Lloyds Banking Group plc

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

Prudent credit principles, risk policies and appetite statements: The independent Risk function sets out the credit principles, credit risk

policies and credit risk appetite statements.

Credit risk appetite is set at Board level and is described and reported through a suite of metrics devised from a combination of accounting and credit

portfolio performance measures, which include the use of various credit risk rating systems as inputs and assess credit risk at a counterparty level using

three components: (i) the probability of default by the counterparty on its contractual obligations; (ii) the current exposures to the counterparty and

their likely future development, from which the Group derives the exposure at default; and (iii) the likely loss ratio on the defaulted obligations, the loss

given default.

Credit principles, risk policies and appetite statements are subject to regular review and governance, with any changes subject to an approval

process. Risk teams monitor credit performance trends and the outlook. Risk teams also test the adequacy of and adherence to credit risk

policies and processes throughout the Group. This includes tracking portfolio performance against an agreed set of credit risk appetite

tolerances.

Robust models and controls: Refer to section “Model risk” onpage 195 of the Annual Report 2024.

Limitations on concentration risk: there are portfolio controls on certain industries, sectors and products to reflect risk appetite as well as individual,

customer and bank limit risk tolerances. Credit policies, appetite statements and mandates are aligned to the Group’s risk appetite and restrict

exposure to higher risk countries and potentially vulnerable sectors and asset classes. Exposures are monitored to prevent both an excessive

concentration of risk and single name concentrations. These concentration risk controls are not necessarily in the form of a maximum limit on

exposure, but may instead require new business in concentrated sectors to fulfil additional minimum policy and/or guideline requirements. The Group’s

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

Defined country risk management framework: the Group sets a broad maximum country risk appetite. Risk-based appetite for all countries is

set within the independent Risk function, taking into account economic, financial, political and social factors as well as the approved business

and strategic plans of the Group.

Specialist expertise: credit quality is managed and controlled by a number of specialist units within the business and Risk function, which

provide for example: intensive management and control; security perfection; maintenance of customer and facility records; expertise in

documentation for lending and associated products; sector-specific expertise; and legal services applicable to the particular market segments

and product ranges offered by the Group.

Stress testing: the Group’s credit portfolios are subject to regular stress testing, including Group-led PRA and other regulatory stress tests

focusing on individual divisions and portfolios. For further information see pages 142 to 143 of the Annual Report 2024 (tagged).

Frequent and robust credit risk assurance: An independent function within the Risk function provides oversight that credit risk is effectively

managed and to ensure appropriate controls are in place and being adhered to. Group Audit conducts assurance on the effectiveness of credit

risk management.