Lloyds Regulatory News (LLOY)

Lloyds Banking Group plc

2016 Results

22 February 2017

FORWARD LOOKING STATEMENTS

This document contains certain forward looking statements with respect to the business, strategy and plans of Lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Banking Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates (including low or negative rates), exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the exit by the UK from the European Union (EU) and the potential for one or more other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; requirements or limitations on the Group as a result of HM Treasury's investment in the Group; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.

CONTENTS

RESULTS FOR THE FULL YEAR

'We have delivered strong financial performance in 2016 as we continue to make good progress against our strategic priorities. Underlying profit was £7.9 billion and statutory profit has more than doubled to £4.2 billion. We continue to improve our customers' experience, simplifying the business whilst growing in targeted areas and in December announced the acquisition of MBNA's prime UK credit card business. Strong capital generation, which is a consequence of our business model, has enabled us to fully cover the expected capital impact of the MBNA acquisition, increase our ordinary dividend by 13 per cent and pay a special dividend. As a simple, low risk, UK focused bank we are committed and well positioned to help Britain prosper and become the best bank for customers and shareholders.'

António Horta-Osório

Group Chief Executive

Good underlying performance with strong improvement in statutory profit

· Underlying profit of £7.9 billion (2015: £8.1 billion); underlying RoRE of 13.2 per cent and RoTE of 14.1 per cent

· Total income of £17.5 billion (2015: £17.6 billion)

- Net interest income of £11.4 billion (2015: £11.5 billion) with improved margin of 2.71 per cent

- Other income at £6.1 billion, up in the fourth quarter but slightly lower (1 per cent) than in 2015 (£6.2 billion)

· Operating costs 3 per cent lower at £8.1 billion. Market-leading cost:income ratio improved to 48.7 per cent with positive operating jaws

· Asset quality remains strong with no deterioration in underlying portfolio. Asset quality ratio of 15 basis points

· Conduct charges of £2.1 billion include £1.0 billion provision for PPI taken in the third quarter

· Statutory profit before tax of £4.2 billion, more than double the £1.6 billion statutory profit in 2015

Strong balance sheet and capital generation

· Strong balance sheet with a pro forma common equity tier 1 (CET1) ratio of 13.8 per cent (31 December 2015: 13.0 per cent) after dividends; 14.9 per cent pre dividend. Prudently retaining c.80 basis points of capital for the announced MBNA acquisition

· CET1 capital generation of c.190 basis points, pre dividend, ahead of guidance due to underlying performance and lower risk-weighted assets

· PRA Buffer reduced reflecting de-risking of the balance sheet. The Group will continue to target a CET1 ratio of c.13 per cent given expected future regulatory capital developments

· Leverage ratio on a pro forma basis increased to 5.0 per cent (30 September 2016: 4.8 per cent; 31 December 2015: 4.8 per cent)

· Tangible net assets per share of 54.8 pence (30 September 2016: 54.9 pence; 31 December 2015: 52.3 pence)

Our differentiated UK focused business model continues to deliver for customers and shareholders

· Cost discipline and low risk business model providing competitive advantage

· Good progress in improving products and propositions to better meet customers' evolving needs and preferences

· Helping Britain prosper through continued support to SMEs, first-time buyers and growth in consumer finance

· Acquisition of MBNA prime UK credit card business will support strategic goal to grow in consumer finance; expected to deliver strong financial returns and create significant shareholder value

· UK government continues to reduce its shareholding through trading plan, with stake now below 5 per cent

Guidance reflects confidence in the Group's future prospects

· Net interest margin for 2017 expected to be greater than 2.70 per cent (before impact of MBNA)

· Asset quality ratio for the full year 2017 expected to be around 25 basis points (before impact of MBNA)

· Continue to target a cost:income ratio of around 45 per cent exiting 2019, with reductions every year

· Now expect RoRE of between 12.0 and 13.5 per cent and RoTE of between 13.5 and 15.0 per cent in 2019

· Group now expects to generate 170−200 basis points of CET1 capital per annum, pre dividend

Increased ordinary dividend and payment of special dividend

· The Board has recommended a final ordinary dividend of 1.7 pence per share, making a total ordinary dividend of 2.55 pence per share, an increase of 13 per cent on 2015 and in line with our progressive and sustainable ordinary dividend policy

· In addition, the Board has recommended a special dividend of 0.5 pence per share

CONSOLIDATED INCOME STATEMENT − UNDERLYING BASIS

BALANCE SHEET AND KEY RATIOS

GROUP CHIEF EXECUTIVE'S STATEMENT

We have delivered strong financial performance in 2016 as we continue to make good progress against our strategic priorities. Underlying profit was £7.9 billion and statutory profit has more than doubled to £4.2 billion. We continue to improve our customers' experience, simplifying the business whilst growing in targeted areas and in December announced the acquisition of MBNA's prime UK credit card business. Strong capital generation, which is a consequence of our business model, has enabled us to fully cover the expected capital impact of the MBNA acquisition, increase our ordinary dividend by 13 per cent and pay a special dividend. As a simple, low risk, UK focused bank we are committed and well positioned to help Britain prosper and become the best bank for customers and shareholders.

Operating environment

Given our UK focus, our performance is inextricably linked to the health of the UK economy which has been more resilient than the market expected post referendum, with GDP growth of 2 per cent in 2016. The UK's decision to leave the European Union means the exact nature of our relationship with Europe going forward remains unclear and the economic outlook is uncertain. However, the recovery in recent years with low unemployment, reduced levels of household and corporate indebtedness and increased house prices means the UK is well positioned.

The regulatory environment also continues to evolve and there are a number of areas on which we await further clarity but, given the strength of our balance sheet and the capital generative nature of our business model, we are well placed to meet these regulatory requirements and the economic uncertainty. Following the de-risking of the balance sheet in recent years our PRA Buffer has been reduced but, in light of expected future regulatory capital developments, the Group will continue to target a CET1 ratio of around 13.0 per cent.

Financial performance

The Group has delivered strong financial performance in the year. Underlying profit was £7.9 billion with an underlying return on required equity of 13.2 per cent (return on tangible equity of 14.1 per cent). Income was slightly lower which was more than offset by lower operating costs, resulting in an improved cost:income ratio of 48.7 per cent. Impairment increased, primarily due to lower releases and write-backs, but asset quality remains strong with no signs of deterioration in the portfolio. The difference between underlying profit and statutory profit reduced significantly in 2016, as statutory profit before tax more than doubled to £4.2 billion, largely due to lower PPI provisions, and this enabled the Group to generate approximately 190 basis points of CET1 capital during the year.

Our balance sheet remains strong with a pro forma CET1 ratio of 13.8 per cent, a total capital ratio of 21.4 per cent and a pro forma leverage ratio of 5.0 per cent. In line with our progressive and sustainable ordinary dividend policy, the Board has recommended a final ordinary dividend of 1.7 pence per share, taking the total ordinary dividend for the year to 2.55 pence per share, an increase of 13 per cent on 2015. The Group has held back c.80 basis points of CET1 capital to cover the estimated capital impact of the MBNA acquisition; however, given our strong capital generation in the year, the Board has also recommended a special dividend of 0.5 pence per share.

Strategic progress

We have continued to make good progress on our strategic priorities in 2016.

Creating the best customer experience

We are committed to meeting our customers' evolving needs and preferences through our multi-brand and multi-channel approach. We operate the UK's largest branch network and the largest digital bank with over 12.5 million active online users. We have more than 8 million mobile banking users and for the second consecutive year, the Lloyds Bank app has been rated the best banking app of all the UK major banks for functionality.

Customer migration to digital channels continues at pace with more than 60 per cent of our simple customer needs now met online and digital is now the number one channel for new loans and credit cards. We continue to invest in our customer propositions to improve processes and the way our customers interact with us. In Commercial Banking we have continued to improve the online banking platform and in Retail Business Banking we are now able to open new customer accounts in 5-6 days, down from 21 days previously, with a best-in-class automated digital ID and verification process. In Consumer Finance, Black Horse has reduced processing times for new loans, while increasing security and protection for customers. In Insurance we have introduced online tools which will allow customers to consolidate their workplace pension assets and employers to process employee monthly pension contributions on the same day, down from 22 days in 2014.

This progress has been reflected in further reductions in the level of customer complaints and our net promoter score, which continued to improve in 2016 and is now nearly 50 per cent higher than at the end of 2011. Our latest 'Building the Best Team' survey results show that colleague engagement is at an all-time high and in line with top performing UK corporates. Our strong performance in 2016 reflects the hard work undertaken by colleagues across the Group and I would like to thank everyone for their significant efforts and commitment.

Becoming simpler and more efficient

Our cost leadership is a significant source of competitive advantage and cost management remains a strategic priority. In response to the lower rate environment we have accelerated the delivery of our cost initiatives, and announced at the half year an increase to the Simplification run-rate savings target and a reduction in our non-branch property portfolio. We remain on track to deliver both, having already achieved £0.9 billion of the increased £1.4 billion Simplification run-rate target. As a result of the continued focus on costs, our market-leading cost:income ratio has improved and we continue to target further reductions.

Delivering sustainable growth

The Group aims to deliver sustainable growth in line with its low risk business model. We have continued to make good progress in growing market share in areas where we are underrepresented, and have grown lending to SME and Mid Markets clients by around £2 billion in the year. In Consumer Finance we have continued to grow our motor finance and credit card portfolios organically and the agreement to acquire MBNA's prime UK credit card business will give us the opportunity to create a best-in-class credit card operation. In Insurance, we will continue to invest in developing the brand and the business, including our financial planning and retirement capabilities, and have also completed four bulk annuity deals. In addition, we are committed to supporting first-time home buyers and remain the largest lender to this customer group.

Helping Britain prosper

We remain committed to supporting the people, businesses and communities in the UK through our Helping Britain Prosper Plan. Notably, we have provided £1.2 billion of new funding to manufacturing businesses, supported 121,000 start-ups and helped 10,000 clients to start exporting in 2016. Our economic contribution to Britain extends beyond the products and services we offer and the funding we provide to our customers and clients. Since we launched our Apprenticeship Scheme we have created more than 4,000 roles, including 1,000 in 2016 and we have committed to creating 8,000 by 2020. We have also exceeded our target to create 20,000 digital champions, a year earlier than expected. Furthermore, we are the highest payer of UK tax in the most recent PwC Total Tax Contribution Survey for the 100 Group, having paid £1.8 billion in 2015. Our tax payment in 2016 was £2.3 billion.

The combination of the progress we have made towards our strategic priorities and our strong financial performance has enabled the UK government to further reduce its stake in the Group to less than 5 per cent, at a profit, returning over £18.5 billion to the UK taxpayer since 2009.

Outlook

Our financial targets reflect our confidence in the future prospects of the Group. In 2017 we expect the net interest margin to be greater than 2.70 per cent and the asset quality ratio to increase to around 25 basis points (before MBNA). We continue to target a cost:income ratio of around 45 per cent exiting 2019, with reductions every year. We now expect a return on required equity of between 12.0 and 13.5 per cent and a return on tangible equity of between 13.5 and 15.0 per cent in 2019. Going forward, the Group expects to generate between 170 and 200 basis points of CET1 capital per annum, pre dividend.

Summary

Following the simplification and transformation of our business in recent years, the Group is now focused on delivering the best customer experience and on continuing to develop our digital capabilities. Our cost leadership and lower risk positioning provide competitive advantage which enables us to deliver superior returns to shareholders. We continue to believe that our simple, low risk business model is the right one, and our strategic progress and strong financial performance position us well for future success.

António Horta-Osório

Group Chief Executive

SUMMARY OF GROUP RESULTS

Good underlying performance with strong improvement in statutory profit

The Group's underlying profit was £7,867 million, 3 per cent lower than 2015, with slightly lower income and higher impairments, partly offset by lower costs. The underlying return on required equity was 13.2 per cent and the underlying return on tangible equity was 14.1 per cent. Statutory profit before tax more than doubled to £4,238 million, compared with £1,644 million in 2015, as the level of PPI provisions reduced significantly.

Total loans and advances to customers were £450 billion, compared with £455 billion at 31 December 2015, and customer deposits were similarly £5 billion lower than a year ago at £413 billion.

The balance sheet remains strong and the CET1 ratio at 31 December 2016 was 13.8 per cent on a pro forma basis and reflects the retention of c.80 basis points of CET1 capital to cover the estimated capital impact of the MBNA acquisition. The Group generated c.190 basis points of CET1 capital, pre dividends, in the period and tangible net asset value per share increased to 54.8 pence (31 December 2015: 52.3 pence).

Given the significant amount of capital generated in the year, the Board has recommended a final ordinary dividend of 1.7 pence per share, making a total ordinary dividend of 2.55 pence per share, an increase of 13 per cent on 2015 and in line with our progressive and sustainable ordinary dividend policy. In addition, the Board has recommended a special dividend of 0.5 pence per share.

Total income

Total income of £17,500 million was 1 per cent lower than 2015, with a small reduction in net interest income and a 1 per cent fall in other income.

Net interest income fell by £47 million to £11,435 million. The net interest margin increased to 2.71 per cent (2015: 2.63 per cent), with lower deposit and wholesale funding costs, including the benefit from the ECN redemptions in the first quarter, more than offsetting the continuing pressure on asset pricing. Average interest-earning banking assets reduced by 1 per cent with growth in SME and Consumer Finance balances more than offset by reductions in the mortgage and run-off portfolios. The Group expects that the net interest margin for 2017 will be greater than 2.70 per cent (before MBNA).

The Group manages the risk to its capital and earnings from adverse movements in interest rates centrally by hedging liabilities which are deemed to be stable or less sensitive to change in market interest rates. As at 31 December 2016, the balance hedged was c.£111 billion with an average duration of c.3 years and an earning rate of approximately 1.6 per cent over LIBOR. In 2016, the benefit from the structural hedge totalled £1.7 billion over LIBOR (2015: £1.8 billion).

Other income was £6,065 million in 2016 (2015: £6,155 million). Other income increased in the fourth quarter compared with the same period last year largely as a result of improved Insurance income and was higher than the third quarter of 2016, largely due to increased Commercial Banking fees and commissions and improved Insurance income. The year-on-year reduction of 1 per cent was largely due to continued pressure on fees and commissions, including the impact of the market-wide cap on card interchange fees introduced in late 2015, lower returns in the Insurance business and reduced income from the run-off portfolio.

Operating lease depreciation increased 17 per cent to £895 million due to continued growth in the Lex Autolease business and additional charges in Commercial Banking related to certain leasing assets.

Operating costs

Operating costs were £8,093 million, 3 per cent lower than 2015, driven by the continued focus on cost management and actions to simplify the business. Investment in the business continues to increase, particularly in digital, and in 2016 the Group made further improvements to the branch network to meet changing customer preferences, investing in new distribution technology, designing new branch formats and upgrading call centre technology.

The Simplification programme remains on track to deliver the increased target of £1.4 billion of annual run-rate savings by the end of 2017, with £0.9 billion of run-rate savings delivered to date. The total spent on the Simplification programme to date is £1.6 billion with an expected further spend of £0.6 billion by the end of 2017, of which around £0.2 billion will be included in restructuring costs.

The Group's market-leading cost:income ratio improved to 48.7 per cent (2015: 49.3 per cent) with positive operating jaws of 1 per cent. The Group remains committed to achieving annual improvements in the cost:income ratio and continues to target a cost:income ratio of around 45 per cent exiting 2019.

Impairment

Asset quality remains strong with no deterioration in the underlying portfolio. The impairment charge increased to £645 million from £568 million in 2015 with the asset quality ratio increasing slightly to 15 basis points. This increase was largely due, as expected, to a reduction in the level of provision releases and write-backs. The gross asset quality ratio (excluding releases and write-backs) remained unchanged at 28 basis points. Looking forward the Group expects a further reduction in releases and write-backs in 2017 and, as a result, the asset quality ratio to increase to around 25 basis points.

The average indexed loan to value (LTV) of the Retail mortgage portfolio improved to 44.0 per cent (31 December 2015: 46.1 per cent) and the percentage of lending with an indexed LTV of greater than 100 per cent improved to 0.7 per cent (31 December 2015: 1.1 per cent).

Impaired loans continued to fall and at 31 December 2016 were £8.5 billion, 1.8 per cent of total loans and advances compared with £9.6 billion, and 2.1 per cent at 31 December 2015.

Statutory profit

Statutory profit before tax more than doubled to £4,238 million (2015: £1,644 million) primarily due to lower PPI provisions of £1,000 million (2015: £4,000 million).

The charge of £790 million for Enhanced Capital Notes in 2016 represented the write-off of the embedded derivative and the premium paid on the redemption of the remaining notes in the first quarter.

Market volatility and asset sales of £439 million included a gain on sale of the Group's interest in Visa Europe of £484 million and negative insurance volatility of £91 million. The main item in the 2015 charge of £81 million was negative insurance volatility of £105 million.

Restructuring costs were £622 million in 2016 and comprised costs relating to the Simplification programme, the announced rationalisation of the non-branch property portfolio and the work on implementing the ring-fencing requirements.

A provision of £1 billion to cover further operating costs and redress relating to PPI was recognised in the third quarter and complaint levels in the second half have been around 8,300 per week on average. The Group's current PPI provision reflects our interpretation of the Financial Conduct Authority's (FCA) consultation paper regarding a potential time bar of the end of June 2019 and the Plevin case.

In addition there was a charge of £1,085 million to cover a range of other conduct issues of which £475 million was recognised in the fourth quarter. The charge for the year included £280 million in respect of complaints relating to packaged bank accounts, £261 million in respect of arrears-related activities on secured and unsecured retail products and £94 million related to insurance products sold in Germany, together with a number of other conduct risk provisions totalling £450 million across all divisions.

Statutory profit in 2015 included a charge of £745 million, comprising £660 million relating to the sale of TSB and £85 million of TSB dual-running costs.

Taxation

The tax charge was £1,724 million (2015: £688 million) representing an effective tax rate of 41 per cent (2015: 42 per cent). The high effective tax rate in 2016 was due to the banking surcharge, restrictions on the deductibility of conduct provisions, and the negative impact on the net deferred tax asset of both the change in corporation tax rate and the expected utilisation by the insurance business. The Group continues to expect a medium term effective tax rate of around 27 per cent.

Return on required equity and tangible equity

The underlying return on required equity was 13.2 per cent (2015: 15.0 per cent) and the underlying return on tangible equity was 14.1 per cent (2015: 16.0 per cent). The reduction in both return measures reflects the lower underlying profit and higher underlying tax charge following implementation of the banking tax surcharge.

The return on required equity increased to 5.3 per cent (2015: 1.5 per cent) and the return on tangible equity increased to 6.6 per cent (2015: 2.6 per cent) both largely reflecting the lower PPI provision made in the year.

Going forward, the Group remains confident in its future prospects and now expects to deliver a return on required equity of between 12.0 and 13.5 per cent and a return on tangible equity of between 13.5 and 15.0 per cent in 2019.

Balance sheet

Loans and advances to customers were £450 billion compared with £455 billion at 31 December 2015. The reduction reflects continued strong growth in Consumer Finance, up 11 per cent, and SME lending, up 3 per cent, with both segments outperforming the market. This was offset by further reductions in 'closed' portfolios, reduced lending to financial institutions and lower 'open book' mortgage balances, reflecting the Group's prudent stance on risk and its focus on protecting margin in the current competitive low growth market. Mortgage open book balances fell by £4.5 billion to £266 billion during the year, of which £3.4 billion was in the first half and £1.1 billion was in the second half. Mortgage open book balances are expected to be broadly stable in 2017.

Deposits fell 1 per cent to £413 billion, with increased high quality deposits from Commercial clients offset by lower Retail and Consumer Finance tactical balances, largely in response to the active management of deposit and funding requirements. The Group has maintained its strong funding position with a loan to deposit ratio of 109 per cent (2015: 109 per cent).

Wholesale funding decreased by £9 billion to £111 billion as excess liquidity is managed down. Wholesale funding with a residual maturity of less than one year was £35 billion (2015: £38 billion), and the Group's term funding ratio was unchanged at 68 per cent.

The Group's liquidity position remains strong, with the liquidity coverage ratio comfortably meeting regulatory requirements.

Capital ratios and risk-weighted assets

The CET1 ratio improved to 13.8 per cent (2015: 13.0 per cent) on a pro forma basis and reflects the retention of c.80 basis points of CET1 capital to cover the estimated capital impact of the MBNA acquisition. The pro forma ratio includes the 2016 dividend paid by the Insurance business in February 2017.

The Group continues to be strongly capital generative and over the year generated c.190 basis points of CET1 capital, pre dividend. This largely comprised c.220 basis points of underlying capital generation, along with benefits from a reduction in risk-weighted assets (c.40 basis points) and the insurance dividend (c.20 basis points) partially offset by conduct (c.100 basis points) and other items. This strong capital generation has enabled us to fully cover the expected CET1 capital impact of the MBNA acquisition, increase the ordinary dividend and pay a special dividend. Going forward we now expect to generate 170 to 200 basis points of capital per annum pre dividends. This will enable us to support sustainable growth in the business and help Britain prosper whilst delivering sustainable returns to shareholders.

The Group is pleased to announce that following their annual review the PRA has reduced our PRA Buffer to reflect the significant de-risking undertaken by the Group in recent years. Going forward however, there remain a number of potential regulatory capital developments (including the introduction of the systemic risk buffer in 2019) and as a result the Board's view of the current level of CET1 capital required to grow the business, meet regulatory requirements and cover uncertainties remains unchanged at around 13 per cent.

The amount of capital we believe is appropriate to hold is likely to vary from time to time depending on circumstances and the Board will continue to give due consideration, subject to the situation at the time, to the distribution of any surplus capital through the use of special dividends or share buy backs.

The Group's total capital ratio remains strong at 21.4 per cent, significantly in excess of regulatory requirements.

Risk-weighted assets fell by 3 per cent to £216 billion with the reduction mainly arising in the fourth quarter primarily as a result of active balance sheet management including securitisations.

The leverage ratio on a pro forma basis increased to 5.0 per cent (2015: 4.8 per cent), largely reflecting the increase in tier 1 capital.

The tangible net asset value per share increased to 54.8 pence (31 December 2015: 52.3 pence) after payment of the 2015 final and 2016 interim dividends totalling 2.85 pence. The increase reflects good underlying profitability partly offset by tax and other statutory items.

Dividend

The Board has recommended a final ordinary dividend of 1.7 pence per share, together with a capital distribution in the form of a special dividend of 0.5 pence per share. This is in addition to the interim ordinary dividend of 0.85 pence per share that was announced at the 2016 half year results.

The total ordinary dividend per share for 2016 of 2.55 pence per share has increased by 13 per cent, from 2.25 pence per share in 2015 and is in line with our progressive and sustainable ordinary dividend policy. We continue to expect ordinary dividends to increase over the medium term with a dividend payout ratio of at least 50 per cent of sustainable earnings.

The special dividend of 0.5 pence per share represents the distribution of capital over and above the Board's view of the current level of capital required to grow the business, meet regulatory requirements and cover uncertainties, and allows for the estimated capital impact of the MBNA acquisition.

UNDERLYING BASIS - SEGMENTAL ANALYSIS

UNDERLYING BASIS - QUARTERLY INFORMATION

DIVISIONAL RESULTS

Retail

Retail offers a broad range of financial service products, including current accounts, savings and mortgages, to UK personal customers, including Wealth and small business customers. It is also a distributor of insurance, and a range of long-term savings and investment products. Its aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value to customers, and by providing them with greater choice and flexibility. It will maintain its multi-brand and multi-channel strategy, and continue to simplify the business and provide more transparent products, helping to improve service levels and reduce conduct risks.

Progress against strategic initiatives

The division has made good progress against its strategic objectives; improving the customer experience and realigning branch and other capabilities in line with changing customer needs.

Creating the best customer experience

· Largest UK digital bank with over 12.5 million active online users including over 8 million mobile users.

· 55 per cent of approved mortgage applications proceed to offer within 14 days compared to 37 per cent in 2015.

· Instant mortgage lending decisions through the online Agreement in Principle.

· Customers can now complete their full remortgage application online.

· Reduced appointment times for opening a new savings account by 44 per cent and matured savings accounts can now be renewed in just a few minutes.

· Extended online and mobile phone application processes to all current accounts.

· Lloyds Bank and Bank of Scotland current account online journeys have been rated #1 and #2 respectively by industry researcher eBenchmarkers.

Becoming simpler and more efficient

· Continued the branch network optimisation programme in response to changing customer behaviour.

− Investing in new distribution technology and rolling out WIFI and tablet solutions.

− Designing new branch formats and upgrading call centre technology.

− Closed further branches, but maintaining the UK's largest branch network with a 21 per cent market share.

Delivering sustainable growth

· Continued to attract new customers through positive switching activity, accounting for more than 1 in 5 switchers in 2016.

· Since the launch of the Group's Helping Britain Prosper Plan in 2014 the Group has continued to be the leading supporter of first-time house buyers, with £11.7 billion lent in 2016.

· Exceeded Helping Britain Prosper target by supporting over 121,000 start-up businesses whilst also launching a range of new products and services to improve the customer experience for small businesses.

Financial performance

· Underlying profit decreased 3 per cent to £3,003 million reflecting the challenging interest rate environment, continued pressure on other operating income and increased investment in the business.

· Net interest income decreased 3 per cent driven largely by a reduction in mortgage balances reflecting the focus on protecting margins. Banking margin fell by just 2 basis points despite the continuing low interest rate environment.

· Other income 6 per cent lower than 2015 driven by changing customer behaviour and improvements to the customer proposition.

· Operating costs decreased 4 per cent to £4,174 million as efficiency savings more than covered an increase in investment. Staff numbers have reduced by 11 per cent in the year.

· Impairment charge increased 7 per cent to £373 million, however underlying credit quality remains stable.

· Loans and advances to customers fell 3 per cent to £297.7 billion, with the open mortgage book (excluding specialist mortgage books and Intelligent Finance) reducing by £4.5 billion to £266 billion during the year, of which £3.4 billion was in the first half and £1.1 billion in the second half. The fall reflects the decision to protect net interest margin in the current competitive low growth market.

· Customer deposits decreased 1 per cent to £271.0 billion, driven by the decision to reduce tactical balances.

· Risk-weighted assets increased £0.6 billion to £55.2 billion reflecting the Group's focus on balancing margin and risk considerations offset by a more prudent approach to secured risk-weighted asset modelling.

Performance summary

Key balance sheet items

Commercial Banking

Commercial Banking has a client-led, low risk, capital efficient strategy, helping UK-based clients and international clients with a link to the UK. Through its four client facing divisions - SME, Mid Markets, Global Corporates and Financial Institutions - it provides clients with a range of products and services such as lending, transactional banking, working capital management, risk management, debt capital markets services, as well as access to private equity through Lloyds Development Capital.

Progress against strategic initiatives

The division has made significant progress against its strategic objectives; delivering a return on risk-weighted assets of 2.44 per cent, exceeding the investor commitment of returns greater than 2.40 per cent by the end of 2017 while continuing to grow lending in key client segments.

Creating the best customer experience

· Awarded Business Bank of the Year at the FD's Excellence Awards for the 12th consecutive year.

· Increased net promoter scores across all client divisions surveyed in 2016.

· Supported over 10,000 first time exporters which is helping the UK government achieve its ambition to deliver 100,000 new exporters by 2020.

Becoming simpler and more efficient

· Reduced SME relationship manager hours spent on business account opening from seven to two hours, enabling more time to be spent face to face with clients.

· Continued to invest in next generation digital capabilities and client analytics to transform clients' experiences. The 'CB Online' transaction banking platform now has over 2,000 clients registered.

Delivering sustainable growth

· Increased lending in SME and Mid Markets by around £2 billion in 2016 and provided UK manufacturers with over £1 billion of funding support in 2016.

· Facilitated over £10.5 billion of financing to support UK government infrastructure projects, including the creation of a wood pellet power plant in Teesside which will provide energy to 600,000 homes and Race Bank Offshore Windfarm which will play a key part in the UK's green energy future.

Financial performance

· Underlying profit in line with prior year at £2,468 million.

· Return on risk-weighted assets of 2.44 per cent with a 7 per cent reduction in risk-weighted assets, total income growth and disciplined cost management.

· Total income up 2 per cent with growth across SME, Mid Markets and Financial Institutions.

· Net interest income up 6 per cent with a 28 basis points improvement in net interest margin, supported by high quality deposit growth, disciplined deposit pricing and reduced funding costs. Other income down 4 per cent due to non-recurring income recognised in 2015 relating to refinancing support of Global Corporates clients. This has been partially offset by growth in CB Markets of 8 per cent and increased momentum in the second half of the year with other income up 9 per cent against the first half of 2016.

· Operating lease depreciation increased due to additional charges relating to certain leasing assets.

· Operating costs down 1 per cent with performance reflecting disciplined cost management and headcount rationalisation, supported by efficiency initiatives resulting in positive jaws.

· Impairment charge of £16 million reflects the benefit of active risk management and the continued low interest rate environment. Asset quality ratio remains low at 2 basis points.

· Risk-weighted assets decreased by £7.2 billion, reflecting the disciplined approach to capital, including capital efficient securitisation activity and credit management. This has received global recognition through the award of Credit Portfolio Manager of the Year at the 2016 Risk Awards.

· Loans and advances to customers fell by 2 per cent to £100.4 billion. Above market growth in SME lending and increases in Mid Markets and Global Corporates offset by lower lending in Financial Institutions.

· Deposits increased 1 per cent to £132.6 billion. Strong momentum in attracting high quality deposits with Global Transactional Banking balances up 10 per cent, further optimising the portfolio and strengthening the Group balance sheet.

Performance summary

Key balance sheet items

Consumer Finance

Consumer Finance comprises all the Group's consumer lending products including motor finance, credit cards, and unsecured personal loans along with its European business. Its aim is to deliver sustainable growth, within a prudent risk appetite in these markets through its multi-brand, multi-channel distribution model.

Progress against strategic initiatives

The division continues to make significant progress against its strategic objectives, and has delivered its original target of increasing UK customer assets by £6 billion a year ahead of target, whilst maintaining a prudent approach to new business and managing residual value risk conservatively. In line with its strategy to grow in consumer finance the Group has entered into an agreement to acquire MBNA's prime UK credit card business with £7.0 billion of assets and c.2.8 million customers, which will give us the opportunity to create a best-in-class credit card operation.

Creating the best customer experience

· Credit Cards launched the innovative Halifax FlexiCard, giving customers more control, with dedicated repayment plans.

· In the Motor business, Black Horse launched a personal contract purchase (PCP) product for caravans and motorhomes, which now accounts for 11 per cent of applications in this sector.

· Lex Autolease built a bespoke system to manage vehicle servicing and maintenance, including online self-service functionality and has been used by over 10,000 customers since May.

· Loans have significantly enhanced the digital sales process with the introduction of an upfront eligibility checker.

Becoming simpler and more efficient

· Consumer Finance continues to focus on efficiency with further significant improvements to processes implemented in the year. This has also helped reduce customer complaints by 11 per cent. 

· Lex Autolease simplified the way it sells c.80,000 vehicles per annum at end of contract, reducing the number of operating sites and associated costs, whilst increasing speed of vehicle disposals.

· Black Horse launched the Mobile Finance Calculator across the dealer network, allowing dealers to provide more accurate indicative customer pricing early on in the process.

Delivering sustainable growth

· Black Horse balances have grown by 20 per cent in the year, ahead of market growth, and continue to benefit from partnerships with key manufacturers such as Jaguar Land Rover.

· Credit card balances grew broadly in line with the market at 4 per cent, and the Group was the number one issuer of new cards in the UK.

· The acquisition of MBNA will enable the Group to enhance its position and offering within the UK prime credit card market and brings capabilities including data analytics and digital expertise in addition to a well-recognised brand. This will be complementary to the Group's existing operation and provides further opportunities for growth and delivering excellent customer service.

· Unsecured loan balances contracted marginally in the year as the Group continues to focus on low risk franchise customers.

Financial performance

· Underlying profit at £1,283 million was down 7 per cent, driven by slightly lower income and increased impairment, but return on risk-weighted assets remained strong at 4.09 per cent.

· Net interest income at £1,941 million was down 1 per cent with strong asset growth offset by the 73 basis point reduction in net interest margin. This was largely due to the focus on high quality, lower margin motor finance business, with the margin also impacted by lower Euribor and planned reductions in deposits, in line with the Group's funding strategy.

· Other income was down 2 per cent at £1,338 million due to the market-wide reduction in card interchange fees. Excluding this, other income was 3 per cent higher driven by continued fleet growth in Lex Autolease.

· Operating costs fell 4 per cent to £939 million with continued investment in the business more than offset by underlying efficiency savings. The division maintained a strong cost:income ratio, in line with 2015 at 37.4 per cent.

· The impairment charge of £282 million increased by £47 million, primarily due to overall growth and the non-recurrence of a favourable one-off release in 2015. Credit quality remains good with new business written within the Group's prudent credit and conduct appetite.

· UK customer assets were up 9 per cent year-on-year, driven primarily by growth in Black Horse.

· Customer deposits were down 29 per cent to £7.9 billion driven by re-pricing activity and the Group's deposit strategy.

Performance summary

Key balance sheet items

Insurance

The Insurance division is committed to providing a range of trusted and value-for-money protection, pension and investment products to meet the needs of its customers. With over £110 billion of funds under management, Scottish Widows is helping six million customers protect what they value most and plan financially for the future. In addition, the general insurance business is protecting the homes, belongings, cars and businesses of over three million customers.

Progress against strategic initiatives

The Group will continue to invest in developing the Insurance business and will seek to grow in areas where it has competitive advantage and is underrepresented, for the benefit of both customers and shareholders.

Creating the best customer experience

· Regained '5 star' Service Awards in both Life & Pensions and Investment categories at the 2016 Financial Adviser Service Awards together with 'Most Improved Provider' award. These accolades are voted on by 5,000 UK financial advisers and reflect improved customer service alongside simplified and streamlined processes.

· Strengthened the general insurance business with the launch of a flexible online home insurance offering, delivering increased direct sales, significant new functionality and more choice for customers.

· A founder member of the UK government's Flood Re initiative and played a lead role in setting up the scheme, which has enabled customers in high flood risk areas to secure affordable home insurance.

Becoming simpler and more efficient

· Launched a new digital service for employers, significantly reducing processing times for monthly corporate pension scheme management.

· Introduced an online tool allowing customers to consolidate other workplace pensions assets into the Group. This builds on the existing '5 Steps to Retirement' website, enabling customers to take control of their retirement plans.

Delivering sustainable growth

· Successfully completed four bulk annuity transactions in 2016, taking the combined external deal size to over £1.85 billion since entering the market in late 2015.

· Continued to leverage Group capabilities to source attractive, low risk, higher yielding assets to back annuity liabilities. Total assets acquired to date are £7 billion.

· Growth in corporate pension sales in a competitive environment, driven by increased uptake of new schemes.

· Scottish Widows Protect monthly applications have increased almost tenfold, providing £2.4 billion of life assurance and critical illness cover to individuals and businesses across the UK.

· Corporate pension, planning and retirement funds under management increased to over £42 billion reflecting net inflows and positive market movements.

Financial performance

· Underlying profit decreased by 13 per cent to £837 million. A 17 per cent increase in new business income was more than offset by adverse economics impacting existing business income together with increased investment costs.

· Life and pensions sales (PVNBP) decreased by 6 per cent. Excluding the internal With-Profits fund bulk annuity transfers in 2015 and 2016, PVNBP increased 23 per cent reflecting the four bulk annuity deals secured, growth in corporate pensions and increased momentum in both planning and retirement and protection.

· General insurance gross written premiums (GWP) decreased by 3 per cent, reflecting the continued softening of the Home market and the run off of legacy products.

· Costs increased by 10 per cent to £772 million, reflecting increased investment and £28 million annual levy associated with the Flood Re scheme.

Capital

· The estimated pre dividend Solvency II ratio of 160 per cent (1 January 2016 pre dividend position: 160 per cent) represents the shareholder view of Solvency II surplus. Benefits from capital optimisation initiatives have been offset by adverse interest rate volatility and the payment of a £500 million dividend in February 2016.

· Paid a further £500 million to the Group in February 2017, bringing total dividends paid since the formation of the Group in 2009, to £7.1 billion.

Performance summary

Profit by product group

New business income has increased by £55 million, or 17 per cent, driven by growth in planning and retirement and protection propositions. This has more than offset lower income from corporate pensions.

Existing business income has decreased by £101 million, primarily driven by adverse economics.

There was a net benefit of £223 million (2015: £235 million) as a result of experience and other items. This included one off benefits following an update to the methodology for calculating the illiquidity premium and the addition of a new death benefit to legacy pension contracts, to align terms with other pensions products. These were partly offset by the effect of recent reforms on activity within the pensions market.

General insurance income net of claims has increased by £31 million primarily driven by lower weather related claims.

Run-off and Central items

Run-off

The lower income and costs reflect further reductions in the run-off portfolios.

Central items

Central items includes income and expenditure not attributed to divisions, including the costs of certain central and head office functions.

Total income increased to £330 million (2015: £176 million) largely as a result of sales of liquid assets including gilts, and the timing of dividends from the Group's strategic investments.

The results in 2015 include TSB for the first quarter only.

OTHER FINANCIAL INFORMATION

1. Reconciliation between statutory and underlying basis results

The tables below set out the reconciliation from the statutory results to the underlying basis results, the principles of which are set out on the inside front cover.