As filed with the Securities and Exchange Commission on 10 March 201725 February 2020

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

¨o  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 31 December 20162019

OR

¨o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨o  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15246

LLOYDS BANKING GROUP plc

(previously Lloyds TSB Group plc)

(Exact name of Registrant as Specified in Its Charter)

Scotland

(Jurisdiction of Incorporation or Organization)

25 Gresham Street

London EC2V 7HN

United Kingdom

(Address of Principal Executive Offices)

Malcolm Wood,Kate Cheetham, Company Secretary

Tel +44 (0) 20 7356 1274,2104, Fax +44 (0) 20 7356 1808

25 Gresham Street

London EC2V 7HN

United Kingdom

(Name, telephone, e-mail and/or facsimile number and address of Company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

7.50% Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Contingent Convertible Securities

6.75% Callable Fixed Rate Reset AT1 Perpetual Subordinated Contingent Convertible Securities
5.125% Callable Fixed Rate Reset AT1 Perpetual Subordinated Contingent Convertible Securities

The number of outstanding shares of each of Lloyds Banking Group plc’s classes of capital or common stock as of 31 December 20162019 was:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yesx    No¨o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes¨o    Nox

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yesx    No¨o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted

and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or (or for such shorter period that the registrant was required to submit and post such files).

Yes¨x    No¨o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. filer, or an emerging growth company.

See definitionthe definitions of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerx    Accelerated filer¨o    Non-Accelerated filer¨o    Emerging Growth Company o

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards^†provided pursuant to Section 13(a) of the Exchange Act.

Yes o    No o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements including in this filing:

U.S. GAAP¨o    International Financial Reporting Standards as issued by the International Accounting Standards Boardx Other¨o

If ‘Other’ has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17¨o    Item o18¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes¨o    Nox

^†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

BUSINESS OVERVIEW

Lloyds Banking Group is a leading provider of financial services to individual and business customers in the UK. At 31 December 2016, total2019, Lloyds Banking GroupGroup’s total assets were £817,793£833,893 million and Lloyds Banking Group had 70,43363,069 employees (on a full-time equivalent basis). Lloyds Banking Group plc’s market capitalisation at that date was £44,616£43,783 million. The Group reported a profit before tax for the 12 months to 31 December 20162019 of £3,888£4,393 million, and its capital ratios at that date were 21.221.3 per cent for total capital, 16.816.7 per cent for tier 1 capital and 13.413.6 per cent for common equity tier 1 capital.

Set out below is the Group’s summarised income statement for each of the last threetwo years:

Lloyds Banking Group’s main business activities are retail and commercial banking and long-term savings, protection and investment.investment and it operates primarily in the UK. Services are offered through a number of well recognised brands including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows, and through a range of distribution channels including the largest branch network and digital bank in the UK.

At 31 December 2016,2019, the Group’s fourthree primary operating divisions, which are also financial reporting segments, were: Retail; Commercial Banking; Consumer Finance and Insurance.Insurance and Wealth. Retail provides banking, mortgages, personal loans, motor finance, credit cards and other financial services to personal and small business customers in the UK.customers. Commercial Banking provides banking and related services to business clients, from SMEssmall and medium-sized entities (SMEs) to large corporates. Consumer Finance provides a range of products including personal loans, motor finance, credit cards,Insurance and European mortgages and deposit taking. InsuranceWealth provides long-term savings, protection and investment products as well as general insurance products in the UK.products.

Profit before tax is analysed on pages 1317 to 1622 on a statutory basis and, in order to provide a more comparable representation of business performance offor the Group’s segments, on pages 24 to 3430 on an underlying basis. The key principles adopted in the preparation of this basis of reporting are described on page 24. The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group’s internal reporting based around these segments (which reflect the Group’s organisational and management structures) in order to assess performance and allocate resources; this reporting is on an underlying basis. IFRS 8,Operating Segmentsrequires that the Group presents its segmental profit before tax on the basis reviewed by the chief operating decision maker that is most consistent with the measurement principles used in measuring the Group’s statutory profit before tax. Accordingly, the Group presents its segmental underlying basis profit before tax in note 4 to the financial statements in compliance with IFRS 8. The table below shows the results of Lloyds Banking Group’s segments in the last threetwo fiscal years, and their aggregation. Further information on non-GAAP measures and the reconciliations required by the Securities and Exchange Commission’s Regulation G are set out on pages F-19F-25 to F-22.F-29.

Lloyds Banking Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on 21 October 1985 with the registered number 95000. Lloyds Banking Group plc’s registered office is The Mound, Edinburgh EH1 1YZ, Scotland, and its principal executive offices in the UK are located at 25 Gresham Street, London EC2V 7HN, United Kingdom, telephone number + 44 (0) 20 7626 1500.

SELECTED CONSOLIDATED FINANCIAL DATA

The financial information set out in the tables below has been derived from the annual reports and accounts of Lloyds Banking Group plc for each of the past five years adjusted, where restatement was required, for subsequent changes in accounting policy and presentation. The financial statements for each of the years shown have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm.

EXCHANGE RATES

In this annual report, unless otherwise indicated, all amounts are expressed in pounds sterling. For the months shown the US dollar high and low Noon Buying Rates per pound sterling were:

For each of the years shown, the average of the US dollar Noon Buying Rates per pound sterling based on the last day of each month was:

On 24 February 2017, the latest practicable date, the US dollar Noon Buying Rate was $1.2499 = £1.00. Lloyds Banking Group makes no representation that amounts in pounds sterling have been, could have been or could be converted into US dollars at that rate or at any of the above rates.

BUSINESS

HISTORY AND DEVELOPMENT OF LLOYDS BANKING GROUP

The history of the Group can be traced back to the 18th century when the banking partnership of Taylors and Lloyds was established in Birmingham, England. Lloyds Bank Plc was incorporated in 1865 and during the late 19th and early 20th centuries entered into a number of acquisitions and mergers, significantly increasing the number of banking offices in the UK. In 1995, it continued to expand with the acquisition of the Cheltenham and Gloucester Building Society (C&G).Society.

TSB Group plc became operational in 1986 when, following UK Government legislation, the operations of four Trustee Savings Banks and other related companies were transferred to TSB Group plc and its new banking subsidiaries. By 1995, the TSB Group had, either through organic growth or acquisition, developed life and general insurance operations, investment management activities, and a motor vehicle hire purchase and leasing operation to supplement its retail banking activities.

In 1995, TSB Group plc merged with Lloyds Bank Plc. Under the terms of the merger, the TSB and Lloyds Bank groups were combined under TSB Group plc, which was re-named Lloyds TSB Group plc, with Lloyds Bank Plc, which was subsequently re-named Lloyds TSB Bank plc, the principal subsidiary. In 1999, the businesses, assets and liabilities of TSB Bank plc, the principal banking subsidiary of the TSB Group prior to the merger, and its subsidiary Hill Samuel Bank Limited were vested in Lloyds TSB Bank plc, and in 2000, Lloyds TSB Group acquired Scottish Widows. In addition to already being one of the leading providers of banking services in the UK, the acquisition of Scottish Widows also positioned Lloyds TSB Group as one of the leading suppliers of long-term savings and protection products in the UK.

The HBOS Group had been formed in September 2001 by the merger of Halifax plc and Bank of Scotland. The Halifax business began with the establishment of the Halifax Permanent Benefit Building Society in 1852; the society grew through a number of mergers and acquisitions including the merger with Leeds Permanent Building Society in 1995 and the acquisition of Clerical Medical in 1996. In 1997 the Halifax converted to plc status and floated on the London stock market. Bank of Scotland was founded in July 1695, making it Scotland’s first and oldest bank.

On 18 September 2008, with the support of the UK Government, the boards of Lloyds TSB Group plc and HBOS plc announced that they had reached agreement on the terms of a recommended acquisition by Lloyds TSB Group plc of HBOS plc. The shareholders of Lloyds TSB Group plc approved the acquisition at the Company’s general meeting on 19 November 2008. On 16 January 2009, the acquisition was completed and Lloyds TSB Group plc changed its name to Lloyds Banking Group plc.

Pursuant to two placing and open offers which were completed by the Company in January and June 2009 and the Rights Issue completed in December 2009, the UK Government acquired 43.4 per cent of the Company’s issued ordinary share capital; throughcapital. Following sales of shares in September 2013 and March 2014 and the impactcompletion of a trading planplans with Morgan Stanley & Co. International plc (Morgan Stanley), this had reduced to 9.9 per cent by 31 December 2015.

UKFI announced on 7 October 2016 that it intended to continue to sell Her Majesty’s Treasury’s (HMT) shareholding in Lloyds Banking Group plc over the next 12 months through a pre-arranged trading plan managed by Morgan Stanley. UnderUK Government completed the trading plan, Morgan Stanley has full discretion to effect a measured and orderly sell downsale of its shares in Lloyds BankingMay 2017, returning the Group plc on behalf of HMT. The trading plan commenced on 7 October and will terminate no later than 6 October 2017. HMT has instructed Morgan Stanley that (a) up to but no more than, 15 per cent of the aggregate total trading volume in Lloyds Banking Group plc may be sold over the duration of the trading plan, and (b) shares may not be sold under the trading plan below a certain price per share that UKFI and HMT have determined represents fair value currently and continues to deliver value for money for the UK taxpayer. As at 22 February 2017, HMT owned approximately 2.8 billion ordinary shares in Lloyds Banking Group plc, which represents less than 4 per cent of the issued ordinary share capital.full private ownership.

Pursuant to its decision approving state aid to the Group, the European Commission required the Group to dispose of a retail banking business meeting minimum requirements for the number of branches, share of the UK personal current accounts market and proportion of the Group’s mortgage assets. Following disposals in 2014, the Group retained an interest of approximately 50 per cent in TSB as at 31 December 2014. The Group sold its remaining interest in TSB to Banco de Sabadell (Sabadell) in 2015, with the acquisition becoming unconditional inand all respects onEC state aid requirements were met by 30 June 20152017.

On 1 June 2017, following the receipt of all relevantcompetition and regulatory clearances.approval, the Group acquired 100 per cent of the ordinary share capital of MBNA Limited, which together with its subsidiaries operates a UK consumer credit card business, from FIA Jersey Holdings Limited, a wholly-owned subsidiary of Bank of America.

The Group successfully launched its new non ring-fenced bank, Lloyds Bank Corporate Markets plc in 2018, transferring in the non ring-fenced business from the rest of the Group, thereby meeting its legal requirements under ring-fencing legislation.

On 23 October 2018, the Group announced a partnership with Schroders to create a market-leading wealth management proposition. The three key components of the partnership are: (i) the establishment of a new financial planning joint venture; (ii) the Group taking a 19.9 per cent stake in Schroders high net worth UK wealth management business; and (iii) the appointment of Schroders as the active investment manager of approximately £80 billion of the Group’s insurance and wealth related assets. The joint venture, Schroders Personal Wealth, was launched to the market in the third quarter of 2019. The Group’s interest in the joint venture is 50.1 per cent.

BUSINESS

STRATEGY OF LLOYDS BANKING GROUP

The Group is a leading provider of financial services to individual and business customers in the UK. The Group’s main business activities are retail and commercial banking, and long-term savings, protection and investment. Services are provided through a number of well recognised brands including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows and through a range of distribution channels, including the largest branch network and digital bank in the UK.

As the Group looks to the future, it sees the external environment evolving rapidly. Changing customer behaviours, the pace of technological evolution and changes in regulation all present opportunities. Given the Group’s strong capabilities and the significant progress made in recent years, the Group believes that it is in a unique position to compete and win in this environment by developing additional competitive advantages. The Group operates a simple, low-risk, customer focused retailwill continue to transform itself to succeed in this digital world and commercial banking business primarily in the UK. The Group’s corporate strategy is built around being the best bank for individual and business customers across the UK and creating value by investing in areas that make a real difference to these customers.

Following the successful delivery of the Group’s 2011 strategy that underpinned the Group’s low cost, low risk, customer focused, UK retail and commercial banking business model, the Group outlined the next phase of its strategy will ensure that the Group has the capabilities to deliver future success.

STRATEGIC PRIORITIES

In 2018 the Group launched the third phase of its strategic plan. The Group identified four strategic priorities focused on the financial needs and behaviours of the customer of the future: further enhancing the Group’s leading customer experience; further digitising the Group; maximising Group capabilities; and transforming ways of working. The Group will invest more than £3 billion in October 2014. these strategic initiatives through the plan period that will drive the Group’s transformation into a digitised, simple, low risk, customer-focused UK financial services provider.

Delivering a leading customer experience

The Group will drive stronger customer relationships through best in class propositions while continuing to provide the Group’s strategy is focused upon delivering valuecustomers with brilliant servicing and high quality experiencesa seamless experience across all channels. This will include:

Digitising the Group

The Group will deploy new technology to drive additional operational efficiencies that will make banking simple and easier for customers alongside superiorwhilst reducing operating costs, pursuing the following initiatives:

Maximising the Group’s capabilities

The Group will deepen customer relationships, grow in targeted segments and sustainablebetter address our customers’ banking and insurance needs as an integrated financial performance within a prudent risk and conduct framework.services provider. This will be achieved through three strategic priorities which will be consistently applied across all divisions:include:

CREATING THE BEST CUSTOMER EXPERIENCE

The Group’s ambition is to create the best customer experience through its multi brand, multi channel approach, combining comprehensive online and mobile capabilities with face to face services. This involves transforming the Group’s digital presence while sustaining extensive customer reach through a branch network focused on delivering high quality service and the right outcomes for customers.

BECOMING SIMPLER AND MORE EFFICIENT

Transforming ways of working

The Group is focused on creating operational capability which is simplermaking its biggest ever investment in people, increasing colleague training and more efficientdevelopment by 50 per cent to 4.4 million hours per annum and will become more responsiveembracing new technology to changingdrive better customer expectations while maintaining its cost leadership amongst UK high street banks. This includes a second phaseoutcomes. The hard work, commitment and expertise of the Simplification programmeGroup’s colleagues has enabled it to achieve run-rate savings of £1.4 billion per annum by the end of 2017. In orderdeliver to achieve these savings,date and the Group will further invest around £2.2 billion over three years on initiativesin capabilities and agile working practices. The Group has already restructured the business and reorganised the leadership team to simplify processes and increase automation.ensure effective implementation of the new strategy.

DELIVERING SUSTAINABLE GROWTH

The Group will seek Group-wide growth opportunities whilst maintaining its prudent risk appetite. This will be achieved by maintaining market leadership in its retail business lines while also focusing on areas where the Group is currently under represented.

SUMMARY

The Group’s purpose is to help Britain prosper. The Group is creating a simpler, more agile, efficient and responsive customer focused organisation which operates sustainably and responsibly. The achievement of our strategy could not happen without the support of our colleagues. We are therefore committed to ‘building the best team’ to create a high performance organisation. The Group believes that the successful execution of its strategy will enable delivery of superior and sustainable returns for shareholders.

BUSINESS AND ACTIVITIES OF LLOYDS BANKING GROUP

At 31 December 2016 theThe Group’s activities wereare organised into fourthree financial reporting segments: Retail; Commercial Banking; Consumer Finance and Insurance.Insurance and Wealth. In 2019 the Group transferred Cardnet, its card payment acceptance service, from Retail into Commerical Banking and also transferred certain equity business from Commercial Banking into Central items. Comparatives have been restated accordingly.

Further information on the Group’s financial reporting segments is set out on pages 2827 to 3429 and in note 4 to the financial statements.

MATERIAL CONTRACTS

The Company and its subsidiaries are party to various contracts in the ordinary course of business.

BUSINESS

ENVIRONMENTAL MATTERS

MANAGING AND REDUCING Helping the transition to a sustainable low carbon economy

The UK is committed to the vision of a sustainable, low carbon future. The Group’s unique position within the UK economy means that the successful transition to a more sustainable, low carbon economy is of strategic importance.

The Group supports the aims of the 2015 Paris Agreement and the UK Government’s Clean Growth Strategy, which will require a radical reinvention of ways of working, living and doing business including new Government policies and sustainable finance solutions. In 2018 the Group set out its Sustainability Strategy and when reporting on its progress, the Group supports the Taskforce on Climate-Related Financial Disclosure (TCFD) framework, and currently plans to achieve full disclosure by 2022 in line with the TCFD recommendations and the UK Government’s Green Finance Strategy.

OUR ENVIRONMENTAL IMPACTSSTRATEGY

The Group’s abilitygoal and approach

As a signal of the Group’s commitment the Group has set an ambitious goal, working with customers, Government and the market to help Britain prosperreduce the emissions it finances by more than 50 per cent by 2030, supporting the UK’s ambition to be net zero by 2050 and the 2015 Paris Agreement. During the course of 2020, the Group intends to conduct a review of its portfolio to establish its current financed emissions and set appropriate metrics and targets for material sectors.

In order to meet its goal, the Group will:

	Identify new opportunities to support customers and clients and finance the UK transition to a low carbon economy
	Identify and manage material sustainability and climate related risks across the Group, disclosing these, their impacts on the Group and its financial planning processes, in line with the TCFD framework
	Use the Group’s scale and reach to help drive progress towards a sustainable and resilient UK economy through engagement with customers, communities, industry, Government, shareholders and suppliers
	Embed sustainability into the way the Group does business and manages its own operations in a more sustainable way

The Group’s ambition

The Group has set itself seven leadership ambitions to support the UK’s transition to a sustainable future:

Business: become a leading UK commercial bank for sustainable growth, supporting clients to transition to sustainable business models and operations, and to pursue new clean growth opportunities

Homes: be a leading UK provider of customer support on energy efficient, sustainable homes

Vehicles: be a leading UK provider of low emission/green vehicle fleets

Pensions and investments: be a leading UK pension provider that offers customers and colleagues sustainable investment choices, and challenge the companies the Group invests in to behave more sustainably and responsibly

Insurance: be a leading UK insurer in improving the resilience of customers’ lives against extreme weather caused by climate change

Green bonds: be a leading UK bank in the green/sustainable bonds market

The Group’s own footprint: be a leading UK bank in reducing the Group’s own carbon footprint and challenging suppliers to ensure the Group’s own consumption of resources, goods and services is inextricably linkedsustainable

Metrics and targets

In 2018, the Group committed to wider environmental issues. Man-madedevelop a reporting framework to track performance against our sustainability strategy. This includes measures for: the Group’s own energy use, emissions, water and waste; Group and portfolio metrics that drive emission reductions related to financing activity; the amount of green finance provided; and metrics that track climate change risk (including exposure to high carbon sectors and sectors at high risk from climate change).

The complexity of accessing robust data has prevented the Group from setting a full suite of targets in 2019. The Group intends, however, to set appropriate targets during 2020 for material sectors. The Group’s new goal to help reduce the emissions it finances by more than 50 per cent by 2030 will frame the level of ambition across the Group’s targets and metrics.

Extending the Group’s own carbon footprint measurement

The Group met its 2030 carbon reduction target in 2019, having reduced emissions by 63 per cent since 2009. The Group also expanded its Scope 3 emissions measurement to include additional categories of emissions from business travel and colleague commuting. The Group continues to pursue our targets to reduce emissions by 80 per cent by 2050, operational waste by 80 per cent by 2025 (compared to 2014/15) and water consumption by 40 per cent by 2030 (compared to 2009). The Group will be developing new carbon, energy and travel targets in 2020.

Green finance

The Group has provided more than £4.9 billion in green finance since 2016 through its Clean Growth Finance Initiative, Commercial Real Estate Green Loans Initiative, Renewable Energy Financing, and green bonds facilitation. While green loan standards are evolving, the Group has teamed up with leading sustainability consultants when developing green finance products to determine a list of qualifying green criteria. These green finance products support a range of eligible activity including; reducing emissions, improving energy efficiency, reducing waste, improving water efficiency, and funding low carbon transport and renewable energy.

BUSINESS

Climate risk sectors

In line with TCFD recommendations, the Group has identified its loans and advances to customers in high carbon sectors and a selection of other sectors that will be exposed to transition risk (see table). This is the Group’s initial view and will be reviewed as its transition risk insight develops. The Group continues to work with customers to support transition, taking into account both risks and opportunities.

The Group’s exposure to high carbon sectors is low (less than 0.5 per cent of total loans and advances to customers). In addition, data for these loans and advances is presented at an overall sector level and not all customers in these sectors will have high emissions or be exposed to significant transition risks. For example:

	Utilities includes financing to entities that have both renewable energy and non-renewable energy generation. The Group has provided finance for more than 40 renewable energy projects, including supporting projects such as the Neart na Gaoithe offshore wind farm;
	Real estate and mortgages will include loans and advances supported by assets which have a full range of Energy Performance Certificate (EPC) ratings including energy efficient properties;
	UK motor finance includes loans and advances for low emission vehicles.
	Loans and advances to customers in high carbon sectors and selected other sectors subject to transition risks.

						Loans and advances to customers (£m)2								% of total loans and advances to customers3
Sector/area1						Dec-2019				Dec-2018				Dec-2019				Dec-2018
		Energy		Coal Mining			21				28				<0.01	%			<0.01	%
				Oil and Gas			1,368				975				0.27	%			0.20	%
		Utilities		(Electric and Gas)			964				1,251				0.19	%			0.26	%
		Total					2,353				2,254				0.47	%			0.46	%
		Agriculture, Forestry and Fishing					7,558				7,314				1.52	%			1.50	%
		Construction and Real Estate					28,228				29,470				5.67	%			6.04	%
		Transportation (Automotive, Aviation, Shipping and Rail)					4,353				5,429				0.87	%			1.11	%
		Cement, Chemicals and Steel Manufacture					143				250				0.03	%			0.05	%
		Mortgages					299,141				297,497				60.05	%			60.96	%
		UK Motor Finance					15,976				14,933				3.21	%			3.06	%

Risk management

Climate risk is a key emerging risk for the Group. The Group’s approach to identifying and managing climate risk is founded on embedding it into its existing risk management framework, and integrating it through policies, authorities and risk control mechanisms. During 2019, the Group updated its TCFD implementation plan to incorporate Prudential Regulatory Authority (PRA) supervisory expectations and refined deliverables, with further resource invested in the programme.

In 2019, the Group included commentary on climate change risk within its Internal Capital Capacity Adequacy Assessment Process (ICAAP) submission, and in 2020 the Group is building on this through its analysis of initial scenarios to assess the impact on capital requirements. The Group is also engaged in the industry response to the Bank of England Discussion Paper to identify the best approach to explore the financial risks posed by climate change within its 2021 Biennial Exploratory Scenario (BES).

The Group has updated its external sector statements to include positions on six new sectors including manufacturing, automotive, agriculture, animal welfare, fisheries and UNESCO World Heritage Sites. This is in addition to the existing statements on power, coal, mining, oil and gas, forestry and defence. www.lloydsbankinggroup.com/Our-Group/responsible-business/reporting-centre/. The Group’s statement on coal has been updated and made more ambitious. The Group continues with its policy of not financing new coal fired power stations. The Group has now tightened its requirements for providing general banking or funding, and now requires new clients to have less than 30 per cent of their revenue from the operation of coal fired power stations and/or coal mines (previously less than 50 per cent).

In addition, existing customers whose overall operations include coal mining and coal power generation or who supply equipment or services to the sector will be expected to explain how they plan to reduce their reliance on revenue from coal fired power stations and/or coal mines. This includes reducing such revenue to less than 30 per cent by 2025 and, where relevant, to eliminate UK coal power generation in line with UK Government commitments.

Sustainability is now a mandatory part of credit applications in Commercial Banking for facilities greater than £500,000, and we continue to develop sector specific guidance to help relationship managers identify climate risks. The Group will review climate risk as part of the 2020 annual refresh of the Group’s Risk Appetite.

In line with TCFD, the Group is also developing forward-looking scenario analysis, incorporating physical and transition risks, to help identify risks and opportunities over the short, medium and long-term. For example, Commercial Banking are conducting analysis on the real estate sector for business as usual and low carbon transition scenarios and the Insurance business has conducted an initial climate stress test. The Group is working with external consultants to enhance scenario analysis across divisions and will use the outputs to support scenario analysis assessments and inform credit risk appetite decisions and future disclosures.

BUSINESS

How we are delivering against our ambitions

In 2019, the Group has focused on developing new products, services and processes to achieve its ambitions, and progress has been recognised.

	Lloyds Banking Group achieved the Leadership level in the 2019 Carbon Disclosure Project (CDP) Climate Change survey, scoring an A minus; the highest placed financial services firm on the Fortune Sustainability All Stars list; and won the Real Estate Capital Sustainable Finance Provider of the Year
	One in 14 electric cars in the UK was supplied by Group subsidiary Lex Autolease in 2019, supported by a £1 million cashback offer on pure electric vehicle (EV) orders, reducing future carbon dioxide emissions by an estimated 28 kilotonnes
	The Group continues to partner with the Cambridge Institute for Sustainability Leadership to provide high quality training to executives and colleagues in risk management, product development and client facing roles. In 2019, over 800 colleagues were trained, ensuring they are able to support clients on this journey
	Since 2018 the Group has supported renewable energy projects that power the equivalent of 5.1 million homes, achieving the Group’s Helping Britain Prosper Plan 2020 target a year early

Evolving our disclosure

In 2020, the Group will continue to review and enhance its methodologies and framework for reporting Environmental, Social and Governance risks. This review will take into account a range of industry guidelines including TCFD, Principles for Responsible Banking, Sustainability Accounting Standards Board (SASB), the evolving World Economic Forum (WEF) ESG standards, and regulatory reporting requirements with a view to further enhancing our disclosures and responding to the evolving needs of both our shareholders and other stakeholders.

BUSINESS

Initiatives and collaboration

Climate change is a global challenge that requires collaboration across companies and industries to ensure the risks and opportunities can be adequately identified and managed. To support this, the Group participates in several industry initiatives and has signed up to key principles that drive action on climate change and global trends, suchsustainability, including:

United Nations Environment Programme

Finance Initiative (UNEP FI)

The Group became a member of UNEP FI in 2019 and joined its Phase 2 Banking TCFD Pilot.

The Group also became a signatory to the Principles for Responsible Banking and Principles for Sustainable Insurance.

Coalition for Climate Resilient Investment

In September 2019, the Group joined the newly formed coalition that aims to transform infrastructure investment by integrating climate risks into decision making.

University of Cambridge Banking Environment Initiative (BEI) – Bank 2030

The Group has been working with 12 leading banks to develop a roadmap for how the industry can direct capital towards environmentally and socially sustainable economic development.

The Climate Group

In 2019, the Group was one of only a handful of businesses globally to sign up to all three of The Climate Group’s campaigns:

	RE100 – a commitment to source 100 per cent of the Group’s electricity from renewable sources by 2030 (achieved in 2019)
	EP100 – a commitment to set ambitious energy productivity targets by 2030
	EV100 – a commitment to accelerate the transition to Electric Vehicles by 2030

Climate Financial Risk Forum

In 2019, the Group joined the PRA and FCA’s joint Climate Financial Risk Forum, participating in the Risk Management Working Group that aims to deliver a UK best practice handbook on implementation of the TCFD recommendations.

Greenhouse gas emissions

The Group has voluntarily reported greenhouse gas emissions and environmental performance since 2009, and since 2013 this has been reported in line with the requirements of the Companies Act 2006. Our total emissions, in tonnes of CO₂equivalent, are reported in the table below. Deloitte LLP has provided limited level ISAE 3000 (Revised) and ISAE 3410 assurance over selected non-financial indicators as resource scarcity, extreme weathernoted by. Their full, independent assurance statement is available online at www.lloydsbankinggroup.com/our-group/responsible-business

Methodology

The Group follows the principles of the Greenhouse Gas (GHG) Protocol Corporate Accounting and risingReporting Standard to calculate our Scope 1, 2 and 3 emissions from our worldwide operations. The reporting period is 1 October 2018 to 30 September 2019, which is different to that of the Directors’ report (January 2019 – December 2019). This is in line with Regulations in that the majority of the emissions reporting year falls within the period of the Directors’ Report. Emissions are reported based on an operational boundary. The scope of reporting is in line with the GHG Protocol and covers Scope 1, Scope 2 and Scope 3 emissions. Reported Scope 1 emissions cover emissions generated from gas and oil used in buildings, emissions from UK company-owned vehicles used for business travel and emissions from the use of air conditioning and chiller/refrigerant plant. Reported Scope 2 emissions cover emissions generated from the use and purchase of electricity for own use, calculated using both the location and market based methodologies. Reported Scope 3 emissions relate to business travel and commuting undertaken by colleagues and emissions associated with waste and the extraction and distribution of each of our energy sources; electricity, gas and commodity prices, have an impact onoil. In 2019 the Group has expanded Scope 3 emissions as part of our sustainability strategy to increase transparency of reporting of the Group’s its own operationscarbon footprint, and stakeholders. The Group is committed to managing its direct environmental impact and reducing its greenhouse gas emissions. The Group manages its impacts through its Environmental Action Plan, which focuses on reducing risk and creating value through improved efficiency.drive reductions in additional categories of emissions; these include Waste Emissions, Upstream Business Travel (the well to tank emissions of rail, air, road vehicles, hired vehicles); Hotels; Commuting; Tube; Taxis. A detailed definition of these emissions can be found in the Group’s 2019 Reporting Criteria online at www.lloydsbankinggroup.com/our-group/responsible-business

EmissionsIntensity ratio

BUSINESS

This year, the Group’s overall location based carbon emissions measured in COwere 207,768 tCO₂equivalent tonnes (CO₂e), have decreased by 12.95e; a 14.6 per cent year-on-yeardecrease since 2018 and by 38.8363.1 per cent against the Group’s 2009 baseline (legacy scope). Reductions achieved are attributable to an extensive energy optimisation programme and reductions in business travel, alongside decarbonisation of the UK electricity grid. In addition, there has been a reduction in property foot print and headcount.

The Group’s market based emissions figure is equal to 101,042 tCO₂e – a comparative decrease of 12.9 per cent year on year and 82.0 per cent against 2009 baseline. This is mainlyFurther reductions in market emissions are attributable to the reduction in consumptionpurchase of gas and electricity (which make up the largest proportionrenewable energy certificates for each of the Group’s emissions)operations outside of the UK equivalent to their consumption since January 2019. The Group continues to source solar, wind, hydro and the Group’s energy optimisation programme.biomass Renewable Energy Guarantees of Origin (REGOs) equivalent to our total UK electricity consumption.

CO₂e emissions

		Oct 2015 –				Oct 2014 –				Oct 2013 – Sept
		Sept 2016				Sept 20151				20141
Total CO2e tonnes			344,316				395,554				437,721
Total scope 1			52,438				57,255				59,856
Total scope 2			205,127				239,721				261,623
Total scope 3			86,752				98,579				116,242

CO2E emissions (tonnes) – Expanded scope
CO2E Emissions Tonnes:		Oct18 – Sep19				Oct17 – Sep181				Oct16 – Sep171
Total CO2e (market based)			179,324				197,484				n/a
Total CO2e (location based)			286,051				324,816				n/a
Total Scope 1			47,524				49,299				51,953
Total Scope 2 (market based)			387				1,951				178,711
Total Scope 2 (location based)			107,113				129,284				162,598
Total Scope 32			131,414				146,233				n/a
CO2E emissions (tonnes) – Legacy scope
CO2E Emissions Tonnes:			Oct18 – Sep19				Oct17 – Sep181				Oct16 – Sep171
Total CO2e (market based)			101,042				115,961				303,065
Total CO2e (location based)			207,768				243,293				286,892
Total Scope 3			53,131				64,710				72,876

1	Restated 2013/20142018/2017 and 2014/20152017/2016 emissions data to improve the accuracy of reporting, using actual data to replace estimations.estimates.
	Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004) including revised Scope 2 guidance (2015) which discloses a Market Based figure in addition to the Location Based figure.
	The measure and reporting criteria for Scope 1, 2, 3 emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at www.lloydsbankinggroup.com/our-group/responsible-business
	Scope 1 emissions include mobile and stationary combustion of fuel and operation of facilities.
	Scope 2 emissions have been calculated in accordance with GHG Protocol guidelines, in both Location and Market Based methodologies.
2	Scope 3 emissions have been expanded to include additional elements within the Group’s own operations including emissions from waste, colleague commuting and additional elements of business travel (including taxis, tube, well to tank emissions of business travel and hotels). We have also disclosed legacy scope numbers to allow fairer comparison to numbers previously disclosed and to demonstrate performance versus our previous targets.
	Indicator is subject to Limited ISAE3000 (revised) and 3410 (ISAE3410) assurance by Deloitte LLP for the 2019 Annual Responsible Business Reporting. Deloitte’s 2019 assurance statement and the 2019 Reporting Criteria are available online at www.lloydsbankinggroup.com/our-group/responsible-business

Omissions

Emissions associated with joint ventures and investments are not included in tonnes CO₂e in line withthis disclosure as they fall outside the GHG Protocol Corporate Standard (2004).scope of our operational boundary. The Group is in the process of transitioning to the revised Scope 2 guidance.

Criteria used to measure and report Scope 1, 2, 3does not have any emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at www.lloydsbankinggroup.com/ResponsibleBusiness.

Scope 1 emissions include mobile and stationary combustion of fuel and operation of facilities.

Scope 2 emissions have been calculated using a location based methodology, as set out by the GHG Protocol.

Indicator is subject to limited ISAE3000 (revised) assurance by Deloitte LLP for the 2016 Annual Responsible Business Reporting. Deloitte’s 2016 assurance statement and the 2016 Reporting Criteria are available online at www.lloydsbankinggroup.com/RBdownloads.

Supporting the low carbon economy

The Group continues to develop products and services to support customers’ transition to a lower carbon, more resource efficient economy. Since 2014 the Group has launched two Environmental, Social and Governance (ESG) bonds totalling £500 million. Lloyds Bank became the first UK bank to develop an ESG deposit scheme in response to client demand to invest in products that create positive ESG impacts.

In March 2016 Lloyds Bank launched its innovative £1 billion Green Loan Initiative for commercial real estate lending. The initiative – the first of its kind in the UK – provides clients with loans at discounted margins to help incentivise energy efficiency and finance investment in green buildings. The Group completed the first tranche of deals in the second half of 2016, totalling £72 million, and has helped borrowers like HPH, a Bath-based property company with a diverse property portfolio, to fund energy efficiency projects. The Group has now set a target in its Helping Britain Prosper Plan to fund 10 million square feet of commercial real estate to become more energy efficient by 2020, the equivalent of seven London Shards.

In 2016 the Group’s UK-based team was responsible for financing renewable projects with a combined capacity of more than 1.78GW. Globally, the Group’s investments in renewable energy are in excess of 7.4GW in capacity and cover solar, offshore and onshore wind, waste to energy and biomass.

In 2016 Lloyds Bank played a key part in financing a major offshore wind farm off the Norfolk coast, with operations in Grimsby. Race Bank will provide enough energy to power 400,000 homes with a potential capacity of 573MW. It is anticipated the project, when in operation, will create more than 100 jobs associated with buildingimported heat, steam or imported cooling and maintaining turbines for the Humber region.is not aware of any other material sources of omissions from our reporting.

PROPERTIES

At 31 December 2016,2019, Lloyds Banking Group occupied 2,2211,768 properties in the UK. Of these, 543371 were held as freeholds and 1,6781,397 as leasehold. The majority of these properties are retail branches, widely distributed throughout England, Scotland, Wales and Northern Ireland. Other buildings include the Lloyds Banking Group’s head office in the City of London with other customer service and support centres located to suit business needs but clustered largely in eight core geographic conurbations – London, Edinburgh, Glasgow, Midlands (Birmingham), Northwest (Chester and Manchester), West Yorkshire (Halifax and Leeds), South (Brighton and Andover) and Southwest (Bristol and Cardiff).

In addition, there are 155132 properties which are either sub-let or vacant. There are also a number of ATMAutomated Teller Machine (ATM) units situated throughout the UK, the majority of which are held as leasehold. The Group also has business operations elsewhere in the world, primarily holding property on a leasehold basis.

BUSINESS

LEGAL ACTIONS AND REGULATORY MATTERS

During the ordinary course of business the Group is subject to threatened or actual legal proceedings and regulatory reviews and investigations both in the UK and overseas. Set out below is a summary of the more significant matters.

PROVISIONS FOR FINANCIAL COMMITMENTS AND GUARANTEES

Provisions are recognised for expected credit losses on undrawn loan commitments and financial guarantees.

PAYMENT PROTECTION INSURANCE (EXCLUDING MBNA)

The Group increased the provision for PPI costs by a further £1,350£2,450 million in 2016,the year ended 31 December 2019, bringing the total amount provided to £17,375£21,875 million.

The charge in 2019 was largely due to the provisionsignificant increase in 2016 was largely driven by a higher total volume of complaints expected as a result of the Financial Conduct Authority’s (FCA) industry deadline being extendedPPI information requests (PIRs) leading up to the enddeadline for submission of claims on 29 August 2019, and also reflects costs relating to complaints received from the Official Receiver as well as changesadministration costs. An initial review of around 60 per cent of the five million PIRs received in the run-up to the rulesPPI deadline has been undertaken, with the conversion rate remaining low, and guidance that should apply when firms handle PPI complaints in lightconsistent with the provision assumption of around 10 per cent. The Group has reached final agreement with the UK Supreme Court’s decision in Plevin v Paragon Personal Finance Limited [2014] UKSC 61 (Plevin). Final rules and guidance were published by the FCA on 2 March 2017 (PS 17/3).

BUSINESSOfficial Receiver.

As atAt 31 December 2016,2019, a provision of £2,608£1,578 million remained unutilised relating to complaints and associated administration costs.costs excluding amounts relating to MBNA. Total cash payments were £2,200£2,201 million during the year toended 31 December 2016. Spend continues to reduce following the completion of the re-review of previously handled cases (remediation).

The provision is consistent with total expected reactive complaint volumes of 5.2 million (including complaints falling under the Plevin rules and guidance) in light of the FCA Policy Statement PS 17/3. Weekly complaint levels in the second half of 2016 have been approximately 8,300 versus approximately 8,600 in the first half, and are expected to vary significantly through to the industry deadline, now confirmed to be August 2019.

SENSITIVITIES

The Group estimates that it has sold approximately 16 million PPI policies since 2000. These include policies that were not mis-sold and those that have been successfully claimed upon. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or provided for approximately 50 per cent of the policies sold since 2000.

Sensitivities

The total amount provided for PPI represents the Group’s best estimate of the likely future cost. However aA number of risks and uncertainties remain in particular with respect to future volumes.including processing the remaining PIRs and outstanding complaints. The cost could differ from the Group’s estimates and the assumptions underpinning them, and could result in a further provision being required. There is significant uncertainty aroundThese may also be impacted by any further regulatory changes and potential additional remediation arising from the impactcontinuous improvement of the regulatory changes, FCA media campaign and Claims Management Companies and customer activity.Group’s operational practices.

Key metrics and sensitivities are highlightedFor every one per cent increase in PIR conversion rate on the table below:

PACKAGED BANK ACCOUNTSstock as at the industry deadline, the Group would expect an additional charge of approximately £100 million.

InPAYMENT PROTECTION INSURANCE (MBNA)

MBNA increased its PPI provision by £367 million in the year ended 31 December 20162019 but the Group’s exposure continues to remain capped at £240 million under the terms of the sale and purchase agreement.

OTHER PROVISIONS FOR LEGAL ACTIONS AND REGULATORY MATTERS

In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators and other governmental authorities on a range of matters. The Group also receives complaints in connection with its past conduct and claims brought by or on behalf of current and former employees, customers, investors and other third parties and is subject to legal proceedings and other legal actions. Where significant, provisions are held against the costs expected to be incurred in relation to these matters and matters arising from related internal reviews. During the year ended 31 December 2019 the Group charged a further £445 million in respect of legal actions and other regulatory matters, and the unutilised balance at 31 December 2019 was £528 million (31 December 2018: £861 million). The most significant items are as follows.

Arrears handling related activities

The Group has provided an additional £280£188 million in the year ended 31 December 2019 for the costs of identifying and rectifying certain arrears management fees and activities, taking the total provided to date to £981 million. The Group has put in place a number of actions to improve its handling of customers in these areas and has made good progress in reimbursing arrears fees to impacted customers.

Packaged bank accounts

The Group had provided a total of £795 million up to 31 December 2018 in respect of complaints relating to alleged mis-selling of packaged bank accounts, raisingwith no further amounts provided during the total amount provided to £505 million. As atyear ended 31 December 2016, £215 million of the provision remained unutilised. The total amount provided represents the Group’s best estimate of the likely future cost, however a2019. A number of risks and uncertainties remain, in particularparticularly with respect to future volumes.

ARREARS HANDLING RELATED ACTIVITIES

Following a review of the Group’s secured and unsecured arrears handling activities, the Group has putCustomer claims in place a number of actionsrelation to further improve its handling of customersinsurance branch business in these areas. As a result, the Group has provided an additional £261 million in the year ended 31 December 2016 (bringing the total provision to £397 million), for the costs of identifying and rectifying certain arrears management fees and activities. As at 31 December 2016, the unutilised provision was £383 million (31 December 2015: £136 million).

CUSTOMER CLAIMS IN RELATION TO INSURANCE BRANCH BUSINESS IN GERMANY

Germany

The Group continues to receive claims in Germany from customers relating to policies issued by Clerical Medical Investment Group Limited (subsequently renamed Scottish Widows Limited)., with smaller numbers received from customers in Austria and Italy. The German industry-wide issue regarding notification of contractual ‘cooling off’ periods has continued to lead to an increasing number of claims in 2016. Accordingly a provision increase of £94 million was recognised in the year ended2016 and 2017. Whilst complaint volumes have declined, new litigation claim volumes per month have remained fairly constant throughout 2019. Up to 31 December 2016 giving2019 the Group had provided a total provision of £639 million; the remaining unutilised provision as at 31 December 2016 is £168 million (31 December 2015: £124 million).£656 million. The validity of the claims facing the Group depends upon the facts and circumstances in respect of each claim. As a result, the ultimate financial effect, which could be significantly different from the current provision, will be known only once all relevant claims have been resolved.

PROVISIONS FOR OTHER LEGAL ACTIONS AND REGULATORY MATTERSHBOS Reading – review

The Group has now completed its compensation assessment for all 71 business customers within the customer review, with more than 98 per cent of these offers to individuals accepted. In total, more than £100 million in compensation has been offered to victims of the HBOS Reading fraud prior to the publication of Sir Ross Cranston’s independent quality assurance review of the customer review, of which £94 million has so far been accepted, in addition to £9 million for ex-gratia payments and £6 million for the re-imbursements of legal fees. Sir Ross’s review was concluded on 10 December 2019 and made a number of recommendations, including a re-assessment of direct and consequential losses by an independent panel. The Group has committed to implementing Sir Ross’s recommendations in full. In addition, further ex gratia payments of £35,000 have been made to 200 individuals in recognition of the additional delay which will be caused whilst the Group takes further steps to implement Sir Ross’s recommendations. It is not possible to estimate at this stage what the financial impact will be.

InHBOS Reading – FCA investigation

The FCA’s investigation into the courseevents surrounding the discovery of its business,misconduct within the Reading-based Impaired Assets team of HBOS has concluded. The Group is engaged in discussionshas settled the matter with the PRA, FCA and other UK and overseas regulators and other governmental authorities onpaid a rangefine of matters. The Group also receives complaints and claims from customers in connection with its past conduct and, where significant, provisions are held against£45.5 million, as per the costs expected to be incurred as a result of the conclusions reached. In the year ended 31 December 2016, the Group charged an additional £450 million in respect of matters across all divisions. At 31 December 2016, the Group held unutilised provisions totalling £573 million for these other legal actions and regulatory matters.FCA’s final notice dated 21 June 2019.

BUSINESS

INTERCHANGE FEES

With respect to multi-lateral interchange fees (MIFs), the Group is not directly involved in the ongoing investigations and litigation (as described below) which involveinvolves card schemes such as Visa and MasterCard.Mastercard. However, the Group is a membermember/licensee of Visa and MasterCardMastercard and other card schemes. The litigation in question is as follows:

BUSINESS

Any impact on the Group of the litigation against Visa and Mastercard remains uncertain at this time. Insofar as Visa is required to pay damages to retailers for interchange fees set prior to June 2016, contractual arrangements to allocate liability have been agreed between various UK banks (including the Group) and Visa Inc, completed itsas part of Visa Inc’s acquisition of Visa Europe on 21 Junein 2016. The Group’s share ofThese arrangements cap the sale proceeds comprised cash consideration of approximately £330 million (of which approximately £300 million was received on completion of the sale and £30 million is deferred for three years) and preferred stock, which the Group measures at fair value. The preferred stock is convertible into Class A Common Stock of Visa Inc or its equivalent upon the occurrence of certain events. As part of this transaction, the Group and certain other UK banks also entered into a Loss Sharing Agreement (LSA) with Visa Inc, which clarifies the allocation of liabilities between the parties should the litigation referred to above result in Visa Inc being liable for damages payable by Visa Europe. The maximum amount of liability to which the Group may be subject, under the LSAand this cap is cappedset at the cash consideration which was received by the Group at completion.for the sale of its stake in Visa Europe to Visa Inc may also have recourse to a general indemnity, currently in place under Visa Europe’s Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.2016.

LIBOR AND OTHER TRADING RATES

In July 2014, the Group announced that it had reached settlements totalling £217 million (at 30 June 2014 exchange rates) to resolve with UK and US federal authorities legacy issues regarding the manipulation several years ago of Group companies’ submissions to the British Bankers’ Association (BBA) London Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Swiss Competition Commission concluded its investigation against Lloyds Bank plc in June 2019. The Group continues to cooperate with various other government and regulatory authorities, including the Serious Fraud Office, the Swiss Competition Commission, and a number of US State Attorneys General, in conjunction with their investigations into submissions made by panel members to the bodies that set LIBOR and various other interbank offered rates.

Certain Group companies, together with other panel banks, have also been named as defendants in private lawsuits, including purported class action suits, in the US in connection with their roles as panel banks contributing to the setting of US Dollar, Japanese Yen and Sterling LIBOR and the Australian BBSW Reference Rate. The lawsuits, which contain broadly similar allegations, allege violations of the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act and the Commodity Exchange Act, as well as various state statutes and common law doctrines. Certain of the plaintiffs’ claims including those asserted under US anti-trust laws, werehave been dismissed by the US Federal Court for Southern District of New York (the District Court). In November 2015 OTC and exchange-based plaintiffs’ claims against the Group were dismissed for lack of personal jurisdiction. On 20 December 2016, the Federal Court for Southern District of New York dismissed all antitrust class action claims against LBG and its affiliates in the Multi District Litigation arising from the alleged manipulation of USD LIBOR. Further appeals in relation(subject to the anti-trust claims remain possible.appeals).

Certain Group companies are also named as defendants in (i) UK based claimsclaims; and (ii) two Dutch class actions, raising LIBOR manipulation allegationsallegations. A number of the claims against the Group in connection withrelation to the alleged mis-sale of interest rate hedging products.products also include allegations of LIBOR manipulation.

It is currently not possible to predict the scope and ultimate outcome on the Group of the various outstanding regulatory investigations not encompassed by the settlements, any private lawsuits or any related challenges to the interpretation or validity of any of the Group’s contractual arrangements, including their timing and scale.

UK SHAREHOLDER LITIGATION

In August 2014, the Group and a number of former directors were named as defendants in a claim filed in the English High Court by a number of claimants who held shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of HBOS plc, alleging breaches of duties in relation to information provided to shareholders in connection with the acquisition and the recapitalisation of LTSB. Judgment was delivered on 15 November 2019. The Group and former directors successfully defended the claims. The claimants have sought permission to appeal. It is currently not possible to determine the ultimate impact on the Group (if any), but the Group intends to defend the claim vigorously.

FINANCIAL SERVICES COMPENSATION SCHEME

The Financial Services Compensation Scheme (FSCS) is the UK’s independent statutory compensation fund of last resort for customers of authorised financial services firms and pays compensation if a firm is unable or likely to be unable to pay claims against it. The FSCS is funded by levies on the authorised financial services industry. Each deposit-taking institution contributes towards the FSCS levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year, which runs from 1 April to 31 March.

Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. At 31 March 2016, the end of the latest FSCS scheme year for which it has published accounts, the principal balance outstanding on these loans was £15,655 million (31 March 2015: £15,797 million). Although it is anticipated that the substantial majority of this loan will be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, any shortfall will be funded by deposit-taking participants of the FSCS. The amount of future levies payable by the Group depends on a number of factors including the amounts recovered by the FSCS from asset sales, the Group’s participation in the deposit-taking market at 31 December, the level of protected deposits and the population of deposit-taking participants.

TAX AUTHORITIES

The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities including open matters where Her Majesty’s Revenue and Customs (HMRC) adopt a different interpretation and application of tax law. The Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013 HMRC informed the Group that their interpretation of the UK rules permittingwhich allow the offset of such losses denies the claim; ifclaim for group relief of losses. If HMRC’s position is found to be correct, management estimate that this would result in an increase in current tax liabilities of approximately £600£800 million (including interest) and a reduction in the Group’s deferred tax asset of approximately £400£250 million. The Group does not agree with HMRC’s position and, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due. There are a number of other open matters on which the Group is in discussion with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc);, none of thesewhich is expected to have a material impact on the financial position of the Group.

RESIDENTIAL MORTGAGE REPOSSESSIONS

In August 2014, the Northern Ireland High Court handed down judgment in favour of the borrowers in relation to three residential mortgage test cases concerning certain aspects of the Group’s practice with respect to the recalculation of contractual monthly instalments of customers in arrears. The FCA is actively engaged with the industry in relation to these considerations. The Group will respond as appropriate to this and any investigations, proceedings, or regulatory action that may in due course be instigated as a result of these issues. The FCA has issued a consultation on new guidance on the treatment of customers with mortgage payment shortfalls. The guidance covers remediation for mortgage customers who may have been affected by the way firms calculate these customers’ monthly mortgage instalments. The output from this consultation is expected in the first quarter of 2017.

BUSINESS

UPDATE TO THE FINANCIAL CONDUCT AUTHORITY’S ANNOUNCEMENT IN NOVEMBER 2015 ON A DEADLINE FOR PPI COMPLAINTS AND PLEVIN V PARAGON PERSONAL FINANCE LIMITED

On 2 August 2016, the Financial Conduct Authority (FCA) published a further consultation paper (CP16/20: Rules and guidance on payment protection insurance complaints: feedback on CP15/39 and further consultation), following on from the original consultation published in November 2015. The consultation papers proposed the introduction of a two year industry deadline by which consumers would need to make their PPI complaints and rules and guidance that should apply when firms handle PPI complaints in light of the UK Supreme Court’s decision in Plevin v Paragon Personal Finance Limited [2014] UKSC 61. On 2 March 2017 the FCA confirmed that the deadline would be 29 August 2019, and new rules for Plevin would come into force in August 2017.

MORTGAGE ARREARS HANDLING ACTIVITIES – FCA INVESTIGATION

On 26 May 2016, the Group was informed that an enforcement team at the FCA had commenced an investigation in connection with the Group’s mortgage arrears handling activities. This investigationIt is ongoing and it isnot currently not possible to make a reliable assessment of theany liability if any, that may resultresulting from the investigation.

HBOS READING – CUSTOMER REVIEW

The Group is commencing a review into a number of customer cases from the former HBOS Impaired Assets Office based in Reading. This review follows the conclusion of a criminal trial in which a number of individuals,investigation including two former HBOS employees, were convicted of conspiracy to corrupt, fraudulent trading and associated money laundering offences which occurred prior to the acquisition of HBOS by the Group in 2009. The review is at an early stage and it is currently not possible to determine the ultimateany financial impact on the Group.penalty.

CONTINGENT LIABILITIES IN RESPECT OFRELATING TO OTHER LEGAL ACTIONS AND REGULATORY MATTERS

In addition, during the ordinary course of business the Group is subject to other complaints and threatened or actual legal proceedings (including class or group action claims) brought by or on behalf of current or former employees, customers, investors or other third parties, as well as legal and regulatory reviews, challenges, investigations and enforcement actions, both in the UK and overseas. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management’s best estimate of the amount required at the relevant balance sheet date. In some cases it will not be possible to form a view, for example because the facts are unclear or because further time is needed properly to assess the merits of the case, and no provisions are held in relation to such matters. In these circumstances, specific disclosure in relation to a contingent liability will be made where material. However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position, operations or cash flows.

BUSINESS

COMPETITIVE ENVIRONMENT

The Group provides financial services to individual and business customers, predominantly in the UK but also overseas. The main business activities of the Group are retail and commercial banking and corporatelong-term savings, protection and investment.

MARKET DYNAMICS

The Group continues to operate in an increasingly competitive environment, driven by regulatory changes, shifting customer behaviours and increasing levels of innovation across the sector.

Across the Group’s traditional business lines, ring-fencing regulation has seen a number of competitors deploy excess liquidity to support asset growth within the UK, specifically within mortgages where customer rates have in the last few years hit record lows. While this is beneficial for customers, this has depressed margins across the UK banking general insurance,sector and life, pensionsmore recently has resulted in some smaller participants stepping back from the market.

Beyond this, digital-only providers have grown their share of the UK market within the past year. This growth has predominantly been driven by neo-banks that provide a more traditional customer offering alongside leading digital functionality and investment provision.are able to target selected customer segments. This is supported by the emergence of marketplace models which enable these providers to collaborate with more specialist fintechs to provide a broader suite of products and financial services, both for personal and business banking customers.

In response, a number of traditional competitors have attempted to replicate the retail bankingsuccess of neo-banks by developing their own digital-only offerings, often under separate and newly created brand names. A number of international peers have also entered the UK market through digital only challengers, taking advantage of the supportive regulatory environment and increasing similarity in customer behaviours across multiple geographies.

Elsewhere, The Group has also started to see the first signs of large technology companies participating in financial services, often partnering with local incumbent banks across different geographies. While the scale of their future ambitions is uncertain at this stage, the power of their brand and large customer bases pose future disruption threats.

THE GROUP’S RESPONSE

The Group continues to respond effectively to the increasingly competitive environment, supported by its significant reach and proven track record of providing products and services that its customers value with this underpinned by significant investment capacity.

Across its core markets such as mortgages, the Group looked to prioritise value while maintaining share and supporting its purpose of Helping Britain Prosper. As marginal players have withdrawn from the market, the Group competeshas more recently strengthened its position, including through the acquisition of Tesco Bank’s mortgage portfolio in September. Alongside this, the Group has also continued to invest in areas where it is under-represented, such as Insurance and Commercial Banking, in line with banksthe commitments outlined at the start of this strategic plan.

In response to changes to the competitive environment from the ongoing shift in digital usage and building societies, major retailersnew entrants, the Group’s multi-channel and internet-only providers. Inmulti-brand offering enables it to continue to effectively meet the mortgage market, competitors includevarying needs of its diverse customer base. The Group’s digital channel is now its most prominent, with 75 per cent of products now originated digitally and we operates the traditional banks and building societies and specialist mortgage providers. The Group competes with both UK and foreign financial institutions along with emerging forms of lending in the commercial banking markets and with bancassurance, life assurance and general insurance companieslargest digital bank in the UK insurance market.with 16.4 million customers and 10.7 million mobile app customers, while its customer satisfaction scores remain strong.

The markets for UK financial services, and the other markets within whichIn addition, the Group operates, areremains committed to retaining the largest branch network in the UK. This allows its customers to interact with the Group in whichever way they prefer, while also providing a human touch point for more complex financial needs. The Group’s network is also key to building and deepening its business banking relationships. The Group sees these as unique competitive advantages, and management expects such competitioncombined with its ongoing commitment to continue or intensify in responseinnovation, provide the Group with a strong platform to competitor behaviour, including non-traditional competitors, consumer demand, technological changes such as the growth of digital banking,maintain relevance and the impact of regulatory actions and other factors.deepen relationships with its customer base.

Link to principal risks

	Regulatory and legal
	Conduct
	Operational
	People

Link to strategic priorities

	Delivering a leading customer experience
	Maximising Group capabilities

For more information see “See Risk Factors – Business and Economic Riskseconomic risks – The Group’s businesses are conducted in competitive environments, with increased competition scrutiny, and the Group’s financial performance depends upon management’s ability to respond effectively to competitive pressures.

See Regulation – Competition Regulation.

RECENT DEVELOPMENTS

CONSOLIDATED FINANCIAL STATEMENTS SET OUT IN THE GROUP’S ANNUAL REPORT AND ACCOUNTS

The audited consolidated financial statements set forth in the Group’s Annual Reportpressures and Accounts published on 22 February 2017 were approved on 21 February 2017. As discussed in notes 38 and 55 of the audited consolidated financial statements included in this Annual Report on Form 20-F (which were approved on 10 March 2017 and which therefore include the impact of adjusting post balance sheet events up to this date), on 2 March 2017 the FCA confirmed that the deadline by which consumers will need to make their PPI complaints will be 29 August 2019 and that the final rules and guidance that should apply when firms handle PPI complaints in light of Plevin will come into force in August 2017. The Group has reassessed its provisioning in light of this guidance, leading to an additional charge of £350 million, bringing the total charge for the year ended 31 December 2016 to £1,350 million.

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OPERATING AND FINANCIAL REVIEW AND PROSPECTSoperating and financial reView and prospects

The results discussed below are not necessarily indicative of Lloyds Banking Group’s results in future periods. The following information contains certain forward looking statements. For a discussion of certain cautionary statements relating to forward looking statements, seeForward looking statements.

The following discussion is based on and should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this annual report. For a discussion of the accounting policies used in the preparation of the consolidated financial statements, seeAccounting policiesin note 2 to the financial statements.

TABLE OF CONTENTS

OPERATING AND FINANCIAL REVIEW AND PROSPECTSoperating and financial reView and prospects

OVERVIEW AND TREND INFORMATION

MARKET OVERVIEWECONOMY

GIVEN THE GROUP’S UK FOCUS, ITS FINANCIAL PERFORMANCE IS INEXTRICABLY LINKED TO THE PERFORMANCE OF THE UK ECONOMY AND ITS REGULATORY AND COMPETITIVE ENVIRONMENTHighlights

	Given our focus on UK customers, the Group’s prospects are closely linked to the fortunes of the UK economy.
	On the assumption that the global economy remains broadly stable, we would expect the UK economy to grow in 2020 to 2022 at a pace slightly above that achieved in the past two years.
	Our low risk business model and focus on efficiency positions us well irrespective of macro conditions. Nevertheless, if the economy was to be impacted significantly by crystallisation of either domestic or international risks, Group financial performance would be impacted.

Overview

ECONOMIC ENVIRONMENTAs a leading UK bank, our prospects are closely aligned to the outlook for the UK economy. Through 2019, the economy continued to show resilience to twin challenges from a slowing global economy and increasing domestic political uncertainty. Although growth of the UK economy has slowed to its weakest since the financial crisis a decade ago, and interest rates remain very low, unemployment has fallen further to a 44 year low and house prices have continued to grow. Barring any sudden shocks to business or consumer confidence, growth is expected to rise mildly in 2020, but international trade-protectionism, the current coronavirus outbreak in China, geo-political instability and the nature of the UK’s exit from the EU, all present risks to that outlook.

RESILIENT UK ECONOMY POST REFERENDUMMarket dynamics

During 20162019, there have been divergent trends between UK businesses and households. For businesses, uncertainty for the domestic political and economic outlook translated into a second consecutive year of reduced investment spending and commercial real estate prices fell slightly. Low productivity growth remains a key challenge for the UK economy, performed broadlyhowever, the flip-side has been buoyant employment. Households continued to increase spending in line2019 as low unemployment boosted pay growth whilst softening global growth reduced inflation.

The UK housing market remained subdued through much of 2019, although falling mortgage rates and the election of a government with a strong Parliamentary majority appeared to be beginning to stimulate the market expectations attowards the startend of the year despiteyear. The level of housing transactions was broadly flat at around 20 per cent lower than the decisionnorm prior to leave2008, with muted price growth.

The economic outlook appears to be improving. Nevertheless, in a long-term context growth is expected to remain subdued and interest rates low - core to that is the European Unionlow rate of productivity growth, with the recent weakness of businesses’ investment spending suggesting a significant improvement is unlikely near-term. Uncertainty for some UK companies may persist in 2020 and significant changesdrag on investment as the UK attempts to negotiate a comprehensive trade deal with the EU to a tight timescale. However, improved pay growth is likely to support households’ spending, and the likely fiscal stimulus is expected to provide some boost to the economy.

The fundamental drivers behind the subdued trends in the political landscape, bothhousing market are expected to remain in place - the UKhigh level of prices relative to incomes that constrains first-time-buyer demand, and abroad.expectations that interest rates could rise from their current low level.

Although post referendum most forecasters were predictingThere are, of course, significant risks to this outlook. The growth-cycle in both of the world’s largest economies - US and China - is in its mature stage, and the coronavirus outbreak and ongoing trade war could complicate the task of policymakers in guiding growth towards a reductionstable and sustainable level. Conversely, high asset prices and corporate debt levels in some countries could be vulnerabilities if an improvement in global economic growth and a resulting rise in practice growth has been resilient andinterest rates causes unexpected shifts in currencies or herd behaviour in financial markets as shareholders change their appetite between different types of investments. Domestically, the future trading relationship with the EU remains uncertain, as does businesses’ response to that uncertainty.

Barring sudden shocks stemming from these challenges, the UK economy is estimatedexpected to have grown by 2grow through 2020 to 2022 at around 1.5 per cent, in 2016, just shy of 2.2slightly above the 1.4 per cent in 2015. Business and consumer confidence did fall immediately post referendum, but most of this has now been recovered and consumers’ retail spending growth actually accelerated inaverage across the months after the referendum.

Manufacturers are expecting exports to benefit from the weaker pound, but confidence in the service sector has weakened. Towards the end of 2016 inflation startedpast two years. The unemployment rate is expected to rise only a little from its current 44 year low. The outlook for the bank rate is uncertain, but capacity constraints and is likely to become a bigger headwind to consumers’ spending growth through the coming year.

UK house prices increased by around 7 per cent during the year, largely driven by strong growth in the first quarter. Prices have continued to increase, albeit at slower rates, during the rest of the year in almost all geographic areas, although the most expensive parts of London have seen some reductions over the last six months.

GROWTH IN THE GROUP’S MARKETS

Household and business deleveraging since 2009 has created capacity for an increased pace of borrowing and the markets in which the Group operates continued to grow in 2016. Specifically:

INTEREST RATES LOW FOR LONGER

Interest rates remain at historical lows with the base rate having been cut to 0.25 per cent in August, and are expected to remain low in the foreseeable future. Market rates currently imply an increase to the base rate to 0.5 per cent during 2018, and to 0.75 per centfiscal boost may support a year later. This flattening of the yield curve along with continued competition has meant bank margins remain under pressure. Significant competition has meant lending rates across the market remain low, particularly in mortgages, although deposit rates have fallen further during the year, offsetting the impact of lower lending rates.

IMPAIRMENT EXPECTED TO REMAIN BENIGN

Improving indebtedness, along with the continued low interest rate environment, is continuing to keep impairment levels low and they remain below through-the-cycle levels.

The expected mild rise in unemployment is likely to lead to anmoderate increase in impairment from the very low level of 2016, but it should remain low over the longer term.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OUTLOOK FOR 2017

How the economy evolves in 2017 is highly dependent on the type of EU-exit deal that companies expect to be achieved in 2019, how deeply that impacts investment and employment plans, and how much squeezed consumer spending power is offset by improved competitiveness of exports following the fall in sterling. Each of these carries a high degree of uncertainty.

The UK economic environment will also continue to be impacted by global uncertainties including the slowdown in China, European elections and the global trade environment, particularly in light of the recent US presidential election.

The consensus expectation is that UK GDP growth will slow from 2 per cent in 2016 to 1.6 per cent in 2017, and unemployment will remain low, but will rise from 4.9 per cent at the end of 2016 to 5.2 per cent at the end of 2017.interest rates. House prices are expected to continue to rise, by around 3 per cent, supported by the ongoing shortage of property for sale, low levels of housebuilding and exceptionally low interest rates, while commercial real estate prices are expected to fall by 4 per cent.grow mildly.

If the economy evolves in line with this consensus view, the Group would expect growth across its markets to remainThis picture of subdued but broadly stable in aggregate, withgrowth is likely to be reflected across our markets. Consumer credit growth has slowed significantly over the past couple of years after a mild weakening inprior period of strong growth, but we expect that the growth of unsecured consumer credit and commercial real estate lending offset by a marginal rise in mortgages and other lending to businesses.slowdown has now run its course.

Our response

Given our UK focus, the Group’s prospects are closely linked to the performance of the UK economy. Our low risk, stable business model and focus on efficiency positions us well to continue to support customers irrespective of macro conditions.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates.

The accounting policies that are deemed critical to the Group’s results and financial position, based upon materiality and significant judgements and estimates, are set out in note 3 to the financial statements.

FUTURE ACCOUNTING DEVELOPMENTS

Future developments in relation to the Group’s IFRS reporting are discussed in note 56 to the financial statements.

OPERATING AND FINANCIAL REVIEW AND PROSPECTSoperating and financial reView and prospects

RESULTS OF OPERATIONS – 2016, 20152019 AND 20142018

SUMMARY

2016 COMPARED WITH 2015

During the year ended 31 December 2016,2019, the Group recorded a profit before tax of £3,888£4,393 million, a decrease of £1,567 million, or 26 per cent, compared with a profit before tax in 20152018 of £1,644 million. The result in 2016 included provisions in respect of redress to customers (together with the related administrative costs) associated with both past sales of Payment Protection Insurance and other matters of £2,435 million (of which £2,374 million is charged within operating expenses and £61 million against income) compared to a charge of £4,837 million in the year ended 31 December 2015. Excluding these charges from both years, profit before tax was £158 million, or 2 per cent, lower at £6,323 million in the year ended 31 December 2016 compared to £6,481 million in the previous year. The comparison of results for 2016 to 2015 is also impacted by the sale of TSB Banking Group plc (TSB), which ceased to be consolidated in March 2015, with the sale of the Group’s remaining holding becoming unconditional on 30 June 2015. The Group recognised a net loss of £660 million in 2015, relating to both the disposal of its shareholding and commitments under agreements entered into with TSB. After taking this item into account there has been a reduction in profit before tax of £818£5,960 million.

Total income, increasednet of insurance claims, decreased by £16,461£267 million, or 711 per cent, to £39,611£18,359 million in 20162019 compared with £23,150£18,626 million in 2015,2018, comprising an £18,505a £2,949 million increase in other income, partlynet of insurance claims, more than offset by a decrease of £2,044£3,216 million in net interest income.

Net interest income was £9,274£10,180 million in 2016;2019; a decrease of £2,044£3,216 million, or 1824 per cent compared to £11,318£13,396 million in 2015.2018. There was a negative impact of £1,813 million in 2016 from ansignificant increase in the amounts payable to unit holders in those Open-Ended Investment Companies (OEICs) included in the consolidated results of the Group reflecting different levelsto £1,822 million in 2019 from a credit of investment£844 million in 2018. This increase reflects positive market movements in the year, with both equity and debt investments generating significant gains over 2019 compared to negative returns on the assets held by the OEICs; theduring 2018. The change in population of consolidated OEICs in 20162019 compared to 20152018 did not have a significant impact. After adjusting for this, net interest income was £231£550 million, or 24 per cent lower, of which £592 million related to TSB which was sold in 2015.lower. Average interest-earning assets fellincreased by £14,782 million, or 3 per cent, to £595,003 million in 2019 compared to £580,221 million in 2018 as a result of decreasesincreased holdings of reverse repurchase agreement balances; excluding these balances average interest-earning assets reduced as growth in average UK mortgagetargeted segments has been more than offset by lower balances and in the portfolio of assets which are outside ofclosed mortgage book and the Group’s risk appetite, as well as a reduction of some £5 billion as resultimpact of the sale of TSB,the Irish mortgage portfolio in the first half of 2018. The net interest margin decreased, with the benefit of lower deposit costs, higher Retail current account balances and a benefit from aligning credit card terms, more than offsetting growthoffset by continued pressure on asset margins, particularly in small business and unsecured personal lending. Net interest margin improved, excluding the impact of amounts payable to OEIC unitholders.mortgage market.

Other income, net of insurance claims, was £18,505£2,949 million, or 56 per cent, higher at £30,337£8,179 million in 20162019 compared to £11,832£5,230 million in 2015. Fee and commission income was £207 million, or 6 per cent, lower at £3,045 million compared to £3,252 million in 2015. Fee and commission expense decreased by £86 million, or 6 per cent, to £1,356 million compared with £1,442 million in 2015. The decrease in net fee and commission income largely reflects lower levels of current account and credit and debit card fees as well as reduced income from commercial banking activities. Net2018. There were increased gains within trading income increased by £14,831 million to £18,545 million in 2016 compared to £3,714 million in 2015; this increase reflected an improvement of £14,797 million in gains on policyholder investments held withinassets in the insurance business, as a result of market conditionsperformance over 2016 relative to thosethe year, particularly in 2015. Insurance premium incomeequities, but this was £3,276 million, or 68 per cent, higher at £8,068 million in 2016 compared with £4,792 million in 2015; there was an increase of £3,289 million in life insurance premiums and a £13 million decrease in general insurance premiums. Premium income in 2015 had been reducedoffset by a chargehigher level of £1,959 million relating to the recapture by a third party insurer of a portfolio of policies previously reassured with the Group; excluding this item life insurance premium income was £1,330 million, or 23 per cent, higher at £7,210 million in 2016 compared to £5,880 million in 2015, principally reflecting growth in bulk annuity business. Other operating income was £519 million higher at £2,035 million in 2016 compared to £1,516 million in 2015 as a gain of £484 million on sale of the Group’s investment in VISA Europe and an improvement in income from the value of in-force insurance business more than offset a loss on redemption of the Group’s Enhanced Capital Notes.

claims. Insurance claims expense was £16,615£20,532 million higher at £22,344£23,997 million in 20162019 compared to £5,729£3,465 million in 2015.2018. The insurance claims expense in respect of life and pensions business was £16,619£20,580 million higher at £21,978£23,710 million in 20162019 compared to £5,359£3,130 million in 2015; this increase was matched by a similar improvement in net trading income, reflecting the relative performance of policyholder investments.2018. Insurance claims in respect of general insurance business were £4£48 million or 114 per cent, lower at £366£287 million in 20162019 compared to £370£335 million in 2015.2018, reflecting the run off of closed books.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Fee and commission income was £92 million, or 3 per cent, lower at £2,756 million compared to £2,848 million in 2018 as a result of decreases in commercial and private banking and asset management fees, in part due to the transfer of business into the Group’s new wealth management joint venture. Fee and commission expense decreased by £36 million, or 3 per cent, to £1,350 million compared with £1,386 million in 2018. Insurance premium income was £385 million, or 4 per cent, higher at £9,574 million in 2019 compared with £9,189 million in 2018; there was an increase of £413 million in life insurance premiums only partly offset by a £28 million decrease in general insurance premiums. The increase in life insurance premiums reflects higher levels of bulk annuity deals and the impact of completion of the acquisition of the Zurich workplace pensions business. Other operating income was £988 million, or 51 per cent, higher at £2,908 million in 2019 compared to £1,920 million in 2018, due mainly to an improvement in the income from movement in value of in-force insurance business and the gain on establishment of the wealth management joint venture.

Operating expenses decreasedincreased by £2,760£941 million, or 188 per cent to £12,627£12,670 million in 20162019 compared with £15,387£11,729 million in 2015; the main reason for the decrease being the £2,4632018 reflecting an increase of £1,545 million reduction in charges for redress payments to customers in respect of PPI and other conduct related matters from £4,837£1,350 million in 20152018 to £2,374£2,895 million in 2016 and a charge of £665 million in 2015 in relation to the disposal of TSB.2019. Excluding these itemscharges from both years, operating expenses were £368 million, or 4 per cent, higher at £10,253 million in 2016 compared to £9,885 million in 2015. Staff costs were £140 million, or 3 per cent, higher at £4,817 million in 2016 compared with £4,677 million in 2015; although annual pay rises have been more than offset by the impact of headcount reductions resulting from the sale of TSB and the Group’s rationalisation programmes, there has been an increase in severance costs in relation to restructuring initiatives. Premises and equipment costs were £43£604 million, or 6 per cent, lower at £672£9,775 million in 20162019 compared to £10,379 million in 2018 as a decrease in restructuring costs was coupled with operating cost savings driven by increased efficiency from digitalisation and process improvements. Staff costs were £511 million, or 11 per cent, lower at £4,251 million in 2019 compared with £715£4,762 million in 2015.2018; as a result of decreased pension charges and redundancy costs. Premises and equipment costs were £238 million lower at £491 million in 2019 compared with £729 million in 2018 following the implementation of IFRS 16. Other expenses excluding the charge relating to the TSB disposal, were £3£110 million, higheror 4 per cent, lower at £2,384£2,373 million in 20162019 compared with £2,381£2,483 million in 2015.2018. Depreciation and amortisation costs were £268£255 million, or 1311 per cent, higher at £2,380£2,660 million in 20162019 compared to £2,112£2,405 million in 2015, in line with increased2018 due to the charge for depreciation of the right-of-use asset balances, particularly following implementation of IFRS 16.

operating lease assets and capitalised software.financial reView and prospects

Impairment losses increased by £362£359 million, or 9338 per cent, to £752£1,296 million in 20162019 compared with £390£937 million in 2015.2018. Impairment losses in respect of loans and advances to customers were £149£285 million, or 3428 per cent, higher at £592£1,307 million in 20162019 compared with £443£1,022 million in 2015;2018; this reflects a lower level of releases and recoveries rather than a deteriorationincrease is primarily driven by two material corporate cases in quality of the underlying portfolio. There was a credit of £13 millionCommercial Banking, along with some weakening in respect of undrawn commitments in 2016, compared to a credit of £55 million in 2015. In addition there was an impairment charge of £173 million in respect of certain equity investments in the Group’s available-for-sale portfolio.used car prices.

In 2016,2019, the Group recorded a tax chargeexpense of £1,724£1,387 million compared to a tax chargeexpense of £688£1,454 million in 2015, an2018. The effective tax rate of 44was 31.6 per cent, compared to the standard UK corporation tax rate of 2019.0 per cent,cent. The higher rate was principally as a result of the banking surcharge, restrictions onincrease in non-deductible conduct provision charges in relation to PPI, partially offset by the deductibilityrelease of conduct provisions and the negative impact on the neta deferred tax asset of both the change in corporation tax rate and the expected utilisation by the life business.liability.

Total assets were £11,105£36,295 million, or 5 per cent, higher at £833,893 million at 31 December 2019 compared to £797,598 million at 31 December 2018. Loans and advances to customers increased in the year by £10,130 million to £494,988 million, compared to £484,858 million at 31 December 2018, as a result of a £14,117 million increase in holdings of reverse repurchase agreement balances, as part of a rebalancing of the Group’s liquid asset portfolio. Adjusting for this, loans and advances to customers were £3,987 million, or 1 per cent, lower at £440,388 million compared to £444,375 million at 31 December 2018; an increase of £3,694 million from the acquisition of the Tesco Bank mortgage portfolio and continued growth in targeted segments such as SME and motor finance was more than offset by reductions in the closed mortgage book and in Commercial Banking following a balance sheet optimisation initiative. Financial assets held at fair value through profit or loss increased by £1,660 million overall, holdings within the insurance business increased by £19,952 million as a result of positive market movements on policyholder assets and an increase of £7,350 million on completion of the acquisition of the Zurich workplace pensions and savings business. However, holdings in the banking business were £18,292 million lower as a result of the reduction in trading activities. Property, plant and equipment was £804 million, or 7 per cent, higher at £13,104 million compared to £12,300 million at 31 December 2018; an increase of £1,716 million as a result of the right-of-use asset recognised on transition to IFRS 16, and net additions in the year, have been partly offset by depreciation. Assets arising from reinsurance contracts held increased by £15,707 million, to £23,567 million, compared to £7,860 million at 31 December 2018, largely as a result of an increase of £13,616 million on completion of the acquisition of the Zurich UK workplace pensions and savings business.

Total liabilities were £38,688 million, or 5 per cent, higher at £786,087 million compared to £747,399 million at 31 December 2018. Customer deposits were £3,254 million, or 1 per cent, higher at £817,793£421,320 million at 31 December 20162019 compared to £806,688£418,066 million at 31 December 2015. Cash2018 as a £7,712 million increase in repurchase agreement balances and growth in retail current account balances has been partly offset by lower levels of retail savings products and commercial deposits. Debt securities in issue were £6,521 million higher at central banks were £10,965 million, or 19 per cent, lower at £47,452 million compared to £58,417£97,689 million at 31 December 2015, reflecting fewer opportunities for2019 compared to £91,168 million at 31 December 2018 following new issuances to maintain funding levels. Insurance and investment contract liabilities have increased by £36,181 million, or 32 per cent, from £112,727 million at 31 December 2018 to £148,908 million at 31 December 2019 as a result of £20,981 million arising on acquisition of the favourable placementZurich workplace pensions and savings business together with the impact of fundsnew business inflows and trading and other assetspolicyholder investment gains. Financial liabilities at fair value through profit or loss were £10,638£9,061 million, or 830 per cent, higherlower at £151,174 million compared to £140,536£21,486 million at 31 December 2015, principally due2019 compared to increases in the long-term insurance and investment funds. Loans and advances to customers were £2,783 million, or 1 per cent, higher at £457,958£30,547 million at 31 December 2016 compared to £455,1752018 following reductions in trading book repurchase agreements, in line with the lower levels of trading activity.

Total equity has decreased by £2,393 million, or 5 per cent, from £50,199 million at 31 December 2015; the continued reduction in the portfolio of assets which are outside of the Group’s risk appetite and lower UK mortgage balances, as the Group concentrates on protecting margin in the current market, were more than offset by an £8,304 million increase in reverse repurchase agreement balances together with growth in SME lending and the UK consumer finance business. Available-for-sale financial assets were £23,492 million, or 71 per cent, higher at £56,524 million compared2018 to £33,032£47,806 million at 31 December 2015; during 2016, the Group reviewed its holding of government securities classified as held-to-maturity (£19,808 million at 31 December 2015) in light of the prevailing low interest rate environment and they have been reclassified as available-for-sale. Total liabilities were £9,620 million, or 1 per cent, higher at £769,328 million at 31 December 2016 compared to £759,708 million at 31 December 2015. Debt securities in issue were £5,742 million, or 7 per cent, lower at £76,314 million compared to £82,056 million at 31 December 2015, reflecting reduced funding requirements; however Insurance and investment contract liabilities were, together, £11,431 million, or 11 per cent, higher at £114,502 million, compared to £103,071 million at 31 December 2015, in line with the increase in investment assets. Subordinated liabilities were £3,481 million or 15 per cent, lower at £19,831 million compared to £23,312 million at 31 December 20152019 as a result of redemptions during the year, includingeffect of the defined benefit pension scheme revaluation and a reduction of £1,095 million as a result of the Group’s Enhanced Capital Notes. Totalshare buyback programme; retained profits were offset by dividends paid and distributions on other equity was £1,485 million, or 3 per cent, higher at £48,465 million at 31 December 2016 compared to £46,980 million at 31 December 2015; this reflected positive revaluation movements in the available-for-sale and cash flow hedging reserves.instruments.

The Group has strengthened its capital position, with aGroup’s common equity tier 1 (CET1) capital ratio of 13.4has reduced to 13.6 per cent (31 December 2015: 12.82018: 14.6 per cent), largelyprimarily driven by the Group’s share buyback programme, the interim dividend paid during the year and the accrual for the 2019 full year ordinary dividend and the defined benefit pension scheme remeasurements.

During 2019 the Prudential Regulation Authority (PRA) reduced the Group’s Pillar 2A CET1 requirement from 2.7 per cent to 2.6 per cent. Separately, the Financial Policy Committee of the Bank of England announced an increase in profits andthe Countercyclical Capital Buffer (CCYB) rate for the UK from 1.0 per cent to 2.0 per cent, effective from December 2020. During 2020 the PRA will consult on a proposed reduction in risk-weighted assets. Pillar 2A total capital requirements by 50 per cent of this increase in the CCYB, equivalent to reducing the Pillar 2A CET1 requirement by 28 per cent of the increase. Taking into account the current and potential future changes to capital requirements, the Board’s view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties continues to be c.12.5 per cent plus a management buffer of c.1 per cent.

The total capital ratio reduced to 21.221.3 per cent (31compared to 22.9 per cent at 31 December 2015: 21.5 per cent)2018, primarily reflecting managed reductions in Tier 2 loan stock, largely through calls and redemptions, offset by the increasereduction in common equity tier 1 capital and the net reduction in Additional Tier 1 securities, offset in part by the reduction in risk-weighted assets.

Risk-weighted assets reduced by £7,399£2,935 million, or 31 per cent, to £215,446£203,431 million, primarily reflecting the optimisation of the Commercial Banking portfolio, offset in part by mortgage model updates, the implementation of IFRS 16 and the acquisition of the Tesco UK prime residential mortgage portfolio.

The UK leverage ratio reduced to 5.1 per cent compared to 5.5 per cent at 31 December 2016 compared to £222,845 million at 31 December 2015, largely relating to active portfolio management, disposals, an improvement in credit quality and capital efficient securitisation activity, partially offset by model updates related to UK mortgage portfolios and foreign exchange movements2018, primarily reflecting the depreciationreduction in Sterling.

The Group’s liquiditythe fully loaded tier 1 capital position, remains good, with liquidity coverage ratio (LCR) eligible assets of £121 billion. LCR eligible assets represent over 8 timesoffset in part by a reduction in the Group’s money-market funding with a maturity of less than one year and were in excess of total wholesale funding at 31 December 2016. The Group’s LCR ratio continues to exceed regulatory requirements.exposure measure.

The Group has recommended a final ordinary dividend of 1.702.25 pence per share together with a capital distribution in the form of a special dividend of 0.5(2018: 2.14 pence per share.share). This is in addition to the interim ordinary dividend of 0.851.12 pence per share (2018: 1.07 pence per share) that was paid in September 2016.

2019. The total ordinary dividend per share for 20162019 of 2.553.37 pence per share has increased by 135 per cent, from 2.253.21 pence in 2015 and is in line with the Group’s progressive and sustainable ordinary dividend policy. The Group continues to expect ordinary dividends to increase over the medium term with a dividend payout ratio of at least 50 per cent of sustainable earnings.

2015 COMPARED WITH 2014

During the year ended 31 December 2015, the Group recorded a profit before tax of £1,644 million compared with a profit before tax in 2014 of £1,762 million. The result in 2015 included provisions in respect of redress to customers relating to both past sales of Payment Protection Insurance, associated administrative costs and other matters of £4,837 million compared to a charge of £3,125 million in the year ended 31 December 2014; 2014 also included a past service pension credit of £822 million and a loss of £1,362 million in relation to the exchange and repurchase of Enhanced Capital Notes, neither of which were repeated in 2015. Excluding these items from both years, profit before tax was £1,054 million, or 19 per cent, higher at £6,481 million in the year ended 31 December 2015 compared to £5,427 million in the previous year, reflecting a significant reduction in expenditure in relation to the Group’s Simplification programme and lower impairment charges.

The comparison of results for 2015 to 2014 is also impacted by the sale of TSB Banking Group plc (TSB), which ceased to be consolidated in March 2015, with the sale of the Group’s remaining holding becoming unconditional on 30 June 2015. The Group recognised a net loss of £660 million in 2015, relating to both the disposal of its shareholding and commitments under agreements entered into with TSB.2018.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Total income decreased by £6,742 million, or 23 per cent, to £23,150 million in 2015 compared with £29,892 million in 2014, comprising a £7,400 million decrease in other income partly offset by an increase in net interest income.

Net interest income was £11,318 million in 2015; an increase of £658 million, or 6 per cent compared to £10,660 million in 2014. There was a positive impact of £358 million in 2015 from a decrease in the amounts payable to unit holders in those Open-Ended Investment Companies (OEICs) included in the consolidated results of the Group, particularly in relation to fixed income securities; the change in population of consolidated OEICs in 2015 compared to 2014 caused an increase of £27 million in this interest expense. After adjusting for this, net interest income was £300 million, or 3 per cent, higher at £11,562 million in 2015 compared to £11,262 million in 2014 reflecting an improvement in margin in the Group’s banking operations, driven by a combination of lower depositoperating and wholesale funding costs, partly offset by continued pressure on asset prices. Average interest-earning assets fell as a result of the sale of TSBfinancial reView and the continued run down of the portfolio of assets which are outside of the Group’s risk appetite.

Other income was £7,400 million, or 38 per cent, lower at £11,832 million in 2015 compared to £19,232 million in 2014. Fee and commission income was £407 million, or 11 per cent, lower at £3,252 million compared to £3,659 million in 2014. Fee and commission expense increased by £40 million, or 3 per cent, to £1,442 million compared with £1,402 million in 2014. The decrease in net fee and commission income largely reflects the disposals of TSB and Scottish Widows Investment Partnership. Net trading income decreased by £6,445 million, or 63 per cent, to £3,714 million in 2015 compared to £10,159 million in 2014; this decrease reflected a reduction of £6,146 million in gains on policyholder investments held within the insurance business as a result of market conditions over 2015 relative to those in 2014. The reduction in trading income within the insurance business was coupled with a small decrease of £266 million in the Group’s other operations. Insurance premium income was £2,333 million, or 33 per cent, lower at £4,792 million in 2015 compared with £7,125 million in 2014; there was a decrease of £2,334 million in life insurance premiums and a £1 million increase in general insurance premiums. Premium income in 2015 has been reduced by a charge of £1,959 million relating to the recapture by a third party insurer of a portfolio of policies previously reassured with the Group; excluding this item life insurance premium income was £375 million, or 6 per cent, lower at £5,880 million in 2015 compared to £6,255 million in 2014. Other operating income was £1,825 million higher at £1,516 million in 2015 compared to a deficit of £309 million in 2014. Other operating income includes the results of liability management from which the Group incurred a loss of £28 million in 2015 compared to a loss of £1,386 million in 2014, which was principally in relation to exchange and repurchase transactions in respect of the Group’s Enhanced Capital Notes. Excluding the impact of liability management activities, other operating income was £467 million, or 43 per cent, higher at £1,544 million in 2015 compared to £1,077 million in 2014; in part reflecting a reduction in the losses arising from the movement in the value of in-force insurance business.

Insurance claims expense was £7,764 million, or 58 per cent, lower at £5,729 million in 2015 compared to £13,493 million in 2014. The insurance claims expense in respect of life and pensions business was £7,804 million, or 59 per cent, lower at £5,359 million in 2015 compared to £13,163 million in 2014; this decrease was matched by a similar decline in net trading income, reflecting the relative performance of policyholder investments. Insurance claims in respect of general insurance business were £40 million or 12 per cent, higher at £370 million in 2015 compared to £330 million in 2014.

Operating expenses increased by £1,502 million, or 11 per cent to £15,387 million in 2015 compared with £13,885 million in 2014; the main reasons for the increase being the £1,712 million increase in charges for redress payments to customers in respect of PPI and other conduct related matters from £3,125 million in 2014 to £4,837 million in 2015, a charge of £665 million in 2015 in relation to the disposal of TSB and a net past service pension credit of £822 million in 2014 which was not repeated in 2015. Excluding these items from both years, operating expenses were £1,697 million, or 15 per cent, lower at £9,885 million in 2015 compared to £11,582 million in 2014. On this basis staff costs were £890 million, or 16 per cent, lower at £4,677 million in 2015 compared with £5,567 million in 2014; annual pay rises being more than offset by the impact of headcount reductions resulting from business disposals and the Group’s rationalisation programmes and a reduction in severance costs as this phase of the Simplification programme draws to a close. Premises and equipment costs were £176 million or 20 per cent, lower at £715 million in 2015 compared with £891 million in 2014. Other expenses, excluding the charges in respect of customer redress provisions and the charge relating to the TSB disposal, were £808 million, or 25 per cent, lower at £2,381 million in 2015 compared with £3,189 million in 2014 as a result of lower levels of technology spend, advertising and professional fees, in particular relating to Simplification and the costs of TSB separation in 2014. Depreciation and amortisation costs were £177 million, or 9 per cent, higher at £2,112 million in 2015 compared to £1,935 million in 2014.

Impairment losses decreased by £362 million, or 48 per cent, to £390 million in 2015 compared with £752 million in 2014. Impairment losses in respect of loans and advances to customers were £292 million, or 40 per cent, lower at £443 million in 2015 compared with £735 million in 2014. The overall performance of the portfolio reflects a significant reduction in lending which is outside of the Group’s risk appetite and improvements in all divisions. The net charge has also benefited from significant provision releases but at lower levels than seen in 2014. There was a credit of £55 million in respect of undrawn commitments in 2015, compared to a charge of £10 million in 2014, a result of improvements in credit quality in a number of corporate relationships.

In 2015, the Group recorded a tax charge of £688 million compared to a tax charge of £263 million in 2014, an effective tax rate of 42 per cent, which was higher than the standard UK corporation tax rate of 20.25 per cent; principally as a result of the disallowance of a substantial proportion of the Group’s charge in respect of PPI and other conduct risk issues. The tax charge of £263 million in 2014 arose on a profit before tax of £1,762 million; this tax charge reflected tax exempt gains on the sale of businesses.

On the balance sheet, total assets were £48,208 million, or 6 per cent, lower at £806,688 million at 31 December 2015 compared to £854,896 million at 31 December 2014, largely due to the disposal of TSB. Loans and advances to customers were £27,529 million, or 6 per cent, lower at £455,175 million at 31 December 2015 compared to £482,704 million at 31 December 2014, with £21,643 million of the reduction being due to the sale of TSB, the continued reduction in the portfolio of assets which are outside of the Group’s risk appetite and a £5,148 million reduction in reverse repurchase agreement balances have more than offset growth in the UK consumer finance business. An increase of £7,925 million in cash and balances at central banks has been more than offset by an £11,395 million reduction in trading and other financial assets at fair value through profit or loss and a £6,661 million reduction in derivative assets. Total liabilities were £45,285 million, or 6 per cent, lower at £759,708 million at 31 December 2015 compared to £804,993 million at 31 December 2014, again largely due to the sale of TSB. Customer deposits were £28,741 million, or 6 per cent, lower at £418,326 million at 31 December 2015 compared to £447,067 million at 31 December 2014 with £24,625 million of the reduction being due to the sale of TSB. Decreases of £10,239 million in trading and other financial liabilities at fair value through profit or loss and £11,095 million in insurance and investment contract liabilities have been partly offset by increases of £6,038 million in deposits by banks and £5,823 million in debt securities in issue as the Group took advantage of favourable funding opportunities. Total equity was £2,923 million, or 6 per cent, lower at £46,980 million at 31 December 2015 compared to £49,903 million at 31 December 2014; this reflected the fact that retained profit for the year has been more than offset by negative reserve movements in respect of available-for-sale revaluation and cash flow hedging reserves, dividends paid and the adjustment to non-controlling interests on the deconsolidation of TSB.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The Group has maintained its capital position, with a common equity tier 1 (CET1) ratio of 12.8 per cent, (31 December 2014: 12.8 per cent) as the impact of the lower capital base (as a result of reduced levels of equity) has been offset by a reduction in risk-weighted assets.

Risk-weighted assets reduced by £16,986 million, or 7 per cent, to £222,747 million, at 31 December 2015 compared to £239,734 million at 31 December 2014, primarily driven by the sale of TSB, reductions in the portfolio of assets which are outside of the Group’s risk appetite and continued improvements in credit quality offset by targeted lending growth.

The Group’s liquidity position remains good, with liquidity coverage ratio (LCR) eligible assets of £123 billion. LCR eligible assets represent almost 5.7 times the Group’s money-market funding with a maturity of less than one year and were in excess of total wholesale funding at 31 December 2015 thus providing a buffer in the event of market dislocation. The Group’s LCR ratio already exceeds regulatory requirements and is greater than 100 per cent.

OPERATING AND FINANCIAL REVIEW AND PROSPECTSprospects

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