our objective remainsfor the Group over time to operate as a whollyprivately owned self-supporting commercialenterprise.

People

I have enjoyed meeting many colleagues invarious visits to our operations all over the countryover the past year. Gaining an on-the-spot insightinto how they work to serve our stakeholdersby building long term relationships with ourcustomers and by supporting businesses hasbeen invaluable. I must tell you that I have beenimpressed by their desire to work together toensure the success of our integration, by theirdiscipline and focus and by their commitmentto their customers. It is clear that in our largeand occasionally complex Group, teamworkcombined with commitment, professionalismand hard work is the key to realising ourpromises to stakeholders.

Our people have faced a difficult year withgreat commitment and purpose. It is not easyor pleasant to work for a group which iscontinuously in the media headlines. All themore so when the delivery of our day-to-daybanking and personal financial services are, innumerous surveys of our customers, judged tobe at the very top or near it. On behalf of theBoard I thank our colleagues for their significantachievements in 2010, which from letters andemails I receive, are as much appreciated by ourshareholders as our customers.

Remuneration

Following on from the unprecedented turmoilacross the sector in 2008 and 2009, the increasedfocus on remuneration has continued into2010. In the context of the evolving economicenvironment and regulatory changes, theRemuneration Committee undertook a furtherreview of executive remuneration in 2010. Wefirmly believe that remuneration policy needsto incentivise executives to continue strong,sustainable growth and delivery of value toshareholders, in light of one of the biggestintegrations ever undertaken in the sector. TheCommittee equally however is mindful of thecontinued heightened awareness in the publicdomain around executive remuneration. Both

these considerations informed the Committeesdecisions on remuneration this year and thatfor Antnio Horta-Osrio, our new GroupChief Executive.

The Group is primarily a retail and commercialbank. This means that the payout under our Groupbonus schemes for 2010 is a small percentage ofoverall revenues. Though profitability increasedsubstantially our total compensation for 2010 islower than that for 2009.

Group Chief Executive

On 28 February 2011, Eric Daniels will retireas Group Chief Executive and Director of

Lloyds Banking Group plc and, in line with hiscontractual commitments, will retire from theGroup in September 2011. His knowledge of theGroup and our customers will, I am pleased tosay, remain available to the Board and myself asrequired until then.

The Board and I are grateful to Eric Daniels forhis leadership since June 2003, particularly sincethe announcement of the acquisition of HBOSin September 2008. The successful integrationof the two companies and the sooner thanexpected return to profitability of the enlargedLloyds Banking Group are testament to hisleadership during a time of unprecedented

financial turmoil. It is to Erics credit that theGroup is in a strong position for the next phaseof its development. I personally have valuedgreatly the considerable management, bankingand organisational expertise Eric has brought toLloyds Banking Group as Group Chief Executive.

In November we announced the appointment ofAntnio Horta-Osrio as the next Group ChiefExecutive. He brings with him deep experiencein, and understanding of, the UK retail andcommercial banking industry, as well as a trackrecord of integrating three well respected UKretail banking franchises. Antnio joined us inJanuary 2011 and took over as Group ChiefExecutive on 1 March 2011. The Board and I lookforward to working with him to ensure the successof the next stage of development of the Group,and I hope many of you will be able personallyto meet him at our annual general meeting inGlasgow on Wednesday 18 May 2011.

Changes to the Board

In addition to the changes previously outlinedduring the year we have continued to strengthenthe Board both in terms of in-depth bankingexperience and broader business perspectives.On 1 March 2010, two new Non-ExecutiveDirectors were appointed, Glen Moreno andDavid Roberts, and Anita Frew joined the Boardon 1 December 2010.

We are delighted that these three outstandingindividuals have agreed to contribute their

judgement and varied expertise to our Board.On a personal front I am also pleased that wehave expanded the proportion of women on theBoard and I expect that process to continue.

Dr Wolfgang Berndt retired at the annual generalmeeting in May 2010, having joined the Board in2003. I would like to thank him for his significantcontribution to the Group.

Our most senior management including ourExecutive Directors, have made extraordinaryefforts both in terms of their time, involvementand personal contribution in achieving theseresults. I thank all of them for their loyalty indifficult circumstances.

The full particulars and background of all ourDirectors are set out on pages 22and23.

Outlook

The successful execution of our strategydemands from us focus on core markets, oncustomer engagement, on cost leadership,on capital efficiency and on a prudent risk andfunding profile. Carried out well these attributesshould enable the Group to deliver earningsgrowth and shareholder value whilst achievingour aim of becoming recognised as the bestfinancial services company in the UK.

We have a great platform for the future and haveestablished a strong financial and operationaltrajectory. I am confident that we will be able togrow the business further over the coming yearswith Antnio Horta-Osrio at the helm leadingour 112,000 colleagues a dedicated workforceand an experienced management team.

Sir Winfried BischoffChairman

8/3/2019 2010 LBG Review

6/28


Summary

2010 was a good year for the Group, in which wemade significant progress, delivering a strongoperating performance, while strengthening thebusiness for the future.

We achieved a step change in our financialperformance despite modest economic growth,

returning the Group to profitability whileabsorbing the substantial costs of reducing riskin the business. While the significant decreasein impairments was a key driver in our return toprofitability, we also saw a good performance inthe core business where underlying income grew7 per cent.

We delivered good momentum across our corebusinesses through the continued developmentof our customer relationship strategy, attractingnew customers to the Group and broadeningand deepening our relationships with existingcustomers.

We also realised substantial cost savings, and we

are on track to deliver our target of 2 billion ofrun-rate cost synergies from the integration ofHBOS by the end of 2011.

We made considerable progress during the yearin reducing the Groups risk. The applicationof our prudent approach to restructuring ofthe existing book and our risk standards to allnew business is being reflected in the morepredictable performance of these portfolios.We also made good progress in reducing thesize of our balance sheet and substantiallystrengthened both our capital and fundingpositions.

As a result of the significant progress we have

made in 2010, Lloyds Banking Group is now amuch stronger business and is well positionedto realise the potential within its franchise.

Results overview

On a combined businesses basis, the Groupreported a 2.2 billion profit in 2010, compared toa 6.3 billion loss before tax in 2009. Underlyingincome grew by 3 per cent to 23.6 billion,reflecting good underlying income growth of7 per cent in our core business, partially offset bya reduction of 9 per cent in our non-core business

as a result of planned asset reductions. Operatingexpenses fell by 6 per cent, resulting in animprovement in our underlying cost:income ratioof 4.5 percentage points to 46.2 per cent.

On a statutory basis, the Group delivered a profitbefore tax of 0.3 billion in 2010. This comparedto a profit of 1 billion in 2009, which benefitedfrom an 11.2 billion negative goodwill gainassociated with the purchase of HBOS.

A significant reduction in theimpairment charge

We achieved a significant reduction in theimpairment charge, which fell 45 per cent, with

the deterioration in some of our Internationalbusinesses more than offset by a substantialimprovement in the rest of the Group, notablyin the Wholesale division.

The considerable reductions in the Retail andWholesale impairment charges reflect thebenefit of the actions we have taken over thepast two years and our ongoing effective riskmanagement, as well as the slowly improvingeconomic environment. While we weredisappointed by the increases in the Internationalportfolios, these reflect specific economicchallenges facing Ireland, and to some degreeAustralia, which we are managing closely.

Good franchise momentum in 2010

We have seen good momentum across ourcore business franchise in 2010, supported bythe extension of our relationship strategy acrossthe Group, in what remain highly competitivemarkets.

In Retail, our strategy is to develop deep and

enduring customer relationships through offeringa broad range of products addressing customersneeds, alongside superior service and advice.We opened 1.9 million current accounts, and over5 million new savings accounts, and increasedcustomer deposits by 5 per cent in the year.

In Wholesale, our commitment to supportingour customers through the cycle was equallysuccessful, and we attracted over 100,000 newstart-up customers and our achievements wererecognised in the marketplace by the receipt ofa number of awards.

We see strong growth opportunities in Wealth,through deepening relationships with existing

Group customers and through the targetedacquisition of new customers. In 2010, we sawencouraging early results from the developmentof our customer offerings, and we grew our UKrelationship customer base by 12 per cent.

In Insurance our focus on sustainable andprofitable growth led to a 13 per cent increasein profit before tax. While this strategy led toa reduction in overall sales volumes in our UKLife, Pensions and Investments business, as westopped selling a number of low return heritageHBOS products, this resulted in a substantialincrease in new business margin.

GROUP CHIEF EXECUTIVES REVIEW

We achieved a step change in ourfinancial performance despite sloweconomic growth, returning the Groupto profitability while absorbing thesubstantial costs of reducing risk inthe business.

8/3/2019 2010 LBG Review

7/28


Supporting the UKs economic recovery

During 2010 the Group continued to supportthe UKs economic recovery through new lendingto our mortgage and business customers. TheGroup extended 30 billion of gross mortgagelending (including remortgages) to UKhomeowners and supported over 50,000first time buyers.

We also provided 49 billion of committedgross lending to UK businesses in 2010, ofwhich 11 billion was for SMEs. As part of ourSME Charter, the Group has committed tohelping 300,000 new start-up businesses by theend of 2012, and has already helped in excessof 100,000 such enterprises during 2010. We

continue to approve over 80 per cent of lendingapplications from SME customers. Despite theuncertain economic environment, the Grouphas successfully grown net lending to its coreSME customers by 2.1 per cent, which comparesfavourably with the industry-wide reduction inSME lending reported in the latest availablemarket statistics.

As a result of our focus, we will exceed themortgage and business lending commitmentsmade by the Group to the UK government forthe year ended 28 February 2011.

We have recently announced, along with fourother major UK banks and in the context of an

agreement with the UK Government, our intentto help support the UK economic recovery byjointly providing the capacity to support grossnew lending of 190 billion to creditworthy UKbusinesses (including 76 billion to small andmedium sized businesses). We are determinedto play a full role in supporting investment byUK businesses and households.

Integration programme on track

We continued to make good progress on theintegration of Lloyds TSB and HBOS, one ofthe largest and most complex programmesundertaken in the UK, exiting the year with run-rate cost synergies of 1.4 billion, as expected.We achieved savings across a wide rangeof Group activities, including implementingimproved processes which are now being usedon a harmonised basis across the Group, anddriving savings in property and procurement. Aspart of the integration, we have also commencedthe implementation of a number of majorsystems changes, which will complete in 2011.

Our progress in 2010 underpins our confidencethat we will deliver our target of 2 billion ofannual run-rate cost synergies by the end of 2011.

Further progress in balance sheet reductions

We are pleased with the progress we have madein reducing the size of the Groups balancesheet, with over half of our five year reductionplan achieved in the first two years. Althoughthis has had an adverse effect on income, it hasresulted in a material reduction in the Groups riskprofile, and a smaller balance sheet which bringsassociated funding benefits.

We have now achieved asset reductions totalling105 billion in the two years since the inceptionof the programme, against our target of a200 billion reduction.

Excellent progress on funding and liquidity

We made excellent progress in enhancing ourfunding and liquidity position in 2010, therebyfurther reducing the Groups risk, albeit at someincremental cost.

We increased our deposit base by 3 per cent,which, together with the reduction in the size ofour balance sheet, resulted in an improvementin our loan to deposit ratio to 154 per centat the end of 2010 from 169 per cent at the2009 year end.

In addition, we substantially exceeded ourguidance for term wholesale funding issuance,achieving 50 billion of issuance in the year. Wealso continued to broaden the range of our

funding sources, and maintained the proportionof our wholesale funding with a maturity of morethan one year at 50 per cent.

Term issuance during the year enabled us tomaterially reduce the liquidity we receive fromgovernment and central bank sources, by61 billion to 97 billion at the year end and wehave made further progress since then.

Capital position further strengthened

We considerably strengthened our capitalposition in the year, positioning us well ahead ofthe implementation of the Basel Committee onBanking Supervisions so called Basel III capitalreforms, and changes expected to a number ofaccounting practices.

Our core tier 1 ratio increased to 10.2 per cent,from 8.1 per cent at the end of 2009, substantiallyin excess of regulatory requirements. We alsorestructured the capital within our insurancesubsidiaries, which will deliver substantial benefitsunder the Basel III reforms. At the year end, ourtier 1 ratio was 11.6 per cent, and our total capitalratio was 15.2 per cent.

Regulatory environment

We operate in a demanding and evolvingregulatory environment, and have continued toengage actively with our regulators during theyear on a number of proposed reforms, ensuringwe have a strong and stable banking system,which will also be able to support and serve itscustomers and the wider economy.

Following extensive scrutiny of the PaymentProtection Insurance (PPI) market in recent years,the Financial Services Authority issued its finalpolicy statement on PPI complaints handling inAugust 2010. The application of this policy, whichhas been challenged by the British BankersAssociation in a judicial review, could in extremis

have a material effect on the Groups financialposition.

Our people

I am proud of the high levels of support andservice our staff have continued to deliver to ourcustomers over the past year, in what remains achallenging environment, and in the context ofthe considerable changes to the Group arisingfrom the integration.

Their dedication is reflected in our significantachievements in 2010, and the Board and I arevery appreciative of their contribution.

Well positioned for future successIt has been a tremendous honour and a privilegeto lead our many talented and dedicated peopleover the last eight years, and I would like to thankmy colleagues and the Board for their supportover this time. I am grateful to have been giventhe opportunity to create the new Group. Thesignificant progress we have made in 2010positions the Group well for the future to meetour objective of becoming the best bank forall our stakeholders, including our customers,shareholders and employees.

J Eric Daniels

Group Chief Executive

8/3/2019 2010 LBG Review

8/28


ADDRESSING THE KEY ISSUES

As a result of the recapitalisation of thebanking sector which included the capitalraisings, the Government now holds asignificant stake in Lloyds Banking Group.As at the date these accountswere approved the Governmentsshareholding in Lloyds Banking Groupwas approximately 40.6 per cent. Thisholding is managed by United KingdomFinancial Investments (UKFI) on behalf ofHM Treasury.

Information on key areas such as whenthe Government may reduce theirholding, how the relationship with UKFIoperates and the impact of the holdingon our strategy is outlined below.

Share disposal

The timing of any share disposal will be at theGovernments discretion, acting on the adviceof UKFI.

However, within the publication An Introduction:Who We Are, What We Do and the FrameworkDocument Which Governs the RelationshipBetween UKFI and HM Treasury, it is stated thatUKFI is to develop and execute an investmentstrategy for disposing of the investments inthe banks in an orderly and active way throughsale, redemption, buy-back or other meanswithin the context of an overarching objectiveof protecting and creating value for thetaxpayer as shareholder, paying due regard tothe maintenance of financial stability and toacting in a way that promotes competition.

Working relationship with UKFI

We have a very good working relationshipwith UKFI who act like any value orientatedshareholder with regard to the strategicdevelopment and financial performance ofthe Group, providing significant constructive

challenge where they see fit.

The Government has made it very clear thatUK financial institutions in which it holdssubstantial stakes will continue to operate asseparate economic units with independentpowers of decision and will continue tohave their own independent Boards andmanagement teams, determining their ownstrategies and commercial policies (includingbusiness plans and budgets).

The future

Going forward the Group is focused ondelivering strategy and subsequently valueto all our shareholders. The Governmentholding does not affect this managementfocus and we remain committed to operatingas a wholly privately owned, self supporting,dividend paying, commercial enterpriseover time.

The European Commission required theGroup to agree a restructuring plan asa result of the investment in the Groupby HM Treasury. The final approvalof the UK Governments state aidmeasures, including the terms of the finalrestructuring plan, was agreed by the

College of Commissioners in November2009. The plan consists of the followingprincipal elements:

The disposal of a retail banking businesswith at least 600 branches, a 4.6 per centshare of the personal current accountsmarket in the UK and approximately19 per cent of the Groups mortgageassets. The business consists of: the TSBbrand; the branches, savings accounts andbranch based mortgages of Cheltenham &Gloucester; the branches and branchbased customers of Lloyds TSB Scotlandand a related banking licence; additionalLloyds TSB branches in England and

Wales, with branch based customers; and,Intelligent Finance. These disposals needto be made within four years of the date ofState Aid approval, so by November 2013.

An asset reduction programme to achieve a181 billion reduction in a specified pool ofend 2008 assets by 31 December 2014; and

Behavioural commitments, includingcommitments; not to make certainacquisitions for approximately three tofour years; and not to make discretionary

payments of coupons or to exercisevoluntary call options on hybrid securitiesfrom 31 January 2010 until 31 January 2012,which will also prevent the Group frompaying dividends on its ordinary shares forthe same duration.

We are making good progress againstthe agreed asset reduction programmeand continue to make good progress inpreparing for the disposal of the agreed retailbanking business. The final cost of disposalwill depend on the buyer and the extent towhich substantial IT system and infrastructuredevelopment will be necessary. Therefore

the total cost is hard to predict but is likely tobe substantial.

The assets and liabilities, and associatedincome and expenses, of the business tobe divested (referred to above) cannot bedetermined with precision until nearer thedate of sale.

During 2010 the Group continued itspolicy of actively supporting the UKseconomic recovery through grossnew lending to our mortgage andbusiness customers.

During the year, the Group extended30 billion of gross mortgage lending

(including remortgages) to UK homeowners(including 5 billion in new lending to first-time buyers) and 49 billion of committedgross lending to UK businesses (of which11 billion was for SMEs). As part of ourSME Charter, the Group has committed tohelping 300,000 start-ups by 2012, and hasalready helped in excess of 100,000 new startup businesses during 2010. We continueto approve over 80 per cent of lendingapplications from SME customers.

As a result of our focus, these actions haveallowed us to remain ahead of the mortgageand business lending commitments made by

the Group to the Government for the yearended 28 February 2011.

The Governments shareholding

State aid Lending to aid theeconomic recovery

8/3/2019 2010 LBG Review

9/28


The Independent Commission onBanking (ICB) was established by theGovernment in June 2010 to examinethe banking sector and to makerecommendations on structural andrelated non-structural measures topromote stability and competition inthe banking sector.

The Commission will makerecommendations covering both:

Structural measures to reform the bankingsystem and promote stability and competition,including the complex issue of separatingretail and investment banking functions;and

Related non-structural measures topromote stability and competition inbanking for the benefit of consumersand businesses.

In considering these measures theCommission will have regard to the legal andoperational requirements of implementingthe options under consideration, andthe importance of generating practicalrecommendations. It will also take into accountthe findings of ongoing EU and internationalwork, and inform the UK Governmentsapproach to international discussions onthe financial system.

The Commission will also have regard tothe Governments wider goals of financialstability and creating an efficient, open,robust and diverse banking sector, withspecific attention paid to the potentialimpact of its recommendations on:

Financial stability;

Lending to UK consumers and businessesand the pace of economic recovery;

Consumer choice;

The competitiveness of the UK financialand professional services sectors and thewider UK economy; and

Risks to the fiscal position of the Government

The Commission will produce a final reportfor the Cabinet Committee on Banking,by the end of September 2011, having

completed its evidence gathering phaseat the end of January 2011. The writtenresponses which the ICB have received at thisstage have been published on its website.The Groups response can also be found onour website, www.lloydsbankinggroup.com.

We believe the Groups through the cyclerelationship based strategy is consistent withthe aims of the Commission but at this timeit is not possible to gauge the impact of thereview on the Group. We have cooperatedfully with the ICB to date and are expectingtheir options paper, which will set out theirinitial thoughts on potential reform, duringApril 2011. Following its publication, there

will be a further period of consultation duringwhich the Group will continue to be at theforefront of the debate with the ICB.

The recent financial position of the Group along with the behavioural commitmentswe entered into as part of the State Aid Restructuring Plan have prevented us payingdividends on our ordinary shares.

We fully understand the hardship that the lack of dividend has caused many of ourshareholders, and we are working diligently to restore the ability to pay dividends andcreate shareholder value.

The Board intends to resume dividend payments on ordinary shares as soon as marketconditions and the financial performance of the Group permit, subject to the expiry, in 2012,of the restrictions on paying dividends arising from the European Commissions remedies.

We have now completed the secondyear of our three year integrationprogramme following the acquisition ofHBOS and remain on target to deliverannualised cost savings from synergiesand other operating efficiencies of2 billion by the end of 2011. Substantialwide-ranging progress has been madeduring 2010, including:

Rollout of the Lloyds TSB branch countersystem and processes to the Halifax andBank of Scotland branches completesMarch 2011.

Migration of 3,700 Halifax andBank of Scotland ATMs to the Lloyds TSBplatform completes April 2011.

Implementation of a single mortgage salesplatform across core mortgage brandsunderway.

Development and implementation of a fullyscaled single IT platform which will supportthe Group.

Single bancassurance sales systemand unified set of products delivered.

Bank of Scotland and Lloyds TSB wealthmanagement functions brought togetherto form one wealth management team.

Contract Hire fleet businesses are beingbrought together onto a single platform.

Following a review of the business, wecompleted our strategic exit from Ireland

by the end of 2010, including the closure of44 Bank of Scotland Ireland branches.

Completion of the legal transfer of ourbusinesses in Spain to form one integratedbusiness serving both local andinternational communities.

Wholesale Markets Corporate businessnow trading under the Lloyds Bank brand.

Procurement benefits of 236 millionachieved in year. Over 90 per cent of Groupexpenditure consolidated within our top1,000 suppliers.

79 non-branch properties exited, bringing

the total to 162 since the start of theprogramme.

Group integration Independent Commission on Banking

Dividend payments to shareholders

8/3/2019 2010 LBG Review

10/28


DIVISIONAL REVIEW

RETAIL

PROFILE

Retail operates the largest retail bank

in the UK and is the leading provider ofcurrent accounts, savings, personal loans,credit cards and mortgages. With its strongstable of brands including Lloyds TSB,Halifax, Bank of Scotland and Cheltenham& Gloucester, it serves over 30 millioncustomers through one of the largest branchand fee free ATM networks in the UK.

Retail is focused on effectively meeting theneeds of its customers. The division has over22 million current account customers andprovides social banking to over four millionpeople through basic banking or social bankingaccounts. It is also the largest provider ofpersonal loans in the UK, as well as being theUKs leading credit card issuer. Retail providesover one in five new residential mortgagesmaking it one of the leading UK mortgagelenders and provided over 50,000 mortgages tohelp first time buyers in 2010. Retail is the largestprivate sector savings provider in the UK. It isalso a major general insurance andbancassurance distributor, offering a wide rangeof long-term savings, investment and generalinsurance products.

STRATEGY SUMMARY

Retails goal is to be recognised by customers

as the UKs best bank. This will be achieved bybuilding deep and enduring customerrelationships which deliver real value tocustomers. Retail believes this strategy will drivesustainable long term value for all stakeholders.A deep understanding of customers and theirneeds combined with highly efficient andeffective processes will allow more investmentin products and services that customers reallyvalue. Retail is increasing its capabilities throughthe integration of Lloyds TSB and HBOS whichpresents a great opportunity to use the bestfrom each heritage and significantly improvesystems and processes. This includes extendingLloyds TSBs strong customer insight capabilities

to Halifax and Bank of Scotland. Success forRetail will be reflected in enhanced customerservice resulting in strong customer advocacywhich in turn leads to lower customer acquisitioncosts, increased share of wallet and improvedcustomer retention.

2010 HIGHLIGHTS

Profit before tax increased to 4,716 million.

Profit before tax and fair value unwindincreased to 3,611 million, driven by goodincome growth, tight cost control and asignificantly lower impairment charge.

Net interest income increased by 18 per centto 9,378 million,largely as a result of thecontinuing re-pricing of risk, mortgage customersmoving onto standard variable rates and adecrease in the LIBOR to Base Rate spread.

Other income decreased by 197 millionor 11 per cent to 1,607 million, relatingparticularly to changes to current accountoverdraft structures.

Operating expenses remain tightlycontrolled, increasing by only 2 per cent to4,644 million,and benefited from continuingcost control as well as integration synergies.

The impairment charge reduced significantly to2,747 million,down by 35 per cent, supported byprudent risk management, a stabilising economy,broadly stable house prices and low interest rates.

Loans and advances to customers decreasedby 7.4 billion, or 2 per cent to 363.7 billion,as customers continued to reduce their personalindebtedness, particularly unsecured debt. Whilemortgage balances declined by 3.8 billion, Retailcontinued to support first time buyers and home

movers with gross mortgage lending of 30 billion.

Customer deposits increased by 11.5 billion,or 5 per cent, to 235.6 billion, predominantlyfrom instant access and tax free ISA accountsrather than more expensive term deposits.

Retail continues to workat responding rapidlyto customer demands.For example, during the disruption fromthe volcanic ash clouds, Retail took a series

of actions to help customers who had beenaffected. This included extending overdraftsand credit card limits to enable customers tomake alternative travel arrangements as wellas waiving the fees for credit and debit cardcustomers who went over their limit due tothe disruption.

In addition cover on a range of insurancepolicies was extended and in the space of48 hours, 6 million text messages were sentto insurance customers to advise them ofthe help Retail could provide.

24Performance overview

8/3/2019 2010 LBG Review

11/28


OPERATING BRANDS

Retail continues to workto deliver products andservices that addresscustomer needs.

An example of this is the recently launchedHalifax Cash ISA Promise. In the monthfollowing the launch in October 2010 the ISAbusiness performed significantly ahead ofexpectations with 44,000 accounts transferred,despite the launch being outside of thetraditional ISA season. This industry leadingpromise addresses the poor transfer times

between ISA providers, by promising to payinterest on new cash ISAs from the completedapplication date rather than when funds aretransferred into the account, often weeks later.

The other parts of the promise are increasedinformation on cash ISA interest rates and anassurance that all cash ISAs are open to bothnew and existing customers.

Retail has been playingan active role in thecommunity as partof its preparations forLondon 2012.During National School Sport Week in 2010,5 million children at 14,000 schools participatedsupported by 1,000 colleague volunteers.

Retail has also played an active role indeveloping future stars of Team GB and

ParalympicsGB with the Local Heroesprogramme. By 2012 the programme will havesupported more than 1,000 emerging athleteson their journey to London 2012 and beyond.

Left: Olympic Gold medallist Denise Lewis takes to the waterwith Cardiff schoolchildren during Lloyds TSB National SchoolSport Week 2010.

8/3/2019 2010 LBG Review

12/28


DIVISIONAL REVIEW

WHOLESALE

PROFILE

The Wholesale division serves in excess of

a million businesses, ranging from start-upsand small enterprises to global corporations,with a range of propositions fully segmentedaccording to customer need. The divisioncomprises Corporate Markets, Treasury andTrading and Asset Finance.

Corporate Markets comprises Commercial,Corporate, Wholesale Markets, Wholesale Equityand Corporate Real Estate Business SupportUnit. Commercial and Corporate providerelationship-based banking, risk managementand advisory services to business customers,principally in the UK. Wholesale Markets providesrisk management solutions, specialised lending,access to capital markets and multi-product

financing solutions to its customers, whilstmanaging the Groups own portfolio of structuredcredit investments and treasury assets. WholesaleEquity manages the divisions equity investmentholdings (including Lloyds Development Capital).Corporate Real Estate Business Support Unitmanages relationships with commercial realestate customers facing financial difficulties.

Treasury and Tradings role is to provide accessto financial markets in order to meet the Groupsbalance sheet management requirements,and provides trading infrastructure to supportexecution of customer-driven risk managementtransactions, whilst operating within a well

controlled and conservative risk appetite.Asset Finance consists of a number of leasing andspeciality lending businesses including ContractHire (Lex Autolease and Hill Hire) and ConsumerFinance (Black Horse Motor and Personal Finance).

STRATEGY SUMMARY

Wholesales strategic goal is to be recognised

as the UKs leading, through-the-cycle,relationship-focused wholesale bank.The mission is to retain and deepenrecurring, multi-product customer relationshipsbuilding on deep insight into customer needsto provide a broad range of banking, riskmanagement and capital market products.

2010 HIGHLIGHTS

Profit before tax was 3,257 million.

Profit before tax and fair value unwind was127 million, a 11,727 million improvementon 2009, primarily reflecting the significantdecrease in the level of impairment charge.

Net interest income decreased by 6 per centto 4,426 million. This decrease reflected thelower interest earning asset balances, in-linewith targeted balance sheet reductions andlower net interest income in Treasury andTrading.

Other income decreased marginally to4,136 million.

Operating expenses decreased 9 per cent,

reflecting reduced levels of operating leasedepreciation and further cost savings achievedfrom the integration programme.

Impairment charges on financial assetsdecreased significantly to 4,446 million.The total impairment charge continues to bedriven from the HBOS heritage real estate andreal estate related asset portfolios.

Assets decreased by 14 per cent.The decrease reflects the targeted reduction inthe balance sheet, mainly in loans and advancesto customers and banks in non-core businessand through reductions in debt securities andavailable-for-sale positions.

Customer deposits decreased 3per cent to114.1 billion due to a reduction in short-termdeposits in Treasury and Trading.

Actively helping ourcustomers to recognisethe risks and to seize theopportunities from a low

carbon, more resourceefficient economy.We know climate change regulation,commodity prices, supply chain greeningand operational efficiency (to name a few) areimportant issues to our customers, who areincreasingly seeing the impact themselvesand developing sustainable business models.

We are training our customer-facing areas ofWholesale and now boast a network of over400 skilled partners trained in the science,policy, business risks and opportunitiesassociated with the emerging green economy.

We are also a leading provider in the renewableenergy sector, having been involved in thearranging and underwriting of eight transactionswith a combined value of 1.25 billion of whichwe provided 275 million during 2010.


8/3/2019 2010 LBG Review

13/28


OPERATING BRANDS

Working closely with,and building strongerlinks with businessin the communityorganisationsThe relationship between Business in theCommunity, Scottish Business in theCommunity and the Groups Wholesaledivision has gone from strength to strengthsince its creation in early 2010.

Our Day to Make A Difference programmegives all staff the chance to spend one dayin the year volunteering for a charity or localcommunity project of their choice. As a result ofthis, since April 2010 we have seen 18 per cent(3,200) of Wholesale colleagues invest 2,800days (19,000 hours) through their engagementand support of over 110 local community

groups throughout 25 regions in the UK.Left: Colleagues from our Wholesale division used theirvolunteering day to carry out essential maintenance work atOasis Childrens Venture in London, October 2010.

Continuing to providesupport to SMEsthrough our award-winning SME Charter.During 2010 we delivered over 250 eventsto provide expert guidance for SMEs thebackbone of the UK economic recovery on starting up, employment law, exporting,bidding for London 2012 contracts,sustainability and finance.

The Group has committed to helping300,000 new businesses by 2012 andsupported more than 100,000 start-upsin 2010.

We have a strong focus on lending in deprivedareas and are supporting over 28,000 small

business customers in the 5 per cent of theUK classified as most deprived.

These are all reasons that contributed to theBank being named Bank of the Year 2010for the sixth year running at the FDsExcellence Awards.

8/3/2019 2010 LBG Review

14/28


DIVISIONAL REVIEW

WEALTH AND INTERNATIONAL

PROFILE

Wealth and International was formed in 2009

to give increased focus and momentum tothe private banking and asset managementbusinesses and to manage the Groupsinternational businesses.

The Wealth business comprises privatebanking, wealth management and assetmanagement. Wealths global private bankingand wealth management operations cater tothe full range of wealth clients from affluent toUltra High Net Worth within the UK, ChannelIslands and Isle of Man, and internationally.Our private banking and wealth managementbusiness operates under the Lloyds TSB andBank of Scotland brands. Our asset managementbusiness, Scottish Widows InvestmentPartnership, has a broad client base, managingassets for Lloyds Banking Group customersas well as a wide range of clients includingpension funds, charities, local authorities,Discretionary Managers and Financial Advisers.In addition, the Group holds a 60 per cent stakein St Jamess Place, the UKs largest independentlisted wealth manager and a 55 per cent stake inInvista Real Estate.

The International business comprises the Groupsother international banking businesses outsidethe UK, with the exception of corporate businessin North America which is managed through theGroups Wholesale division. These largely

comprise corporate, commercial and assetfinance business in Australia, Ireland andContinental Europe and retail businesses inGermany and the Netherlands.

STRATEGY SUMMARY

Wealth provides strong growth opportunities

for the Group and, through deepening therelationships with existing Group clientsalongside targeted external customeracquisition, Wealths goal is to be recognisedas the trusted adviser to expatriate and privatebanking clients both in the UK and selectedinternational markets. Wealths initial focus inthe UK is to increase the penetration of itsoffering into the Groups existing customerbase by the referral of wealthier customers toits private banking businesses where their widerfinancial needs can be more effectively met.Outside the UK, Wealth will be building onthe strengths of its brand portfolio and existingexpatriate, wealth management and private

banking propositions.In the International businesses, the priorityis to maximise value in the medium term.Internationals immediate focus is on closemanagement of the lending portfolio,particularly in the Irish business, and re-pricingassets where appropriate. At the same timeInternational is delivering operationalefficiencies, reshaping its business modelsand rightsizing the balance sheet to reflectthe ongoing environment.

2010 HIGHLIGHTS

Loss before tax increased to 4,824 million.

Loss before tax and fair value unwindincreased to 5,196 million, due to a higherimpairment charge, predominantly in Ireland.

In Wealth, profit before tax increased by36 per cent to 269 million. However, this wasmore than offset by the International loss.

Net interest income decreased by 3 per centto 1,176 million.

Operating expenses decreased by 1 per centto 1,536 million.

The impairment charge amounted to5,988 million, reflecting the materialdeterioration in the economic environment inIreland in the last quarter of 2010.

Loans and advances to customers decreasedby 8.2 billion, to 55.3 billion, reflecting netrepayments of 4.1 billion, and additionalimpairment provisions in the Internationalbusinesses.

Customer deposits increased by 13 per cent,to 32.8 billion, due to strong inflows in UKPrivate Banking and Bank of Scotland Germany,partly offset by outflows in Ireland following theclosure of the Irish retail branch network.

Offering our clientsa wealth of specialisedsolutions.A key focus for Wealth and International isto ensure our customers across the Group

have the opportunity to talk to us about theirfinancial needs beyond everyday bankingservices including the range of Wealthand Private Banking solutions we offer inLloyds Banking Group.

Referrals from Corporate Banking to ourWealth businesses increased by 39 per cent in2010 compared with the same period the yearbefore. And those clients are investing morewith us with assets under supervision fromthese clients increasing by 970 per cent in thesame period.


8/3/2019 2010 LBG Review

15/28

8/3/2019 2010 LBG Review

16/28


DIVISIONAL REVIEW

INSURANCE

PROFILE

The Insurance division provides long

term savings, protection and investmentproducts and general insurance productsto customers in the UK and Europe andconsists of three business units:

Life, Pensions and Investments UK (LP&I UK):The UK Life, Pensions and Investments businessis the leading bancassurance provider in theUK and has one of the largest intermediarychannels in the industry. The business provideslong-term savings, protection and investmentproducts distributed through the bancassurance,intermediary and direct channels through theLloyds TSB, Halifax, Bank of Scotland andScottish Widows brands.

Life, Pensions and Investments Europe:The European Life, Pensions and Investmentsbusiness distributes products primarily in theGerman market under the Heidelberger Lebenand Clerical Medical brands.

General Insurance: The General Insurancebusiness is a leading distributor of homeinsurance in the UK, with products sold throughthe branch network, direct channels andstrategic corporate partners. The businessalso has significant brokerage operations forpersonal and commercial insurances. It operatesprimarily under the Lloyds TSB, Halifax andBank of Scotland brands.

STRATEGY SUMMARY

The Insurance divisions strategic vision is to be

recognised as the leading insurance businessby its customers, the Groups shareholders andstaff.

The division has four strategic objectives toachieve its vision: complete the integration of itsbusinesses; continue to strengthen its leadingbrands and grow sales profitably in its targetedmarkets; enhance the capital managementand operational efficiency of existing and futurebusiness; and utilise the Groups strengths indistribution and asset management.

2010 HIGHLIGHTS

Profit before tax increased by 13 per cent to

1,102 million.Profit before tax and fair value unwindincreased by 19 per cent, to 1,215 million.

Total income, net of insurance claimsdecreased by 11 million to 2,009 million,primarily reflecting lower PPI income and claimsarising from the freeze events in 2010, which areoffset by reduced payment protection insuranceclaims and improved investment markets.

Operating expenses decreased by 12per cent to 854 million due to a continuedfocus on cost management and delivery ofintegration synergies.

Good progress continues to be made onintegration, including the launch of a singlebancassurance proposition in June 2010.

LP&I UK sales of 10,316 million (PVNBP)reduced by 20 per cent largely due to thewithdrawal of certain lower return HBOS legacyproducts as the business continued to focus onvalue over volume and a change in mix towardsprotection products.

LP&I UK margins increased to 3.7 per centfrom 2.6 per cent in 2009. The improvedmargin reflects strategic choices made inrespect of product and channel propositionsas the legacy businesses are integrated in order

to focus on value.

General Insurance profits increased by1 per cent to 372 million.

An award-winning Life,Pensions & InvestmentsproviderScottish Widows won or was commended forits performance in no fewer than 17 prestigiousawards throughout 2010.

Key accolades included Five Star ratings in theLife & Pension and Investment categories in the2010 Financial Adviser Service Awards.


8/3/2019 2010 LBG Review

17/28


OPERATING BRANDS

Supporting ourcustomers whenthey need it most

Halifax Home Insurance is one of just a fewinsurers who have in-house Personal ClaimsConsultants. This approach has proven sosuccessful it has also been rolled out acrossLloyds TSB Home Insurance in 2010.

Over 100 of our customers were forced to

abandon their homes following theCockermouth flooding disaster which hitCumbria at the end of 2009. Thanks to ourPersonal Claims Consultants we had all ofour customers back in their homes within12 months.

The Official Pensionsand Investment Providerof the London 2012Games.As one of UKs leading financial organisations,

at Scottish Widows, we have been helpingcustomers prepare for the future since 1815.We understand the sacrifice young athletes haveto make to realise their potential to become thebest. We also understand that no athlete canstand behind the start line at a London 2012Games final if they arent prepared.

As part of the Scottish Widows Golden HopefulsProgramme, we are helping to prepare four ofBritains up and coming athletes Ali Jawad,Toni Prince, James McLean and Callum Skinner for the next two years on their journey to theLondon 2012 Olympic and Paralympic Games.

Right: Picture includes Scottish Widows Ambassadors for the

London 2012 Games Roger Black MBE and Sarah Storey OBE.

Picture includes Scottish Widows Ambassadorsfor the London 2012 Games Roger Black MBEand Sarah Storey OBE

8/3/2019 2010 LBG Review

18/28


OUR PEOPLE

Building long lasting relationships

through peopleLloyds Banking Groups continued successdepends on our people. Our employees arefocused on providing our customers with greatservice they know that successful relationshipsare at the heart of how we do business and howwe support our customers through the cycle.We are creating an organisation that attracts,retains and develops the best talent in theindustry. We want to be recognised as a greatplace to work.

In 2010 we harmonised Terms and Conditionsfor most employees in the Group. Over 87,000employees selected benefits through our

Flexible Benefits plan. Over 52,000 showedtheir confidence in the Group by participatingin Sharesave. Our new pension scheme, YourTomorrow, was awarded the Pension QualityMark Plus - the highest quality mark availablefrom the National Association of Pension Funds.

We are committed to professional developmentand creating outstanding learning opportunitiesthat allow people to reach their full potential.Learning @ Lloyds Banking Group is one of thelargest corporate learning facilities in Europe.

Our sponsorship of London 2012 offersemployees a unique opportunity to be involvedboth in the Games and the legacy they leave.

Integration

2010 was significant in relation to peopleintegration. By 1st December 85 per centof eligible colleagues were on the newlyharmonised Terms and Conditions.

Inevitably in bringing the two organisationstogether, there has been an opportunity torationalise and this has led to a reduction inroles. Our aim has always been, where possible,to either redeploy people to other areas ofthe Group or reduce numbers through naturalattrition. Compulsory redundancies are alwaysa last resort.

We implemented a number of integratedLloyds Banking Group platforms for colleaguesin 2010.

We launched Your Performance providing aGroup-wide online performance managementsystem, and Your Learning, an integrated toolhelping colleagues develop learning plans. YourTomorrow, the first Group Defined Contributionpension scheme launched in 2010. We alsocompleted development of an integratedPay & Bonus tool, aligned directly withPerformance Management. The ResourcingCandidate Management System provides theGroup with one internal recruitment tool and

one external careers website.

Colleague engagement

In 2010, we achieved record response ratesof 83 per cent in our quarterly colleagueengagement survey, regarded as best in class.The Engagement Index finished the year at 80index points, an increase of 8 points on 2009.Our level of engagement now exceeds allexternal benchmarks.

Talent, recruitment and retention

A major focus in 2010 has been recruiting,retaining and developing talented people tosupport our strategy. Through detailed talentreviews, succession planning, internal promotionand attracting new talent, we have improved the

talent profile and succession pipeline.In 2010 we recruited 147 people into ourGraduate Leadership Programme, the strengthof which has been acknowledged with The Timesrating us in the Top 30 UK Graduate Employers.

Performance and reward

Effective performance management is criticalin building a high performance culture anddeveloping our colleagues to build long termpartnerships with customers. Every colleaguehas a Balanced Scorecard comprising of fivemeasures: building the business, customer, risk,people and finance. Objectives are aligned to

our broader strategy and how well a colleaguemeets these objectives results in an individualperformance rating. This rating links directly tohow a colleague is rewarded.

In 2010 we launched a single approach toperformance management across Lloyds BankingGroup, the success of which was acknowledgedat the 2010 Personnel Today Awards at which wereceived the top award for Managing Change.

Learning and development

In 2010 we continued to invest in thedevelopment of colleagues across theorganisation providing an average of 5.4 days

formal learning per full time equivalent (FTE).Our learning strategy is aligned to our goal ofoutperformance through cost and customerleadership. We aim to drive high performance,achieve greater productivity and deep lastingcustomer relationships by encouraging thedevelopment of highly engaged and skilledcolleagues.

We continued to employ our Academiesapproach supported by a redesignedLearning @ Lloyds Banking Group website,attracting around 1.7 million visits per month.

Diversity and inclusion

2010 saw the launch of the new Diversity andInclusion strategy. We made significantprogress through the appointment of fiveexecutive director sponsors covering genderand work life balance, ethnic diversity, sexualorientation, disability and generational diversity.In reviewing our resourcing, work life balanceand leadership development practices, weattract, recruit and retain talented colleaguesfrom diverse backgrounds. In 2010 ouremployees had the opportunity to learn moreabout our progress through our first nationalDiversity and Inclusion Week.

HR people risk

In 2010 we established a People Risk functionwithin Group HR, with the aim of ensuring thatthe management of people risks are central to

the development and delivery of the Groupsbusiness strategy. We have built people riskmanagement into our overall accountabilityframework including our Group Risk Appetiteand People Strategy. An early priority of thePeople Risk function has been to provideguidance on moderation of pay and bonuses incompliance with the FSAs Remuneration Code.

As we enter the final year of our integrationprogramme, we continue to make excellentprogress towards becoming One Bank. We willgo on building a diverse, talented and engagedworkforce and equipping it with the skills it needsto provide the best customer service.

Retail Customer Service Training

A key focus for training across Retail has been thetransformation of our approach in handling customercomplaints. This has resulted in over 30,000 customer facingcolleagues receiving training across Lloyds TSB, Halifax and

Bank of Scotland Branch Networks. The key purpose of thistraining was to improve the experience for customers whenadvising us of a complaint this included colleagues takingownership of each complaint at first point of contact, accuraterecording and effective and timely resolution. A blendof training approaches was adopted including e-learning,testing, validation and face to face sessions supported bycomprehensive Senior Manager engagement. Thisprogramme has resulted in a significant improvement in thenumber of complaints resolved at first point of contact and ishaving a positive impact on our Customer Service measures.

8/3/2019 2010 LBG Review

19/28


CORPORATE RESPONSIBILITY

Supporting our business strategy

Our business strategy is to be recognised as theUKs best financial services company. Trust inthe banking industry has been eroded over thepast few years. Rebuilding stakeholders trust infinancial institutions will be central to us achievingour goal.

Corporate responsibility is integral to ourbusiness strategy. We need to ensure that weare running our business in a responsible way.We need to demonstrate that we are making asustained, positive contribution to the economyand to society. As a relationship-led business,we need to focus on building deep and lastingrelationships with our stakeholders; by engaging

with them, listening to their needs and, ifappropriate, making changes to the way we dobusiness.

Responsible business management

Corporate responsibility governanceWe strengthened our governance framework in2010, establishing Board representatives for keystrands of our corporate responsibility agenda:Sir Winfried Bischoff for Corporate Responsibility;Helen Weir for Financial Inclusion and Truett Tatefor Climate Change and Environmental Issues.We also established new Financial Inclusion andEnvironmental Steering Groups to drive ourstrategic approach.

Responsible lending, advice and supportAs a responsible lender, we aim to ensurecustomers only borrow what they can affordto repay. We only offer loans and credit cardsafter carefully assessing customers financialcircumstances and regularly check thattheir borrowing remains suitable to theircircumstances. We speak to more than300,000 customers a month to assess theirfinancial health and find ways to help. We havetrained over 7,000 financial health specialiststo help customers in our branches. We alsocontributed 12.5 million in 2010 to the financialadvice sector.

Environmental managementWe believe that we have an important role toplay in facilitating and financing the transition toa low carbon, resource efficient economy. Wewere rated the top UK bank in the new FTSE CDPCarbon Strategy Index Series in 2010, recognisingour performance in managing climate risks andgrasping emerging opportunities.

In 2010, we launched Smart and Responsible,our new targeted environmental action planwhich aims to deliver significant environmentaland cost savings.

We also registered for the Carbon ReductionCommitment Energy Efficiency Scheme andwill now be required to purchase allowancesfor each tonne of energy-related CO2 we emit,providing a further incentive to reduce our carbonemissions.

Our economic and social impact

Supporting the UKs economic recoveryAs a UK-focused bank, we have an important roleto play in supporting the UKs economic recovery.In 2010, we extended 79 billion of new lendingto homeowners and businesses. The vast majorityof this lending was conducted in the UK.

We extended 30 billion of gross mortgagelending to homeowners, including more than5 billion in new lending to first time buyers.We also extended 49 billion of committedgross lending to UK businesses. We approveover 80 per cent of lending applications fromsmall and medium sized enterprises (SMEs), andhelped more than 100,000 new business

start ups last year.We actively participate in all the mainGovernment financial initiatives aimed at helpingcustomers enter the housing market, and helpingsmall businesses access finance. We are one ofthe most active lenders under the GovernmentsEnterprise Finance Guarantee Scheme, offering30 per cent of total loans granted.

Financial inclusion & capabilityWe have dedicated products and services thataddress financial exclusion. With over four millionaccounts, we are the UKs biggest provider ofsocial bank accounts. We are also the only majorUK bank to offer social banking customers a

bespoke Christmas savings account, the HalifaxChristmas Saver.

We launched Money for Life in 2010, our new4 million financial capability programme for thefurther education sector. The programme aimsto develop the capacity of the sector to improvethe financial capability and personal moneymanagement skills of the 3 million people itserves.

Community investmentOur economic contribution to society issupported by our active investment in thecommunities in which we operate. We invested

148 million in communities across the UK in2010, including support for financial inclusion andsocial banking, sponsorship of sports for youngpeople and donations through the Groupscharitable Foundations.

In 2010, the Foundations received more than29 million to distribute to charities across theUK. In the current economic climate, whencharities are finding it difficult to attract funding,the Foundations are helping many charities tosurvive. We raised over 3.4 million for the BritishHeart Foundation, our Charity of the Year fromJuly 2008 to December 2010. Colleagues votedfor Save the Children as our Charity of the Yearfor 2011.

Building relationships

As a bank, we have long term, sometimeslifelong, relationships with our customers.Ensuring we maintain and build customers trustis core to the sustainability of our business.

Listening to our customersEvery month we contact 75,000 customers aspart of a systematic customer-feedback process.We listen carefully to what our customers tellus, both good and bad, and use this to makechanges where necessary. Often, we learn aboutthe small things that cause irritation to customers.

By listening to customers, we can quickly putthings right.

Addressing customers complaintsThe vast majority of our customers are happywith the service we provide. When we do receivecomplaints, we ensure that they are dealt withfairly, quickly and consistently. We now resolve90 per cent of complaints at first touch with thesupport of our new Phone a Friend complaintsresolution team. However, we know we have towork hard to reduce the number of complaintswe receive in the first place.

Delivering innovative products and services

We work hard to introduce new and innovativeproducts that respond to customers evolvingneeds. We launched a number of market-leadingproducts in 2010, including the Halifax Cash ISAPromise which enables all customers switchingtheir existing cash ISA to Halifax, to earn interestfrom the first day that we receive their completedtransfer form.

Summary

We realise that it will take time to rebuild trustin the sector and we are committed to leadingthe way. We need to continue to engage inopen conversations with our key stakeholders

and demonstrate how we are listening to theirneeds. Over time, we believe that this willenable us to deliver superior, more sustainableshareholder value.

Save the Children our Charity of the Year

Lloyds Banking Groups Charit y of the Year for 2011 is Save theChildren. Working together we aim to raise at least 1 millionto fund 52 Save the Children Families and Schools Together(FAST) projects in some of the UKs most disadvantagedcommunities. FAST is a unique programme that works withthree- to-five year olds and their families to ensure thatchildren get the best possible start to their school life.

8/3/2019 2010 LBG Review

20/28


SUMMARY CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2010

2010

million

2009

million

Net interest income 12,546 9,026

Other income 30,921 36,271

Total income 43,467 45,297

Insurance claims (18,511) (22,019)

Total income, net of insurance claims 24,956 23,278

Operating expenses (13,270) (15,984)

Trading surplus 11,686 7,294

Impairment (10,952) (16,673)

Share of results of joint ventures and associates (88) (752)

Gain on acquisition 11,173Loss on disposal of businesses (365)

Profit before tax 281 1,042

Taxation (539) 1,911

(Loss) profit for the year (258) 2,953

Profit attributable to non-controlling interests 62 126

(Loss) profit attributable to equity shareholders (320) 2,827

(Loss) profit for the year (258) 2,953

Basic earnings per share (0.5) 7.5pDiluted earnings per share (0.5) 7.5p

Total dividend per share for the year

Total dividend for the year

000 000

Directors emoluments 10,641 9,900

The Groups income statement includes substantial amounts of income and expenditure attributable to the policyholders of the Groups long-termassurance funds, which are consolidated in order to meet the requirements of accounting standards. These amounts are volatile and can causesignificant variations in total income and insurance claims; however they have no overall effect upon profit attributable to equity shareholders overthe long term.

p

p

8/3/2019 2010 LBG Review

21/28


SUMMARY CONSOLIDATED BALANCE SHEET

At 31 December 2010

2010

million

2009

million

Assets

Cash and balances at central banks 38,115 38,994

Derivatives, trading and other financial assets at fair value through profit and loss 206,968 199,939

Loans and receivables:

Loans and advances to customers 592,597 626,969

Loans and advances to banks 30,272 35,361

Debt securities 25,735 32,652

648,604 694,982

Available-for-sale financial assets 42,955 46,602

Held-to-maturity investments 7,905

Investment properties 5,997 4,757

Intangible assets, including goodwill, and the value of in-force business 12,879 12,788

Tangible fixed assets 8,190 9,224

Retirement benefit assets 736

Other assets 19,225 19,969

Total assets 991,574 1,027,255

Liabilities

Deposits from banks 50,363 82,452

Customer deposits 393,633 406,741

Derivatives, trading and other financial liabilities at fair value through profit or loss 68,920 68,756

Debt securities in issue 228,866 233,502

Insurance liabilities 81,372 77,261

Liabilities to customers under non-participating investment contracts 51,363 46,348

Other liabilities 33,500 32,581

Retirement benefit obligations 423 780

Subordinated liabilities 36,232 34,727

Total liabilities 944,672 983,148

Shareholders equity 46,061 43,278

Non-controlling interests 841 829

Total equity 46,902 44,107

Total equity and liabilities 991,574 1,027,255

The summary financial statement, comprising the summary consolidated income statement on page 18, the summary consolidated balance sheeton page 19 and the directors remuneration commentary on page 21 was approved by the directors on 24 February 2011.

Sir Winfried Bischoff J Eric Daniels Tim J W TookeyChairman Group Chief Executive Group Finance Director

8/3/2019 2010 LBG Review

22/28


REPORTS ON THE ACCOUNTS

We have examined the summary financial statement,

which comprises the summary consolidated incomestatement on page 18, the summary consolidatedbalance sheet on page 19, the summary directorsreport on page 20 and the directors remunerationcommentary on page 21.

Respective responsibilities of Directorsand Auditors

The Directors are responsible for preparing theannual review in accordance with applicableUnited Kingdom law.

Our responsibility is to report to you our opinion onthe consistency of the summary financial statementwithin the annual review with the annual financialstatements, the directors report, and the directorsremuneration report, and its compliance withthe relevant requirements of section 428 of theCompanies Act 2006 and the regulations madethereunder.

We also read the other information contained inthe annual review and consider the implications forour statement if we become aware of any apparentmisstatements or material inconsistencies with thesummary financial statement and the corporategovernance statement and the other items listed onthe contents page.

This statement, including the opinion, has beenprepared for and only for the Companys members

as a body in accordance with section 428 of theCompanies Act 2006 and for no other purpose.We do not, in giving this opinion, accept or assumeresponsibility for any other purpose or to any otherperson to whom this statement is shown or intowhose hands it may come save where expresslyagreed by our prior consent in writing.

We conducted our work in accordance with Bulletin2008/3 issued by the Auditing Practices Board.Our reports on the Companys full annual financialstatements describe the basis of our audit opinionson those financial statements, the directors reportand the directors remuneration report.

Opinion

In our opinion the summary financial statement isconsistent with the full annual financial statements,the directors report and the directors remunerationreport of Lloyds Banking Group plc for the yearended 31 December 2010 and complies with theapplicable requirements of section 428 of theCompanies Act 2006, and the regulations madethereunder.

PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsEdinburgh24 February 2011

a) The maintenance and integrity of the Lloyds Banking Group

website is the responsibility of the Directors; the work carriedout by the Auditors does not involve consideration of these

matters and, accordingly, the auditors accept no responsibility

for any changes that may have occured to the full annual

financial statements or the summary financial statement since

they were initially presented on the website.

b) Legislation in the United Kingdom governing the preparation

and dissemination of financial statements may differ from

legislation in other jurisdictions.

The auditors reports on the full accounts for the

year ended 31 December 2010 were unqualifiedand did not include a statement under sections498(2) (accounting records or returns inadequate oraccounts not agreeing with records and returns) or498(3) (failure to obtain necessary information andexplanations) of the UK Companies Act 2006. Inaddition, the auditors statement under section 496was unqualified.

The Company is a holding company and its

subsidiary undertakings provide a wide range ofbanking and financial services through branches andoffices in the UK and overseas.

A review of the business and an indication of futuredevelopments are given on the inside front cover,page 1 and pages 8 to 15.

Biographical details of Directors are shown onpages 22 and 23.

Changes to the composition of the Board since1 January 2010 are shown below:

Dr W C G Berndt retired from the Board on6 May 2010. Mr G R Moreno and Mr D L Roberts

joined the Board on 1 March 2010 and Ms A M Frew

joined the Board on 1 December 2010.Mr A Horta-Osrio joined the Board on 17 January2011. Mr J E Daniels will retire from the Board on28 February 2011 and will be succeeded asGroup Chief Executive by Mr A Horta-Osrio on1 March 2011.

Ms A M Frew and Mr A Horta-Osrio wereappointed to the Board after the annual generalmeeting held in 2010 and will therefore stand forelection at the forthcoming annual general meeting.

Under the articles of association, Sir Julian Horn-Smithand Mr G T Tate are required to retire from theBoard at the annual general meeting. However, inthe interests of good corporate governance and inaccordance with the provisions of the UK CorporateGovernance Code, effective from 2012, the Boardhas decided that all of the Directors will retirevoluntarily and submit themselves for re-election atthe annual general meeting.

Particulars of the Directors interests in shares in theCompany and detailed information about sharecapital and change of control are shown in the fullreport and accounts.

.

INDEPENDENT AUDITORSSTATEMENT TO THE MEMBERSOF LLOYDS BANKING GROUP PLC

AUDITORS REPORTON FULL ACCOUNTS SUMMARY DIRECTORS REPORT

8/3/2019 2010 LBG Review

23/28


Full details of the Groups remuneration policy for directors as well as details

of their remuneration in 2010 appear in the Directors remuneration report inthe full report and accounts. This may be seen in the Investors section of theGroups website at www.lloydsbankinggroup.com.

The Group has made significant progress during the year. It has reducedthe level of risk in the business in reaction to the economic events that had aparticularly deep impact on the banking sector and the Group is endeavouring,as a business, to continue to support the UKs economic recovery.

The Groups decision making has focussed on balancing shareholders viewson remuneration with the need to attract, incentivise and retain the rightpeople, in light of this improved business performance. The Group is proposingincreases to Executive Director base salaries for 2011, in line with those for thewider workforce. This will be the first increase since 2008. The annual incentiveopportunity for 2011 will stay the same as in previous years. The bonus willcontinue to be based on a combination of Group financial measures and a

balanced scorecard of business financial and non-financial measures, includingcustomers, people and risk. Awards under the Long Term Incentive Plan (LTIP)remain below 2008 levels and will be limited to 300 per cent of salary(420 per cent for Antnio Horta-Osrio). The Group believes that theperformance measures for the 2011 LTIP award for the Group ExecutiveCommittee should be Economic Profit, Earnings per share and absoluteTotal Shareholder Return.

At this time the Group

Documents

2010 LBG Review