lloyds bank optimising liquidity and yield

OPTIMISING LIQUIDITY & YIELD SME

April 2016

BEYOND CREDIT RATINGS

2

Output

Qualitative Factors

Credit Ratings

Institution/Limits

Liquidity Funding Lending Exposure

6 Factor Quantitative Framework

Basel III

Relationship strength, operational reach, news flow and ease of business

Input

Combining traditional measures with these factors provides a strong framework to set counterparty limits

Market Data

Capital Buffer

Regulatory Environment

An approach to assessing and monitoring your bank limits beyond traditional Credit Ratings

LOW RISK BUSINESS MODEL

3

Increasing recognition of balance sheet strength and de-risking through best in peer group CDS*

Apr-2012 101 301 15 417Apr-2013 50 156 15 221Apr-2014 53 74 15 142Apr-2015 57 60 15 132Apr-2016 59 102 15 176

15/04/16

EXAMPLE: 5YR Wholesale Deposit (bps)

PERIOD 3MTH LIBOR

LLOYDS BANK CDS

ARRANGEMENT FEE TOTAL DIFFERENTIAL

Source: Bloomberg Data & Lloyds Bank analytics as

-241

Lloyds Bank PLC 102.497Banco Santander SA 124.779Santander UK PLC 90.456Barclays Bank PLC 125.947Royal Bank Of Scotland PLC 124.573HSBC Holdings PLC 98.39

Source: Bloomberg Data as at 15/04/16

INSTITUTION CDS (bps)

*CDS: A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties.

SUMMARY OF RISK FACTORS

LONG TERM

SHORT TERM

LONG TERM

SHORT TERM

LONG TERM

SHORT TERM

Lloyds Bank PLC £49,303.71 16 4.80% 13.00% A1 P-1 A+ F1 A A-1 102.497Banco Santander SA £46,678.65 18 4.70% 10.05% A3 P-2 A- F2 A- A-2 124.779Santander UK PLC N/A N/A 4.00% 11.60% A1 P-1 A F1 A A-1 90.456Barclays Bank PLC £28,191.15 40 4.20% 11.10% A2 P-1 A F1 A- A-2 125.947HSBC Holdings PLC £88,486.56 9 5.00% 11.90% Aa2 P-1 AA- F1+ AA- A-1+ 98.39Royal Bank Of Scotland PLC £26,773.86 44 5.60% 15.50% A3 P-2 BBB+ F2 BBB+ A-2 124.573

15/04/16

FITCH S&P'S

CDS

Source: Bloomberg data as of

INSTITUTION MARKET CAP (MN)

MARKET CAP

(RANKING) (1)

LEVERAGE RATIO (2)

FULLY LOADED TIER 1 (3)

MOODY'S

A typical risk summary used by treasury teams to help determine Bank limits for deposits

3. The Fully Loaded Tier 1 Ratio measures a bank's core equity capital compared with its total risk-weighted assets. This provides a form of measure of a bank's capital adequacy or financial strength.

1. Ranking is based on the largest market capitalised banks (1731) in the world

2. The Basel III leverage ratio is defined as the Capital Measure (the numerator) divided by the Exposure Measure (the denominator), with this ratio expressed as a percentage. The basis of the calculation is the average of the three month-end leverage ratios over a quarter. The ratio provides a form of measure of the bank’s capital compared with its financial leveraging and the bank’s ability to meet financial obligations.

4

HSBC Bank PLC Lloyds Bank PLC Santander UK PLC Banco Santander SA Barclays Bank PLC RBS PLC

Fitch (review date 19th May 2015) Moody's (review date 28th May 2015) S&P (review date 9th June 2015)

FITCH LONG TERM SENIOR DEBT RATING OF LLOYDS BANK PLC & LLOYDS BANKING

GROUP UPGRADED TO ‘A+’ FROM ‘A’ (19TH MAY 2015)

MOODY’S LONG-TERM SENIOR DEBT AND DEPOSIT RATINGS OF LLOYDS BANK PLC

CONFIRMED AT ‘A1 / P-1’ & OUTLOOK UPGRADED TO POSITIVE (28TH MAY 2015)

S&P LLOYDS SENIOR DEBT RATING ARRIFMED AT ‘A’ (OUTLOOK STABLE) ON

CONCLUSION OF SOVEREIGN SUPPORT REVIEW (9TH JUNE 2015)

CREDIT RATING AGENCIES ACTIONS 2015

5

AA-

Aa2

AA-

A+ A1

A A

A1

A A A2

A- A- A3

BBB+

A3

BBB+ BBB+

One notch upgrade One notch downgrade

Revised rating landscape following Agencies removal of UK Bank assumed Sovereign support post implementation of BRRD regulation

Spain not yet adopted BRRD therefore not assessed

LOW RISK BUSINESS Mortgage credit quality continues to improve with book supported by employment trends and low interest rates

6

LBG: Lloyds Banking Group LTV: Loan to Value HPI: House Price Index

Source: Lloyds Banking Group FY2015 Results.

Is the PRA satisfied that the bank is

failing or likely to fail?

Is the BoE satisfied that it is reasonably likely that action will

be taken that will result in the bank no

longer failing or likely to fail?

Does automatic write down or conversion of

capital instruments at the point of non-viability ensure the

firm is no longer failing or likely to

fail?

Does the BoE consider it is necessary to exercise a

stabilisation power having regard to the objectives of

the resolution regime?

Does the failing firm have protected

deposits?

Consider which tool, or combination

of tools, provides appropriate degree

of continuity of critical economic

functions

No action required by resolution

authority

Place firm into bank insolvency

procedure, for pay-out or transfer

Carry out chosen resolution strategy

No further action within the resolution

regime No

Yes

Stabilisation tools: • Private sector purchaser: transfer all or part of the business to a willing purchaser • Bridge bank: this is used to transfer all or part of the business to a subsidiary pending a future sale

or share issuance. • Bail-in: this is used to absorb the losses of a failed firm, and recapitalise that firm using the firm’s

own resources. The claims of shareholders and unsecured creditors are written down and/or converted into equity to restore solvency, in a manner that respects the hierarchy of claims in insolvency.

• Good Bank/Bad Bank: Separate clean and toxic assets allocated between good and bad bank through a partial transfer of assets and liabilities

January 2015: Banks that fail will have losses imposed on shareholders and creditors (including depositors) before being able to access alternate means of support

Yes Yes

No No No

Yes

Yes

No

• Private sector purchaser • Bridge bank • Bail-in • Good Bank/Bad bank

PRA: Prudential Regulation Authority BoE: Bank of England

Source: Bank of England’s approach to resolution, October 2014 www.bankofengland.co.uk/financialstability/Documents/resolution/apr231014.pdf

BANK RECOVERY AND RESOLUTION DIRECTIVE (BRRD)

7

Bail-in order of priority (from January 2015)

*Interest incurred post-insolvency and liquidators will only arise in the event of liquidation where both will belong to the holding company

1

2

3

4

5

7

8

9

6

10


Shareholders (ordinary shares)

Shareholders (preference shares)

Interest Incurred post-insolvency*

Unsecured subordinated creditors (eg subordinated bondholders)

Unsecured Senior Creditors

Floating charge holders

Preferential creditors (secondary)

Preferential creditors (ordinary)

Liquidators*

Fixed charge holders


8

Potential running order of a Bail In with supporting ring fence structure

Bail-In Waterfall (2)

12.0

2.1

Tier 2

ECN tier 2

Fully loaded CET1

Tier 1

18.8

2.7

1.4

10.3

Dec 2013 pro forma

4.4

CET1* and total capital vs. peers(1) (%)

2015 CAPITAL POSITION OF PEER BANKS

9

Lloyds Banking Group is a strongly capitalised bank within its peer group with a £81bn Bail In buffer

Bail-In

£28.5bn

£19.5bn

£33.0bn

£222.0bn

£229.0bn

£33.0bn

Equity Capital

Sub Debt

Senior Unsecured greater than one year

Unsecured Funding (e.g. Corporate & Local Authority Deposits)

FSCS (Retail)

Secured Funding

£81BN

1) Peers are RBS, Barclays and HSBC as reported at Q3 2015 and Standard Chartered at HY 2015 2) Lloyds Banking Group as of 31st December 2015 3) LBG: 13.0% pro forma *CET1: A measurement of a bank's core equity capital compared with its total risk-weighted assets. This is the measure of a bank's financial strength.

£10 loss------------------ ------------------

£300 assets £290 assets £290 assets

£3 sub-debt

£2 sub-debt

£10 loss on assets

£10 loss on assets

£120 deposits

£128 other liabilities

£9 Equity

£40 senior liabilities of which £10 unsecured

£40 senior liabilities of which £10 unsecured

£33 senior liabilities of which £3

unsecured

£9 Equity

£120 deposits


£120 deposits


Worked Bail In Example

Bank PLC has a balance sheet worth £300, funded by equity of £9 and other liabilities of £291. Bank PLC incurs losses on its assets of £10, £9 of equity and £1 sub-debt are written down to absorb the £10 loss. This reduces the assets and liabilities to £290. The new balance sheet to meet the PRA’s capital requirements. The £9 of equity and £1 of sub-deb have been written off to absorb the £10 loss. Consequently, £7 of unsecured senior liabilities and £2 of sub-debt is converted to equity.

1 2 3


1

2

3

£300 £300 Net £290/Gross £300 £290 £290 £290


10

PRUDENTIAL REGULATION AUTHORITY (PRA) STRESS TEST SCENARIOS 2014

11 Sourced from the Bank of England site (16/12/2014). http://www.bankofengland.co.uk/financialstability/Documents/fpc/keyelements.pdf

Annual GDP

Annual Inflation

Unemployment

HPI & CRE

Analysis of key metrics used by PRA

HPI: -35 CRE: -30%

+5.2%

-3.9%

+5.9%

-3.9% SCEN

ARIO

S C

APIT

AL

RU

LES

MET

HO

DO

LOG

Y

Key UK economic metrics (to trough): GDP (Gross Domestic Product): 3.9% CPI rate: 6.5% Unemployment: +5.2% HPI (House Price Index): -35% CRE (Commercial Real Estate) : -30% Base Rate: 4.25% Equities: -28% Market shock assessed against EBA (European Banking Authority) scenarios.

PRA implementation of CRDIV (Capital Requirement Regulation & Directive) Capital Rules as outlined in PS 7/13 No prudential filter applied for AFS assets Hurdle rates CET1 > 7% base, > 4.5% stress Leverage ratio > 3% in base. No hurdle in stress Dynamic balance sheet with deleveraging restrictions. No post 31-Dec capital actions included (balance sheet as of close 31 Dec 13) Securitisation & Market risk methodology aligned to EBA. No additional methodology restrictions

http://www.bankofengland.co.uk/financialstability/Documents/fpc/keyelements.pdf

http://www.bankofengland.co.uk/financialstability/Documents/fpc/keyelements.pdf

PRUDENTIAL REGULATION AUTHORITY (PRA) STRESS TEST SCENARIOS 2015

12 Sourced from Bank of England site (01/12/2015). http://www.bankofengland.co.uk/financialstability/Documents/fpc/results011215.pdf

Analysis of key metrics used by PRA

-3.9%

SCEN

ARIO

S C

APIT

AL

RU

LES

MET

HO

DO

LOG

Y

Key UK economic metrics (to trough): Oil falls to USD 38p/b World GDP falls 7% from IMF World economical forecast China house prices – 35% Hong Kong CRE – 45% China GDP slows from 7.5% to 1.7% CPI rate: -1.0% UK house prices: -20% UK Base Rate: 0% CET1 ratio > 4.5% of RWAs New Threshold for 2015 – 3% of leverage exposure measure Stress scenario would reduce aggregate CET1 ratio across 7 banks from 11.2% to low of 7.6% in 2016 Aggregate Tier 1 leverage ratio falls from 4.4% at the end of 2014 to low of 3.5% in 2016

Designed to assess resilience of UK banks 2015 stress test has 3 main components: 1. Macroeconomic factors 2. Trade risk element of stress 3. Stressed projections for

potential misconduct In house modelling played a greater role than 2014 test

CPI and Bank Rate in the UK in the 2014 and 2015 stress scenarios

Differences in severity of GDP shocks between the 2014 and 2015 stress tests

Projected cumulative five-year impairment charges in China and Hong Kong

UK residential property price index and commercial real estate index in the 2014 and 2015 stress

scenarios

http://www.bankofengland.co.uk/financialstability/Documents/fpc/results011215.pdf

PRUDENTIAL REGULATION AUTHORITY (PRA) STRESS TEST – 2014 VS 2015

13

4.7% 5.0%

3.9%

5.0% 4.6%

5.0%

3.5%

4.2% 3.6%

4.1%

2.4%

3.9%

2.0%

2.9%

4.1% 3.5%

3.0% 3.2% 2.6%

3.3%

2014 2015 2014 2015 2014 2015 2014 2015 2014 2015

Lloyds Banking Group Royal Bank of Scotland HSBC Barclays Santander UK

Leverage Ratio Leverage Ratio (PRA Stressed)

PRA Stress Leverage Ratio Test Results

12.0%

13.7%

10.8%

12.7% 11.2% 11.8%

10.0% 11.1%

11.8% 11.7%

5.0%

9.5%

4.6% 5.9%

8.7%

7.0% 7.0% 6.8% 7.6%

9.5%

2014 2015 2014 2015 2014 2015 2014 2015 2014 2015

Lloyds Banking Group Royal Bank of Scotland HSBC Barclays Santander UK

CET1 Ratio CET1 Ratio (PRA Stressed)

PRA Stress CET1 Ratio Test Results

Sourced from the Bank of England site (01/12/2015). http://www.bankofengland.co.uk/financialstability/Documents/fpc/results011215.pdf Past performance is not a guarantee of future results



BASEL III REPLACES INDIVIDUAL LIQUIDITY ADEQUACY STANDARD (ILAS)

14

Key changes for Bank stress event buffer

*30 Day coverage period is called Liquidity Coverage Ratio (LCR)

Cash comes in 2 types

Basel III Coverage Period*

ILAS Coverage Period

Day 1 30 Days 94 Days

1

2

Current A/C Client A/C Cash Management

Call A/C Term / Notice Current A/C Client A/C Cash Management

* Subject to economic incentive guidelines for calculation of LCR

Operational Investment

Cash held contractually less than 30 days falls into the Basel III Coverage period

OUTFLOW COVERAGE: LIQUIDITY COVERAGE RATIO (LCR)

15

LCR 1 day to 30 days coverage duration

Operational* Current A/C Client A/C Cash Mgmt

Investment Call A/C Current A/C Client A/C Cash Mgmt

Day 30 32 Days 95 Days

3 months 6 months Day 1

Notice A/C’s

25% Outflow

40% Outflow

Last 30 days of term deposits needs to be covered as

Investment at 40% * Subject to economic incentive guidelines for calculation of LCR

Until notice is given there is no coverage outflow

Cash held contractually less than 30 days is now less attractive to deposit takers

OUR PRODUCT GUIDE

16

<3MTH

Call Account

Transactional Bank Account*

<3MTH Fixed Term Deposit

32 Day Notice Account

3-12MTH Fixed Term Deposit

12MTH Fixed Term Deposit

12MTH+ Fixed Term Deposit

OPERATIONAL CASH Generally required within 3 Months

for day to day business

CORE CASH Generally required between 3 to 12 Months not for day to day business

STRATEGIC CASH Generally not required for at least

12 Months

3-12MTH

12MTH+

*Transactional Bank Account is not provided by Financial Markets and is available from your Local Relationship Management Team

Deposit products available from Lloyds Banking Group

Description

Variable interest rate is paid on funds that remain committed on a rolling 32 day basis

Minimum of £10’000 and a maximum of £5,000,0001 can be withdrawn giving Lloyds Bank 32 calendar days’ notice, providing the remaining balance is over £10,000

Interest is calculated by reference to the Bank of England Bank Rate

32 Day Notice Accounts are available in GBP only

Benefits

Participate fully in any increase in the Bank of England Bank Rate.

Interest is paid to the account daily.

Limitations and Risks

The interest rate received on funds will decrease if the Bank of England Bank Rate decreases

Funds are committed for a minimum period of 32 calendar days

Once notice is given a Reversion Rate will be applied on the notice account balance. The Reversion Rate will apply for the entirety of the notice period.

32 DAY NOTICE ACCOUNT

17

32 Day Notice Account that pays a variable interest rate and has improved return over 32 day Fixed Term Deposit for the same tenor

Quick Facts:

Account Type Notice Deposit

Currency GBP

Minimum Notice Period 32 Days

Interest Payment Frequency

Daily

Minimum Opening Balance

10,000 (£)

Minimum Withdrawal Amount

10,000 (£)

Minimum Account Balance

10,000 (£)

Maximum Account Balance1

5,000,000 (£)

GBP

Interest Rate2 Variable interest rate tracking BoE Bank Rate with an agreed margin.

Reversion Rate BoE Bank Rate

1. Larger amounts may be available at Lloyds Bank’s discretion 2. Indicative Interest Rate only. The Interest Rate will be agreed with you at account opening.

OPTION TO USE A LAYERED APPROACH

18

You can chose to use our layering deposit solution that may deliver flexibility of liquidity

• The example above left shows an example rolling layered deposit approach where we take an example £1M portfolio, split out into 4 equal amounts and place into a 3, 6, 9 and 12 month deposits.

• On the maturity of each deposit there are two ways the deposits can be rolled:

1. Preserving current maturity Each deposit is then rolled at its maturity date into the same term. 2. Maximising Return When each deposit matures a new 12 month deposit is entered into. At any time there is a 3 month liquidity on ¼ of the portfolio.

0 5 10 15Months

250 250

250

250

Dep

osit

Siz

e £k

Rolling layered deposit – initial set up

0 5 10 15 20Months

Dep

osit

Siz

e £k

1. Rolling and preserving current maturity

0 5 10 15 20Months

Dep

osit

Siz

e £k

2. Rolling into 12 month deposits

This is a hypothetical illustration, actual results may vary

250 250

250 250 250

250 250 250 250

250 250 250 250 250 250 250 250

250 250

250 25

250

250 250

250

250

250

CASH-FLOW VS YIELD PORTFOLIO REVIEW An approach to assessing cash-flow to potentially improve yield

Typical deposit portfolio:

Long Date (12m+)

Medium Date (3m – 11m)

Short Date (1 day – 3m)

Call

Operational

Long Date (12m+)

Medium Date (3m – 11m)

Call

Revised deposit portfolio:

• Enhanced blended return = Y%

Operational

Short Date (1 day – 3m)

Supports payment profile

Potential mix change but

still supports payment

profile

19

Return on capital Return on capital

• Blended return = X%

• Or £x return sum

Please note this is for illustrative purposes only

Scenario 1 Scenario 2

MONTHLY CASH-FLOW TOOL EXAMPLE

20

Change your return with Lloyds Bank

Returns are based on current Lloyds Bank deposits rates. Past performance is not a guarantee of future results and potential returns and forecasts may not be achieved

UK OUTLOOK

21

Source: Lloyds Bank International Financial Outlook, April 2016 Forecast may not be achieved.

Lloyds Banking Group house view on key rates

PROGRESS AGAINST STRATEGIC PRIORITIES

22

Source: Lloyds Banking Group FY2015 Results.

DISCLAIMER

23

This presentation is for information purposes only. It is intended as a summary only and whilst it contains some information about the potential risks and benefits of various financial instruments it should not of itself, form the basis for any investment decision. Whilst Lloyds Bank has exercised reasonable care in preparing this presentation and any views, analysis or other information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds Bank Sales representative for clarification. Not all products or transactions will fulfill your requirements. You should be aware that any product or transaction which you enter into with us is, in the absence of any written agreement to the contrary, on the basis that you are able to make your own independent assessment and decision as to your requirements and whether that product or transaction fulfils those requirements. Your decision will be based on your own knowledge and experience and any professional advice which you may have sought in relation to the financial, legal, regulatory, tax or accounting aspects of the proposed product or transaction. Lloyds Bank, its directors, officers and employees accept no responsibility or liability for any loss (whether direct, indirect, consequential, loss of profit or damages) howsoever caused or howsoever arising, in relation to this presentation or any subsequent product or transaction entered into. Lloyds Banking Group plc and its subsidiaries may participate in benchmarks in any one or more of the following capacities; as administrator, submitter or user. Benchmarks may be referenced by Lloyds Banking Group plc for internal purposes or used to reference products, services or transactions which we provide or carry out with you. More information about Lloyds Banking Group plc’s participation in benchmarks is set out in the Benchmark Transparency Statement which is available on our website. This communication does not constitute an offer to sell or a solicitation of an offer to buy securities in the United States (“US”) and is not being directed at persons who are located in the US or who are US Persons, as defined in Rule 902 of Regulation S under the U.S Securities Act 1933, as amended (altogether, “US Persons”). Lloyds Bank is a trading name of Lloyds Bank plc and Bank of Scotland plc, which are both subsidiaries of Lloyds Banking Group plc. Lloyds Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC327000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration numbers 119278 and 169628 respectively. (09.15).