Lloyds Regulatory News (LLOY)

2021 Results

News Release

Lloyds Banking Group plc

24 February 2022

CONTENTS

Alternative performance measures

The Group uses a number of alternative performance measures, including underlying profit, in the description of its business performance and financial position. These measures are labelled with an 'A' throughout this document. Further information on these measures is set out on page 33. Unless otherwise stated, commentary on pages 1 and 2 and on pages 10 to 13 is given on an underlying basis.

RESULTS FOR THE FULL YEAR

"2021 has been a year of solid financial performance with successful strategic execution, ongoing investment and continued franchise growth. This has enabled the Group to deliver on its customer focused ambitions, as set out in Strategic Review 2021, as well as on Helping Britain Recover during the pandemic. It has also enabled the Group to offer high levels of capital return to our shareholders.

Building on our strong foundations, our purpose of Helping Britain Prosper forms the basis of our new strategy to profitably deliver for all of our stakeholders. We will look to deepen relationships with our existing customers, both consumers and businesses of all sizes, and meet more of their financial needs by making our great products more relevant to them and our channels simpler and more personalised to use. This will set the Group on a higher growth trajectory with more diversified revenue streams, while we retain our strong focus on cost and capital discipline. Enabled by maximising the potential of our dedicated people, technology and data capabilities, our strategy represents an exciting new chapter for Lloyds Banking Group. 

I am confident that the Group's purpose, customer focus, unique business model and significant competitive strengths, embodied in our ambitious strategy will ensure the Group is able to deliver higher, more sustainable long-term returns and capital generation for our shareholders, whilst meeting the needs of broader stakeholders."

Charlie NunnGroup Chief Executive

We are Helping Britain Recover with strong progress made under Strategic Review 2021

• Strong performance against Helping Britain Recover commitments, including lending more than £16 billion to over 80,000 first-time homebuyers (target: £10 billion), supporting over 93,000 start-ups and small businesses1 with online support, business advice and business banking accounts (target: 75,000) and expanding the funding available under the Group's discounted green finance initiatives from £3 billion to £5 billion

• Significant progress against our customer focused commitments, including maintaining the Group's record all-channel net promoter score of 69 and increasing net new open book Assets under Administration (AuA) in Insurance and Wealth by over £7 billion

• Continuing to enhance the Group's digital capabilities, with mobile app releases nearly double that of prior year and a three-fold increase in corporate clients onboarded to the Group's new cash management and payments platform

Solid financial performance with continued business momentum

• Statutory profit before tax of £6.9 billion and statutory profit after tax of £5.9 billion, benefitting from higher income and a net impairment credit. Tangible net asset value per share of 57.5 pence, up 5.2 pence per share

• Solid net income of £15.8 billion, up 9 per cent, with underlying net interest income of £11.2 billion, up 4 per cent, underlying other income of £5.1 billion, up 12 per cent and a reduction in operating lease depreciation. Underlying net interest income benefitted from increased average interest-earning banking assets, up 2 per cent and a strengthened banking net interest margin of 2.54 per cent

• Sustained cost discipline with operating costs of £7.6 billion, up 1 per cent compared to the prior year, including the impact of rebuilding variable pay. Remediation charges of £1,300 million, with £775 million in the fourth quarter, including £600 million in the quarter for HBOS Reading

• Asset quality remains strong. Net underlying impairment credit of £1.2 billion, including a net credit of £467 million in the fourth quarter, benefitting from improvements to the macroeconomic outlook for the UK, combined with robust observed credit performance

Balance sheet and capital strength further enhanced

• Loans and advances to customers at £448.6 billion, up £8.4 billion versus prior year, driven by strong growth in the open mortgage book (up £16.0 billion in the year to £293.3 billion)

• Customer deposits up £25.6 billion to £476.3 billion, with Retail current accounts up 14 per cent to £111.5 billion

• Loan to deposit ratio of 94 per cent, providing robust funding and liquidity; significant potential to lend into recovery

• Strong pro forma capital build of 210 basis points, with 51 basis points in the fourth quarter. CET1 ratio of 16.3 per cent (pro forma2), remaining ahead of the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent

• Board has recommended a final ordinary dividend of 1.33 pence per share, resulting in a total ordinary dividend for 2021 of 2.00 pence per share, in line with the Group's progressive and sustainable ordinary dividend policy. The Board has also announced its intention to implement an ordinary share buyback programme of up to £2.0 billion, given the strong capital position of the Group

2022 guidance

Based on our current macroeconomic assumptions and the Group's new strategy, for 2022 the Group now expects:

• Banking net interest margin above 260 basis points

• Operating costs of c.£8.8 billion on the new basis, with the increase from the 2021 equivalent (£8.3 billion) reflecting stable business-as-usual costs, incremental investment and new businesses3

• Asset quality ratio to be c.20 basis points

• Return on tangible equity of c.10 per cent

• Risk-weighted assets at the end of 2022 to be c.£210 billion

1 This figure comprises both for-profit enterprises and not-for-profit enterprises, such as charities. Not-for-profit enterprises comprise approximately 10 per cent of this figure.

2 The pro forma CET1 ratio as at 31 December 2021 reflects both the dividend paid up by the Insurance business in the subsequent first quarter period and the impact of the announced ordinary share buyback programme.

3 From the first quarter of 2022 the Group will include all restructuring costs, apart from merger, acquisition and integration costs, within operating costs. Non lending-related fraud costs, currently included within underlying impairment, will also be reported as part of operating costs. See page 16. Business-as-usual costs are total operating costs less strategic investment and new businesses, including Embark and Citra Living.

INCOME STATEMENT − UNDERLYING BASISA

KEY BALANCE SHEET METRICS

1 The pro forma CET1 ratio as at 31 December 2021 reflects both the dividend paid up by the Insurance business in the subsequent first quarter period and the impact of the announced ordinary share buyback programme.

QUARTERLY INFORMATIONA

BALANCE SHEET ANALYSIS

1 Primarily Europe.

2 Includes Retail Business Banking.

3 Primarily non interest-bearing Commercial Banking current accounts.

4 Primarily Commercial Banking interest-bearing accounts.

GROUP RESULTS - STATUTORY BASIS

The results below are prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards (IFRSs). The underlying results are shown on page 4. A reconciliation between the statutory and underlying results is shown on page 35.

1 Includes income and expense attributable to the policyholders of the Group's long-term assurance funds that materially offset in arriving at profit attributable to equity shareholders. These can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims from one period to the next.

2 Contains assets measured at fair value through profit or loss arising from contracts held with reinsurers, previously included within other assets; comparatives have been presented on a consistent basis.

3 Repurchase agreements, previously reported within deposits from banks and customer deposits are now reported within other liabilities; comparatives have been presented on a consistent basis.

GROUP CHIEF EXECUTIVE'S STATEMENT

2021 was a year of continued delivery for the Group, with successful strategic execution, ongoing investment and continued franchise growth, enabling the Group to succeed in its customer focused ambitions set out in the Strategic Review 2021. This resulted in a solid financial performance, with continued business momentum and balance sheet growth. Given the Group's performance and strong capital position, the Board has recommended a final ordinary dividend of 1.33 pence per share, in line with our progressive and sustainable ordinary dividend policy and a share buyback of up to £2.0 billion, marking 2021 as a very strong year of capital return to shareholders.

During 2021 the Group focused on Helping Britain Recover, supporting customers and communities across the UK as they continued to deal with the pandemic. I am very proud of the positive impact that the Group was able to make. The dedication of colleagues and their ongoing support for customers, communities and businesses across the UK in these unique and challenging times is impressive. I would like to express my gratitude to all of our colleagues for their resilience, commitment and hard work throughout 2021.

Since joining the Group in August 2021, I have been impressed by the Group's purpose-driven culture, real customer focus, its commitment to sustainability and diversity, as well as its disciplined risk management. Building on the Group's strong foundations and distinct competitive strengths, we are today launching our new strategy to deliver for all of our stakeholders, as detailed below. I very much look forward to working with my colleagues across the Group to drive our purpose, our growth opportunities and build higher, more sustainable Group returns and capital generation.

Financial performance

In the context of continued business momentum and balance sheet growth, the Group has delivered a solid financial performance with statutory profit after tax of £5.9 billion, significantly higher than 2020. Increased profits benefitted from higher income and the net underlying impairment credit of £1.2 billion in 2021 (2020: underlying impairment charge of £4.2 billion), driven by improvements to the macroeconomic outlook for the UK, combined with robust observed credit performance. Underlying profit before impairment of £6.8 billion was up 6 per cent on 2020, with increased average interest-earning assets, a strengthened banking net interest margin and early signs of recovery in other income, alongside a reduction in operating lease depreciation. Cost discipline was sustained, with operating costs of £7.6 billion, up 1 per cent compared to the prior year, including the impact of rebuilding variable pay in the context of stronger than expected financial performance. Remediation charges increased in the year to £1,300 million, with £775 million in the fourth quarter. The full year remediation charges relate to a number of pre-existing legacy issues and include a £790 million charge relating to HBOS Reading which reflects the Group's estimate of its full liability, albeit significant uncertainties remain. We continue to support the independent Foskett Panel re-review and Dame Linda Dobbs' independent review process as we work to bring this matter to a conclusion.

The Group has benefitted from continued balance sheet growth during the year. Loans and advances to customers were up £8.4 billion versus prior year at £448.6 billion, driven by strong net growth in the open mortgage book of £16.0 billion, the strongest in over a decade. Cards balances were down year-on-year but are showing signs of recovery with balances growing £0.5 billion in the second half. These were offset by lower SME and Mid Corporate balances given clients' high levels of liquidity, as well as the continued reduction in the closed mortgage book. Customer deposits continued to increase during the year, with significant growth of £25.6 billion since the end of 2020, including significant growth in retail current accounts and relationship savings balances, with continued inflows to our trusted brands. Deposit balances are now up c.£65 billion since the end of 2019.

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

Strong progress made under Strategic Review 2021

The Group launched Strategic Review 2021 last February with a focus on Helping Britain Recover and further enhancing our core capabilities. We have invested c.£0.9 billion to support our strategic initiatives, enabling us to succeed in our Helping Britain Recover commitments and achieving significant progress on our 2021 customer focused commitments. Highlights include strengthening our digital offering and attaining record levels of customer satisfaction, with the all-channel net promoter score maintained at 69 for the year; supporting over 93,000 start-ups and small businesses1, by providing our customers with online support, business advice and business banking accounts (target: 75,000); expanding the availability of affordable and quality homes by lending more than £16 billion to over 80,000 first-time buyers (target: £10 billion) and; expanding the funding available under the Group's discounted green finance initiatives from £3 billion to £5 billion.

A further priority outlined in Strategic Review 2021 was for the Group to meet more of its customers' broader financial needs. Good progress was made, with over £7 billion net new money in Insurance and Wealth open book Assets under Administration (AuA) over the period (£133 billion as at 31 December 2021). The Group also completed the acquisition of Embark early in 2022, contributing c.£37 billion of AuA on behalf of c.354,000 consumer clients. This acquisition is important as it provides a digital, mass market, direct-to-consumer proposition, complementing the Group's existing advice offerings via Schroders Personal Wealth and Cazenove Capital.

The Group completes Strategic Review 2021 in a strong position.

Our strategy

Building on our strong foundations, our purpose of Helping Britain Prosper forms the basis of our new strategy to profitably deliver for all of our stakeholders. Core to our purpose and strategy is our focus on building an inclusive society and supporting the transition to a low carbon economy. This is where we can make the biggest difference, whilst creating new avenues for our future growth. It is only by doing right by our customers, colleagues and communities that we can achieve higher, more sustainable returns for shareholders.

We have a clear strategic vision to be a UK customer-focused digital leader and integrated financial services provider, capitalising on new opportunities, at scale. We will look to deepen relationships with our existing customers, both consumers and businesses of all sizes, and meet more of their financial needs by making our great products more relevant to them and our channels simpler and more personalised to use. This will set the Group on a higher growth trajectory with more diversified revenue streams while we retain our strong focus on cost and capital discipline. Enabled through maximising the potential of our dedicated people, technology and data capabilities, our strategy represents an exciting new chapter for Lloyds Banking Group.

I am confident that the Group's purpose, customer focus, unique business model and significant competitive strengths, embodied in our ambitious strategy will ensure the Group is able to deliver higher, more sustainable long-term returns and capital generation for our shareholders, whilst meeting the needs of broader stakeholders.

Outlook

The coronavirus pandemic continues to have a significant impact on the people, businesses and communities of the UK and around the world. As we look forward into 2022, we are seeing early recovery and the macroeconomic outlook is improving, supported by the successful vaccine roll out in the UK. Although the outlook remains uncertain, particularly with regards to new virus variants, as well as the impact of inflation on the economy and households, I am confident that the Group is well-placed to deliver increased returns whilst Helping Britain Prosper, as embodied in our new strategy. This is reflected in the new guidance outlined below.

GROUP CHIEF EXECUTIVE'S STATEMENT (continued)

2022 guidance

Reflecting confidence in the Group's business model and new strategy and based on our current macroeconomic assumptions, the Group now expects:

• Banking net interest margin above 260 basis points

• Operating costs of c.£8.8 billion on the new basis, with the increase from the 2021 equivalent (£8.3 billion) reflecting stable business-as-usual costs, incremental investment and new businesses2

• Asset quality ratio to be c.20 basis points

• Return on tangible equity of c.10 per cent

• Risk-weighted assets at the end of 2022 to be c.£210 billion

2024 and 2026 guidance

Based on the Group's new strategy, reflecting focus on our growth potential, improved efficiency and realising the capabilities of our people, technology and data, the Group expects:

• Return on tangible equity in excess of 10 per cent by 2024 and in excess of 12 per cent by 2026, as the full benefits of our investment are realised

• Additional revenues of c.£0.7 billion by 2024 and more than double that of c.£1.5 billion by 2026

• Business-as-usual costs2 flat in 2024 versus 2021, while costs increase only to finance new investment, enabling a cost:income ratio of less than 50 per cent by 2026

• Asset quality ratio to be less than 30 basis points over 2022 to 2024

• Capital generation of around 150 basis points per annum over 2022 to 2024, improving to 175 to 200 basis points by 2026. We are committed to returning excess capital to shareholders and expect to pay down to our target capital ratio by 2024

1 This figure comprises both for-profit enterprises and not-for-profit enterprises, such as charities. Not-for-profit enterprises comprise approximately 10 per cent of this figure.

2 From the first quarter of 2022 the Group will include all restructuring costs, apart from merger, acquisition and integration costs, within operating costs. Non lending-related fraud costs, currently included within underlying impairment, will also be reported as part of operating costs. See page 16. Business-as-usual costs are total operating costs less strategic investment and new businesses, including Embark and Citra Living.

OUR STRATEGY

Lloyds Banking Group is the largest bank and sole integrated provider of banking, insurance and wealth propositions in the UK. The Group's strong foundations have created distinctive competitive strengths. It has leading customer franchises with trusted brands, significant data assets and leading market shares. Alongside, the Group has a strong balance sheet, disciplined risk management and an efficient business model, operating at scale with strong focus on cost discipline.

Our purpose of Helping Britain Prosper drives our business model and strategic participation choices. The Group's new strategy has a clear vision to be a UK customer-focused digital leader and integrated financial services provider, capitalising on new opportunities, at scale. To this end we are embedding delivery of broader stakeholder outcomes in our strategy and the way we create value to be a truly purpose-driven organisation.

We will deliver for all our stakeholders by helping build an inclusive society and supporting the transition to a low carbon economy. Our efforts on the former will be focused on improving access to quality housing, promoting financial inclusion and education, enabling regional development and creating a more inclusive and diverse workforce with ambitious targets. To support the transition to a low carbon economy, we are reinforcing our prior commitments, reducing the carbon emissions we finance by more than 50 per cent by 2030, on the path to net zero by 2050 or sooner, with our own operations being net zero by 2030 and further sustainability outcomes embedded across business priorities.

Through our new strategy, we will transform our business, creating higher, more sustainable value for all stakeholders. We will drive revenue growth and diversification across all our main businesses, focusing on strengthening cost and capital efficiency, together with leveraging an enabling platform which maximises the potential of people, technology and data to support our business ambitions. These strategic priorities are supported by incremental investment of c.£3 billion over the next three years, and a total of c.£4 billion over five years.

Our strategy will enable the Group to deliver higher, more sustainable, returns and capital generation. The Group is targeting a return on tangible equity in excess of 10 per cent by 2024 and in excess of 12 per cent by 2026 as the full benefits of our investment are realised. This will be achieved by additional revenues of c.£0.7 billion by 2024 and more than double that of c.£1.5 billion by 2026. Our strong focus on cost discipline will ensure that we keep business-as-usual costs flat in 2024 versus 2021, whilst costs increase only to finance new investment, enabling a cost-income ratio of less than 50 per cent by 2026. The increased profitability resulting from the strategy will support capital generation of around 150 basis points per annum over 2022 to 2024, improving to 175 to 200 basis points by 2026. We are committed to returning excess capital to shareholders and paying down to our target capital ratio by 2024.

Driving revenue growth and diversification

Growth is a core focus of our strategy. Around two-thirds of our £3 billion strategic investment over the next three years is aligned to growing and diversifying revenue. We have carefully prioritised opportunities across each of our businesses to ensure we generate value in the near-term as well as creating new revenue streams which deliver over the longer-term. There are four areas of focus:

i) Deepen and innovate in Consumer

We start from a strong position as the largest UK consumer franchise with a full set of products, leading financial services brands and record levels of customer satisfaction across our channels. We have 26 million customer relationships through our iconic and trusted brands, with over 18 million digitally active users, making us the largest digital bank in the UK. Our digital customers engage with us nearly once a day on average. Alongside, we have the largest branch network in the UK, working closely with local communities and customers. We are the market leader in mortgages, current accounts, savings and credit cards and a top three home insurance and workplace pensions provider.

OUR STRATEGY (continued)

Deepen and innovate in Consumer relationships

We serve customers directly through our three strong and trusted relationship brands - Lloyds, Halifax and Bank of Scotland. Based on our capabilities versus our current customer engagement, there is significant potential for us to grow by meeting more of our existing customers' needs. Our relationship-led business should be the first place that customers in our priority segments turn to for all of their financial needs across their lifetime.

We aim to increase the depth of our existing relationships by over 5 per cent by 2024 through providing a more personalised, relevant engagement, and offering a simple, convenient way for customers who want a more unified experience, to fulfil more of their needs in one place. As part of this we will develop a home ecosystem with integrated mortgages, green retrofit solutions and insurance products supporting our target of £10 billion of green mortgage lending by 2024. We will continue to help our customers through all channels and provide support and education to build their financial resilience and opportunities. In doing so, we aim to increase our digitally active customers by over 10 per cent by 2024, to greater than 20 million customers. Our data and analytics capability, and our digital leadership will deliver personalised engagement, offers, pricing and credit risk decisions. Payments will be a key anchor to drive greater engagement. Through enhanced propositions we aim to grow our market share in credit card spend, which is below our credit card balances share. We will innovate to meet emerging customer needs, including new direct to consumer leasing and financing solutions for electric vehicles and charging points.

Innovate and broaden our intermediary propositions

Intermediaries constitute a significant proportion of the market for certain key products, representing around 40 per cent of our total consumer income supported by our strong specialist brands, unique to our Group. Whilst we have a leading proposition and market share in Mortgages, there are opportunities to significantly leverage our scale to grow in under-represented intermediary products such as Motor Finance, Home Insurance, Protection, Individual Pensions and Investments. By making it easier for intermediaries to do business with us, the Group can deliver high quality products and services to all customer segments via reliable, low-friction, intermediated customer journeys. We will look to emulate our success in workplace pensions where we have grown market share from 10 per cent to 19 per cent since 2017.

We will protect and grow our franchise to maintain our leading intermediary market shares with our specialist brands and partnerships with major distributors. In banking, we will drive growth in new propositions such as embracing embedded finance solutions, a transport offering with more flexible finance solutions and scaling Citra Living, our private rental housing business. As part of this, we will provide £8 billion of financing and leasing for electric vehicles and plug-in hybrid electric vehicles through our Black Horse and Lex businesses by 2024. In insurance, we will strengthen our intermediary offering to capture market share as we aim to become a top three protection provider by 2025. We will build upon Embark's modern digital platform and contribute towards our target of generating more than £55 billion of new open book net flows in investment and retirement products by 2024, with between £20 billion and £25 billion invested in climate-aware strategies through Scottish Widows by 2025.

ii) Creating a new mass affluent offering

Mass affluent is an attractive and currently under-served segment. We see a clear gap in the market for a digital-first, integrated offering combining a full set of banking, insurance and investment products. This requires being able to support customers in the accumulation and decumulation stage of their lives by joining-up services across banking, housing, pensions and investments. The Group is uniquely placed to do this. It starts with the largest mass-affluent customer base in the UK of more than two million customers through its banking relationships and a complete product range at scale.

We intend to focus on the broader pool of mass affluent customers with income or wealth above £75,000, with a scale digital wealth offering and integrated banking solution. We will combine a tailored banking proposition with investments, protection and advice, leveraging our current leading capabilities and the Embark platform. We will provide a personalised banking experience through a convenient and easy-to-use digital first interface, supported by personal intervention, offering tailored products such as higher-value mortgages and lending solutions. As part of this, we are targeting an increase of over £5 billion in total banking balances for our mass affluent customers by 2024. This offering

OUR STRATEGY (continued)

will be integrated with services meeting investment needs, providing access to digital-guided advice for simple investment solutions, again supported by access to human support, if needed. As a result, we are aiming for over £7 billion of incremental net flows into our investment proposition, increasing to £25 billion by 2026.

iii) Digitising and diversifying our SME business

The Group serves over one million clients across its Business Banking and SME franchises. It is a top three player across key purpose aligned sectors including agriculture, real estate and healthcare. With a strong 20 per cent primary relationship market share of SMEs, we have an important role to play in driving growth in priority areas and regions, lifting UK productivity, supporting start-ups, growing quality jobs and supporting our clients on key issues, including sustainability. We have a significant opportunity to grow our market share in underpenetrated sectors and to meet more non lending transactional needs of our clients, especially in fast growing markets where we are underweight.

To deliver our vision we must further build our digital SME banking capability. We need to digitise front-to-back to improve client experience and enable clients to conveniently and quickly meet their needs. This is essential given changing client expectations, increasing digital engagement and competition. We aim to grow our digital product origination and fulfilment to more than 50 per cent of total volumes, with automated lending decisions for smaller loans improving time-to-cash. For new customers we will provide a quick and intuitive onboarding experience. Our digital-first offering will be complemented by sector and product specialists for their more complex needs, delivering value for our customers and the Group. Alongside digitisation, we will expand our SME proposition through merchant services, trade, cashflow lending, and broader, value added services like supporting SME transition to net zero. We are targeting over 15 per cent income growth in mid-sized SME transaction banking and working capital and, in addition, aiming for 20 per cent annual growth in new merchant services clients.

iv) Target our Corporate and Institutional offering

The Group has a well-established, focused and disciplined Corporate and Institutional franchise, maintaining active relationships with two-thirds of the FTSE 350. The business has a significant role in delivering our purpose, including contributing to regional development and transition to net zero. We have strong core capabilities in cash, debt and risk management products, such as transaction banking, lending and rate risk management. In addition, our Corporate and Institutional offering has important synergies with the broader Group, providing product capabilities such as foreign exchange and rates management to our Consumer and SME franchises, and generating £0.5 billion of relationship income from Corporate and Institutional clients' use of the Group's motor, insurance and pension propositions.

In recent years, we have improved returns and generated material capital for the Group through disciplined participation and optimisation. Maintaining our current prudent risk appetite, we can now significantly build on this to grow in key sectors aligned to our purpose and areas where we have deep capability. By enhancing our capabilities and sector coverage, there is significant headroom to grow other income as a proportion of total income by meeting more of our existing client needs. This is illustrated by our proportion of other income being 18 percentage points lower than top quartile peers. To enable this, we will strengthen our offering with product enhancements in transaction banking, debt financing, and targeted markets investments. We will drive growth and value from our cash management and payments platform by continuing to build on the three-fold increase in corporate clients onboarded to the platform in 2021. Within transaction banking we will also launch a new supply chain proposition this year. Within debt financing, to meet the needs of our UK clients we will ensure an expanded US dollar franchise and continue to invest in our foreign exchange and Rates capabilities, targeting a top-5 GBP interest rate swaps ranking by 2024. As we fulfil our clients' borrowing needs, we will increase our balance sheet velocity and capital efficiency through a scaled originate-to-distribute model.

Our selective participation means that we are not looking to expand into regions where we do not have sufficient scale, capability or a clear UK link. Also, we will not participate outside of our core cash, debt and risk management capabilities. Through this focus, and strengthening our product capabilities, we aim to grow other operating income by more than 20 per cent by 2024. Integral to these steps, we will continue to drive our purpose outcomes by supporting goals such as regional development and building our leading green financing capability to support more clients with their transition plans. As a result, sustainable finance will represent 20 per cent of our corporate lending book by end of 2024, more than double the proportion today.

OUR STRATEGY (continued)

Strengthen cost and capital efficiency

i) Strengthen cost efficiency

As we invest to grow and diversify our revenue, it is essential to maintain our disciplined cost approach - a key strength of the Group. These are important to create capacity for investment and growth, to increase the pace at which we can change and improve our services, and to further strengthen our resilience.

One of the key objectives is to lower the cost of technology through modernising our technology estate, leveraging public and our private cloud, decommissioning over 15 per cent of legacy applications and adopting a more agile operating model, while increasing the throughput of change. In doing so, we aim to achieve a 15 per cent gross reduction in run and change technology costs by 2024. We will reduce cost to serve through further end-to-end digitisation of customer journeys, which will drive greater efficiency in distribution, operations and servicing as we aim to increase customers served per distribution FTE by more than 10 per cent by 2024. Finally, we will reduce our central functions and office overheads. The former will be addressed through automation and process simplification and the latter will benefit from the move to hybrid ways of working and transformed workspaces, resulting in a greater than 30 per cent reduction in office footprint by 2024.

ii) Strengthen capital efficiency

The Group's capital efficient business model will be strengthened by strategic initiatives, continued rigid discipline on pricing and returns, portfolio management and enhancement of capital efficient capabilities. Our new growth initiatives reflect disciplined participation choices, focusing on new, less capital intensive, fee-generating businesses. Building and scaling an originate-to-distribute model in the Commercial bank and leveraging our synergies with Scottish Widows will increase balance sheet velocity and generate higher fee income further enhancing capital efficiency. Alongside, we will continue to use our economic value framework to assess and optimise existing portfolios, determine new business pricing and evaluate new strategic opportunities, helping ensure efficient usage and distribution of capital.

Maximise the potential of people, technology and data

Delivering this strategy will require the Group to build on the capabilities and new ways-of-working it has developed over the last few years and accelerate the pace at which it uses digital technologies and data to support customers. We seek to emulate our success in building the largest UK Retail digital bank on a larger scale across the Group. Our prior investments in technology and data provide a strong foundation for delivering on our strategy.

Our colleagues' expertise and skills are instrumental to our success. It is our people who offer the most distinctive customer experience, will drive us to innovate, take thoughtful risk and enable change at greater pace, delivering for our customers. Going forward, we will need to invest in our people and how the organisation works to deliver this strategy. This will include further developing our ways of working and culture to enable greater empowerment for the teams serving customers and innovating our products, with clear accountability to drive growth and maintain our disciplined risk approach. It will also increase collaboration and organisational 'joining-up', to serve customers better and manage risk across our divisions and functions. As a result, we are aiming to improve our employee engagement by 2024.

We will enhance our data and technology estate by taking a Group-wide approach to transforming core functions and capabilities alongside businesses to deliver value. We seek to continually deliver value and improve resilience as we progressively modernise and simplify our technology estate, including rationalising data centres and legacy applications, driving greater adoption of the cloud and increasing automation. In doing so we are aiming for 20 per cent of our applications to be on private and public cloud by 2024. As part of this we will enhance our operating model by embedding modern engineering practices, with autonomous multi-skilled teams. In doing so we will leverage data capabilities to support our business strategies across multiple use cases. We will use data ethically to create insights that deliver better customer outcomes, strengthen our own risk management process and generate value for all our stakeholders.

Our new strategy combines focus on our growth potential, improved efficiency and realising the capabilities of our people, technology and data. It represents a significant shift for the Group to better achieve our purpose. We will capitalise on our opportunities to deliver for all of our stakeholders.

SUMMARY OF GROUP RESULTS

Statutory results

The Group's statutory profit before tax for the year was £6,902 million. Statutory profit after tax was £5,885 million. Both measures benefitted from higher income and a net impairment credit given the improved macroeconomic outlook for the UK compared to the prior year. In the fourth quarter of the year, statutory profit before tax was £968 million and statutory profit after tax was £420 million, a reduction on the run rate in the first three quarters of 2021, primarily reflecting increased remediation and restructuring costs.

The Group's statutory income statement includes income and expense attributable to the policyholders of the Group's long-term assurance funds. These items materially offset in arriving at profit attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis between total income and insurance claims from one period to the next. In the year to 31 December 2021, due to strong market conditions, the Group recognised significant gains on policyholder investments within total income which were materially offset by the corresponding growth in insurance and investment contract liabilities, recognised as an increase in the insurance claims expense and an increase in the amounts payable to unit holders in the Group's consolidated open-ended investment companies, recognised within net interest income.

Total statutory income, net of insurance claims for the year was £16,324 million, an increase of 8 per cent on 2020, reflecting strong growth within the open mortgage book, positive insurance assumption and methodology changes and strong returns in the Group's equity investments businesses. The Group has maintained its focus on cost management, whilst continuing to invest in the business with total statutory operating expenses up 11 per cent on the prior year. This included the impact of rebuilding variable pay in the context of continued stronger than expected financial performance within both income and impairment, as well as the increased remediation and restructuring costs.

The Group's balance sheet reflects continued franchise growth during the year. Loans and advances to customers are up 2 per cent on the prior year at £448.6 billion. This was driven by strong growth in open mortgage book net lending of £16.0 billion in the year, reflecting the strength of the UK housing market. Customer deposits increased by £25.6 billion in the year to £476.3 billion, with continued inflows to the Group's trusted brands. This included Retail current account growth of £14.1 billion, driven by continued reduced levels of customer spending.

Assets and liabilities associated with the policyholders of the Group's long-term assurance funds are included in the Group's statutory balance sheet. These items have no material impact upon the net assets attributable to equity shareholders but their movements, which depend on market movements, can lead to significant variances, predominantly in financial assets at fair value through profit or loss and liabilities arising from insurance and investment contracts, from one period to the next. In the year to 31 December 2021, due to strong market conditions, significant growth was seen in policyholder investments, primarily within financial assets at fair value through profit or loss. This was materially offset by an increase in the corresponding insurance and investment contract liabilities.

The Group's CET1 capital ratio increased over the year to 17.3 per cent.

SUMMARY OF GROUP RESULTS (continued)

Underlying resultsA

The Group's underlying profit for 2021 was £8,040 million, compared to an underlying profit of £2,193 million in 2020, reflecting solid financial performance alongside the improved macroeconomic outlook for the UK. In particular, the Group recognised a net underlying impairment credit of £1,207 million in 2021, compared to a net charge of £4,247 million in 2020. Underlying profit before impairment for the year of £6,833 million is up 6 per cent against 2020. Within this, net income was higher than in 2020 at £15,763 million, partly offset by higher total costs, largely driven by higher remediation charges.

Net incomeA

Net income performance of £15,763 million was solid and 9 per cent higher than in the prior year, reflecting both increased underlying net interest income and increased underlying other income in the year, alongside a reduction in the charge for operating lease depreciation.

Underlying net interest income of £11,163 million was up 4 per cent year-on-year, benefitting from an increase in average interest-earning banking assets and a strengthened banking net interest margin of 2.54 per cent, up 2 basis points compared to 2020. Average interest-earning banking assets were up 2 per cent on the prior year at £444.6 billion, driven by strong growth in the open mortgage book and the benefit of a full year of government-backed lending business. This was partially offset by increased levels of optimisation within Commercial Banking, the repayment of revolving credit facilities provided to support commercial clients during the pandemic and lower average balances in the closed mortgage book, credit cards, and UK Motor Finance for 2021. The banking net interest margin in the fourth quarter of 2.57 per cent, up 2 basis points on the third quarter, reflected the positive impact of improved structural hedge income and lower funding costs. Based on its current macroeconomic assumptions, particularly including interest rate assumptions, the Group expects the banking net interest margin in 2022 to be above 260 basis points.

The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 31 December 2021 the Group's structural hedge had an approved capacity of £240 billion. This represents a prudent increase from £210 billion at year end 2020 and £185 billion at year end 2019, on the basis of substantially greater deposit growth since year end 2019 (growth of £65 billion) added to continued review of deposits to assess their eligibility for the structural hedge. The nominal balance of the structural hedge was £240 billion at 31 December 2021 (31 December 2020: £186 billion) with a weighted-average duration of about three-and-a-half years (31 December 2020: about two-and-a-half years). The Group generated £2.2 billion of total gross income from the structural hedge balances in the year (2020: £2.4 billion).

Underlying other income of £5,060 million in 2021 was 12 per cent higher than in 2020, with £1,307 million in the fourth quarter. The 2021 performance reflected recovering levels of customer activity, strong returns in the Group's equity investment businesses (including Lloyds Development Capital) and a positive impact from assumption and methodology changes in Insurance and Wealth (largely in the fourth quarter) compared to a negative impact in 2020. This was partly offset by a reduced Lex fleet size and lower levels of gilt sales.

SUMMARY OF GROUP RESULTS (continued)

Within Retail, underlying other income was broadly in line with prior year, with the effects of recovering levels of customer activity and improved current account performance offset by the continuing impact of a reduced Lex fleet size due to contraction of the corporate fleet and new vehicle supply issues. Commercial Banking underlying other income was broadly stable compared to prior year despite lower income from financial markets. Insurance and Wealth underlying other income (£1,432 million) was 15 per cent higher than the prior year (£1,250 million), largely reflecting the impact of £111 million of positive assumption and methodology changes, of which c.£80 million occurred in the fourth quarter. Underlying other income associated with the Group's equity investments businesses, including Lloyds Development Capital, was £682 million (2020: £281 million), with £151 million recognised in the fourth quarter.

Operating lease depreciation reduced to £460 million (2020: £884 million) as a result of significantly stronger used car prices, combined with the continued impact of a reduced Lex fleet size given industry wide supply constraints in the new car market and contraction of the corporate fleet.

Total costsA

Total costs of £8,930 million were 12 per cent higher than in 2020, driven by slightly increased operating costs and significantly higher remediation charges. The Group has maintained its focus on cost management. Operating costs of £7,630 million, 1 per cent higher than 2020, included the accelerated rebuild of variable pay in the context of continued stronger than expected financial performance. The Group's cost:income ratio was 56.7 per cent.

From the first quarter of 2022 the Group will report all restructuring costs, with the exception of merger, acquisition and integration costs, within operating costs. Non lending-related fraud costs, currently included within underlying impairment, will also be reported as part of operating costs. On this new basis, based on current macroeconomic assumptions, operating costs are expected to be c.£8.8 billion in 2022, with the increase from the 2021 equivalent (£8.3 billion) reflecting stable business-as-usual costs, incremental investment and new businesses. Operating costs on the new basis are expected to be stable throughout the period 2022 to 2024.

Remediation charges increased significantly to £1,300 million. This includes the costs in relation to HBOS Reading, the previously announced £91 million regulatory fine relating to the past communication of historical home insurance renewals and redress and operational costs in respect of litigation and other ongoing legacy programmes. During 2021, £790 million has been recognised in relation to HBOS Reading estimated future awards and operational costs, of which £600 million was recognised in the fourth quarter. This reflects the Group's estimate of its full liability and includes the expected future cost in relation to the independent Foskett Panel re-review, operational costs in relation to Dame Linda Dobbs' review which is considering whether the issues relating to HBOS Reading were investigated and appropriately reported by the Group during the period January 2009 to January 2017 and other programme costs. The final outcome could be significantly different once the re-review is concluded.

SUMMARY OF GROUP RESULTS (continued)

Underlying impairmentA

Asset quality remains strong, with sustained low levels of new to arrears during the year. Underlying impairment was a net credit of £1,207 million in the year, compared to a net charge of £4,247 million in 2020, largely driven by improvements to the economic outlook. Within this, a charge of £557 million (2020: £1,610 million) was incurred before the impact of economic outlook revisions, primarily split between a charge of £887 million for Retail and a £324 million net credit for Commercial Banking. The net credit in Commercial Banking reflects credit quality improvements and lower cases flowing into default as well as a smaller overall balance sheet. The overall net credit in the year was driven by a £1,699 million release of expected credit loss (ECL) allowances, based upon improvements to the macroeconomic outlook for the UK, £601 million of which was recognised in the fourth quarter given a stronger economic outlook than previously forecasted.

1 Charges (releases) based on economic outlook as at 31 December 2019, prior to the impact of the coronavirus pandemic on expected losses.

2 Additional (releases) charges on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct effect upon the recovery strategy.

Overall the Group's loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to credit risk with high levels of security. The Group's ECL allowance reduced in the year by £2.4 billion to £4.5 billion following improvements to the economic outlook, although it remains c.£0.3 billion higher than at the end of 2019 (31 December 2020: £6.9 billion, 31 December 2019: £4.2 billion). As noted above, observed credit performance remained robust in the year, with the flow of assets into arrears, defaults and write-offs remaining at low levels.

The Group's IFRS 9 base case economic scenario used to calculate the ECL allowance assumes that unemployment will remain close to the reduced level of c.4.3 per cent observed in the fourth quarter following the end of the coronavirus job retention scheme. The ECL allowance continues to reflect a probability-weighted view of future economic scenarios built out from the base case and its associated conditioning assumptions, with a 30 per cent weighting applied to base case, upside and downside scenarios and a 10 per cent weighting to the severe downside. All scenarios have improved since the start of the year, following the changes made to the base case outlook.

SUMMARY OF GROUP RESULTS (continued)

The management adjustments to address unprecedented conditions and specific model limitations resulting from the pandemic have reduced by c.£0.1 billion over the year. Following increases during the first nine months of the year, c.£0.4 billion has been released in the fourth quarter, which was partially offset by c.£0.1 billion of this amount now captured in modelled ECL. The Group continues to retain in total £0.8 billion of net management judgements in respect of coronavirus (31 December 2020: c.£0.9 billion). £0.4 billion of this is held within portfolios to reflect the expected base case and mitigate remaining risks within the base case not captured fully by models. In addition, the central adjustment introduced in 2020 has also been maintained at the same level of £0.4 billion to recognise the greater downside risks outside of the base case conditioning assumptions and the probability-weighted view of economic scenarios, such as new virus strains emerging. The quantum of this adjustment is equivalent to a c.15 percentage points higher weighting of the severe downside scenario (31 December 2020: c.10 percentage point), noting that the latest severe scenario is more favourable than that held at 31 December 2020.

Stage 2 loans and advances to customers decreased to £41.7 billion (31 December 2020: £60.5 billion), equivalent to 8.3 per cent (31 December 2020: 12.0 per cent) of total loans and advances to customers, as a result of the improvements in economic outlook. Of these, 86 per cent are up to date (31 December 2020: 89 per cent). Stage 3 loans and advances to customers of £8.7 billion (31 December 2020: £9.1 billion) as a proportion of the portfolio have remained stable against prior year at 1.7 per cent. Continued low levels of flows to arrears and default have so far been sustained, post the removal of government support and payment holidays. The Group's ECL coverage of Stage 2 assets decreased to 3.5 per cent (31 December 2020: 4.5 per cent), again reflecting the improved economic outlook.

Coverage of Stage 3 assets has decreased to 24.7 per cent (31 December 2020: 28.6 per cent) primarily due to an increase in Stage 3 Retail Bounce Back Loan Scheme assets which hold zero ECL due to the government guarantee in place, the improved macroeconomic outlook and a small number of single name releases in Commercial Banking (including on coronavirus impacted restructuring cases).

On the basis of the Group's updated base case and current underlying performance the Group expects the 2022 asset quality ratio to be c.20 basis points.

Restructuring, volatility and other items

Further information on the reconciliation of underlying to statutory results is included on page 35.

SUMMARY OF GROUP RESULTS (continued)

Restructuring

Restructuring costs of £956 million were 83 per cent higher than in 2020 with £570 million incurred in the fourth quarter, including a c.£400 million software write-off as the Group invests in new technology and systems infrastructure, partly offset by lower property transformation and severance costs. From the first quarter of 2022 all restructuring costs, with the exception of merger, acquisition and integration costs, will be reported as part of the Group's operating costs. Merger, acquisition and integration costs will continue to be reported after underlying profit.

Volatility and other items reflected a net loss of £182 million in 2021, comprising £87 million of positive market volatility and asset sales, £70 million of amortisation of purchased intangibles and £199 million of fair value unwind. Market volatility and asset sales included a benefit of £238 million from positive insurance and banking volatility (driven mainly by narrowing bond spreads and increased inflation, partly offset by increasing interest rates), and a loss of £101 million relating to liability management exercises recognised in the fourth quarter.

Tax

The Group recognised a tax expense of £1,017 million for the year, including a credit of £954 million arising on the remeasurement of deferred tax assets following the announcement, and subsequent substantive enactment, by the UK Government of a corporation tax rate increase from 19 per cent to 25 per cent on 1 April 2023. The Group expects a medium term effective tax rate of around 27 per cent which includes the effects of both the increase in corporation tax rate and the expected reduction from 8 per cent to 3 per cent of the rate of banking surcharge from 1 April 2023. An explanation of the relationship between the tax expense and the Group's accounting profit for the year is set out on page 97.

Return on tangible equityA

The return on tangible equity for 2021 was 13.8 per cent (2020: 2.3 per cent), or 11.4 per cent (2020: 1.4 per cent) excluding the remeasurement of deferred tax assets. Returns benefitted from the net impairment credit in the year. Earnings per share were 7.5 pence (2020: 1.2 pence).

Subject to the economic outturn and market volatility, the Group expects the return on tangible equity for 2022 to be c.10 per cent.

SUMMARY OF GROUP RESULTS (continued)

Balance sheet

1 Excludes balances relating to margins of £3.8 billion (31 December 2020: £5.3 billion).

2 Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts.

3 The Liquidity coverage ratio is calculated as a simple average of month end observations over the previous 12 months.

Loans and advances to customers of £448.6 billion increased 2 per cent on the prior year, driven by strong growth in the open mortgage book of £16.0 billion in the year, reflecting the strength of the UK housing market. Total customer deposits were up £25.6 billion in the year, to £476.3 billion, with continued inflows to the Group's trusted brands. This included Retail current account growth of £14.1 billion in 2021, driven by inflows to trusted brands and continued reduced levels of customer spending.

The Group has maintained its robust funding and liquidity position with a loan to deposit ratio of 94 per cent, down 4 percentage points on 2020, largely driven by increased customer deposits.

The Group continued to access wholesale funding across a variety of currencies and markets. The Group has made net drawings of £16.3 billion from the Term Funding Scheme with additional incentives for SMEs (TFSME) in 2021, taking the total outstanding amount to £30 billion at 31 December 2021. Overall, total wholesale funding reduced to £91.4 billion at 31 December 2021 (31 December 2020: £109.4 billion) primarily as a result of the growth in customer deposits and TFSME drawings.

SUMMARY OF GROUP RESULTS (continued)

Capital

1 The pro forma CET1 ratio as at 31 December 2021 reflects both the dividend paid up by the Insurance business in the subsequent first quarter period and the impact of the announced ordinary share buyback programme.

1 Excluding movement in threshold risk-weighted assets.

2 Based upon in year shareholder distributions.

The Group's CET1 capital ratio (after announced distributions) increased by 15 basis points over the year to 16.3 per cent on a pro forma basis, compared to 16.2 per cent at 31 December 2020. The strong pro forma capital build of 210 basis points for the year largely reflected banking profitability (pre-underlying impairment credit) of 210 basis points, with a limited impairment offset of 19 basis points, being the net impact of IFRS 9 transitional relief reduction and the underlying impairment credit for the year. The capital build also benefitted from a reduction in risk-weighted assets equivalent to 58 basis points and 16 basis points for the final dividend received from the Insurance business in February 2022 (£300 million). These positives offset fixed pension contributions made to the defined benefit pension schemes of 41 basis points and other movements of 14 basis points which include around 30 basis points for the impact of the equity provided to Insurance to fund the acquisition of Embark. The pro forma CET1 capital ratio reduced by a further 185 basis points in respect of the full year ordinary dividend and the announced share buyback programme. In addition, variable pension contributions of 10 basis points, based upon a proportion of in year shareholder distributions, were made to the main defined benefit pension schemes in December.

Excluding the Insurance dividend received in February 2022 and the impact of the announced ordinary share buyback programme, the Group's CET1 capital ratio at 31 December 2021 was 17.3 per cent (31 December 2020: 16.2 per cent).

SUMMARY OF GROUP RESULTS (continued)

Risk-weighted assets at £196.0 billion reduced by £6.7 billion during the year, including £4.7 billion in the fourth quarter. This was driven primarily by optimisation activity undertaken in Commercial Banking, partially offset by balance sheet growth in the business. Credit migrations have had a limited impact on the risk-weighted asset position in part due to the increase in house prices.

On 1 January 2022 the Group's risk-weighted assets increased to £212 billion on a pro forma basis, reflecting the impact of regulatory changes that include the implementation of new CRD IV mortgage, retail unsecured and commercial banking models and revised counterparty credit risk measurement rules (SA-CCR) following the UK implementation of the remainder of CRR 2. These were partially offset by the removal of risk-weighted assets linked to the reversal of the revised treatment previously applied to intangible software assets and other movements. The new CRD IV models are subject to finalisation and approval by the PRA and therefore uncertainty over the final impact remains.

The pro forma CET1 capital ratio on 1 January 2022 reduced by around 230 basis points to 14.0 per cent, reflecting the above increase in risk-weighted assets and other related modelled impacts, in addition to the capital impact of the treatment of intangible software assets and phased reductions in IFRS 9 transitional relief. The full impact of the regulatory changes has been absorbed through the retention of surplus capital (post announced distributions) that was held aside for this purpose. The Group's pro forma CET1 capital ratio after reflecting the regulatory changes remains strong and above the Group's target capital level and minimum regulatory capital requirements. The Board remains committed to capital returns and intends to pay down to its capital target within the course of the current plan by 2024.

The Group's CET1 regulatory minimum capital requirement is currently around 11 per cent.

In December 2021 the Financial Policy Committee (FPC) of the Bank of England announced that the UK countercyclical capital buffer rate will increase from nil to 1 per cent in December 2022, with an expectation that it will increase to 2 per cent in the second quarter of 2023. This would represent an equivalent increase in the Group's countercyclical capital buffer to 0.9 per cent in December 2022 and to 1.8 per cent in the second quarter of 2023, based on the position at 31 December 2021 and reflective of the concentration of exposures of the Group to the UK market.

The PRA reduced the Group's nominal Pillar 2A CET1 capital requirement during the year. It was the equivalent of around 2.1 per cent of risk-weighted assets as at 31 December 2021.

In December 2020 the PRA introduced a reduction to the Group's Pillar 2A requirement linked to the setting of a 2 per cent UK countercyclical capital buffer rate under normal conditions (as defined by the FPC). In line with PRA policy, the reduction is currently fully offset by other regulatory capital buffers at the CET1 level whilst the UK countercyclical capital buffer rate remains at nil. This offset is expected to unwind going forward as the UK countercyclical capital buffer rate increases to 2 per cent in line with the FPC announcement, effectively allowing the reduction of the PRA requirement to take effect.

The Board's view of the ongoing level of CET1 capital required to grow the business, meet current and future regulatory requirements and cover uncertainties continues to be around 12.5 per cent, plus a management buffer of around 1 per cent.

SUMMARY OF GROUP RESULTS (continued)

Pensions

During 2021 the valuations of the Group's three main defined benefit pension schemes were agreed with the scheme trustees. The latest annual update as at 31 December 2020 showed the funding deficit had improved to £6.0 billion from the £7.3 billion shown at the 31 December 2019 triennial valuation. The revised deficit included an allowance for the impact of RPI reform as announced by the Chancellor of the Exchequer in November 2020 which is currently subject to judicial review in 2022.

Under the agreed recovery plans, the Group will make c.£0.8 billion of fixed contributions to the pension schemes per annum, plus a further 30 per cent of in-year capital distributions to ordinary shareholders, up to a limit on total deficit contributions of £2.0 billion per annum, payable until the 2019 deficit has been removed. A total of £1,064 million of deficit contributions were paid in 2021. The Group continues to provide security to these pension schemes, with corporate guarantees and collateral pledged, whilst also making additional annual contributions for future service and scheme running costs.

The next triennial valuation will take place as at 31 December 2022 with the outcome to be agreed by 31 March 2024.

Dividend and share buyback

The Group has a progressive and sustainable ordinary dividend policy whilst maintaining the flexibility to return surplus capital through buybacks or special dividends.

Given the Group's solid financial performance and strong capital position at the year end, the Board has recommended a final ordinary dividend of 1.33 pence per share. This is in addition to the interim ordinary dividend of 0.67 pence per share that was announced in the 2021 half year results. The recommended total ordinary dividend per share for 2021 is therefore 2.00 pence per share. The Board has also announced its intention to implement an ordinary share buyback of up to £2.0 billion which will commence as soon as is practicable and is expected to be completed by 31 December 2022. The Board intends to return surplus capital by way of a buyback programme given the amount of surplus capital, the normalisation of ordinary dividends and the flexibility that a buyback programme offers. Given the total ordinary dividend of 2.00 pence per share and the intended ordinary share buyback, equivalent to up to 2.82 pence per share, the total capital return in respect of 2021 will be up to 4.82 pence per share, equivalent to £3.4 billion.

The Board remains committed to future capital returns. Going forward, the Board intends to maintain its progressive and sustainable ordinary dividend policy and due consideration will be given to further excess capital returns at the end of the year as appropriate. The Board intends to pay down to its capital target within the course of the current plan, by 2024.

SEGMENTAL ANALYSIS - UNDERLYING BASISA