The Group is in a stronger position today. We have made substantial progress towards creating a strong and stable bank, one better able to serve our customers. We have significantly strengthened our balance sheet and reduced our dependence on Government funding. We have a stronger capital position and more deposits to back our loans.

 

As we emerge from the financial crisis and the economic downturn, we recognise the public concern surrounding the banking industry and know we have much work to do to rebuild trust and understanding. We can only earn that trust by addressing the fundamentals and by acknowledging our mistakes.

 

We need to demonstrate that we are meeting our obligations to customers and society by proactively – and responsibly – channelling the deposits we gather into productive enterprises and households. We provided nearly £80 billion of gross lending to UK homeowners and businesses in 2010. For the year ended 28 February 2011 we exceeded the mortgage and business lending commitments made by the Group to the UK Government. Lending is one of our core business functions and it is in our interest and that of our customers that we make access to responsible credit as easy as possible.

 

At the same time, as a responsible lender, we seek to ensure that we lend to customers who can afford to repay their borrowing and to businesses that have a fundamentally sound business model. These are principles to which we must adhere.

 

COST EFFICIENCY

 

We are focused on emerging from the financial crisis a fitter, leaner organisation. Our integration programme is delivering significant cost savings for the Group – £1.4 billion a year as at the end of 2010. We expect this to increase to £2 billion a year by the end of 2011. We have also reduced our operating expenses by 6 per cent and improved our cost:income ratio from 50.7 per cent in 2009 to 46.2 per cent by the end of 2010. Although we have made good progress so far, there is more we can do to drive the ratio down further.

 

Recapitalisation

 

It is widely accepted that banks were undercapitalised before the financial crisis. We considerably strengthened our capital position in 2010. Our core tier 1 ratio increased to 10.2 per cent as at the end of 2010, from 8.1 per cent at the end of 2009, substantially in excess of regulatory requirements. That is a strong capital position, both compared with other banks and compared with our historical position.

 

Government support

 

We welcomed the Government’s interventions in 2008 to stabilise the banking system and provide liquidity. This led us to raising capital from the UK Government, which became a significant shareholder in the Group. HM Treasury held approximately 40.6 per cent of the Group’s ordinary share capital as at the end of 2010. This shareholding is managed on its behalf by UK Financial Investments Ltd. Our, and the Government’s, objective is that in time the Group will operate as a wholly privately owned, self-supporting commercial enterprise.

 

During 2010, we reduced our reliance on liquidity support from Government and central bank facilities by £60.6 billion. The Group’s overall support from Government and central bank facilities totalled £97 billion as at the end of 2010 and we have made further progress in reducing this since then.

 

Regulatory environment

 

Robust and stable regulation will be an important component in rebuilding confidence and trust and creating a healthy and sound financial system. We continue to actively engage with the Government, our regulators and other stakeholders on a number of proposed reforms, to ensure we have a strong and stable banking system which is able to support and serve its customers and the wider economy.


In 2010, the UK Government appointed The Independent Commission on Banking (ICB) to make recommendations for the reform of the banking system and to promote stability and competition.


The Commission published their Interim Report in April 2011. We have reviewed the Report and will consider and respond to the options presented more fully in due course. We welcome the focus by the Commission on improving switching and greater transparency. That should be positive for customers of banks and is very much in line with our own proposals to the Commission. We will continue to play a constructive role in the debate and to consult with the ICB during the coming months ahead of the publication of their final report and recommendations in September 2011.

 

INTEGRATION

Inevitably, some of the cost synergies of our integration programme come from a reduction in roles.  As a result, we have had to make some difficult decisions about jobs. It has therefore been a challenging period of change for our employees.

 

We have endeavoured to deliver changes in a sensitive way, in accordance with our vision and values. We have followed a robust communications process to ensure that employees are aware of changes before they take place, and have four recognised Unions with whom we have consulted extensively on all proposed changes.

 

Our aim has always been, where possible, to either redeploy people to other areas of the Group or to reduce numbers through natural attrition. Where it has been necessary for individuals to leave the organisation, this has been achieved by offering voluntary severance and by making less use of contractors and agency staff. Only a small proportion of colleagues left via compulsory redundancy. Compulsory redundancies are always a last resort.

 

Our focus has been on enabling the business to integrate, while also building the foundations for the future to ensure we can attract, retain and develop the best talent. We took some important steps last year on our journey to becoming ‘One Bank’. Around 90 per cent of our employees are now on harmonised employment terms and conditions. We believe that employees have embraced the changes that we’ve made – at the end of 2010, we recorded our highest-ever colleague engagement scores, with 93 per cent of employees saying they work beyond what is required to help Lloyds Banking Group succeed. We also won the top award at the 2010 Personnel Today Awards for Managing Change. This recognises our work in delivering significant organisational and people changes while maintaining high engagement of our employees.