As a wholly-owned subsidiary of Lloyds Banking Group plc, a public company with limited liability incorporated in the United Kingdom and which has its registered office in Scotland, Lloyds Bank plc meets the conditions set forth in General Instructions I(1)(a) and I(1)(b) of Form 10-K, as applied to reports on Form 20-F and is therefore filing its Form 20-F with a reduced disclosure format.

The Lloyds Bank Group is a leading provider of financial services to individual and business customers in the UK. At 31 December ~~2020,~~2021, Lloyds Bank Group had ~~60,672~~57,180 employees (on a full-time equivalent basis) and its total assets were ~~£599,939~~£602,849 million. The Lloyds Bank Group reported a profit before tax for the ~~12 months to~~year ended 31 December ~~2020~~2021 of ~~£1,329~~£5,785 million, and its capital ratios at that date were 23.5 per cent for total capital, ~~19.8~~19.7 per cent for tier 1 capital and ~~15.5~~16.7 per cent for common equity tier 1 capital.

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

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

At 31 December ~~2020,~~2021, the Lloyds Bank Group’s two primary operating divisions, which are also reporting segments, were Retail and Commercial Banking. Retail provides current accounts, savings, mortgages, credit cards, motor finance and unsecured loans to personal and business banking customers. Commercial Banking provides lending, transactional banking, working capital management, risk management and debt capital markets services to commercial customers.

Lloyds Bank plc was incorporated as a public limited company and registered in England under the UK Companies Act on 20 April 1865 with the registered number 2065. Lloyds Bank plc’s registered office and its principal executive offices in the UK are located at 25 Gresham Street, London EC2V 7HN, United Kingdom, telephone number + 44 (0) 20 7626 1500. Lloyds Bank maintains a website at www.lloydsbank.com.

The Lloyds Bank Group is a leading provider of financial services to individual and business customers in the UK. The Lloyds Bank Group’s main business activities are retail and commercial banking. Services are provided through a number of well recognised brands including Lloyds Bank, Halifax and Bank of Scotland and through a range of distribution channels, including the largest branch network and digital bank in the UK. The Lloyds Bank Group strategy is directly aligned to the strategy of its parent, Lloyds Banking Group plc.

~~Today's environment continues to evolve and provide new challenges. The macroeconomic environment remains uncertain, whilst~~ Lloyds Banking Group is ~~witnessing increasing societal expectations, an accelerated shift to digital and new technology capabilities in the context of the pandemic driving a step change in ways of working.~~

The Group’s purpose of ~~the Group's journey.~~

The Group aims to deliver for all its stakeholders by helping build an inclusive society and ~~deliver long-term~~supporting the transition to a low carbon economy. To support the transition to a low carbon economy, the Group is reinforcing its prior commitments, reducing the carbon emissions the Group finances by more than 50 per cent by 2030, on the path to net zero by 2050 or sooner, with the Group’s own operations being net zero by 2030 and sustainability outcomes embedded across business priorities.

Through its new strategy, Lloyds Banking Group will transform its business, creating higher, more sustainable ~~returns~~value for all stakeholders. The Group will drive revenue growth and diversification across all its ~~shareholders.~~main businesses, focusing on strengthening cost and capital efficiency, together built off a powerful enabling platform maximising the potential of people, technology and data to support the business ambitions.

The Lloyds Bank Group’s activities are organised into two financial reporting segments: Retail and Commercial Banking. During 2020, the Group migrated certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail; the Group has also revised its approach to internal funding charges, including the adoption of the Sterling Overnight Index Average (SONIA) interest rate benchmark in place of LIBOR. Comparatives have been restated accordingly.

Further information on the Lloyds Bank Group’s segments is set out in note 4 to the financial statements.

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

Lloyds Banking Group sets the environmental goals and measures the environmental achievements of the Lloyds Banking Group as a whole.

Accordingly, the disclosures below are for Lloyds Banking Group as a whole and not specific to the Group. Throughout this section, references to "we" are to the Lloyds Banking Group.

This section contains certain disclosures in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The Group is making good progress in better understanding the risks and opportunities that climate change presents for our business and our customers, but there is still a lot of work to be done.

A high level summary of disclosure aligned to the TCFD recommendations is provided below.

Further detailed information can be found in our 2021 Climate Report.

We have been continually making progress against the TCFD recommendations and enhancing our climate-related financial disclosures since our 2018 Annual Report on Form 20-F. We comply with the FCA’s Listing Rule 9.8.6R(8) and make disclosures consistent with the 2017 TCFD recommendations and recommended disclosures across all four of the TCFD pillars: Strategy; Governance; Risk Management; and Metrics and Targets.

We will continue to assess and develop our disclosures against the TCFD recommendations and recommended disclosures in 2022, taking into account relevant TCFD guidance and materials and evolving best practice. Key areas of focus in 2022 include the following:

We believe that the ~~successful~~ transition to a ~~more sustainable,~~ low carbon economy isrepresents an opportunity to build a resilient future, creating new businesses and jobs. The transition will require transformation of ~~strategic importance. The Group supports~~every sector at scale.

We want to play our part in supporting the transition and support the aims of the 2015 Paris Climate Agreement, the UK Government’s ~~Net Zero~~net zero target, ~~and~~the Ten Point Plan for athe Green Industrial Revolution and the recommendations of the TCFD.

~~The economic recovery required post COVID-19 provides~~Supporting an effective transition is a ~~critical~~priority for us and an integral part of our new strategy. Our Board is fully engaged in key decisions and ensuring continued progress. We have prioritised our activities around net zero ambitions associated with achieving net zero in our own operations by 2030 and for the activities of those we finance by 2050, with interim ambitions set for 2030.

Our priority areas are greening the built environment, supporting the energy transition, low carbon transportation, sustainable farming and natural capital, and sustainable investments and pensions. These form a fundamental part of our overall approach to net zero and represent where we see the greatest challenge and opportunity to ~~drive clean growth~~help accelerate the transition to a low carbon economy for the UK. Our ambitions and ~~ensure~~priority areas are underpinned by four pillars of our sustainability strategy that will help us to achieve our ambitions in a manner that engages the ~~UK’s decarbonisation requirements sit~~whole of our organisation and across our wider stakeholder network.

As signatories to Net-Zero Banking Alliance, we have committed to setting sector-based ambitions across our highest emitting sectors. We have now published ambitions covering Power, Thermal Coal, Oil and Gas and Retail (Motor) vehicles.

We will report additional sector ambitions in 2022 for parts of our remaining carbon intensive sectors, including residential mortgages, transportation and automotive activity beyond Retail (Motor) vehicles. We will also develop further ambitions and a transition plan in accordance with the timelines stipulated by the NZBA. Our sector ambitions for our banking activities complement our Scottish Widows Climate Action Plan, which covers our approach for our investing activity through Scottish Widows.

With our strategic update, we have published new sustainable lending and investment ambitions with £10 billion lending for green mortgages by 2024, £8 billion financing for electric and plug-in hybrid electric vehicles by 2024, and £15 billion sustainable financing for corporate and institutional clients by 2024, and £20-25 billion in climate aware investment strategies through Scottish Widows by 2025. In-year targets are part of the 2022 Group balanced scorecard, supplementing the measure on reducing own operational carbon emissions.

Central to our ambitions is the alignment of our lending and investment activities with the 2015 Paris Agreement. The need to reorient financial flows in line with a 1.5ºC pathway means that we will have to fundamentally reshape our approach to the types of investments and lending we undertake across the Group.

In ~~2020,~~2021, we announced a new set of operational climate pledges, including a commitment to achieve net zero carbon operations across Scope 1 and 2 by 2030, against a 2018/19 baseline, while at the same time halving our energy consumption and maintaining travel related carbon emissions from business travel and commuting below 50% of a pre-COVID 19 baseline. We are also embedding our response to natural capital preservation as part of our approach to sustainable operations by protecting our operational green spaces, through restoring natural ecosystems, decreasing human intervention and encouraging native species.

For our suppliers, we have focused our efforts on understanding the carbon emissions generated through our sourcing activities and how we can positively influence a sustainable supply chain. We know that we cannot achieve our net zero ambitions without the support of our suppliers and in 2021 we have been developing our methodology for measuring our supply chain emissions. We are building our programme to further enhance sustainability considerations in our sourcing approach and to engage those suppliers that have the biggest impact on our carbon emissions with the aim of developing specific ambitions for reducing supply chain emissions and working collaboratively to achieve them.

Net zero strategies should prioritise carbon reduction in line with science, ahead of considering the use of carbon credits to offset emissions. While carbon credits can be an important tool in combatting climate change if used responsibly, it is important that such credits are deployed as part of an ambitious, science-based decarbonisation plan.

Our financed emissions capture the emissions attributed to the Group ~~joined over 200 businesses, investors,~~from our lending and ~~business organisations~~investment activities. We do not currently plan to use carbon credits to offset our financed emissions and we will monitor and contribute to emerging industry standards in ~~calling~~this area as they develop. However, we will engage with our clients to encourage them to develop their own net zero plans, which may involve them using carbon credits for offsetting residual emissions for some of their activity, where applicable and in line with science.

Our priority as a Group remains focused on reducing our emissions, in a responsible way, before considering the ~~Government~~use of carbon credits to ~~deliver a clean, inclusive,~~offset emissions from our own operations. We have committed to achieve net zero carbon operations by 2030, reducing our direct Scope 1 and ~~resilient recovery plan.The Group has produced a separate document outlining its belief that prioritising a green recovery is critical~~2 emissions by at least 75 per cent (compared to 2018/19 levels). In 2030, we will purchase carbon credits to offset the remainder of our direct emissions. We intend to use certified neutralisation carbon credits from high-quality carbon removal projects.

We have developed several initial metrics to measure our progress against our net zero ambitions and the ~~priority areas that the Group thought should feature within any economic stimulus plan.~~activities required to achieve them. These include measures related to our financed emissions, sustainable finance and own operations.

~~Lloyds~~We expect these metrics to evolve as we develop additional sector-based ambitions in line with our Net Zero Banking ~~Group Strategy~~Alliance commitments and further expand our sustainable finance and own operations activity.

~~As a signal of commitment, the Group set an ambitious goal in 2020: working~~In addition to our ambition to work with customers, ~~Government,~~government and the market to help reduce the emissions we finance by more than 50% by 2030 on the path to net zero by 2050 or sooner, we joined the NZBA in April 2021 as a founding member.

We are now committed to developing 2030 sector-specific ambitions for the most GHG intensive and GHG emitting sectors within our portfolio that will be key to the transition to a net zero economy and will complement our existing ambition.

We have made good progress to date, having now set 2030 ambitions for four sectors, including power, thermal coal, oil and gas, and motor. We are working to develop additional 2030 sector ambitions in 2022 for our residential mortgages, transportation and automotive activity beyond Retail motor vehicle loans with further ambitions following in 2023. Sector ambitions will be set using up to date science-based decarbonisation scenarios which are aligned with a 1.5°C pathway. Examples include the International Energy Agency (IEA) Net Zero Emissions by 2050 (IEA NZE 2050) scenario and the UK Committee on Climate Change's Balanced Net Zero Pathway scenario. As climate science evolves and scenarios are updated we will review our methodologies and ambitions.

In 2021, we have estimated our financed emissions producing two separate baselines to align to the individual ambitions to reduce our financed emissions as outlined in the Strategy section. The first baseline is for our banking operations, which covers Lloyds Banking Group, excluding Scottish Widows (the Bank). The second is for our Scottish Widows activity which is reported separately. In measuring financed emissions, the Bank and Scottish Widows have both applied the Partnership for Carbon Accounting Financials (PCAF) standard. Additional detail on approach has been included in the Lloyds Banking Group Climate Report 2021.

Lloyds Banking Group, including Scottish Widows, has continued to apply the emerging industry-led standard developed by the PCAF in measuring and disclosing our greenhouse gas (GHG) emissions financed by loans and investments. The PCAF is now recognised as the most widely adopted global standard for measuring and accounting for Scope 3 emissions by the financial sector, referred to here and across industry as 'financed emissions'. Where possible, we have adopted the guidance afforded by the PCAF standard across all material asset classes where published methodologies have been made available.

Our baseline represents Scope 3 financed emissions which is calculated from the Scope 1 and 2 emissions generated from our investments or lending.

Scope 3 (value chain) emissions are also calculated and reported separately for certain sectors, aligning to the PCAF standard phased approach. Scope 3 includes all other indirect GHG emissions of the reporting company not included in Scope 2, and can be broken down into upstream emissions that occur in the supply chain (for example, from production or extraction of purchased materials) and downstream emissions that occur as a consequence of using the organisation‘s products or services. The comparability, coverage, transparency and reliability of Scope 3 data still varies greatly by sector and data source.

Aligning to the PCAF standard, we have adopted an attribution factor at a single client or asset class level to measure our share of financed emissions. Where necessary, hierarchies of best-available data and approximations have been used to resolve certain data gaps. We have incorporated additional detail and explanation on the variations to our approach within the individual business sections below.

Where sourcing of emission data by client or by asset type was challenging, adaptations to our approach reflected the hierarchy of options outlined in the PCAF data scoring framework. We used a range of internal and external data sources to determine the Scope 1 and Scope 2 emissions for each asset class and calculated our average data quality scores across all business lines and sectors, using the classification opposite, which can be found in the PCAF methodology.

Throughout 2021, we have continued to mature and refine our measurement of financed emissions across the Group. Progress has been made to extend the scope of our emissions baseline, refine our methodologies and improve data quality, recognising there is still more to do. This includes working in partnership with government, industry and policymakers to improve our approach and calculation estimates. Further, we have started to embed our emissions calculation process, governance and controls via a Group-wide financed emissions framework which follows the Group’s three lines of defence model.

In order to extend the coverage of our baseline, we will continue to develop our calculation approach to consider equity, non-UK mortgages and corporate bonds. We will also review any new PCAF asset class methodologies as they are released to consider applicability to our portfolios. Continued refinement of our emissions baseline is expected as data availability and quality improves in line with industry developments and as methodologies evolve.

Recognising the Bank‘s commercial lending portfolio composition, it is also anticipated that the ~~Group finances~~impact of increased lending to customers as part of the Government supported Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme is likely to have a proportionate increase to our financed emissions reporting from 2020. For future reporting periods, we will consider how best to disclose such lending in our financed emissions reporting.

Extending our scope to calculating more of our clients’ Scope 3 emissions will continue to be monitored in line with the PCAF published timelines, and we will continue to report separately from our Scope 1 and 2 financed emissions.

Furthermore, in light of the regulatory plans to scale up mandatory TCFD-aligned disclosures across a broader range of reporting entities, we expect our emissions calculations to include more reported emissions with a higher PCAF score over time. We also recognise the need to provide support to our consumers and SME clients to help them understand their carbon footprint and how they can reduce it.

Aligned to our commitment to report a consistent, and transparent financed emissions disclosure and following our enhancements to data, methodology and scope, we have recalculated our 2018 baseline estimates as previously stated in our 2020 Annual Report, in addition to calculating our financed emissions for the year ended 2019. These calculations are based on Bank own lending activity and provide an early starting position on our ambition to reduce the emissions we finance by more than 50 per cent by 2030 on the path to net zero by 2050, or ~~sooner,~~sooner.

Bank aggregated emissions is supported by estimates by divisional asset class and are found in the Bank financed emissions table, which ~~will support~~is followed by commentary on material design choices, limitations and recognised drivers to changes in our financed emissions. Of specific note, the ~~UK Government's ambition and~~2018 baseline re-calculation has formed the ~~2015 Paris Agreement. During~~foundation of target-setting in accordance with the ~~course of 2020,~~NZBA commitment made by the Group ~~has calculated an initial estimate~~during 2021.

Our 2019 balance sheet coverage extends to 71 per cent of ~~its 2018 financed~~the Group’s Balance Sheet Assets, excluding Scottish Widows, and includes all material exposures across our Mortgages, Motor Finance (which includes finance and leasing activity), Business Banking and Commercial Banking portfolios. Cash is represented in our balance sheet coverage as zero emissions, ~~baseline and has developed its first emission intensity reduction ambition for~~noting the ~~power sector, the decarbonisation~~PCAF standard remains silent on treatment. Exclusions to measurement totals 29 per cent, 25 per cent of which ~~is critical to the UK achieving its climate targets. The Group will continue to develop additional sector specific ambitions throughout 2021.~~

Aligned to the PCAF requirement to phase in Scope 3 (value chain) emissions from 2021, we have established an approach to include Scope 3 estimated emissions for clients in the oil and ~~leading academics to develop a robust climate risk measurement capability.~~gas sector within our financed emissions calculations and have reported these separately in the Bank financed emissions table. The Group's mining exposures have been excluded from Scope 3 reporting reflecting nominal residual exposure.

~~The Group set seven leadership ambitions~~We have continued to ~~support~~build appropriate controls into our calculation approach, including:

The year-on-year movement equated to a 10.8 per cent reduction in emissions and ~~quality also improving from clients~~was largely driven by a combination of client decarbonisation, and ~~Government sources.~~lending contraction in certain sectors.

7

The ~~financed~~Bank’s weighted average PCAF data score has moved from 3.9 to 3.8 reflecting improved data sourcing and enhanced consistency in methodology approach. While progress has been made during 2021, the ongoing challenges to data sourcing gaps remain significant particularly in measuring emissions for ~~the Insurance~~SME clients, which require an industry-wide shift to address this, and ~~Wealth division are not included in the Group’s total financed emissions or the Group’s target~~will be required to ~~reduce financed emissions by 50~~help inform future NZBA targets.

We have selected 2019 to be the baseline year in line with the science-based recommendations of the Intergovernmental Panel on Climate Change (IPCC) and guidance from the Institutional Investors Group on Climate Change (IIGCC). To calculate a reduction of emissions produced by the companies in our investment portfolios, we’ve used the emerging industry standard for calculating financed emissions developed by the PCAF.

To establish emissions data for corporate bonds and equities, we matched our investments against the published emissions data available on those companies from S&P Global Trucost’s data and analytics tool. Trucost provides carbon and environmental data and risk analysis for more than 15,000 companies. There is a lack of published emissions data on loan investments.

Therefore, we adopted an alternative PCAF aligned approach to calculate emissions using estimates from Office for National Statistics (ONS) and Department for Business, Energy & Industrial Strategy (BEIS) sector averages.

Due to the nature of the calculations we would expect short-term variation of the carbon intensity number generated by the PCAF standard. In any given year the metric is impacted by a) changes in reported emissions, b) changes in enterprise value and c) our own investment activity.

In the example where equity markets are strong and the value of our investment increases in line with the enterprise value, this would drive a material reduction in carbon intensity even in the absence of any underlying change in the reported emissions of the company in which we are invested. Therefore, acknowledging this is a long-term target, it is important to study the medium-term trend from future reporting.

Our baseline represents Scottish Widows’ Scope 3 financed emissions which is calculated from the Scope 1 and 2 emissions generated from our investment or lending.

Where there is no current PCAF methodology for calculating emissions those asset types have been excluded from the scope of the baseline at this time. Asset types excluded on this basis are government bonds, derivatives, and cash. Collateralised securities (securitised loans) are also excluded on this basis unless data on the underlying loan portfolio is available enabling an alternative PCAF methodology to be followed.

When it comes to Scope 3 of the companies we invest in, at this time we do not feel the data is robust enough or has wide enough coverage for us to be able to set targets using it. We will continue to monitor the developments in data quality and will consider extending our portfolio targets to cover Scope 3 of our underlying holdings when there is market consensus on the appropriateness of available data.

With the support of our Sustainability and ESG Financing team, created in 2021, we will help clients with an increasing volume of Sustainability and ESG-linked loan transactions, underpinned by our range of sustainable finance tools and propositions. The £15 billion ambition by 2024 will include:

We will enhance our transport offering with more flexible finance solutions, expanded manufacturer partnerships and services. We will also extend digital channels to include new direct to consumer leasing and financing solutions for EV charge points to meet emerging customer needs.

As the largest UK mortgage lender, we will continue our commitment to supporting customers grow their understanding of home energy efficiency, as well as providing innovative products that drive greater customer consideration for energy efficiency when purchasing their homes.

We’re working closely with our core strategic fund management partners to develop and refine a range of funds that have a bias towards investing in companies that are adapting their businesses to be less carbon-intensive and/or developing climate solutions. We’ll invest in climate solutions investments either within these strategies or other funds. To define climate solution investments, we look at company revenue associated with activities such as alternative energy, energy efficiency, green building, sustainable agriculture, sustainable water and pollution prevention. We use MSCI Environmental Impact Revenue data to help with this classification.

Since 2020, we have been tracking against three ~~new~~ operational climate pledges, which were announced early in 2021. They are designed to accelerate ~~the Group’s~~our plan to tackle climate change and apply across ~~its~~our own operations.

Achieving these goals will not be easy, and ~~the Group~~we will need to invest in ~~its~~our buildings over the next decade, supporting the UK ~~to make~~in the transition towards a ~~green recovery. The Group~~greener future. We will continue to deploy energy efficient technology including LED lighting and improved building controls. ~~The Group~~We will remove all use of natural gas from ~~its~~our estate, replacing ~~its~~ gas boilers with ~~zero~~low carbon heating technologies and ~~creating~~create more sustainable branches in communities across the UK. Many of the technologies ~~that the Group~~we will need to use are still new and itwe will ~~need to~~ work closely with ~~its~~our partners and supply chain to innovate.

We proudly remained Carbon Trust Standard certification holders for carbon reduction for the twelfth year in a row. We are also members of the UK Green Buildings Council and we have recently renewed our commitment to the World Green Building Council Net Zero Carbon Buildings Commitment to include the new embodied carbon reduction requirement for new build and major refurbishment by 2030. This renewed commitment, along with those we’ve already made by joining The Climate Group’s campaigns on renewable electricity (RE100), energy productivity (EP100) and electric vehicles (EV100), underpins our new climate pledges.

We also have broader environmental ambitions for our own operations, which focus on reducing waste and improving water efficiency, which include:

We also achieved certification to the Carbon Trust Standard for Waste for the first time in 2021. The standard recognises organisations that follow best practice in measuring, managing, and reducing their waste impact.

Further information on operational carbon and sustainability performance can be located in our Lloyds Banking Group ESG Report 2021.

The Group has reported greenhouse gas emissions and environmental performance since 2009, and since 2013 this has been reported in line with the requirements of the Companies Act 2006 and its applicable ~~regulations. The Group’s~~regulations and the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (i.e. Streamlined Energy and Carbon Reporting (`SECR').

The Group follows the principles of the ~~Greenhouse Gas (GHG)~~GHG Protocol Corporate Accounting and Reporting Standard to calculate Scope 1, 2 and 3 emissions from ~~its~~our worldwide operations. The reporting period is 1 October ~~2019~~2020 to 30 September ~~2020.~~2021, which is different to that of our Directors’ report (January to December 2021). This is in line with the regulations in that most of the emissions reporting year falls within the period of the Directors’ Report. Emissions are reported based on the operational control approach.

Reported Scope 1 emissions are those generated from gas and oil used in buildings, emissions from fuels used in UK company owned vehicles used for business travel and fugitive emissions from the use of air conditioning and chiller/refrigerant ~~plant.~~ plants.

Reported Scope 2 emissions are generated from the use of electricity and are calculated using both the location and market-based methodologies.

Reported Scope 3 emissions relate to business travel and commuting undertaken by colleagues, emissions from colleagues working from home, operational waste and the extraction and distribution of each of ~~the Group’s~~our energy sources – electricity, gas and oil. This year, in light of the coronavirus pandemic’s impacts on Group operations, the Group has included the emissions of colleagues working from home before and during the pandemic in the Group’s Scope 3 totals.

Group ~~building~~ energy consumption, electricity and gas, ~~and electricity,~~has also reduced ~~in part~~mainly due to the ~~impacts~~impact of this operational ~~shift, though impacts are not as significant.~~shift. However, most of our buildings have still been operational and subject to our continued energy management and optimisation programme. Throughout winter months we have seen a small increase in our gas consumption due to additional fresh air requirements in our operational buildings. Overall, we have seen building energy consumption and associated carbon emissions reduced.

Emissions associated with joint ventures and investments are not included in this disclosure as they fall outside the scope of ~~the Lloyds Banking Group~~our operational boundary. The Group does not have any emissions associated with imported heat, steam or imported cooling and is not aware of any other material sources of omissions from ~~its~~our reporting.

~~Whilst coronavirus~~While COVID-19 has ~~significantly impacted Lloyds Banking Group's~~had an impact on our energy performance year on year, ~~the Group did see a 4 per cent year to year energy~~we have also seen consumption reduction ~~achieved in a 6-month period prior to the impacts of coronavirus, largely due to the Group’s~~driven by our continued energy ~~reduction~~efficiency initiatives. ~~These initiatives include~~This workstream includes an energy optimisation ~~programme; an energy intervention scheme~~programme that ~~includes remote and on-site~~implements onsite optimisation and strategic alterations of ~~building management systems~~Building Management System (BMS) and controls systems to match the run hours of plant to core operating hours and ~~ensure~~ensures temperature settings are aligned with Group comfort guidelines. In ~~2020, 89~~2021, 45 deep-dives, ~~88 on-site~~80 onsite optimisations, 139 remote optimisations and ~~550~~531 bank holiday programming were completed, which resulted in a ~~105~~101.5 GWh saving. ~~Additionally,~~We have also run a programme of LED lighting upgrades throughout our estate, leading to an estimated 1,280 MWh electricity saving.

Given the strategic importance of our sustainability ambitions and commitment in managing the impacts arising from climate change, our governance structure provides clear oversight and ownership of the Group’s environmental sustainability strategy and management of climate risk.

Further information with respect to entity governance and executive oversight can be located in the Lloyds Banking Group ~~saw~~Climate Report 2021.

The Group defines climate risk as, ‘the risk that the Group experiences losses and/or reputational damage as a ~~14 per cent year~~result of climate change, either directly or through our customers’. These may be realised from physical weather events, the impacts of the transition to ~~year energy reduction in~~net zero or as a consequence of the Group's response to managing this transition.

The Group’s response to managing climate risk affects many different stakeholder groups, including: our ~~company owned vehicles energy usage~~customers; colleagues; suppliers; regulators and policymakers; investors and NGOs and wider society. Our response will have a long-term bearing on these stakeholders and the Group’s business model.

Climate risk is considered a principal risk within the Group’s Enterprise Risk Management Framework (ERMF), reflecting its importance and the focus required. This ensures a consistent approach to embedding the consideration of climate risk in the ~~6-month period prior~~Group’s activities, while also enhancing Board-level insight.

Climate risk also impacts many of the financial and non-financial risks the Group faces. Therefore, the Group has also taken steps to ~~April 2020, due~~build and embed the consideration of climate-related risks throughout our ERMF to ensure comprehensive consideration across our ~~ongoing focus~~business activities.

The Group and the wider industry continue to develop both the understanding and capabilities for managing climate risk, therefore, the Group’s approach will evolve significantly in the coming years.

In addition to the risks already facing the Group, new risks will continue to emerge as a consequence of the transition to net zero. Further information on ~~reducing business travel.~~the emerging risks facing the Group, including those relating to climate change, can be found in the Risk overview section of this document.

In 2021, the Group established the Group Climate Risk Policy to provide an overarching framework for managing climate risks and opportunities. The policy is structured around seven principles, setting out clear requirements to help meet the Group’s ambitions relating to climate change, the TCFD recommendations and relevant regulatory expectations.

The policy is intended to support appropriate consideration of climate risks and opportunities across key activities. However, it also recognises that understanding of and capability for managing climate risk will continue to evolve. As such, some areas of the policy cannot currently be fully embedded at this time, with ongoing activity to implement these expectations continuing into 2022.

The Group will ensure climate risk is fully embedded through effective policies, procedures, processes, systems and controls.

The Group will identify and assess potential climate risks and opportunities, including how these could impact on the Group’s strategy, external commitments, operating model and customer journeys.

The Group will embed appropriate scenario analysis capabilities to support its understanding and proactive management of climate risk and opportunities.

The Group’s strategy will consider climate risks and opportunities to support our customers and meet our strategic objectives.

The Group will set an appropriate risk appetite for climate risk against which it will operate.

The Group’s governance structure will provide oversight of climate risk impacts, effective decision-making and timely escalation to senior management.

The Group’s reporting will support monitoring and management of climate risks as well as the Group’s relevant strategic commitments, alongside appropriate disclosures to inform our external stakeholders.

We have incorporated the consideration of climate risk into a number of key processes to ensure suitable Board-level visibility.

We have mapped how examples of the Group's key risks from climate change impact across the different risk types within the Group’s risk taxonomy.

While the majority of the Group’s principal risks are impacted in different ways, we have focused on the impact for the most material risk types, outlined in the table below.

These examples are useful to understand some of the key risks for the Group across its risk taxonomy; however, this is not an exhaustive view of all the potential climate risks across the Group’s other principal risks.

We are continuing to integrate consideration of climate risk as part of activity and processes for managing other principal risks in our enterprise Risk Management Framework. This has focused on the most material risks impacting the Group. We have refined our analysis of lending to customers in sectors with increased climate risk, and over 2020 and 2021, we have completed sector deep dives.

We have refined our analysis of the sectors where we have lending to customers that may likely contribute a higher share of the Group's financed emissions. Not all customers in these sectors have high emissions or are exposed to significant transition risks. We continue to enhance and refine this work at both counterparty and sector level, considering both risks and opportunities as we look to support our customers’ responses to climate change.

We are committed to supporting the UK Government's vision of a sustainable low carbon future, so in line with our purpose of Helping Britain Prosper we have undertaken an analysis of how the Group’s principal risks are impacted by climate change.

As detailed in the table 10, we have identified sectors where we have lending to customers that are likely to be higher carbon emitters or be exposed to higher levels of physical or transition risks and continue to enhance and refine this work at both counterparty and sector level, considering both risks and opportunities as we look to support our customers’ responses to climate change.

Across 2020 and 2021, we completed bespoke deep dives into each of these sectors which has been supported by external third-party consultants and sector experts. A summary of the sectors identified and the progress achieved to date is detailed in the Lloyds Banking Group Climate Report 2021.

The follow-up actions as a result of these sector deep dives are to:

As the understanding and importance of climate risk progresses, climate scenario analysis is becoming an increasingly important risk management tool assisting the identification, measurement and ongoing assessment of climate risks that pose threats to Lloyds Banking Group’s strategic objectives.

In a first generation exercise, the Group analysed the impact of three scenarios on a sample of the balance sheet compromising credit portfolios in Commercial Banking, Retail Mortgage and Motor businesses prior to the wider Climate Biennial Exploratory Scenario (CBES) exercise undertaken for the Bank of England. The Group ran workshops with subject matter experts providing an assessment of the scenario analysis results. This helped to advance the understanding of the risks and financial implications in different sectors and business areas resulting from climate change, as well as suggesting what potential management actions might be required under the different scenarios.

Climate scenario analysis is a fast-evolving discipline, requiring new skills and capabilities to be established with appropriate levels of governance. Participating in the Bank of England’s CBES exercise enabled the Group to explore the resilience of its credit portfolios under three different climate scenarios (early policy action, late policy action, no additional policy action) over the next 30 years to 2050. The CBES exercise was intended to be a learning exercise and the Group took away key learnings. These, along with further details on Climate Scenario Analysis, are described in the Lloyds Banking Group Climate Report 2021.

The Group has made good progress in further incorporating climate change into the Group strategy and business operations as well as prioritising the areas of our businesses where we see the greatest opportunity to support and accelerate the transition to a low carbon economy.

We are enhancing our disclosures with our inaugural standalone Climate Report and have published key sector ambitions for high-emissions and fossil fuel sectors, committing to a full phase-out from thermal coal.

In 2022, we will continue to develop ~~additional sector-based ambitions to support its goal~~propositions and tools for our customers to help them reduce their emissions, while further advancing our work on reducing our own operational and supply chain emissions.

We will also look to report additional sector ambitions in 2022 for parts of our remaining carbon-intensive sectors, including residential mortgages, transportation and automotive activity beyond Retail (Motor). In addition, we will be developing further ambitions and a transition plan in accordance with the ~~emissions it finances~~timelines stipulated by ~~more than 50 per cent by 2030. The Group~~the NZBA.

Given this progress and the evolving best practice for climate votes, we do not intend at present to bring a climate vote to the 2022 AGM. We will continue to consider a vote on a year-by-year basis.

Managing the risk from climate change remains a key priority for the Group. We expect to enhance ~~its methodologies~~our capabilities by leveraging the learnings from our participation in the Bank of England’s Climate Biennial Exploratory Scenario and ~~framework~~undertaking further climate scenario analysis in 2022. This will allow us to better understand the resilience of the Group's business model to climate risks.

We will continue to develop our assessment of the sectors at increased risk from climate change or the transition to net zero, and augment our climate related policies as our capabilities strengthen. Focused Board level reviews will consider how our strategy and credit portfolios will evolve as we transition to net zero, including the further development of our risk management capabilities.

Continued embedding of climate risk is essential for ~~reporting climate~~the Group to achieve our strategy in transitioning to net zero. Our understanding of climate-related risks and opportunities ~~taking into account relevant industry guidelines~~continues to develop and ~~regulatory reporting requirements. This~~our strategy and risk management activities will ~~further advance the Group disclosures and respond~~evolve accordingly in order to ~~the evolving needs of both its shareholders and other stakeholders.~~best respond.

During the ordinary course of business the ~~Lloyds Bank~~ Group is subject to threatened or actual legal proceedings and regulatory reviews and investigations both in the UK and overseas. ~~Set~~Further discussion on the Group's regulatory and legal provisions is set out ~~below is a summary of~~in note 29 to the ~~more significant matters.~~

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

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

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

Future developments in relation to the Lloyds Bank Group’s IFRS reporting are discussed in note 4746 to the financial statements.

During the year ended 31 December ~~2020,~~2021, the Lloyds Bank Group recorded a profit before tax of £5,785 million, an increase of £4,456 million compared with £1,329 million ~~a reduction of £2,794 million, or 68 per cent, compared with £4,123 million~~ in ~~2019;~~2020; the ~~decrease~~increase reflected, in particular, the ~~Group's revised~~improved economic outlook for the UK ~~following the outbreak of the coronavirus pandemic.The~~in 2021. The Lloyds Bank Group profit before tax for the year ended 31 December ~~2020~~2021 included a profit before tax of ~~£1,856~~£5,024 million from its Retail division ~~a 16 per cent decrease compared to 2019, as lower income and a higher impairment charge have more than offset reduced provisions for conduct risk;~~ and a profit before tax of ~~£20~~£1,536 million from its Commercial Banking division.

Total income ~~decreased~~increased by ~~£2,023~~£88 million, or 121 per cent, to £14,673 million in 2021 compared with £14,585 million in 2020, ~~compared with £16,608~~reflecting an increase of £266 million in ~~2019, reflecting reductions in both~~ net interest income ~~and~~partly offset by a decrease of £178 million in other income.

Net interest income was ~~£10,770~~£11,036 million in ~~2020, a decrease~~2021, an increase of ~~£1,450~~£266 million, or 122 per cent compared to ~~£12,220~~£10,770 million in ~~2019.~~2020. Average interest earning ~~banking~~ assets increased by ~~£19,263~~£2,762 million ~~or 3 per cent,~~to £576,276 million in 2021 compared to £573,514 million in 2020 ~~compared to £554,251 million in 2019~~ as ~~a result of increased placings with central banks and~~ growth in ~~reverse repurchase agreement balances. Average customer~~new mortgage lending ~~was stable; the impact of increased balances due from SMEs under the UK Government-backed coronavirus support schemes and growth in the open mortgage book~~ was offset by lower balances in the closed mortgage book, ~~and~~ credit cards and motor finance, as well as the continued optimisation of the Corporate and Institutional book within Commercial Banking. The net interest margin ~~decreased, reflecting~~increased as the benefit of lower ~~rate environment, actions taken during~~funding costs more than offset the ~~year to support customers and~~impact of a change in asset ~~mix, largely as a result of reduced levels of customer demand during the coronavirus pandemic.~~mix.

Other income was ~~£573~~£178 million, or 135 per cent, lower at £3,637 million in 2021 compared to £3,815 million in ~~2020 compared to £4,388 million in 2019.~~2020.

Fee and commission income was £439 million, or 19 per cent, lower at £1,924 million compared to £2,363 million in 2019 as a result of decreases across most categories of fees reflecting reductions in business and transaction volumes as a result of the coronavirus pandemic as well as the impact of the transfer of business into the Lloyds Banking Group’s wealth management joint venture in 2019. Fee and commission expense decreased by £118 million, or 11 per cent, to £909 million compared with £1,027 million in 2019; interchange fees were lower as a result of reduced customer usage of ATMs during the pandemic and there were reductions in card and other fees payable. Net trading income was ~~£390~~£365 million ~~higher~~lower at £385 million in 2021 compared with £750 million in 2020, ~~compared with £360 million in 2019,~~ reflecting the change in fair value of interest rate derivatives and foreign exchange contracts in the banking book not mitigated through hedge accounting. Other operating income was ~~£642~~£51 million, or 242 per cent, lower at £1,999 million in 2021 compared to £2,050 million in 2020, ~~compared to £2,692 million in 2019,~~ reflecting a lower ~~level~~levels of operating lease rental income, ~~following~~as a result of a reduction in the Lex vehicle fleet size, ~~increased losses~~and reduced gains on ~~liability management exercises and a lower~~disposal of financial assets at fair value through other comprehensive income, partly offset by increases in the level of cost recharges to other Lloyds Banking Group entities. Fee and commission income was £271 million, or 14 per cent, higher at £2,195 million compared to £1,924 million in 2020 as a result of increases across most fee categories as customer activity increased and the economy improved. Fee and commission expense increased by £33 million, or 4 per cent, to £942 million compared with £909 million in 2020, as a consequence of increased customer activity.

Operating expenses ~~decreased~~increased by ~~£1,927~~£1,010 million, or 1711 per cent to £10,206 million in 2021 compared with £9,196 million in 2020 ~~compared with £11,123 million in 2019~~primarily reflecting ~~a decrease of £1,776 million in~~higher charges for ~~redress payments to customers in respect of PPI~~regulatory and ~~other conduct related matters~~ legal provisions (see below). ~~Excluding these charges from both years, operating expenses~~Staff costs were ~~£151~~£77 million, or 2 per cent, ~~lower~~higher at ~~£8,782~~£3,692 million in ~~2020~~2021 compared ~~to £8,933 million in 2019. Staff costs were £370 million, or 9 per cent, lower at~~with £3,615 million in ~~2020 compared with £3,985 million in 2019. This reflects a reduction in staff numbers, significantly lower accruals in respect~~2020; as the impact of staff ~~bonuses~~reductions and ~~reduced~~lower levels of ~~agency staff only partly~~redundancy costs has been offset by higher ~~redundancy costs.~~bonus accruals following the recovery in the Group's profitability. Premises and equipment costs were ~~£21~~£210 million lower at £215 million in 2021 compared with £425 million in 2020, ~~compared with £446 million in 2019~~ reflecting ~~increased~~higher gains on ~~the~~ disposal of ~~tangible fixed~~operating lease assets ~~only partly offset by~~at the ~~cost~~end of ~~making~~ the ~~Group's premises COVID-secure.~~contract term and gains on disposal of Group premises. Other expenses were ~~£168~~£1,040 million, or 942 per cent, higher at ~~£2,068~~£3,522 million in 2021 compared with £2,482 million in 2020, ~~compared with £1,900 million~~driven by the increase in ~~2019 mainly reflecting increased investment spend~~charges for regulatory and ~~cost recharges from Lloyds Banking~~legal provisions and higher communications and data processing costs as the Group ~~plc.~~develops and maintains its information technology infrastructure. Depreciation and amortisation costs were ~~£68~~£107 million, or 34 per cent, higher at £2,777 million in 2021 compared to £2,670 million in 2020, ~~compared to £2,602 million~~ in ~~2019 due to increased levels~~part reflecting a software asset write-off as a result of ~~software capitalisation.~~investment in new technology and systems infrastructure.

The Group incurred a regulatory and legal provisions charge in operating expenses of £1,177 million in 2021 compared to £414 million in 2020 compared to £2,190 million in 2019. Of this amount £85 million related to payment protection insurance; this charge was driven by the impact of coronavirus delaying operational activities during 2020, the final stages of work to ensure operational completeness and final validation of information requests and complaints with third parties that resulted in a limited number of additional complaints to be handled. Of the approximately six million enquiries received pre-deadline, more than 99 per cent have now been processed. A small part of the costs incurred during the year also reflect the costs associated with litigation activity to date. The unutilised provision, excluding MBNA, at 31 December 2020 was £198 million2020. The charge in ~~relation to other conduct issues was £329 million in 2020, compared to £395 million in 2019. During~~2021 includes the ~~year additional charges, both redress and operational~~ costs ~~of £159 million, have been taken~~ in relation to HBOS Reading ~~as well as further~~and litigation costs 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 ~~arrears handling, packaged bank account complaints and various settlements in relation~~Dame Linda Dobbs' review which is considering whether the issues relating to ~~historic claims. A number of programmes are now close to conclusion. Others, such as~~ HBOS Reading ~~including~~were investigated and appropriately reported by the ~~conclusion of~~Group during the ~~recommendations from~~period January 2009 to January 2017 and other programme costs. The final outcome could be significantly different once the ~~Cranston Review, are still ongoing and further costs are likely to be incurred.~~re-review is concluded.

Impairment ~~losses increased~~improved by ~~£2,698~~£5,378 million to a credit of £1,318 million in 2021 compared with a charge of £4,060 million in 2020, largely reflecting the improved UK macroeconomic outlook. 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 £2,132 million to £4,000 million, compared ~~with £1,362~~to £6,132 million ~~in 2019. Impairment losses in respect of loans and advances~~at 31 December 2020, following the improvements to ~~customers were £2,458 million higher due primarily to an increase in expected credit loss (ECL) allowances taken to reflect the deterioration in~~ the UK economic outlook as a consequence of the coronavirus pandemic and further charges taken on existing distressed clients whose recovery strategies were affected more immediately. Aside from these distressed cases, observedoutlook. Observed credit performance ~~has~~ remained ~~stable,~~robust in ~~part as a result of~~ the continued effectiveness of government support schemes and payment holidays extended by the Group. Additional funding has been made available to businesses impacted by lockdown restrictions which has prevented a more material increase in business failures and unemployment.

The Group’s ~~closing~~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 ~~deteriorated~~improved since the start of the year, following the changes made to the base case. They also reflect a widening of the range of potential outcomes, following changes to the generation of scenarios around the base case. Overall the Group’s loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to credit risk and high levels of security. The Retail portfolio is heavily weighted toward high quality mortgage lending where low loan-to-value ratios provide security against potential risks. The prime consumer finance portfolio also benefits from high quality growth in past periods in the context of the Group’s prudent risk appetite. The commercial portfolio reflects a diverse client base with relatively limited exposure to the most vulnerable sectors so far affected by the coronavirus outbreak. Within Commercial Banking, the Group’s management of concentration risk includes single name and country limits as well as controls over the overall exposure to certain higher risk and vulnerable sectors or asset classes.case outlook.

In ~~2020,~~2021, the Lloyds Bank Group recorded a tax ~~credit~~expense of ~~£137~~£583 million compared to a tax ~~expense~~credit of ~~£1,287~~£137 million in ~~2019.~~2020. The tax ~~credit~~charge in ~~2020 arose primarily as a result of~~2021 includes a credit of ~~£435~~£1,168 million arising on the remeasurement of ~~the Group’s~~ deferred tax ~~balances~~assets following the substantive enactment by the UK ~~Government’s decision to maintain~~Government of an increase in the corporation tax rate atfrom 19 per cent ~~which was substantively enacted~~to 25 per cent, effective on ~~17 March 2020.~~1 April 2023.

The Lloyds Bank Group’s post-tax return on average total assets ~~reduced~~increased to ~~0.24~~0.86 per cent compared to ~~0.48~~0.24 per cent in the year ended 31 December ~~2019.~~

Total assets were ~~£18,571~~£2,910 million ~~or 3 per cent,~~ higher at £602,849 million at 31 December 2021 compared to £599,939 million at 31 December ~~2020 compared to £581,368 million at 31 December 2019.~~2020. Cash and balances at central banks were ~~£11,008~~£4,391 million, or 289 per cent, higher at ~~£49,888~~£54,279 million compared to ~~£38,880~~£49,888 million at 31 December ~~2019,~~2020 reflecting increased liquidity holdings ~~following~~as a result of the inflow of customer ~~deposits.~~deposits; and retirement benefit assets were £2,817 million higher at £4,531 million compared to £1,714 million at 31 December 2020 as a result of actuarial gains and employer contributions. Financial assets at amortised cost decreased by £1,650 million to £490,316 million compared to £491,966 million at 31 December 2020. Loans and advances to customers increased in the year by ~~£5,671~~£5,135 million to ~~£480,141~~£430,829 million, compared to ~~£474,470~~£425,694 million at 31 December ~~2019, due to an increase~~2020, however this was more than offset by a decrease in reverse repurchase agreements, held for liquidity purposes, ~~growth~~of £6,365 million, or 11 per cent, from £56,073 million at 31 December 2020 to £49,708 million at 31 December 2021. The increase in ~~lending~~loans and advances to ~~SMEs and~~customers reflected growth in the open mortgage book, ~~which was in part~~partly offset by ~~lower levels of~~reductions in the closed mortgage book, other ~~commercial lending, lower credit card~~Retail balances and ~~unsecured loans and the continued reduction in the Group's closed mortgage book.~~

Total liabilities were £3,256 million, or 1 per cent, higher at £562,077 million compared to ~~£396,839~~£558,821 million at 31 December ~~2019.~~2020. Customer deposits were £24,221 million, or 6 per cent, higher at £449,373 million at 31 December 2021 compared to £425,152 million at 31 December 2020. There has been ~~significant~~continued growth in retail current account and savings balances, reflecting reduced consumer spending during the coronavirus pandemic, ~~and in commercial current accounts, as businesses have built up funds to cope with the pandemic,~~ which has only been partly ~~been~~ offset by lower levels of ~~other~~ commercial deposits. Repurchase agreement balances were £1,922 million, or 7 per cent, higher at £30,106 million compared to £28,184 million at 31 December 2020 however deposits from banks were £2,867 million lower at £3,363 million compared to £6,230 million at 31 December 2020 reflecting a reduced need for this source of funding. Debt securities in issue were ~~£17,138~~£10,569 million lower at £48,724 million at 31 December 2021 compared to £59,293 million at 31 December 2020 ~~compared to £76,431 million at 31 December 2019~~ as the availability of Government support and liquidity measures and increased levels of customer deposits have reduced the need for new funding issuance. Amounts due to fellow Lloyds Banking Group undertakings were £5,385 million lower at £1,490 million compared to £6,875 million at 31 December 2020 and derivative liabilities were £3,585 million lower at £4,643 million compared to £8,228 million at 31 December 2020, again driven by movements in the yield curve.

Total equity has ~~increased~~decreased by ~~£2,219~~£346 million, or 61 per cent, from ~~£38,899 million at 31 December 2019 to~~ £41,118 million at 31 December 2020 ~~as a result of retained profits and the issuance of £1,070~~to £40,772 million ~~of other equity instruments.~~

The PRA is consulting on a proposal to reverse the revised capital treatment of intangible software assets (which currently follows EU capital regulations), thereby reinstating the original requirement to deduct in full. Excluding the impact of the revised capital treatment Lloyds Bank Group'sGroup’s common equity tier 1 (CET1) capital ratio ~~would be 15.0~~has increased to 16.7 per ~~cent.~~cent (31 December 2020: 15.5 per cent) largely reflecting profits for the year and a reduction in risk-weighted assets, partially offset by dividends paid (net of the brought forward foreseeable dividend accrual), pension contributions made to the defined benefit pension schemes and a release of IFRS 9 transitional relief which largely offset the impairment credit through profits.

Risk-weighted assets reduced by £9,286 million, or 5 per cent, from £170,862 million at 31 December 2020 to £161,576 million at 31 December 2021. This was primarily as a result of 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.

The transitional total capital ratio remained at 23.5 per cent, with the benefit of the increase in CET1 capital and reduction in risk-weighted assets broadly offset by reductions in Additional Tier 1 (AT1) and Tier 2 capital instruments. The latter largely reflected the reduction in transitional limits applied to legacy tier 1 and tier 2 capital instruments and calls made on both AT1 and tier 2 capital instruments, partially offset by new issuances.

The UK leverage ratio reduced to 5.3 per cent (31 December 2020: 5.5 per cent) as a result of the reduction in the fully loaded total tier 1 capital position which was partially offset by the reduction in the leverage exposure measure, the latter primarily reflecting movements in securities financing transactions and off-balance sheet items, net of increased balance sheet lending.

The Lloyds Bank Group’s results for the year ended 31 December ~~2018,~~2019, and a discussion of the results for the year ended 31 December ~~2019~~2020 compared to those for the year ended 31 December ~~2018,~~2019, were included ~~on pages 13 to 15 of~~in the ~~2019~~2020 Annual Report on Form 20-F, filed on 2311 March ~~2020.~~2021.

Average balances are based on daily averages for the principal areas of the Group’s banking activities with monthly or less frequent averages used elsewhere. Management believes that the interest rate trends are substantially the same as they would be if all balances were averaged on the same basis.

The Group’s operations are predominantly UK-based and as a result an analysis between UK and non-UK activities is not provided.

The following table allocates changes in net interest income between volume, rate and their combined impact for 2021 compared with 2020 and for 2020 compared with ~~2019 and for 2019 compared with 2018.~~2019.

Our mission is to protect our customers, shareholders, colleagues and the Group, while enabling sustainable growth in targeted segments. This is achieved through informed risk decisions and robust risk management, supported by a consistent risk-focused culture.

This full risk management section provides a more in-depth picture of how risk is managed within the Group, detailing the Group’s emerging risks, approach to stress testing, risk governance, committee structure, appetite for risk and a full analysis of the principal risk categories (pages 3044 to ~~74)~~89), the framework by which risks are identified, managed, mitigated and monitored.

Each principal risk category is described and managed using the following standard headings: definition, exposures, measurement, mitigation and monitoring.

The Group operates a prudent approach to risk with rigorous management controls to support sustainable business growth and minimise losses. Through a strong and independent risk function (Risk division), a robust control framework is maintained to identify and escalate current and emerging risks, support sustainable growth within the Group's risk appetite, and to drive and inform good risk reward decision-making.

To meet ring-fencing requirements, core UK retail and commercial financial services and ancillary retail activities are ring-fenced from other activities of the Lloyds Banking Group. ~~Lloyds Bank~~The Group has adopted the enterprise risk management framework (ERMF) of ~~the Parent Group.~~ Lloyds ~~Bank~~Banking Group ~~has~~and supplemented ~~the Parent Group enterprise risk management framework~~ with additional ~~risk management related~~tailored practices to ~~ring fencing requirements as required. The Parent Group’s Governance framework, which is tailored to meet~~address the ~~entity specific needs of Lloyds Bank Group, is adopted by Lloyds Bank Group to ensure effective corporate governance within Lloyds Bank Group.~~ring-fencing requirements.

The Group’s ERMF is structured to align with the industry-accepted internal control framework standards.

The ERMF applies to every area of the business and covers all types of risk. It is reviewed, updated and approved by the Board at least annually to reflect any changes in the nature of the Group's business and external regulations, law, corporate governance and industry best practice. The ERMF provides the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. It also seeks to facilitate effective communication on these matters across the Group.

Key responsibilities of the Board and senior management include:

The Group's approach to setting, governing, embedding and monitoring risk appetite is detailed in the risk appetite framework, a key component of the ERMF.

Risk appetite is defined within the Group as ~~‘the~~the amount and type of risk that the Group is prepared to seek, accept or ~~tolerate’~~tolerate in delivering its strategy.

Group strategy and risk appetite are developed in tandem. Business planning aims to optimise value within the Group's risk appetite parameters and deliver on its promise to Help Britain Prosper.

The Group’s risk appetite statement details the risk parameters within which the Group operates. The statement forms part of the Group's control framework and is embedded into its policies, authorities and limits, to guide decision-making and risk management. Group risk appetite is regularly reviewed and refreshed to ensure appropriate coverage across our principal risks and any emerging risks, and to align with internal or external change.

The Board is responsible for approving the Group’s Board risk appetite statement ~~at least~~ annually. Group Board-level metrics are augmented by further sub-Board-level metrics and cascaded into more detailed business appetite metrics and limits.

~~Group risk appetite includes the~~The following ~~areas:~~

The Group’s approach to risk is ~~founded~~based on a robust control framework and a strong risk management culture which are the foundation for the delivery of effective risk management and guide the way all employees approach their work, behave and make decisions.

Governance is maintained through delegation of authority from the Board to individuals through the management hierarchy. Senior executives are supported where required by a ~~committee based~~committee-based structure which is designed to ensure open challenge and support effective decision-making.

The Group’s risk appetite, principles, policies, procedures, controls and reporting are regularly reviewed and updated where needed to ensure they remain fully ~~in-line~~in line with regulation, law, corporate governance and industry good practice.

The interaction of the executive and non-executive governance structures relies upon a culture of transparency and openness that is encouraged by both the Board and senior management.

Board-level engagement, coupled with the direct involvement of senior management in Group-wide risk issues at Group Executive Committee level, ensures that escalated issues are promptly addressed and remediation plans are initiated where required.

Line managers are directly accountable for identifying and managing risks in their individual businesses, ensuring that business decisions strike an appropriate balance between risk and reward and are consistent with the Group’s risk appetite.

Clear responsibilities and accountabilities for risk are defined across the Group through a three lines of defence model which ensures effective independent oversight and assurance in respect of key decisions.

The ~~risk committee~~Risk Committee governance framework is outlined on page ~~27.~~39.

The ERMF is implemented through a ‘three lines of defence’ model which defines clear responsibilities and accountabilities and ensures effective independent oversight and assurance activities take place covering key decisions.

Business lines (first line) have primary responsibility for risk decisions, identifying, measuring, monitoring and controlling risks within their areas of accountability. They are required to establish effective governance and control frameworks for their business to be compliant with ~~Lloyds Banking~~ Group policy requirements, to maintain appropriate risk management skills, mechanisms and toolkits, and to act within Group risk appetite parameters set and approved by the Board.

Risk division (second line) is a centralised function, headed by the Chief Risk Officer, providing oversight and ~~independent~~ constructive challenge to the effectiveness of risk decisions taken by business management, providing proactive advice and guidance, reviewing, challenging and reporting on the risk profile of the Group and ensuring that mitigating actions are appropriate.

It also has a key role in promoting the implementation of a strategic approach to risk management reflecting the risk appetite and ERMF agreed by the Board that encompasses:

The primary role of Group Internal Audit (third line) is to help the Board and executive management protect the assets, reputation and sustainability of the Group. ~~The internal audit function~~Group Internal Audit is led by the Group Chief Internal Auditor. ~~The internal audit function~~Group Internal Audit provides independent assurance to the Audit Committee and the Board through performing reviews and engaging with committees and executive management, providing opinion, challenge and informal advice on risk and the state of the control environment. ~~The internal audit function~~Group Internal Audit is a single independent internal audit function, reporting to the ~~Board~~ Audit Committee of ~~Lloyds Banking~~the Group and the ~~Board~~ Audit Committees of the key subsidiaries.

To allow senior management to make informed risk decisions, the business follows a continuous risk management approach which includes producing appropriate, accurate and focused risk reporting. The risk and control cycle sets out how this should be ~~approached, with the appropriate controls and processes in place.~~approached. This cycle, from identification to reporting, ensures consistency and is intended to manage and mitigate the risks impacting the Group.

The process for risk identification, measurement and control is integrated into the overall framework for risk governance. Risk identification processes are forward-looking to ensure emerging risks are identified. Risks are captured and measured using robust and consistent quantification methodologies. The measurement of risks includes the application of stress testing and scenario analysis, and considers whether relevant controls are in place before risks are incurred.

Identified risks are reported on a monthly basis or as frequently as necessary to the appropriate committee. The extent of the risk is compared to the overall risk appetite as well as specific limits or triggers. When thresholds are breached, committee minutes are clear on the actions and time frames required to resolve the breach and bring risk within tolerances. There is a clear process for escalation of risks and risk events.

All key controls are recorded and assessed on a regular basis, in response to triggers or minimum annually. Control assessments consider both the adequacy of the design and operating effectiveness. Where a control is not effective, the root cause is established and action plans implemented to improve control design or performance. Control ~~Effectiveness~~effectiveness against all residual risks isare aggregated by risk category and reported and monitored via the monthly Consolidated Risk Report (CRR). The CRR is reviewed and independently challenged by the Risk ~~Division~~division and provided to the Risk ~~Division~~division Executive Committee and Group Risk Committee. On an annual basis, a point in time assessment is made for control effectiveness against each risk category and across ~~sub-groups.~~subgroups. The CRR data is the primary source used for this ~~point in time~~point-in-time assessment and a ~~year on year~~year-on-year comparison on control effectiveness is reported to the Board.

One Risk and Control Self-Assessment (One RCSA) is part of the ~~Group’s Risk~~Group's risk and ~~Control Strategy~~control strategy to deliver a stronger risk culture and simplified risk and control environment. ~~The three lines of defence have worked together to identify~~Following improvements made to the ~~Group’s~~Group's approach to risk ~~management. Following pilot activity, this new approach (One RCSA) is being adopted~~management, implementation was completed at the end of 2021 across Divisional and Sub-Group Risk Profiles. One RCSA will continue to embed across the Group ~~through a phased implemented plan. All aspects of the 2020 Plan for implementation of One RCSA have been delivered. The 2021 plans capture the remaining highest risks to customers~~as risk practices, data quality, culture and ~~the business, and the Board will continue to review progress with embedding the cultural change and improving the risk and control environment.~~capability mature.

Based on the Group’s prudent business model, prudent approach to risk management, and guided by the Board, the senior management articulates the core risk values to which the Group aspires, and sets the tone at the top. Senior ~~Management~~management establishes a strong focus on building and sustaining long-term relationships with customers, through the economic cycle. Lloyds Banking Group’s Code of Responsibility reinforces colleagues’ accountability for the risks they take and their responsibility to prioritise their customers’ needs.

Appropriate mechanisms are in place to avoid over-reliance on key personnel or system/technical expertise within the Group. Adequate resources are in place to serve customers both under normal working conditions and in times of stress, and monitoring procedures are in place to ensure that the level of available resource can be increased if required. Colleagues undertake appropriate training to ensure they have the skills and knowledge necessary to enable them to deliver fair outcomes for customers.

There is ongoing investment in risk systems and models alongside the Group’s investment in customer and product systems and processes. This drives improvements in risk data quality, aggregation and reporting leading to effective and efficient risk decisions.

Risk analysis and reporting enables better understanding of risks and returns, supporting the identification of opportunities as well as better management of risks.

An aggregate view of the Group’s overall risk profile, key risks and management actions, and performance against risk appetite, including the CRR, is reported to and discussed monthly at the Lloyds Banking Group and Ring Fenced-Banks Risk ~~Committee~~Committees with regular reporting to the Board Risk Committee and the Board.

Rigorous stress testing exercises are carried out to assess the impact of a range of adverse scenarios with different probabilities and severities to inform strategic planning.

The Chief Risk Officer regularly informs the Board Risk Committee of the aggregate risk profile and has direct access to the Chair and members of Board Risk Committee.

The Group maintains risk management systems and internal controls relating to the financial reporting process which are designed to:

The Audit Committee reviews the quality and acceptability of Lloyds Bank Group's financial disclosures. In addition, the Lloyds Banking Group Disclosure Committee assists the Lloyds Bank Group Chief Executive and Chief Financial Officer in fulfilling their disclosure responsibilities under relevant listing and other regulatory and legal requirements.

The risk governance structure below is integral to effective risk management across Lloyds Banking Group, including Lloyds Bank Group. To meet ring-fencing requirements the Boards and Board Committees of Lloyds Banking Group and the Ring-Fenced Banks (Lloyds Bank plc and Bank of Scotland plc) as well as relevant Committees of Lloyds Banking Group and the Ring-Fenced Banks will sit concurrently, referred to as the Aligned Board Model. The Risk division is appropriately represented on key committees to ensure that risk management is discussed in these meetings. This structure outlines the flow and escalation of risk information and reporting from business areas and the Risk division to the Group Executive Committee and Board. Conversely, strategic direction and guidance is cascaded down from the Board and Group Executive Committee.

The Company Secretariat supports senior and Board-level committees, and supports the Chairs in agenda planning. This gives a further line of escalation outside the three lines of defence.

The Group’s risk governance structure strengthens risk evaluation and management, while also positioning the Group to manage the changing regulatory environment in an efficient and effective manner.

Assisted by the ~~Lloyds Banking Group~~ Board Risk and Audit Committees, the Board approves ~~Lloyds Bank~~the Group’s overall governance, risk and control frameworks and risk appetite. Refer to the ~~Corporate Governance~~corporate governance section on pages 7792 to ~~82,~~98, for further information on Board ~~committees.~~Committees.

The sub-group, divisional and functional risk committees review and recommend sub-group, divisional and functional risk appetite and monitor local risk profile and adherence to appetite.

Lloyds Bank Group Chief Executive is supported by the following:

Stress testing is recognised as a key risk management tool by the Boards, senior management, the businesses and the Risk and Finance functions of all parts of the Group and its legal entities. It is fully embedded in the planning process of the Group and its key legal entities as a key activity in medium-term planning, and senior management is actively involved in stress testing activities via ~~a strict~~the governance process.

On at least an annual basis, the Group conducts macroeconomic stress tests of the operating plan, which are supplemented with higher-level refreshes if necessary. The exercise aims to highlight the key vulnerabilities of the Group’s and its legal entities’ business plans to adverse changes in the economic environment, and to ensure that there are adequate financial resources in the event of a downturn.

Reverse stress testing is used to explore the vulnerabilities of the Group’s and its key legal entities’ strategies and plans to extreme adverse events that would cause the businesses to fail. Where this identifies plausible scenarios with an unacceptably high risk, the Group or its entities will adopt measures to prevent or mitigate that and reflect these in strategic plans.

The Group’s stress testing programme also involves undertaking assessments of liquidity scenarios, market risk sensitivities and scenarios, and ~~business specific~~business-specific scenarios (see the principal risk categories on ~~page 23~~pages 32 to 34 for further information on risk-specific stress testing). If required, ad hoc stress testing exercises are also undertaken to assess emerging risks, as well as in response to regulatory requests. This ~~wide ranging~~wide-ranging programme provides a comprehensive view of the potential impacts arising from the risks to which the Group is exposed and reflects the nature, scale and complexity of the Group. Lloyds Banking Group ~~will undertake~~participated in Part 1 of the Bank of England’s Climate Biennial Exploratory Stress test in 2021 and will leverage the experience gained through that exercise to further embed climate risk into risk management and stress testing activities.

The stress tests at all levels must comply with all regulatory requirements, achieved through the comprehensive construction of macroeconomic scenarios and a rigorous divisional, functional, risk and executive review and challenge process, supported by analysis and insight into impacts on customers and business drivers.

The engagement of all required business, Risk and Finance teams is built into the preparation process, so that the appropriate analysis of each risk category’s impact upon the business plans is understood and documented. The methodologies and modelling approach used for stress

Clear accountabilities and responsibilities for stress testing are assigned to senior management and the Risk and Finance functions throughout the Group and its key legal entities. This is formalised through the Lloyds Banking Group ~~Business Planning~~business planning and ~~Stress Testing Policy~~stress testing policy and ~~Procedure,~~procedure, which are reviewed at least annually.

The Group Financial Risk Committee (GFRC), chaired by the Chief Risk Officer and attended by the Chief Financial Officer and other senior Risk and Finance colleagues, is the committee that has primary responsibility for overseeing the development and execution of the Group’s stress tests.

The review and challenge of the Group’s detailed stress forecasts, the key assumptions behind these, and the methodology used to translate the economic assumptions into stressed outputs conclude with the appropriate Finance and Risk ~~Directors’~~ sign-off. The outputs are then presented to GFRC and the Board Risk Committee for review and challenge, before being approved by the Board.

Understanding emerging risks is an essential component of the Group’s risk management approach, enabling the Group to identify the most pertinent risks and opportunities, and to respond through strategic planning and appropriate risk mitigation.

Although emerging risk is not a principal risk, if left undetected emerging risks have the potential to adversely impact the Group or result in missed opportunities.

Impacts from emerging risks on the Group’s principal risks can materialise via two different routes:

Where an emerging risk is considered material enough in its own right, the Group may choose to recognise the risk as a principal risk. Recent examples of this include climate risk and strategic risk. Such elevations are considered and approved through the Board as part of the annual refresh of Lloyds Banking Group's enterprise risk management framework.

The basis for risk identification is founded on collaboration between functions across the Group. The activity incorporates internal horizon scanning and engagement with external experts to gain an external context, ensuring broad coverage.

This activity is inherently linked with and builds upon the annual strategic planning cycle and is used to identify key external trends, risks and opportunities for the Group.

The Group is evolving its methodology in respect of the identification and prioritisation of emerging risks. 2021 saw the development of a quantitative risk assessment methodology for understanding the connectivity of strategic risk. The Group has drawn on this methodology and findings to expand its insights.

The Group considers the following emerging risk themes as having the potential to increase in significance and affect the performance of the Group.

Key actions to tackle the emerging challenges and capitalise on opportunities as part of the Group’s strategy include the following:

Outcomes will see products, services and activities, aligning to societal and regulatory expectations, which drive impacts across housing, financial wellbeing, businesses and jobs, communities, regions, and sustainability.

Key components include:

The strategy places focus on a colleague proposition that can attract and retain the best people, while leveraging talent pools across the UK and exploring in-house skills growth strategies, alongside partnerships with universities and businesses, to supplement scarce skill sets.

For the long term, the Group intends to use its strategic workforce planning capability for understanding and meeting the evolving demand of skills from its businesses and functions. This will also act as the bedrock for key strategic decisions and interventions in respect of important elements of the Group’s talent strategy in the future.

The Group aims to manage the challenges of a rapidly evolving landscape by employing technology that is aligned to industry best practice refresh rates, while promoting autonomy and empowerment within teams by streamlining governance.

This will be supplemented with an aligned business and technology vision and a rationalised hybrid cloud technology estate and modern engineering standards.

The Group has developed a data management strategy to provide the common framework and direction by uplifting data quality, simplifying data architecture, enhancing data governance and implementing market leading tools to improve its ability to deliver a data-first culture. The Group has also invested in data ethics framework and strong governance for its advanced analytics and cloud programmes.

In addition to the strategic actions detailed above, the Group works closely with regulatory authorities and industry bodies to ensure that the Group can monitor external developments (e.g. potential regulatory divergence from EU) and identify and respond to the evolving landscape, particularly in relation to regulatory and legal risk.

Risk categories recognised by the Group are periodically reviewed to ensure that they reflect the Group risk profile in light of internal and external factors, such as the Group strategy and the regulatory environment in which it operates. ~~The only change~~Changes include the recategorisation of governance risk, from a principal risk type to a secondary risk under operational risk, plus enhancement to the naming of some secondary risk ~~categories during 2020 has been the addition of Climate risk.~~categories.

~~Lloyds Bank~~The Group considers both reputational and financial impact in the course of managing all its risks and therefore does not classify reputational impact as a separate risk category.

Market risk is defined as the risk that the Group's capital or earnings profile is affected by adverse market rates or prices, in particular interest rates and credit spreads in both the Banking business ~~interest rates,~~ and ~~credit spreads in~~ the Group’s ~~Defined Benefit Pension Schemes.~~defined benefit pension schemes.

~~The Lloyds Bank~~ Group risk appetite is calibrated primarily to ~~five~~a number of multi-risk ~~Lloyds Banking~~ Group economic scenarios, and is supplemented with sensitivity-based measures. The scenarios assess the impact of unlikely, but plausible, adverse stresses on income with the worst case for banking activities, defined benefit pensions, insurance and trading portfolios reported against independently, and across ~~Lloyds Bank~~the Group as a whole.

The ~~Lloyds Bank~~ Group risk appetite is cascaded first to the Group Asset and Liability Committee (GALCO), chaired by the Chief Financial Officer, where risk appetite is approved and monitored by risk type, and then to the Group Market Risk Committee (GMRC) where risk appetite is sub-allocated by division. These metrics are reviewed regularly by senior management to inform effective decision-making.

GALCO is responsible for approving and monitoring ~~group~~Group market risks, management techniques, market risk measures, behavioural assumptions, and the market risk policy. Various mitigation activities are assessed and undertaken across ~~Lloyds Bank~~the Group to manage portfolios and seek to ensure they remain within approved limits. The mitigation actions will vary dependent on exposure but will, in general, look to reduce risk in a cost effective manner by offsetting balance sheet exposures and externalising to the financial markets dependent on market liquidity. The market risk policy is owned by Group Corporate Treasury (GCT) and refreshed annually. The policy is underpinned by supplementary market risk procedures, which define specific market risk management and oversight requirements.

GALCO and GMRC regularly review high level market risk exposure as part of the wider risk management framework. They also make recommendations to the Board concerning overall market risk appetite and ~~Lloyds Banking Group's Market Risk Policy.~~market risk policy. Exposures at lower levels of delegation are monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios. Levels of exposures compared to approved limits and triggers are monitored by Risk and appropriate escalation procedures are in place.

How market risks arise and are managed across ~~Lloyds Bank~~the Group’s activities is considered in more detail below.

The ~~Lloyds Bank~~ Group’s banking activities expose it to the risk of adverse movements in market rates or prices, predominantly interest rates, credit spreads, exchange rates and equity prices. The volatility of market rates or prices can be affected by both the transparency of prices and the amount of liquidity in the market for the relevant asset, liability or instrument.

Yield curve risk in ~~Lloyds Bank~~the Group’s divisional portfolios, and in ~~Lloyds Bank~~the Group’s capital and funding activities, arises from the different repricing characteristics of ~~Lloyds Bank~~the Group’s non-trading assets, liabilities and off-balance sheet positions.

Basis risk arises from the potential changes in spreads between indices, for example where the ~~bank~~Bank lends with reference to a central bank rate but funds with reference to ~~LIBOR,~~a market rate, e.g. SONIA, and the spread between these two rates widens or tightens.

Optionality risk arises predominantly from embedded optionality within assets, liabilities or off-balance sheet items where either ~~Lloyds Bank~~the Group or the customer can affect the size or timing of cash flows. One example of this is mortgage prepayment risk where the customer owns an option allowing them to prepay when it is economical to do so. This can result in customer balances amortising more quickly or slowly than anticipated due to customers’ response to changes in economic conditions.

Equity risk arises primarily from exposure to the Lloyds Banking Group share price through deferred shares and deferred options granted to employees as part of their benefits package.

Credit spread risk

Credit spread risk arises largely ~~from~~from: (i) the liquid asset portfolio held in the management of ~~Lloyds Bank Group's~~Group liquidity, comprising of government, supranational and other eligible assets; (ii) the Credit Valuation Adjustment (CVA) and ~~Debt~~Debit Valuation Adjustment (DVA) sensitivity to credit spreads; (iii) a number of the ~~Lloyds Bank~~ Group’s structured medium-term notes where ~~Lloyds Bank~~the Group has elected to fair value the notes through the profit and loss account; and (iv) banking book assets in Commercial Banking held at fair value under IFRS 9.

Interest rate risk exposure is monitored monthly using, primarily:

Market value sensitivity: this methodology considers all repricing mismatches (behaviourally adjusted where appropriate) in the current balance sheet and calculates the change in market value that would result from an instantaneous 25, 100 and 200 basis points parallel rise or fall in the yield curve. ~~GBP~~Sterling interest rates are modelled with a floor atbelow zero per cent, with negative rate floors also modelled for ~~non-GBP~~non-Sterling currencies where appropriate (product-specific floors apply). The market value sensitivities are calculated on a static balance sheet using principal cash flows excluding interest, commercial margins and other spread components and are therefore discounted at the ~~risk free~~risk-free rate.

Interest income sensitivity: this measures the ~~12 month~~ impact on future net interest income arising from various economic scenarios. These include instantaneous 25, 100 and 200 basis point parallel shifts in all yield curves and the ~~five Lloyds Banking~~ Group economic scenarios. ~~GBP~~Sterling interest rates are modelled with a floor atbelow zero per cent, with negative rate floors also modelled for ~~non-GBP~~non-Sterling currencies where appropriate (product-specific floors apply). These scenarios are reviewed every year and are designed to replicate severe but plausible economic events, capturing risks that would not be evident through the use of parallel shocks alone such as basis risk and steepening or flattening of the yield curve.

Additional negative rate scenarios are also used, where floors are removed, ~~or lowered,~~ to ensure that this risk is monitored; however, these are not measured against the limit framework for the purposes of ~~Risk Appetite.~~risk appetite.

Unlike the market value sensitivities, the interest income sensitivities incorporate additional behavioural assumptions as to how and when individual products would reprice in response to changing rates. ~~In addition a dynamic balance sheet is used which includes the run-off of current assets and liabilities and the addition of planned new business.~~

Reported sensitivities are not necessarily predictive of future performance as they do not capture additional management actions that would likely be taken in response to an immediate, large, movement in interest rates. These actions could reduce the net interest income sensitivity, help mitigate any adverse impacts or they may result in changes to total income that are not captured in the net interest income.

Structural hedge: the structural hedging programme managing interest rate risk in the banking book relies on assumptions made around customer behaviour. A number of metrics are in place to monitor the risks within the portfolio.

~~Lloyds Banking~~The Group has an integrated Asset and Liability Management (ALM) system which supports non-traded asset and liability management of ~~Lloyds Bank~~the Group. This provides a single consolidated tool to measure and manage interest rate repricing profiles (including behavioural assumptions), perform stress testing and produce forecast outputs. ~~Lloyds Bank~~The Group is aware that any ~~assumptions based~~assumptions-based model is open to challenge. A full behavioural review is performed annually, or in response to changing market conditions, to ensure the assumptions remain appropriate and the model itself is subject to annual re-validation, as required under ~~the~~ Lloyds Banking ~~Group Model Governance Policy.~~Group's model governance policy. The key behavioural assumptions are:

The table below shows, split by material currency, ~~Lloyds Bank~~the Group’s market value sensitivities to an instantaneous parallel up and down 25 and 100 basis points change to all interest rates.

This is a ~~risk based~~risk-based disclosure and the amounts shown would be amortised in the income statement over the duration of the portfolio.

The market value sensitivity ~~is driven by temporary customer flow positions not yet hedged plus other positions occasionally held, within limits, in order~~ to ~~minimise overall funding and hedging costs.~~a down 100 basis points shock has increased due to rates being higher than at year end 2020 leading to a larger downshock being applied before hitting the modelled interest rate floor. The sensitivity to an up ~~100bps, increased in 2020 due~~100 basis points shock has decreased as a result of hedging activity and changes to ~~customer balance sheet changes and the associated hedging, in particular growth in fixed rate mortgages. The level of risk remains low relative to the size of the total balance sheet.~~mortgage prepayment assumptions.

The table below shows supplementary value sensitivity to a steepening and flattening (c.100 basis points around the ~~3 year~~three-year point) in the yield curve. This ensures there are no unintended consequences to managing risk to parallel shifts in rates.

The table below shows the banking book one year net interest income sensitivity to an instantaneous parallel up and down 25 ~~and 100~~ basis points change to all interest rates.

The ~~decrease~~table below shows supplementary income sensitivity on a one to three-year forward-looking basis to an instantaneous parallel up 25, down 25 and up 50 basis points change to all interest rates.

Year 1 net interest income sensitivity, to up 25 basis points, has decreased year-on-year mostly due to the additional structural hedging that has been transacted in 2021 in addition to the use of simpler illustrative pass through assumptions. The increase in risk sensitivity year-on-year, to down ~~100bps,~~25 basis points, is driven by ~~a reduction in~~greater modelled margin compression risk following the ~~fall~~rise in interest rates in ~~2020.~~December 2021. This isresults in the full 25 basis points downshock being applied at December 2021 whereas a 10 basis points shock was applied at December 2020 due to ~~Lloyds Bank~~the Group’s ~~assumptions~~assumption, at the time, for modelling ~~GBP~~Sterling interest rates with a floor of zero per cent (product-specific floors apply) ~~which limits the down-shock applied.~~.

The three year net interest income sensitivity to a down 25 basis points shock is driven predominantly by margin compression on Retail and Commercial Bank savings products as well as structural hedge maturities to be reinvested in years two and three. The sensitivity to an up 25 basis points and 50 basis points shock is largely due to reinvestment of structural hedge maturities.

The sensitivities are illustrative and do not reflect new business margin implications and/or pricing actions, other than as outlined.

The following assumptions have been applied:

Basis risk, foreign exchange, equity and credit spread risks are measured primarily through scenario analysis by assessing the impact on profit before tax over a ~~12 month~~12-month horizon arising from a change in market rates, and reported within the Board risk appetite on a monthly basis. Supplementary measures such as sensitivity and exposure limits are applied where they provide greater insight into risk positions. Frequency of reporting supplementary measures varies from daily to quarterly appropriate to each risk type.

~~Lloyds Bank~~The Group’s policy is to optimise reward ~~whilst~~while managing its market risk exposures within the risk appetite defined by the Board. Lloyds Banking ~~Group Market Risk Policy~~Group's market risk policy and procedures outlines the hedging process, and the centralisation of risk from divisions into ~~GCT,~~Group Corporate Treasury (GCT), e.g. via the transfer pricing framework. GCT is responsible for managing the centralised risk and does this through natural offsets of matching assets and liabilities, and appropriate hedging activity of the residual exposures, subject to the authorisation and mandate of GALCO within the Board risk appetite. The hedges are externalised to the market by derivative desks within GCT and the Commercial Bank. ~~Lloyds Bank~~The Group mitigates income statement volatility through hedge accounting. This reduces the accounting volatility arising from ~~Lloyds Bank~~the Group’s economic hedging activities and any hedge accounting ineffectiveness is continuously monitored.

The largest residual risk exposure arises from balances that are deemed to be insensitive to changes in market rates (including current accounts, a portion of variable rate deposits and investable equity), and is managed through ~~Lloyds Bank~~the Group’s structural hedge. Consistent with ~~Lloyds Bank~~the Group’s strategy to deliver stable returns, GALCO seeks to minimise large reinvestment risk, and to smooth earnings over a range of investment tenors. The structural hedge consists of longer-term fixed rate assets or interest rate swaps and the amount and duration of the hedging activity is reviewed regularly by GALCO.

~~Whilst~~While the ~~bank~~Bank faces margin compression in low rate environments, its exposure to pipeline and prepayment risk are not considered material and are hedged in line with expected customer behaviour. These are appropriately monitored and controlled through divisional Asset and Liability Committees (ALCOs).

Net investment foreign exchange exposures are managed centrally by GCT, by hedging non-Sterling asset values with currency borrowing. Economic foreign exchange exposures arising from non-functional currency flows are identified by divisions and transferred and managed centrally. ~~Lloyds Banking~~The Group also has a policy of forward hedging its forecasted currency profit and loss to year end. The Group makes use of both accounting and economic foreign exchange exposures, as an offset against the impact of changes in foreign exchange rates on the value of non-Sterling-denominated risk-weighted assets. This involves the holding of a structurally open currency position; sensitivity is minimised where, for a given currency, the ratio of the structural open position to risk-weighted assets equals the CET1 ratio. Continually evaluating this structural open currency position against evolving non-Sterling-denominated risk-weighted assets mitigates volatility in the Group’s CET1 ratio.

The appropriate limits and triggers are monitored by senior executive committees within the ~~banking~~Banking divisions. Banking assets, liabilities and associated hedging are actively monitored and if necessary rebalanced to be within agreed tolerances.

~~Lloyds Bank~~The Group’s defined benefit pension schemes are exposed to significant risks from their assets and liabilities. The liability discount rate exposes ~~Lloyds Bank~~the Group to interest rate risk and credit spread risk, which are partially offset by fixed interest assets (such as gilts and corporate bonds) and swaps. Equity and alternative asset risk arises from direct asset holdings. Scheme membership exposes ~~Lloyds Bank~~the Group to longevity risk. Increases to pensions in deferment and in payment expose the Group to inflation risk.

~~Management~~The Group's management of the schemes’ assets is the responsibility of the Trustees of the schemes who are responsible for setting the investment strategy and for agreeing funding requirements with ~~Lloyds Bank~~the Group. ~~Lloyds Bank~~The Group will be liable for meeting any funding deficit that may arise. As part of the triennial valuation process, ~~Lloyds Bank~~the Group will agree with the Trustees a funding strategy to eliminate the deficit over an appropriate period.

Longevity risk is measured using both 1-in-20 year stresses (risk appetite) and 1-in-200 year stresses (regulatory capital).

~~Lloyds Bank~~The Group takes an active involvement in agreeing mitigation strategies with the schemes’ Trustees. An interest rate and inflation hedging programme is in place to reduce liability risk. The schemes have also reduced equity allocation and invested the proceeds in credit assets. The Trustees have put in place a longevity ~~swap~~swaps to mitigate longevity risk. The merits of longevity risk transfer and hedging solutions are reviewed regularly.

In addition to the wider risk management framework, governance of the schemes includes two specialist pensions committees.

The surplus, or deficit, in the schemes is tracked monthly along with various single factor and scenario stresses which consider the assets and liabilities holistically. Key metrics are monitored monthly including ~~Lloyds Bank~~the Group’s capital resources of the scheme, the performance against risk appetite triggers, and the performance of the hedged asset and liability matching positions.

~~Lloyds Bank~~The Group’s trading activity is small relative to its ~~peers and does not engage in any proprietary trading activities. Lloyds Bank~~peers. The Group’s trading activity is undertaken solely to meet the financial requirements of commercial and retail customers for foreign exchange and interest rate products. These activities support customer flow and market making activities.

All trading activities are performed within the Commercial Banking division. While the trading positions taken are generally small, any extreme moves in the main risk factors and other related risk factors could cause significant losses in the trading book depending on the positions at the time. The average 95 per cent 1-day trading VaR (Value at Risk; diversified across risk factors) was £0.1 million for 31 December 2021.

Trading market risk measures are applied to all of ~~Lloyds Bank~~the Group’s regulatory trading books and they include daily VaR, ~~sensitivity based~~sensitivity-based measures, and stress testing calculations.

~~Lloyds Bank~~The Group internally uses VaR as the primary risk measure for all trading book positions.

The risk of loss measured by the VaR model is the minimum expected loss in earnings given the 95 per cent confidence. The total and average trading VaR numbers reported below have been obtained after the application of the diversification benefits across the five risk types. The maximum and minimum VaR reported for each risk category did not necessarily occur on the same day as the maximum and minimum VaR reported at Group level.

The Group’s closing VaR, allowing for diversification, at 31 December 2021 across interest rate risk, foreign exchange risk, equity risk, credit spread risk and inflation risk was less than £0.05 million. During the year ended 31 December 2021, the Group’s minimum VaR was less than £0.05 million and its average and maximum VaR was £0.1 million.

For the year ended 31 December 2021, excluding the effects of diversification, the maximum total VaR for all of the above risks was £0.2 million, the average total VaR was £0.1 million and minimum VaR was less than £0.05 million. The closing VaR at 31 December 2021, excluding the effects of diversification, was less than £0.06 million.

34

The market risk for the trading book continues to be low ~~with respect~~relative to the size of ~~Lloyds Bank~~the Group and in comparison to peers. This reflects the fact that ~~Lloyds Bank~~the Group’s trading operations are customer-centric and focused on hedging and recycling client risks.

Although it is an important market standard measure of risk, VaR has limitations. One of them is the use of a limited historical data sample which influences the output by the implicit assumption that future market behaviour will not differ greatly from the historically observed period. Another known limitation is the use of defined holding periods which assumes that the risk can be liquidated or hedged within that holding period. Also calculating the VaR at the chosen confidence interval does not give enough information about potential losses which may occur if this level is exceeded. ~~Lloyds Bank~~The Group fully recognises these limitations and supplements the use of VaR with a variety of other measurements which reflect the nature of the business activity. These include detailed sensitivity analysis, position reporting and a stress testing programme.

Trading book VaR (1-day 99 per cent) is compared daily against both hypothetical and actual profit and loss at underlying legal entity level (HBOS and Lloyds Bank).

The level of exposure is controlled by establishing and communicating the approved risk limits and controls through policies and procedures that define the responsibility and authority for risk taking. Market risk limits are clearly and consistently communicated to the business. Any new or emerging risks are brought within risk reporting and defined limits.

Trading risk appetite is monitored daily with 1-day 95 per cent VaR and stress testing limits. These limits are complemented with position level action triggers and profit and loss referrals. Risk and position limits are set and managed at both desk and overall trading book levels. They are reviewed at least annually and can be changed as required within the overall ~~Lloyds Bank~~ Group risk appetite framework.

Credit risk is defined as the risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off- balance sheet).

In terms of loans and advances (for example mortgages, term loans and overdrafts) and contingent liabilities (for example credit instruments such as guarantees and documentary letters of credit), credit risk arises both from amounts advanced and commitments to extend credit to a customer or bank. With respect to commitments to extend credit, the Group is also potentially exposed to an additional loss up to an amount equal to the total unutilised commitments. However, the likely amount of loss may be less than the total unutilised commitments, as most retail and certain commercial lending commitments may be cancelled based on regular assessment of the prevailing creditworthiness of customers. Most commercial term commitments are also contingent upon customers maintaining specific credit standards.

Additionally, credit risk arises from leasing arrangements where the Group is the lessor. Note 2(J) on page ~~F-19~~F-20 provides details on the Group’s approach to the treatment of leases.

Loans and advances, contingent liabilities, commitments, debt securities and derivatives also expose the Group to refinance risk. Refinance risk is the possibility that an outstanding exposure cannot be repaid at its contractual maturity date. If the Group does not wish to refinance the exposure then there is refinance risk if the obligor is unable to repay by securing alternative finance. This may occur for a number of reasons which may include: the borrower is in financial difficulty, because the terms required to refinance are outside acceptable appetite at the time or the customer is unable to refinance externally due to a lack of market liquidity. Refinance risk exposures are managed in accordance with the Group’s existing credit risk policies, processes and controls, and are not considered to be material given the Group’s prudent and ~~through the cycle~~through-the-cycle credit risk appetite. Where heightened refinance risk exists exposures are minimised through intensive account management and, where appropriate, are classed as impaired and/or forborne.

The process for credit risk identification, measurement and control is integrated into the Board-approved framework for credit risk appetite and governance.

Credit risk is measured from different perspectives using a range of appropriate modelling and scoring techniques at a number of levels of granularity, including total balance sheet, individual portfolio, pertinent concentrations and individual customer - for both new business and existing ~~lending.Key~~exposure. Key metrics, ~~such as~~which may include total exposure, expected credit loss (ECL), risk-weighted assets, new business quality, concentration risk and portfolio performance, are reported monthly to Risk Committees and Forums.

Measures such as ECL, risk-weighted assets, observed credit performance, predicted credit quality (usually from predictive credit scoring models), collateral cover and quality, and other credit drivers (such as cash flow, affordability, leverage and indebtedness) have been incorporated into the Group's credit risk management practices to enable effective risk measurement across the Group.

The Group has also continued to strengthen its capabilities and abilities for identifying, assessing and managing climate-related risks and opportunities, recognising that Climate change is likely to result in changes in the risk profile and outlook for the Group's customers, the sectors the Group operates in and collateral/asset valuations. For further information, please refer to LBG’s 2021 Climate Report.

In addition, stress testing and scenario analysis are used to estimate impairment losses and capital demand forecasts for both regulatory and internal purposes and to assist in the formulation of credit risk appetite.

As part of the ‘three lines of defence’ model, the Risk division is the second line of defence providing oversight and independent challenge to key risk decisions taken by business management. The Risk division also tests the effectiveness of credit risk management and internal credit risk controls. This includes ensuring that the control and monitoring of higher risk and vulnerable portfolios and sectors is appropriate and confirming that appropriate loss allowances for impairment are in place. Output from these reviews helps to inform credit risk appetite and credit policy.

As the third line of defence, Group Internal Audit undertakes regular risk-based reviews to assess the effectiveness of ~~Credit~~credit risk management and controls.

The Group uses a range of approaches to mitigate ~~Credit~~credit risk.

requirements. The Group’s largest credit limits are regularly monitored by the Board Risk Committee and reported in accordance with regulatory requirements.

The principal types of acceptable collateral include:

The Group maintains appetite parameters on the acceptability of specific classes of collateral.

For non-mortgage retail lending to small businesses, collateral may include second charges over residential property and the assignment of life cover.

Collateral held as security for financial assets other than loans and advances is determined by the nature of the underlying exposure. Debt securities, including treasury and other bills, are generally unsecured, with the exception of asset-backed securities and similar instruments such as covered bonds, which are secured by portfolios of financial assets. Collateral is generally not held against loans and advances to financial institutions. However, securities are held as part of reverse repurchase or securities borrowing transactions or where a collateral agreement has been entered into under a master netting agreement. Derivative transactions with financial counterparties are typically collateralised under a Credit Support Annex (CSA) in conjunction with the International Swaps and Derivatives Association (ISDA) Master Agreement. Derivative transactions with non-financial customers are not usually supported by a CSA.

The requirement for collateral and the type to be taken at origination will be based upon the nature of the transaction and the credit quality, size and structure of the borrower. For non-retail exposures, if required, the Group will often seek that any collateral ~~include~~includes a first charge over land and buildings owned and occupied by the business, a debenture over the assets of a company or limited liability partnership, personal guarantees, limited in amount, from the directors of a company or limited liability partnership and key man insurance. The Group maintains policies setting out which types of collateral valuation are acceptable, maximum loan to value (LTV) ratios and other criteria that are to be considered when reviewing an application. The fundamental business proposition must evidence the ability of the business to generate funds from normal business sources to repay a customer or counterparty’s financial commitment, rather than reliance on the disposal of any security provided.

~~The extent to which collateral values are actively managed will depend on the credit quality and other circumstances of the obligor and type of underlying transaction.~~ Although lending decisions are primarily based on expected cash flows, any collateral provided may impact the pricing and other terms of a loan or facility granted. This will have a financial impact on the amount of net interest income recognised and on internal loss given default estimates that contribute to the determination of asset quality and returns.

The Group requires collateral to be realistically valued by an appropriately qualified source, independent of both the credit decision process and the customer, at the time of borrowing. In certain circumstances, for Retail residential mortgages this may include the use of automated valuation models based on market data, subject to accuracy criteria and LTV limits. Where ~~third-parties~~third parties are used for collateral valuations, they are subject to regular monitoring and review. Collateral values are subject to review, which will vary according to the type of lending, collateral involved and account performance. Such reviews are undertaken to confirm that the value recorded remains appropriate and whether revaluation is required, considering, for example, account performance, market conditions and any information available that may indicate that the value of the collateral has materially declined. In such instances, the Group may seek additional collateral and/or other amendments to the terms of the facility. The Group adjusts estimated market values to take account of the costs of realisation and any discount associated with the realisation of the collateral when estimating credit losses.

The Group considers risk concentrations by collateral providers and collateral type with a view to ensuring that any potential undue concentrations of risk are identified and suitably managed by changes to strategy, policy and/or business plans.

The Group seeks to avoid correlation or wrong-way risk where possible. Under the Group’s repurchase (repo) policy, the issuer of the collateral and the repo counterparty should be neither the same nor connected. The same rule applies for derivatives. The Risk division has the necessary discretion to extend this rule to other cases where there is significant correlation. Countries with a rating equivalent to AA- or better may be considered to have no adverse correlation between the counterparty domiciled in that country and the country of risk (issuer of securities).

The Group uses a variety of lending criteria when assessing applications for mortgages and unsecured lending. The general approval process uses credit acceptance scorecards and involves a review of an applicant’s previous credit history using internal data and information held by Credit Reference Agencies (CRA).

The Group also assesses the affordability and sustainability of lending for each borrower. For secured lending this includes use of an appropriate stressed interest rate scenario. Affordability assessments for all lending are compliant with relevant regulatory and conduct guidelines. The Group takes reasonable steps to validate information used in the assessment of a customer’s income and expenditure.

In addition, the Group has in place quantitative limits such as maximum limits for individual customer products, the level of borrowing to income and the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are policy limits above which the Group will typically reject borrowing applications. The Group also applies certain criteria that are applicable to specific products, for example applications for buy-to-let mortgages.

For UK mortgages, the Group’s policy permits owner occupier applications with a maximum ~~loan to value (LTV)~~LTV of 95 per cent. This can increase to 100 per cent for specific products where additional security is provided by a supporter of the applicant and held on deposit by the Group. Applications with an LTV above 90 per cent are subject to enhanced underwriting criteria, including higher scorecard cut-offs and loan size restrictions.

Buy-to-let mortgages within Retail are limited to a maximum loan size of £1,000,000 and 75 per cent LTV. Buy-to-let applications must pass a minimum rental cover ratio of 125 per cent under stressed interest rates, after applicable tax liabilities. Portfolio landlords (customers with four or more mortgaged buy-to-let properties) are subject to additional controls including evaluation of overall portfolio resilience.

The Group’s policy is to reject any application for a lending product where a customer is registered as bankrupt or insolvent, or has a recent County Court Judgment or financial default registered at a CRA used by the Group above de minimis thresholds. In addition, the Group typically rejects applicants where total unsecured debt, debt-to-income ratios, or other indicators of financial difficulty exceed policy limits.

Where credit acceptance scorecards are used, new models, model changes and monitoring of model effectiveness are independently reviewed and approved in accordance with the governance framework set by the Group Model Governance Committee.

It is credit policy that a ~~Group approved~~Group-approved master netting agreement must be used for all derivative and traded product transactions and must be in place prior to trading, with separate documentation required for each Group entity providing facilities. This requirement extends to trades with clients and the counterparties used for the Bank’s own hedging activities, which may also include clearing trades with Central Counterparties (CCPs).

Any exceptions must be approved by the appropriate credit sanctioner. Master netting agreements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis. However, within relevant jurisdictions and for appropriate counterparty types, master ~~nettings~~netting agreements do reduce the credit risk to the extent that, if an event of default occurs, all trades with the counterparty may be terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially within a short period, since this is the net position of all trades under the master netting agreement.

The Group also undertakes asset sales, credit derivative based transactions, securitisations (including ~~Significant Risk Transfer~~significant risk transfer transactions), purchases of credit default swaps and purchase of credit insurance as a means of mitigating or reducing credit risk and/or risk concentration, taking into account the nature of assets and the prevailing market conditions.

In conjunction with the Risk division, businesses identify and define portfolios of credit and related risk exposures and the key behaviours and characteristics by which those portfolios are managed and monitored. This entails the production and analysis of regular portfolio monitoring reports for review by senior management. The Risk division in turn produces an aggregated view of credit risk across the Group, including reports on material credit exposures, concentrations, concerns and other management information, which is presented to the divisional risk committees and forums, Group Risk Committee and the Board Risk Committee.

The Group operates a number of solutions to assist borrowers who are experiencing financial stress. The material elements of these solutions through which the Group has granted a concession, whether temporarily or permanently, are set out below.

The Group’s aim in offering forbearance and other assistance to customers in financial distress is to benefit both the customer and the Group by supporting its customers and acting in their best interests by, where possible, bringing customer facilities back into a sustainable position.

The Group offers a range of tools and assistance to support customers who are encountering financial difficulties. Cases are managed on an individual basis, with the circumstances of each customer considered separately and the action taken judged as being appropriate and sustainable for both the customer and the Group.

Forbearance measures consist of concessions towards a debtor that is experiencing or about to experience difficulties in meeting its financial commitments. This can include modification of the previous terms and conditions of a contract or a total or partial refinancing of a troubled debt contract, either of which would not have been required had the debtor not been experiencing financial difficulties.

The provision and review of such assistance is controlled through the application of an appropriate policy framework and associated controls. Regular review of the assistance offered to customers is undertaken to confirm that it remains appropriate, alongside monitoring of customers’ performance and the level of payments received.

The Group classifies accounts as forborne at the time a customer in financial difficulty is granted a concession. However, where customers ~~have been~~were temporarily impacted by COVID-19, the Group ~~has~~ looked to follow regulator principles and guidance on the granting of concessions resulting from the impact of the pandemic.

Balances in default or classified as Stage 3 are always considered to be non-performing. Balances ~~are~~may be non-performing but not in default or Stage 3, ~~if they are greater than 90 days past due (compared with 180 days past due~~where for ~~Stage 3 mortgages) or if~~example they are within their ~~12 month~~ non-performing forbearance cure period.

Non-performing exposures can be reclassified as ~~Performing Forborne~~performing forborne after a minimum ~~12 month~~12-month cure period, providing there are no past due amounts or concerns regarding the full repayment of the exposure. A minimum of a further 24 months must pass from the date the forborne exposure was reclassified as ~~Performing Forborne~~performing forborne before the account can exit forbearance. If conditions to exit forbearance are not met at the end of this probation period, the exposure shall continue to be identified as forborne until all the conditions are met.

The Group’s treatment of loan renegotiations is included in the impairment policy in note ~~2((H)~~2(H) on page ~~F-18.~~F-19.

To assist customers in financial distress, the Group participates in UK Government sponsored programmes for households, including the Income Support for Mortgage Interest programme, under which the ~~Government~~government pays the Group all or part of the interest on the mortgage on behalf of the customer. This is provided as a government loan which the customer must repay.

Working closely with the UK Government and regulators, the Group ~~has continued to support~~supported its retail, small business and commercial customers through a comprehensive and unprecedented range of flexible measures to help alleviate temporary financial pressure on customers during the crisis.

For retail customers, the Group ~~has~~ provided payment holidays of up to three months across a range of products including mortgages, personal loans, credit cards and motor finance, ~~with~~ extensions ~~available~~ of up to ~~six~~6 months in total ~~should customers request them.~~

Similarly, the Group ~~is providing~~provided significant support for its small business and commercial customers ~~and has provided~~as well as providing loans to businesses under the different government schemes, including Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS). These schemes closed in March 2021, replaced by the Recovery Loan Scheme through which the Group is also providing support. The Group ~~has~~continues to provide ongoing support to BBLS customers through the Pay As You Grow (PAYG) scheme, where customers are able to access a number of options including repayment holidays and term extensions. The Group also supported its customers through repayment holidays and its own COVID-19 fund which ~~includes~~included fee-free lending for new overdrafts or overdraft limit increases as well as new or increased invoice discounting and finance facilities. The Group is also ~~offering~~offered SME customers a mentoring service to help navigate a path beyond the pandemic.

The following pages contain analysis of the Group’s loans and advances to customers by sub-portfolio. Loans and advances to customers are categorised into the following stages:

Stage 1 assets comprise of newly originated assets (unless purchased or originated credit impaired), as well as those which have not experienced a significant increase in credit risk. These assets carry an expected credit loss allowance equivalent to the expected credit losses that result from those default events that are possible within 12 months of the reporting date (12 month expected credit losses).

Stage 2 assets are those which have experienced a significant increase in credit risk since origination. These assets carry an expected credit loss allowance equivalent to the expected credit losses arising over the lifetime of the asset (lifetime expected credit losses).

Stage 3 assets have either defaulted or are otherwise considered to be credit impaired. These assets carry a lifetime expected credit loss.

Purchased or originated credit-impaired assets (POCI) are those that have been originated or acquired in a credit impaired state. This includes within the definition of credit impaired the purchase of a financial asset at a deep discount that reflects impaired credit losses.

The Group’s assessment of a significant increase in credit risk, and resulting categorisation of Stage 2, includes customers moving into early arrears as well as a broader assessment that an up to date customer has experienced a level of deterioration in credit risk since origination. A more sophisticated assessment is required for up to date customers, which varies across divisions and product type. This assessment incorporates specific triggers such as a significant proportionate increase in probability of default relative to that at origination, recent arrears, forbearance activity, internal watch lists and external bureau flags. Up to date exposures in Stage 2 are likely to show lower levels of expected credit loss (ECL) allowance relative to those that have already moved into arrears given that an arrears status typically reflects a stronger indication of future default and greater likelihood of credit losses.

With the support of our Sustainability and ESG Financing team, created in 2021, we will help clients with an increasing volume of Sustainability and ESG-linked loan transactions, underpinned by our range of sustainable finance tools and propositions. The £15 billion ambition by 2024 will include:

We will enhance our transport offering with more flexible finance solutions, expanded manufacturer partnerships and services. We will also extend digital channels to include new direct to consumer leasing and financing solutions for EV charge points to meet emerging customer needs.

As the largest UK ~~Motor Finance~~mortgage lender, we will continue our commitment to supporting customers grow their understanding of home energy efficiency, as well as providing innovative products that drive greater customer consideration for energy efficiency when purchasing their homes.

We’re working closely with our core strategic fund management partners to develop and refine a range of funds that have a bias towards investing in companies that are adapting their businesses to be less carbon-intensive and/or developing climate solutions. We’ll invest in climate solutions investments either within these strategies or other funds. To define climate solution investments, we look at company revenue associated with activities such as alternative energy, energy efficiency, green building, sustainable agriculture, sustainable water and pollution prevention. We use MSCI Environmental Impact Revenue data to help with this classification.

Since 2020, we have been tracking against three operational climate pledges, which were announced early in 2021. They are designed to accelerate our plan to tackle climate change and apply across our own operations.

Achieving these goals will not be easy, and we will need to invest in our buildings over the next decade, supporting the UK in the transition towards a greener future. We will continue to deploy energy efficient technology including LED lighting and improved building controls. We will remove all use of natural gas from our estate, replacing gas boilers with low carbon heating technologies and create more sustainable branches in communities across the UK. Many of the technologies we will need to use are still new and we will work closely with our partners and supply chain to innovate.

We proudly remained Carbon Trust Standard certification holders for carbon reduction for the twelfth year in a row. We are also members of the UK Green Buildings Council and we have recently renewed our commitment to the World Green Building Council Net Zero Carbon Buildings Commitment to include the new embodied carbon reduction requirement for new build and major refurbishment by 2030. This renewed commitment, along with those we’ve already made by joining The Climate Group’s campaigns on renewable electricity (RE100), energy productivity (EP100) and electric vehicles (EV100), underpins our new climate pledges.

We also have broader environmental ambitions for our own operations, which focus on reducing waste and improving water efficiency, which include:

We also achieved certification to the Carbon Trust Standard for Waste for the first time in 2021. The standard recognises organisations that follow best practice in measuring, managing, and reducing their waste impact.

Further information on operational carbon and sustainability performance can be located in our Lloyds Banking Group ESG Report 2021.

The Group has reported greenhouse gas emissions and environmental performance since 2009, and since 2013 this has been reported in line with the requirements of the Companies Act 2006 and its applicable regulations and the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (i.e. Streamlined Energy and Carbon Reporting (`SECR').

The Group follows the principles of the GHG Protocol Corporate Accounting and Reporting Standard to calculate Scope 1, 2 and 3 emissions from our worldwide operations. The reporting period is 1 October 2020 to 30 September 2021, which is different to that of our Directors’ report (January to December 2021). This is in line with the regulations in that most of the emissions reporting year falls within the period of the Directors’ Report. Emissions are reported based on the operational control approach.

Reported Scope 1 emissions are those generated from gas and oil used in buildings, emissions from fuels used in UK company owned vehicles used for business travel and fugitive emissions from the use of air conditioning and chiller/refrigerant plants.

Reported Scope 2 emissions are generated from the use of electricity and are calculated using both the location and market-based methodologies.

Reported Scope 3 emissions relate to business travel and commuting undertaken by colleagues, emissions from colleagues working from home, operational waste and the extraction and distribution of each of our energy sources – electricity, gas and oil.

Group energy consumption, electricity and gas, has also reduced mainly due to the impact of this operational shift. However, most of our buildings have still been operational and subject to our continued energy management and optimisation programme. Throughout winter months we have seen a small increase in our gas consumption due to additional fresh air requirements in our operational buildings. Overall, we have seen building energy consumption and associated carbon emissions reduced.

Emissions associated with joint ventures and investments are not included in this disclosure as they fall outside the scope of our operational boundary. The Group does not have any emissions associated with imported heat, steam or imported cooling and is not aware of any other material sources of omissions from our reporting.

While COVID-19 has had an impact on our energy performance year on year, we have also seen consumption reduction driven by our continued energy efficiency initiatives. This workstream includes an energy optimisation programme that implements onsite optimisation and strategic alterations of Building Management System (BMS) and controls systems to match the run hours of plant to core operating hours and ensures temperature settings are aligned with Group comfort guidelines. In 2021, 45 deep-dives, 80 onsite optimisations, 9 remote optimisations and 531 bank holiday programming were completed, which resulted in a 101.5 GWh saving. We have also run a programme of LED lighting upgrades throughout our estate, leading to an estimated 1,280 MWh electricity saving.

Given the strategic importance of our sustainability ambitions and commitment in managing the impacts arising from climate change, our governance structure provides clear oversight and ownership of the Group’s environmental sustainability strategy and management of climate risk.

Further information with respect to entity governance and executive oversight can be located in the Lloyds Banking Group Climate Report 2021.

The Group defines climate risk as, ‘the risk that the Group experiences losses and/or reputational damage as a result of climate change, either directly or through our customers’. These may be realised from physical weather events, the impacts of the transition to net zero or as a consequence of the Group's response to managing this transition.

The Group’s response to managing climate risk affects many different stakeholder groups, including: our customers; colleagues; suppliers; regulators and policymakers; investors and NGOs and wider society. Our response will have a long-term bearing on these stakeholders and the Group’s business model.

Climate risk is considered a principal risk within the Group’s Enterprise Risk Management Framework (ERMF), reflecting its importance and the focus required. This ensures a consistent approach to embedding the consideration of climate risk in the Group’s activities, while also enhancing Board-level insight.

Climate risk also impacts many of the financial and non-financial risks the Group faces. Therefore, the Group has also taken steps to build and embed the consideration of climate-related risks throughout our ERMF to ensure comprehensive consideration across our business activities.

The Group and the wider industry continue to develop both the understanding and capabilities for managing climate risk, therefore, the Group’s approach will evolve significantly in the coming years.

In addition to the risks already facing the Group, new risks will continue to emerge as a consequence of the transition to net zero. Further information on the emerging risks facing the Group, including those relating to climate change, can be found in the Risk overview section of this document.