SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
08 March 2004
LLOYDS TSB GROUP plc
(Translation of registrant's name into English)
5th Floor
25 Gresham Street
London
EC2V 7HN
United Kingdom
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F..X..Form 40-F.....
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes .....No ..X..
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ________
Index to Exhibits
Item
No. 1 Regulatory News Service Announcement, dated 08 March 2004
re: Final Results
LLOYDS TSB GROUP PLC - 2003 RESULTS
PRESENTATION OF RESULTS
During 2003 the Group has implemented a change in accounting policy following
the issue of new accounting guidance in Urgent Issues Task Force Abstracts 37 '
Purchases and sales of own shares' and 38 'Accounting for ESOP trusts'. The
Group has also changed its accounting policy relating to the deferral of certain
expenses incurred in connection with the acquisition of new asset finance and
unit trust business. These costs are now charged to the profit and loss account
as incurred, rather than over the expected life of the related transactions.
The Group has restated comparative figures to reflect these changes (page 45,
note 1).
In order to provide a clearer representation of the underlying performance of
the Group, the results of the Group's life and pensions, and general insurance
businesses include investment earnings calculated using longer-term investment
rates of return (page 48, note 5). The difference between the normalised
investment earnings and the actual return ('the investment variance') together
with the impact of changes in the economic assumptions used in the embedded
value calculation (page 49, note 6), and the profit on the sale of a number of
overseas businesses in 2003 (page 49, note 7) have been separately analysed and
a reconciliation to the Group's profit before tax is given on page 16.
LLOYDS TSB GROUP
CONTENTS
Page
Performance highlights 1
Group Chief Executive's statement 2
Summary of results 6
Review of financial performance 7
Consolidated profit and loss account 11
Consolidated balance sheet 12
Consolidated cash flow statement 13
Segmental analysis 14
Profit before tax by main businesses 16
Performance by sector 17
Income 31
Operating expenses 36
Credit quality 39
Capital ratios 41
Overview of consolidated balance sheet 42
Notes 45
Contacts for further information 52
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the
business, strategy and plans of the Lloyds TSB Group, its current goals and
expectations relating to its future financial condition and performance. By
their nature, forward looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
Lloyds TSB Group's actual future results may differ materially from the
results expressed or implied in these forward looking statements as a result of
a variety of factors, including UK domestic and global economic and business
conditions, risks concerning borrower credit quality, market related risks such
as interest rate risk and exchange rate risk in its banking business and equity
risk in its insurance businesses, changing demographic trends, unexpected
changes to regulation or regulatory actions, changes in customer preferences,
competition and other factors. Please refer to the latest Annual Report on Form
20-F of Lloyds TSB Group filed with the US Securities and Exchange Commission
for a discussion of such factors.
LLOYDS TSB GROUP
PERFORMANCE HIGHLIGHTS
Results
- Profit before tax increased by GBP1,730 million, or 66 per cent, to
GBP4,348 million.
- Profit attributable to shareholders increased by GBP1,464 million, or
82 per cent, to GBP3,254 million.
- Earnings per share increased by 82 per cent to 58.3p.
- Post-tax return on average shareholders' equity 38.5 per cent.
- Total capital ratio 11.3 per cent, tier 1 capital ratio 9.5 per cent.
- Final dividend of 23.5p per share, making a total of 34.2p for the
year (2002: 34.2p).
Results, excluding changes in economic assumptions, investment variance and
profit on sale of businesses
- Profit before tax decreased by GBP126 million, or 4 per cent, to GBP3,380
million.
- Earnings per share decreased by 6 per cent to 41.5p.
- Economic profit increased by 4 per cent to GBP1,553 million.
- Post-tax return on average shareholders' equity 27.4 per cent.
Key achievements
- A new strategic focus on organic growth has been implemented, and a
number of non-core overseas businesses have been sold.
- The Group has improved its market share in many key product areas,
including credit cards, personal loans, bank savings, and UK life and
pensions.
- Excluding the impact of disposals, customer lending grew by 10 per
cent to GBP135 billion and customer deposits increased by 6 per cent to
GBP116 billion.
- The rate of decline in the Group's net interest margin has slowed.
- Strict cost control has been maintained. Excluding the impact of
acquisitions and the customer redress provision, expenses decreased by 1
per cent.
- Asset quality remains strong.
- Profit before tax from UK Retail Banking and Mortgages, excluding the
impact of the provision for customer redress, increased by 21 per cent, as
a result of 9 per cent growth in income and flat costs.
- New business profitability in Scottish Widows increased by 13 per cent, as
a result of market share growth and an improved new business margin.
- In Wholesale and International Banking, positive results are emerging
from the improved co-ordination between our Corporate and Financial Markets
businesses.
- Capital ratios significantly improved. Scottish Widows remains on
track to pay a 2004 dividend to Lloyds TSB.
Page 1 of 52
LLOYDS TSB GROUP
GROUP CHIEF EXECUTIVE'S STATEMENT
Lloyds TSB's headline results in 2003 showed a 66 per cent rise in profit before
tax to GBP4,348 million, compared to GBP2,618 million in 2002. This increase
does not appropriately reflect the Group's performance, as it was, in large
part, the result of the strategic repositioning of our business portfolio and
the greater stability in global financial markets. Excluding the profit on the
sale of businesses, investment variance and changes in economic assumptions, the
Group's profit before tax was down 4 per cent, or GBP126 million, to GBP3,380
million. On the same basis, profit before tax increased by 3 per cent in the
second half of 2003, compared to the first half of the year, supported by
improvements in each of the main business units.
When viewing the Group's trading performance for the year, a number of other
factors need to be taken into account to allow for a better understanding and
comparison with 2002. In particular, the reduction of GBP131 million in the
Group's pension scheme related income, and the introduction of the Competition
Commission's remedies for small and medium-sized enterprises which reduced
profit before tax by GBP174 million in 2003.
Whilst it is important to recognise that these are ongoing parts of the
business, the year-on-year comparison excluding these factors shows earnings
growth, with a modest income uplift and continued tight control over expenses.
Growth in income was supported by good quality growth in customer lending and
deposits which, excluding the impact of disposals, grew by 10 per cent and 6 per
cent respectively. The rate of decline in the Group's net interest margin has
slowed, despite intense competition within the UK financial services market, as
we improved the mix of assets. The Group net interest margin in 2003 was 3.04
per cent, compared with 3.20 per cent in 2002, and we continue to budget for
further gradual product margin erosion.
The Group's cost performance reflected good progress in a number of efficiency
related initiatives, together with a reduction of some 1,200 in the Group's
total staffing, after allowing for the acquisition and disposal of businesses.
Provisions for bad and doubtful debts reduced by 8 per cent, as a result of
lower charges in the corporate and international businesses. Asset quality
across the Group remains strong and total non-performing lending reduced by 14
per cent during the year, partly as a result of business disposals. The Group's
return on equity, excluding disposal gains, investment variance and changes in
economic assumptions, was 27.4 per cent.
Management priorities
In 2003, the management team set a series of priorities to guide the Group and
provide a framework to build the franchise. The three key themes are:
- to actively manage the portfolio of businesses and to reduce risk and
earnings volatility,
- to maintain and build profitability, and,
- to position the Group to deliver profitable growth from within our retail
and corporate customer franchises.
Page 2 of 52
LLOYDS TSB GROUP
The key achievements against these priorities are summarised below.
Managing the business portfolio
During the year, the Group reviewed the strategic options for a number of its
businesses. The criteria used in our evaluation process were the strategic fit
with the Group and the prospects for long-term economic profit growth. As a
result of the review, we sold The National Bank of New Zealand, substantially
all of our businesses in Brazil and our French operations. We have also
announced the sale of our Central American businesses, pending approval from the
regulatory authorities. Our emerging markets debt portfolio, which totalled
GBP1.1 billion at the end of 2002, was also sold. We have removed significant
earnings volatility and are now more focused on our core franchises, and are
confident the quality of our future earnings will improve.
In our life assurance business, we continue to keep close control over earnings
risk and have put plans in place to deliver capital efficient growth.
In 2003, we implemented a new risk infrastructure across all our business units
and maintained tight control over our risk positions and credit quality, which
is in part reflected in our lower charge for bad and doubtful debts and reduced
levels of non-performing lending.
We have also put in place new sales management processes and incentive plans
designed to guide the organisation to build deep, long-term customer
relationships, and to underpin our commitment to treating our customers fairly.
We are determined to avoid future lapses in our sales processes which, in the
first half of 2003, required us to raise a GBP300 million provision to provide
redress to customers.
Maintaining and building profitability
Our key financial measures of performance are economic profit growth and return
on economic equity. During 2003, the Group delivered an economic profit
increase of 4 per cent and maintained a high post-tax return on equity,
excluding disposal gains, investment variance and changes in economic
assumptions at 27.4 per cent.
In 2003, we established an increased focus on economic capital management,
supported by the introduction of a more rigorous, Basel 2 compliant, equity
attribution model. This has changed the way we allocate capital, and has been
reflected in the mix of our balance sheet growth during 2003. We have seen good
growth in consumer lending and a reduction in the Group's portfolio of finer
margin loans and debt securities. The improvement in our mix of assets has
supported an increase in the Group's net interest margin in the fourth quarter
of the year.
In line with our plans to maximise the use of our capital resources, we have
reviewed the performance of our life, pensions and investments product
portfolio. The new business margin rose from 19.3 per cent to 21.6 per cent
whilst growing market share from 5.2 per cent to 5.7 per cent. Scottish Widows
remains one of the most strongly capitalised life assurance companies in the UK
and is on track to pay a 2004 dividend to Lloyds TSB. During the year Scottish
Widows' free asset ratio, a key measure of life assurance companies' financial
strength, increased to an estimated 13.5 per cent, from 12.2 per cent in 2002.
Page 3 of 52
LLOYDS TSB GROUP
Cost control continues to have high priority throughout the Group. The
increasing use of straight through processing, and our introduction of a Sigma
approach to quality, currently covering almost 30 per cent of our transactions,
has started to improve our cost effectiveness and customer service levels. We
intend to extend this programme over the next year. The Group has also embarked
on a programme of outsourcing a number of its processing and back office
operations.
Positioning the Group for growth
The Group's principal focus is on growth from within the franchise, and our
objective is to build valuable long-term relationships with customers in both
the retail and corporate markets. We will however continue to review
opportunities for 'in-market' purchases, such as the successful acquisition of
Goldfish. The Group's capital position has strengthened considerably during
2003, providing the capital flexibility to make value creating acquisitions to
support this focus on organic growth.
The emphasis on developing the core franchise has resulted in a robust
performance in UK Retail Banking and Mortgages in 2003, with profit before tax
increasing by 21 per cent as revenues increased by 9 per cent whilst costs were
held flat, excluding the customer redress provision of GBP200 million.
There has been strong balance growth in many key areas, particularly credit
cards, up 18 per cent, and personal loans, up 9 per cent, excluding the Goldfish
acquisition, retail banking current accounts, savings and investments, up 10 per
cent, and mortgages, up 13 per cent. Over 1.8 million customers have benefited
from the roll out of enhanced relationship management offers, Premier and
Privilege, that have begun to have a positive impact on income generation and
customer loyalty. In our mortgage business, we increased our outstanding
balances but our share of net new lending fell in the second half of 2003, given
the uneconomic nature of some products. Product sales via the internet
distribution channel continue to grow rapidly with an average of more than
70,000 product sales per month, up 80 per cent on 2002. This reflects the
successful development of our multi-channel distribution strategy. Overall,
sales from direct channels amounted to nearly 40 per cent of total retail
banking sales in 2003, representing a significant increase over the prior year.
Scottish Widows has made good market share gains in the UK life and pensions
market, particularly through the Independent Financial Advisor distribution
channel, with new business contribution up by 13 per cent and the margin on new
business increasing significantly, following the focus on the distribution of
more profitable and capital efficient products. Work is also underway to
improve the overall performance through our branch channels. Profitability from
existing business fell largely as a result of changes in actuarial assumptions.
Our general insurance business continued to perform well with good income growth
in the home insurance market.
In Wholesale and International Banking, positive results are emerging from the
improved co-ordination between our Corporate and Financial Markets businesses.
There was an uplift in foreign exchange and interest rate management product
sales to Corporate customers in the second half of 2003, and the pipeline for
new business continues to expand. Even after absorbing the GBP174 million
reduction in income as a result of the Competition Commission's SME ruling and
excluding the GBP865 million profit on sale of businesses, profit before tax in
Wholesale and International Banking grew 5 per cent during 2003.
Page 4 of 52
LLOYDS TSB GROUP
Looking forward
During 2003 we have made good progress both strategically and financially. We
have brought a sharper focus on maintaining and building profitability and we
are beginning to deliver growth in our substantial retail and corporate customer
franchises. We remain confident of delivering further improved performance by
the second half of 2004.
Finally, I would like to extend my thanks to our staff for their commitment and
support and, in particular, their desire to serve our customers. The positive
way in which they have embraced the change programme lends further confidence to
my belief that we will grow our business in line with our expectations.
J Eric Daniels
Group Chief Executive
Page 5 of 52
LLOYDS TSB GROUP
SUMMARY OF RESULTS
Increase
2003 2002* (Decrease)
Results - statutory GBPm GBPm %
Total income 9,908 8,887 11
Operating expenses 5,173 4,913 5
Trading surplus 4,735 3,974 19
Provisions for bad and doubtful debts 950 1,029 (8)
Profit before tax 4,348 2,618 66
Profit attributable to shareholders 3,254 1,790 82
Economic profit (page 47, note 2) 2,493 830 200
Earnings per share (pence) 58.3 32.1 82
Post-tax return on average shareholders' equity (%) 38.5 16.8
Results, excluding changes in economic assumptions,
investment variance and profit on sale of businesses (page 16)
Profit before tax 3,380 3,506 (4)
Economic profit 1,553 1,500 4
Earnings per share (pence) 41.5 44.2 (6)
Post-tax return on average shareholders' equity (%) 27.4 23.1
Shareholder value
Closing market price per share (year-end) 448p 446p
Total market value of shareholders' equity GBP25.1bn GBP24.8bn
Dividends per share 34.2p 34.2p -
Balance sheet GBPm GBPm
Shareholders' equity 9,624 7,943 21
Net assets per share (pence) 170 140 21
Total assets 252,012 252,561 -
Loans and advances to customers 135,251 134,474 1
Customer deposits 116,496 116,334 -
Risk asset ratios % %
Total capital 11.3 9.6
Tier 1 capital 9.5 7.7
*restated (page 45, note 1)
Page 6 of 52
LLOYDS TSB GROUP
REVIEW OF FINANCIAL PERFORMANCE
In 2003 the Group's performance was significantly affected by the profit on sale
of a number of overseas businesses and the absence of a negative investment
variance. As a result, profit before tax on a statutory basis increased by
GBP1,730 million, or 66 per cent, to GBP4,348 million, from GBP2,618 million in
2002. Total income increased by GBP1,021 million, or 11 per cent, to GBP9,908
million whilst operating expenses increased by GBP260 million, or 5 per cent.
Profit attributable to shareholders was 82 per cent higher at GBP3,254 million
and earnings per share increased by 82 per cent to 58.3p. Shareholders' equity
increased by GBP1,681 million to GBP9,624 million, from GBP7,943 million at the
end of 2002. The post-tax return on average shareholders' equity was 38.5 per
cent, compared to 16.8 per cent in 2002, and economic profit increased by 200
per cent to GBP2,493 million. The post-tax return on average assets was 1.57 per
cent, and the post-tax return on average risk-weighted assets was 2.63 per cent.
To enable meaningful comparisons to 2002 to be made it is appropriate to exclude
the gains on business disposals, which totalled GBP865 million in 2003,
investment variances, which totalled a negative GBP943 million in 2002, and
changes in economic assumptions in the Group's life assurance businesses (page
16). On this basis, profit before tax decreased by 4 per cent, or GBP126
million, to GBP3,380 million. A number of other significant issues affected the
Group's results in 2003 including, particularly, the impact of the
implementation of remedies required by the UK Competition Commission following
its investigation into the supply of banking services to small and medium sized
enterprises, which reduced profit before tax by GBP174 million in 2003, and a
reduction of GBP131 million in the Group's FRS17 related other finance income,
partly reflecting the fall, in 2002, in the value of assets in the Group's
pension schemes.
In many key product areas the Group continued to grow market share and as a
result, adjusting for the impact of disposals over the last 12 months, customer
lending grew by GBP12.1 billion, or 10 per cent, to GBP135 billion, of which
GBP1 billion represented the Goldfish lending portfolios acquired, and customer
deposits increased by 6 per cent to GBP116 billion. The Group net interest
margin was 3.04 per cent, compared with 3.20 per cent in 2002. The
implementation of the remedies required by the Competition Commission's SME
report reduced the Group's net interest margin in 2003 by some 10 basis points.
The strong growth in lending and deposit volumes, however, ensured that this
reduction in the Group net interest margin was more than compensated for by
volume growth, resulting in overall growth in net interest income of 2 per cent
compared with 2002.
Pre-tax profit from UK Retail Banking and Mortgages increased by GBP13 million,
or 1 per cent, to GBP1,021 million, compared with GBP1,008 million in 2002.
Excluding the GBP200 million provision for customer redress taken at the
half-year, pre-tax profit from UK Retail Banking and Mortgages increased by
GBP213 million, or 21 per cent, to GBP1,221 million. There was strong growth in
credit card balances, up 18 per cent, and in personal loan balances outstanding,
up 9 per cent, excluding the impact of the acquisition of the Goldfish lending
portfolios in September 2003. Current account and savings and investment account
balances, within Retail Banking, increased by 10 per cent. Costs remained
tightly controlled and asset quality generally remains satisfactory. Provisions
for bad and doubtful debts increased by GBP98 million, or 20 per cent, to GBP594
million, largely as a result of volume related asset growth in the personal loan
and credit card portfolios, and a higher charge for fraud in the personal
lending portfolios.
Page 7 of 52
LLOYDS TSB GROUP
In the Mortgages business, gross new lending increased by 27 per cent to a
record GBP24.2 billion, compared with GBP19.0 billion in 2002. Net new lending
was a record GBP8.3 billion, compared with GBP5.9 billion in 2002, resulting in
a market share of net new lending of 8.6 per cent. As a result of this strong
growth in both gross and net new lending, mortgage balances outstanding
increased by 13 per cent to GBP70.8 billion, during 2003. Cheltenham &
Gloucester (C&G) has continued its policy of not exceeding a 95 per cent
loan-to-value ratio on new lending and the average loan-to-value ratio of C&G
mortgage business written during 2003 was 64 per cent (2002: 67 per cent).
During 2003, 69 per cent of new lending was written at a loan-to-value below 80
per cent. C&G has minimal exposure to the sub-prime and self-certification
mortgage markets.
Profit before tax from Insurance and Investments decreased by GBP136 million, or
11 per cent, to GBP1,094 million. Excluding changes in economic assumptions,
investment variance and provisions for customer redress, pre-tax profits from
Insurance and Investments decreased by GBP241 million, or 17 per cent, to
GBP1,194 million, largely as a result of a reduction of GBP168 million in
benefits from experience variances and assumption changes, and reduction of
GBP61 million in normalised investment earnings. New business income, however,
increased by GBP59 million, or 15 per cent, to GBP457 million and the margin on
new business increased to 21.6 per cent, from 19.3 per cent in 2002. Overall,
weighted sales in the Group's life, pensions and unit trust businesses in 2003
were GBP733.4 million, compared to GBP767.6 million last year, a decrease of 4
per cent. The overall UK market for life, pensions and unit trusts declined by
11 per cent in 2003. Against this backdrop, the Group's market share of the UK
life, pensions and long-term savings market increased from 5.2 per cent to 5.7
per cent during the year. In the Group's general insurance operations, continued
strong growth in household insurance revenues, which increased by 12 per cent,
was offset by a 15 per cent reduction in creditor insurance revenues.
Wholesale and International Banking pre-tax profit increased by GBP931 million,
to GBP2,195 million, largely reflecting the GBP865 million profit on disposal of
a number of overseas businesses. In Wholesale, the impact of the introduction of
the Competition Commission's SME report remedies and lower income in Financial
Markets was more than offset by strong profit growth in asset finance and a
reduction in provisions for bad and doubtful debts. This led to an increase of 1
per cent in profit before tax from GBP883 million in 2002 to GBP890 million in
2003. In International Banking, profit before tax increased by GBP924 million to
GBP1,305 million, largely as a result of the GBP865 million of overseas business
disposal profits, and a lower provisions charge in Argentina. During the year,
the Group decided to sell The National Bank of New Zealand as we did not
consider the outlook for its profitable growth to be as positive, without the
benefit of cost synergies, as that achieved in recent years. The sale to
Australia and New Zealand Banking Group, who already own banking operations in
New Zealand and are therefore better positioned to achieve cost synergies, was
the value maximising strategy for our shareholders.
Growth in customer lending and the impact of acquisitions in the asset finance
business was more than offset by the Competition Commission SME report impact,
leading to a GBP3 million decrease in total income. The provisions charge for
bad and doubtful debts decreased by GBP171 million, despite a small increase in
provisions within the asset finance businesses reflecting portfolio growth. In
2002, provisions against Group loans and advances to certain large US corporate
customers totalled some GBP100 million, and there was a GBP79 million reduction,
compared to 2002, in the new provisions required against the Group's exposure in
Argentina.
Page 8 of 52
LLOYDS TSB GROUP
The total Group charge for bad and doubtful debts was 8 per cent lower at GBP950
million, compared with GBP1,029 million in 2002. In UK Retail Banking, the
provisions charge increased by GBP115 million, or 23 per cent, to GBP612
million, largely as a result of volume related asset growth in the personal loan
and credit card portfolios, but also as a result of a higher charge for fraud.
In Mortgages, an improved arrears position and the beneficial effect of house
price increases resulted in an GBP18 million provisions release for the year. In
Wholesale, the provisions charge decreased by GBP78 million to GBP300 million.
International Banking provisions decreased to GBP69 million, from GBP162 million
in 2002, as a result of the reduction in provisions relating to the Group's
exposure to Argentina. The Group's charge for bad and doubtful debts, expressed
as a percentage of average lending, was 0.66 per cent, compared to 0.77 per cent
in 2002. Non-performing lending decreased by 14 per cent to GBP1,218 million,
reflecting the impact of business disposals and lower levels of non-performing
lending in the Group's corporate portfolio.
During 2003 the Group accelerated the sale of its portfolio of emerging markets
debt investments to take full advantage of improving secondary bond market
conditions, and to reduce future earnings volatility. Profits on bond sales,
and certain closed foreign exchange positions, in 2003 totalled some GBP295
million. The emerging markets debt portfolio has now been completely sold and,
as a result, the Group will not achieve any further contribution from the
portfolio in 2004 and beyond.
The Group has completed, in conjunction with the regulator, an investigation
into the appropriateness of certain sales of the Extra Income & Growth Plan, a
stock market related investment product sold in 2000 and 2001. During 2003
there has also been an increase in the level of complaints relating to Group
sales and performance of certain endowment based and long-term savings products.
Whilst the Group maintains provisions for customer redress in respect of past
product sales, the adequacy of these provisions was reviewed in the light of
ongoing experience and the completion of the Extra Income & Growth Plan
investigation. As a result, the estimated total cost of redress is forecast to
increase by some GBP300 million, largely reflecting sales of endowment based and
long-term savings products, and a provision of this amount was made during the
first half of the year. The Group still considers this provision to be adequate
and will continue to keep it under review.
At the end of 2003, the total capital ratio was 11.3 per cent (2002: 9.6 per
cent) and the tier 1 capital ratio was 9.5 per cent (2002: 7.7 per cent).
Risk-weighted assets decreased by 4 per cent to GBP117.7 billion, from GBP122.4
billion at the end of 2002, reflecting the impact of business disposals. At the
end of 2003, the Scottish Widows free asset ratio was an estimated 13.5 per
cent, compared to 12.2 per cent at the end of 2002 (page 50, note 8). The
equity content in both Scottish Widows' with-profits fund and shareholder owned
estate has been reduced, and the Group has further improved its protection
against short-term volatility in equity markets by hedging part of its equity
portfolio. The equity backing ratio for traditional with-profits policies at 31
December 2003 was 49 per cent (equities 38 per cent; property 11 per cent).
Scottish Widows remains one of the most strongly capitalised life assurance
companies in the UK, and we are also satisfied with Scottish Widows' overall
capital position calculated using the Financial Services Authority's new '
realistic' basis of balance sheet reporting. On a market consistent basis, we
estimate a 'realistic' surplus within the long-term fund of Scottish Widows
which is more than three times the risk capital margin. The Group has not
injected additional capital from outside the Group's insurance businesses into
Scottish Widows, and does not expect to inject capital into Scottish Widows
unless the level of the FTSE 100 index were to fall to, and remain, below 3,000.
Scottish Widows remains on track to pay a 2004 dividend to Lloyds TSB.
Page 9 of 52
LLOYDS TSB GROUP
Lloyds TSB's capital ratios improved significantly during 2003, partly as a
result of gains on business disposals, and the Group continues to generate
strong cash flows from its banking operations. Lloyds TSB remains one of the
most profitable major banks in the world and is one of only two large
commercially owned banks in the world, and the only UK bank, to have a 'triple
A' rating from Moody's.
The Group's capital management policy is focused on optimising value for
shareholders. There is a clear focus on delivering organic growth and expected
capital retentions are sufficient to support planned levels of growth. However,
we also wish to maintain the flexibility to make value enhancing 'in market'
acquisitions such as the recent acquisitions of the Goldfish credit card and
personal loan businesses, asset finance businesses and Chartered Trust. At this
stage, therefore, the Board has decided not to implement a share buyback
programme but will, of course, continue to keep all options for the utilisation
of capital under review.
The Board has decided to maintain the final dividend at 23.5p per share to make
a total for the year of 34.2p (2002: 34.2p). The Board continues to recognise
the importance attached by shareholders to the Group's dividend which in 2003
represented a dividend yield of 7.6 per cent, calculated using the 31 December
2003 share price of 448p.
Page 10 of 52
LLOYDS TSB GROUP
CONSOLIDATED PROFIT AND LOSS ACCOUNT
2003+ 2002*
GBPm GBPm
Interest receivable:
Interest receivable and similar income arising from
debt securities 452 567
Other interest receivable and similar income 9,697 9,982
Interest payable 4,894 5,378
Net interest income 5,255 5,171
Other finance income 34 165
Other income
Fees and commissions receivable 3,099 3,053
Fees and commissions payable (722) (645)
Dealing profits (before expenses) 560 188
Income from long-term assurance business 453 (294)
General insurance premium income 535 486
Other operating income 694 763
4,619 3,551
Total income 9,908 8,887
Operating expenses
Administrative expenses 4,476 4,212
Depreciation 646 642
Amortisation of goodwill 51 59
Depreciation and amortisation 697 701
Total operating expenses 5,173 4,913
Trading surplus 4,735 3,974
General insurance claims 236 229
Provisions for bad and doubtful debts
Specific 946 965
General 4 64
950 1,029
Amounts written off fixed asset investments 44 87
Operating profit 3,505 2,629
Share of results of joint ventures (22) (11)
Profit on sale of businesses 865 -
Profit on ordinary activities before tax 4,348 2,618
Tax on profit on ordinary activities 1,025 766
Profit on ordinary activities after tax 3,323 1,852
Minority interests - equity 22 19
- non-equity 47 43
Profit for the year attributable to shareholders 3,254 1,790
Dividends 1,911 1,908
Profit (loss) for the year 1,343 (118)
Earnings per share 58.3p 32.1p
Diluted earnings per share 58.1p 32.0p
*restated (page 45, note 1)
+an analysis of the 2003 results between continuing operations and discontinued
operations is set out on page 46.
Page 11 of 52
LLOYDS TSB GROUP
CONSOLIDATED BALANCE SHEET
31 December 31 December
2003 2002*
GBPm GBPm
Assets
Cash and balances at central banks 1,195 1,140
Items in course of collection from banks 1,447 1,757
Treasury bills and other eligible bills 539 2,409
Loans and advances to banks 15,547 17,529
Loans and advances to customers 135,251 134,474
Debt securities 28,669 29,314
Equity shares 458 206
Interests in joint ventures 54 45
Intangible assets 2,513 2,634
Tangible fixed assets 3,918 4,096
Other assets 3,944 5,239
Prepayments and accrued income 1,918 2,287
Long-term assurance business attributable to the shareholder 6,481 6,213
201,934 207,343
Long-term assurance assets attributable to policyholders 50,078 45,218
Total assets 252,012 252,561
Liabilities
Deposits by banks 23,955 25,443
Customer accounts 116,496 116,334
Items in course of transmission to banks 626 775
Debt securities in issue 25,922 30,255
Other liabilities 7,007 8,284
Accruals and deferred income 3,206 3,659
Post-retirement benefit liability 2,139 2,077
Provisions for liabilities and charges:
Deferred tax 1,376 1,313
Other provisions for liabilities and charges 402 361
Subordinated liabilities:
Undated loan capital 5,959 5,496
Dated loan capital 4,495 4,672
Minority interests:
Equity 44 37
Non-equity 683 694
727 731
Called-up share capital 1,418 1,416
Share premium account 1,136 1,093
Merger reserve 343 343
Profit and loss account 6,727 5,091
Shareholders' funds (equity) 9,624 7,943
201,934 207,343
Long-term assurance liabilities to policyholders 50,078 45,218
Total liabilities 252,012 252,561
*restated (page 45, note 1)
Page 12 of 52
LLOYDS TSB GROUP
CONSOLIDATED CASH FLOW STATEMENT
2003 2002
GBPm GBPm
Net cash inflow from operating activities 772 5,394
Dividends received from associated undertakings 5 2
Returns on investments and servicing of finance:
Dividends paid to equity minority interests (14) (18)
Payments made to non-equity minority interests (81) (43)
Interest paid on subordinated liabilities (loan capital) (600) (463)
Net cash outflow from returns on investments and servicing of finance (695) (524)
Taxation:
UK corporation tax (598) (758)
Overseas tax (186) (193)
Total taxation (784) (951)
Capital expenditure and financial investment:
Additions to fixed asset investments (35,420) (46,830)
Disposals of fixed asset investments 36,281 45,507
Additions to tangible fixed assets (778) (1,315)
Disposals of tangible fixed assets 287 359
Capital injection to life fund - (140)
Net cash inflow (outflow) from capital expenditure
and financial investment 370 (2,419)
Acquisitions and disposals:
Additions to interests in joint ventures (12) (21)
Acquisition of group undertakings and businesses (1,106) (117)
Disposal of group undertakings and businesses 2,382 -
Net cash inflow (outflow) from acquisitions and disposals 1,264 (138)
Equity dividends paid (1,908) (1,903)
Net cash outflow before financing (976) (539)
Financing:
Issue of subordinated liabilities (loan capital) 533 2,120
Cash proceeds from issue of ordinary share capital and sale
of own shares held in respect of employee share schemes 32 77
Repayments of subordinated liabilities (loan capital) (75) (55)
Minority investment in subsidiaries - 167
Capital element of finance lease rental payments (1) (4)
Net cash inflow from financing 489 2,305
(Decrease) increase in cash (487) 1,766
Page 13 of 52
LLOYDS TSB GROUP
SEGMENTAL ANALYSIS
UK Retail
Year ended Banking Wholesale and
31 December 2003 and Insurance and International Central
Mortgages Investments Banking group items Total
GBPm GBPm GBPm GBPm GBPm
Net interest income 3,137 81 2,387 (350) 5,255
Other finance income - - - 34 34
Other income 909 1,653 1,656 298 4,516
Total income 4,046 1,734 4,043 (18) 9,805
Operating expenses 2,409 404 2,300 60 5,173
Trading surplus (deficit) 1,637 1,330 1,743 (78) 4,632
General insurance claims - 236 - - 236
Bad debt provisions 594 - 369 (13) 950
Amounts written off
fixed asset investments - - 44 - 44
Share of results of joint ventures (22) - - - (22)
Profit (loss) before tax* 1,021 1,094 1,330 (65) 3,380
Profit on sale of businesses - - 865 - 865
Changes in economic
assumptions - (22) - - (22)
Investment variance - 125 - - 125
Profit (loss) before tax 1,021 1,197 2,195 (65) 4,348
UK Retail
Year ended Banking Wholesale and
31 December 2002+ and Insurance and International Central
Mortgages Investments Banking group items Total
GBPm GBPm GBPm GBPm GBPm
Net interest income 2,890 74 2,458 (251) 5,171
Other finance income - - - 165 165
Other income 837 1,865 1,588 149 4,439
Total income 3,727 1,939 4,046 63 9,775
Operating expenses 2,212 480 2,185 36 4,913
Trading surplus 1,515 1,459 1,861 27 4,862
General insurance claims - 229 - - 229
Bad debt provisions 496 - 540 (7) 1,029
Amounts written off
fixed asset investments - - 57 30 87
Share of results of joint ventures (11) - - - (11)
Profit before tax* 1,008 1,230 1,264 4 3,506
Changes in economic
assumptions - 55 - - 55
Investment variance - (943) - - (943)
Profit before tax 1,008 342 1,264 4 2,618
*excluding profit on sale of businesses, changes in economic assumptions and
investment variance
+restated (see page 16)
Page 14 of 52
LLOYDS TSB GROUP
SEGMENTAL ANALYSIS BY HALF-YEAR (unaudited)
UK Retail
Half-year ended Banking Wholesale and
30 June 2003+ and Insurance and International Central
Mortgages Investments Banking group items Total
GBPm GBPm GBPm GBPm GBPm
Net interest income 1,515 39 1,184 (167) 2,571
Other finance income - - - 17 17
Other income 440 771 816 288 2,315
Total income 1,955 810 2,000 138 4,903
Operating expenses 1,256 211 1,129 31 2,627
Trading surplus 699 599 871 107 2,276
General insurance claims - 108 - - 108
Bad debt provisions 298 - 185 (13) 470
Amounts written off
fixed asset investments - - 24 - 24
Share of results of joint ventures (11) - - - (11)
Profit before tax* 390 491 662 120 1,663
Loss on sale of businesses - - (15) - (15)
Changes in economic
assumptions - (8) - - (8)
Investment variance - 42 - - 42
Profit before tax 390 525 647 120 1,682
Half-year ended Banking Wholesale and
31 December 2003 and Insurance and International Central
Mortgages Investments Banking group items Total
GBPm GBPm GBPm GBPm GBPm
Net interest income 1,622 42 1,203 (183) 2,684
Other finance income - - - 17 17
Other income 469 882 840 10 2,201
Total income 2,091 924 2,043 (156) 4,902
Operating expenses 1,153 193 1,171 29 2,546
Trading surplus (deficit) 938 731 872 (185) 2,356
General insurance claims - 128 - - 128
Bad debt provisions 296 - 184 - 480
Amounts written off
fixed asset investments - - 20 - 20
Share of results of joint ventures (11) - - - (11)
Profit (loss) before tax* 631 603 668 (185) 1,717
Profit on sale of businesses - - 880 - 880
Changes in economic
assumptions - (14) - - (14)
Investment variance - 83 - - 83
Profit (loss) before tax 631 672 1,548 (185) 2,666
*excluding profit on sale of businesses, changes in economic assumptions and
investment variance
+restated (see page 16)
Page 15 of 52
LLOYDS TSB GROUP
PROFIT BEFORE TAX BY MAIN BUSINESSES
Increase
2003 2002 (Decrease)
GBPm GBPm %
UK Retail Banking and Mortgages
Before provisions for customer redress 1,221 1,008 21
Provisions for customer redress (200) -
1,021 1,008 1
Insurance and Investments
Before provisions for customer redress 1,194 1,435 (17)
Provisions for customer redress (100) (205)
1,094 1,230 (11)
Wholesale and International Banking 1,330 1,264 5
Central group items (65) 4
Profit before tax, excluding changes in economic
assumptions, investment variance and profit on
sale of businesses 3,380 3,506 (4)
Changes in economic assumptions (page 49, note 6) (22) 55
Investment variance (page 48, note 5) 125 (943)
Profit on sale of businesses (page 49, note 7) 865 -
Profit before tax 4,348 2,618 66
2002 figures have been restated to reflect a change in accounting policy
following the issue of new accounting guidance in Urgent Issues Task Force
Abstracts 37 'Purchases and sales of own shares' and 38 'Accounting for ESOP
trusts', the reclassification of Business Banking earnings from UK Retail
Banking and Mortgages to Wholesale and International Banking, and changes in
internal transfer pricing arrangements. The Group has also changed its
accounting policy relating to the deferral of certain expenses incurred in
connection with the acquisition of new asset finance and unit trust business.
These costs are now charged to the profit and loss account as incurred, rather
than over the expected life of the related transactions.
YEAR END ASSETS BY MAIN BUSINESSES
2003 2002
GBPm GBPm
UK Retail Banking and Mortgages 90,272 79,629
Insurance and Investments* 9,844 9,127
Wholesale and International Banking 101,555 117,066
Central group items 263 1,521
Total assets* 201,934 207,343
*excluding long-term assurance assets attributable to policyholders
Page 16 of 52
LLOYDS TSB GROUP
PERFORMANCE BY SECTOR
UK Retail Banking and Mortgages
(covering the Group's UK retail businesses, providing banking and financial
services to personal customers; mortgages; private banking and stockbroking)
2003 2002
GBPm GBPm
Net interest income 3,137 2,890
Other income 909 837
Total income 4,046 3,727
Operating expenses:
Before provisions for customer redress 2,209 2,212
Provisions for customer redress 200 -
2,409 2,212
Trading surplus 1,637 1,515
Provisions for bad and doubtful debts 594 496
Share of results of joint ventures (22) (11)
Profit before tax 1,021 1,008
Profit before tax, before provisions for customer redress 1,221 1,008
Efficiency ratio, before provisions for customer redress 54.6% 59.4%
Total assets (year-end) GBP90.3bn GBP79.6bn
Total risk-weighted assets (year-end) GBP53.8bn GBP48.4bn
Profit before tax from UK Retail Banking and Mortgages increased by GBP13
million, or 1 per cent, to GBP1,021 million, compared to GBP1,008 million in
2002. Continued strong growth in the Group's consumer lending portfolios,
particularly mortgages and credit cards, higher current and savings account
credit balances, and a strict focus on cost control, was largely offset by a
GBP200 million provision for customer redress. Excluding the impact of the
provision for customer redress, profit before tax from UK Retail Banking and
Mortgages increased by 21 per cent, as a result of 9 per cent growth in income
and flat costs.
Total income increased by GBP319 million, or 9 per cent, to GBP4,046 million.
Net interest income increased by GBP247 million, or 9 per cent, to GBP3,137
million, as a result of strong growth in customer deposits and consumer credit.
Excluding the impact of the Goldfish acquisition, personal loan and credit card
balances outstanding increased by 9 per cent and 18 per cent respectively and,
within Retail Banking, balances on current accounts and savings and investment
accounts grew by 10 per cent. Over the last 12 months, mortgage balances
outstanding increased by 13 per cent to GBP70.8 billion. Other income increased
by GBP72 million to GBP909 million. There was an improvement in income earned
from credit and debit cards, and increased income from added value current
accounts, but this was partly offset by a higher level of fees and commissions
payable.
Page 17 of 52
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
Operating expenses were GBP197 million, or 9 per cent, higher at GBP2,409
million, compared to GBP2,212 million in 2002 largely as a result of the GBP200
million provision for customer redress. Excluding the provision for customer
redress, operating expenses decreased by GBP3 million to GBP2,209 million. On
the same basis, the efficiency ratio improved to 54.6 per cent, from 59.4 per
cent last year.
Bad debt provisions increased by GBP98 million to GBP594 million, mainly as a
result of volume related asset growth in personal loan and credit card lending
and a higher charge for fraud in the personal lending portfolio. The provisions
charge as a percentage of average lending for personal loans and overdrafts
increased to 4.25 per cent, from 3.73 per cent in 2002, while the charge in the
credit card portfolio decreased to 3.19 per cent, from 3.52 per cent in 2002. In
Mortgages, there was a net provision release of GBP18 million. Overall, the
provisions charge as a percentage of average lending was 0.72 per cent, compared
to 0.68 per cent in 2002. In the second half of 2003, the provisions charge as a
percentage of average lending improved to 0.69 per cent, compared to 0.76 per
cent in the first half of 2003.
2003 2002
Provisions for bad and doubtful debts by product GBPm GBPm
Personal loans/overdrafts 430 344
Credit cards 182 153
Mortgages (18) (1)
594 496
Charge as a percentage of average lending % %
Personal loans/overdrafts 4.25 3.73
Credit cards 3.19 3.52
Mortgages (0.03) 0.00
The UK Retail Banking strategy is to deliver organic growth by leveraging the
Group's distribution and customer knowledge capabilities. A key focus is to
develop valuable long-term relationships with our customers. The Group has been
achieving this by acquiring and retaining higher value customers, by developing
tailored offers for key customer segments, and by deepening relationships
through the use of our customer relationship management capabilities. In
addition the Group is introducing greater profit accountability in distribution
channels and local markets. The implementation of the new strategy is proving
successful and, excluding provisions for customer redress, both income and
profit per customer continue to increase reflecting our focus on building
valuable long-term relationships. Day-to-day costs remain tightly controlled.
During 2003 we announced the establishment of an operational centre in India,
and exploratory work also continues to assess the scope of outsourcing and
offshoring opportunities to further improve central processing efficiencies.
Minimising risk is critical to the overall strategy and a range of initiatives
have now commenced, including the implementation of balanced scorecards, which
encourage behaviours that focus activity on generating value for the bank and
our customers across a broad range of measures.
Page 18 of 52
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
Our multi-channel distribution, comprising a network of over 2,000 branches, one
of the largest telephone banking operations in the UK, and www.lloydstsb.com,
our internet banking service, one of the most visited financial websites in
Europe, offers extensive customer choice. In 2003 we have continued to invest
in meeting the needs of our customers by providing greater accessibility and
personalised service through all our distribution channels. We have increased
substantially the number of branches open on Saturday, the number of
relationship managers to support our key customer segments, the range of
services offered through internet banking, and increased availability of our
telephony service outside normal working hours.
This increased investment in our direct channels has led to a significant growth
in customer usage. In 2003 some 260 million transactions were processed through
internet banking. Product sales through the internet channel continue to grow
rapidly with an average of more than 70,000 product sales per month, an increase
of 80 per cent on 2002. In addition, the usage of our telephony channel
increased by 29 per cent over the year. Sales from direct channels represented
nearly 40 per cent of total sales in 2003.
Credit cards, supported by the launch of a number of segmented, competitive and
innovative product offers including the createcard and the premier credit card,
achieved strong growth both in new accounts and balances outstanding.
Cardholder acquisition is focused on prime borrowers and mass affluent
customers, utilising a number of brands to appeal to a larger potential market
through a broad range of distribution channels. Our market leading on-line
capabilities utilise our customer data to provide product offers at a customer
level. Market share grew to 12.6 per cent. In September 2003, the Group
acquired the credit card and personal loan businesses of Goldfish Bank, the
assets of which amounted to some GBP1.0 billion.
The launch of the Group's 'Plus' range of interest-bearing current accounts has
supported the retention of high quality customers within the retail banking
franchise, as well as positioning the Group to attract new-to-brand customers
through a competitively priced offer, reflecting the use of a lower cost
distribution channel. Lloyds TSB has maintained its clear market leadership in
the added value current account market with over 4 million customers. Rates of
customer attrition have fallen by some 17 per cent, reflecting improved levels
of customer satisfaction and the Group's improved range of segmented and
targeted offers in the personal market. Extensive work continues, to improve
levels of service and customer satisfaction, with a focus on continuous
performance improvement and innovation to meet customer needs and expectations.
The Group has also launched Lloyds TSB branded energy and home telephone
products. By leveraging the strategic advantages offered by the Lloyds TSB
customer base, distribution strength and brand, the provision of Lloyds TSB
branded gas, electricity and home telephone services adds value to existing
customer relationships, and provides an opportunity for the Group to build new
sustainable revenue streams. Customers purchased over 100,000 products under
this offer in 2003.
Page 19 of 52
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
Building on a successful 2003, Lloyds TSB continues to be well positioned in the
attractive UK wealth management market, with a range of segmented offers.
During 2003 the Group increased its wealth management customers by 45 per cent
to some 55,000, largely reflecting the March 2003 launch of Premier Banking.
Within the Lloyds TSB customer franchise are approximately 450,000 customers who
are eligible for wealth management services, representing an estimated 20 per
cent of the UK wealth management market. Entry level for these offers starts
with Premier Banking which provides a tailored service and product offering to
mass affluent customers.
Mortgages 2003 2002
Gross new mortgage lending GBP24.2bn GBP19.0bn
Market share of gross new mortgage lending 8.9% 8.7%
Net new mortgage lending GBP8.3bn GBP5.9bn
Market share of net new mortgage lending 8.6% 7.5%
Mortgages outstanding (year-end) GBP70.8bn GBP62.5bn
Market share of mortgages outstanding 9.2% 9.3%
Gross new mortgage lending increased by 27 per cent to a record GBP24.2 billion,
compared with GBP19.0 billion in 2002. Net new lending increased to GBP8.3
billion resulting in a market share of net new lending of 8.6 per cent. Over the
last twelve months, mortgage balances outstanding increased by 13 per cent to
GBP70.8 billion.
The Group continues to be one of the most efficient mortgage providers in the UK
and Cheltenham & Gloucester's (C&G) total costs as a percentage of mortgage
assets were 0.5 per cent in 2003. C&G continues to benefit from mortgage sales
distribution through the Lloyds TSB branch network, the IFA market and from the
strength of the C&G brand. During 2003, C&G received a 5-star service award
from the Association of Independent Financial Advisors for the ninth consecutive
year, an achievement unmatched by any UK financial services provider.
Asset quality remains strong. The average indexed loan-to-value ratio on the C&
G mortgage portfolio was 43 per cent (2002: 46 per cent), and the average
loan-to-value ratio for C&G mortgage business written during 2003 was 64 per
cent (2002: 67 per cent). C&G has continued its policy of not exceeding a 95
per cent loan-to-value ratio on new lending, and has minimal exposure to the
sub-prime and self-certification mortgage markets.
A slight improvement in arrears and the beneficial effect of house price
increases have meant that bad debt provisions remained at low levels. New
provisions were more than offset by releases and recoveries resulting in an
GBP18 million net provisions release for the year, compared with a net release
of GBP1 million in 2002.
Page 20 of 52
LLOYDS TSB GROUP
Insurance and Investments
(the life, pensions and unit trust businesses of Scottish Widows and Abbey Life;
general insurance underwriting and broking; and Scottish Widows Investment
Partnership)
2003 2002
GBPm GBPm
Life, pensions and unit trusts
Scottish Widows 379 590
Abbey Life 93 92
Provisions for customer redress (100) (205)
372 477
General insurance 720 753
Operating profit from Insurance 1,092 1,230
Scottish Widows Investment Partnership 2 -
Profit before tax* 1,094 1,230
Profit before tax, before provisions for customer redress* 1,194 1,435
*excluding changes in economic assumptions and investment variance
Profit before tax from Insurance and Investments, excluding changes in economic
assumptions and investment variance, decreased by GBP136 million, or 11 per
cent, to GBP1,094 million, from GBP1,230 million in 2002. Profit before tax from
our life, pensions and unit trust businesses decreased by GBP105 million, or 22
per cent, to GBP372 million. A reduction of GBP168 million in benefits from
experience variances and assumption changes, and a GBP61 million decrease in
normalised investment earnings, were partly offset by a GBP105 million reduction
in provisions for customer redress.
The market for medium and long-term investments continued to be adversely
affected by uncertainties in global stock markets. Overall, weighted sales were
GBP733.4 million compared to GBP767.6 million last year, a reduction of 4 per
cent. This decrease in weighted sales reflected a 1 per cent increase in
weighted sales from life and pensions, offset by a 24 per cent reduction in
weighted sales from unit trusts and equity-based ISAs.
The 4 per cent reduction in weighted sales compared to a reduction of 11 per
cent in the weighted sales of the UK life, pensions and investments market and,
as a result, Scottish Widows increased its market share to 5.7 per cent, from
5.2 per cent in 2002. In UK life and pensions, the market share in 2003
increased to 7.1 per cent, compared with 5.9 per cent in 2002. By distribution
channel, weighted sales from independent financial advisors (IFA) rose by 17 per
cent as a result of strong regular savings and pensions sales. Our share of the
IFA market in 2003 increased to 5.8 per cent, compared to 4.4 per cent in 2002.
Page 21 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
In the branch network, weighted sales were 20 per cent lower as a result of a
significant reduction in the sales of single premium investments, driven mainly
by depressed market conditions for unit trusts and open-ended investment
companies (OEICs). Our market share of life and pensions in the branch network
and direct distribution channels was broadly held at 8.0 per cent, compared to
8.1 per cent in 2002. The reduction of GBP685.1 million in the Group's sales of
single premium life products was, however, offset by an increase in Retail
Banking customer deposits of some GBP4.2 billion, or 10 per cent, during the
year. This reduction in single premium life product sales was also partly
influenced by the Group's decision to reduce its emphasis on the sale of capital
intensive with-profits products. Scottish Widows remains one of the leading unit
trust and equity-based ISA providers in the UK.
In 2001, Scottish Widows was one of the first companies to be accredited under
the 'Raising Standards' quality mark, which aims to raise standards generally
throughout the insurance industry to create an environment which encourages
consumers to provide for their own future. In March 2003 Scottish Widows was
one of the first companies to gain re-accreditation under 'Raising Standards',
confirming Scottish Widows' position at the forefront of industry-wide
initiatives to improve standards. In the 2003 IFA Service Awards, Scottish
Widows achieved its best ever performance with a 5-star rating in all
categories.
Scottish Widows has been developing an actuarial model to assist in the
management of the with-profits fund and to meet regulatory requirements. The
model allows management to estimate the effects of different economic scenarios
upon the financial position of the fund and consider the implications of
different management actions. Preliminary output from this model indicates that
the possible cost of providing benefits on policies containing features such as
options and guarantees varies widely and, depending on the economic scenario
encountered, could result in the Group incurring a liability. Based on the
information available at present, having considered a range of possible
outcomes, and after making allowance for the effect of proposed future
management actions, the Group currently considers that no provision is
necessary. However, the model is subject to ongoing development and the
position will be kept under review. We are also satisfied with Scottish Widows'
overall capital position calculated using the Financial Services Authority's new
'realistic' basis of balance sheet reporting. On a market consistent basis, we
estimate a 'realistic' surplus within the long-term fund of Scottish Widows
which is more than three times the risk capital margin. Scottish Widows remains
on track to pay a 2004 dividend to Lloyds TSB.
Profit before tax from general insurance operations, excluding investment
variance, decreased by GBP33 million, or 4 per cent, to GBP720 million as
continued revenue growth from home insurance was offset by lower levels of
creditor insurance. Sales from direct channels continue to grow strongly,
increasing by some 1 million policies, or 14 per cent, compared to 2002. The
overall claims ratio of 42 per cent was lower than last year (46 per cent) as
portfolio growth exceeded the rise in claims, generally reflecting more
favourable weather conditions.
Page 22 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
Over the last 5 years the Group has delivered rapid growth in general insurance
product sales, largely through the branch network distribution channel, and the
number of policies in force has risen from less than 5 million to over 9
million. This is a key indicator of the success of the Group's bancassurance
strategy. With over 9 million policies in force, the Group is a market leader
in the distribution of home and creditor insurance.
Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased to
GBP2 million, reflecting increased revenues from new mandates gained in 2003 and
lower levels of investment spend as the programme of investment in new
infrastructure draws towards completion. At the end of the year SWIP has GBP77
billion of funds under management, an increase of GBP7 billion during the year.
Over the three-year period to 31 December 2003, 80 per cent of SWIP's retail
funds, on a weighted basis, have performed above their benchmark and SWIP now
has a total of 18 funds rated A and above by Standard & Poor's, compared to 14
at the end of 2002. SWIP remains strong in bond and property investment
management, with the Scottish Widows pensions and assurance fixed interest and
property funds showing top quartile performance over three and five years to
December 2003. Asset management is a key component in the successful
implementation of the Group's bancassurance strategy, and SWIP has a major part
to play in this.
Page 23 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
2003 2002
GBPm GBPm
Total new business premium income
Regular premiums:
Life - mortgage related 43.9 35.0
- non-mortgage related 51.4 32.7
Pensions 236.7 212.7
Health 5.9 5.9
Total regular premiums 337.9 286.3
Single premiums:
Life 846.7 1,531.8
Annuities 512.5 497.0
Pensions 1,279.1 1,060.2
Total single premiums 2,638.3 3,089.0
External unit trust sales:
Regular payments 41.0 71.5
Single amounts 907.3 1,009.5
Total external unit trust sales 948.3 1,081.0
Weighted sales (regular + 1/10 single)
Life and pensions 601.7 595.2
Unit trusts 131.7 172.4
Life, pensions and unit trusts 733.4 767.6
Weighted sales by distribution channel
Branch network 278.8 350.6
Independent financial advisors 391.6 335.4
Direct 61.6 67.9
Other, including International 1.4 13.7
Life, pensions and unit trusts 733.4 767.6
Group funds under management GBPbn GBPbn
Scottish Widows Investment Partnership 77 70
UK Wealth Management 11 10
International 15 18
103 98
Page 24 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
Life, pensions and unit trusts
2003 2002
GBPm GBPm
New business income 457 398
Life and pensions distribution costs (327) (283)
New business contribution 130 115
Existing business
- expected return 276 273
- experience variances (16) (1)
- assumption changes and other items (75) 78
- provisions for customer redress (100) (205)
85 145
Development costs (13) -
Investment earnings 153 214
355 474
Unit trusts 71 92
Unit trust distribution costs (54) (89)
17 3
Profit before tax* 372 477
Profit before tax, excluding provisions
for customer redress* 472 682
New business margin (life and pensions) 21.6% 19.3%
*excluding changes in economic assumptions and investment variance
New business income increased by 15 per cent supported by a 1 per cent growth in
weighted sales from life and pensions products, an increase in the new business
margin, and an improved performance in the more profitable life products. After
deducting distribution costs, the new business contribution increased by 13 per
cent from GBP115 million in 2002, to GBP130 million in 2003. The life and
pensions new business margin, defined as new business contribution divided by
weighted sales, increased to 21.6 per cent, from 19.3 per cent in 2002. The
improvement reflects our strategy to improve product mix, particularly in moving
to higher margin protection and regular premium life products.
Profit before tax from existing business fell by GBP60 million, or 41 per cent,
to GBP85 million. The expected return from existing business, which largely
reflects the unwinding of the long-term discount rate applied to the expected
cash flows from the Group's portfolio of in-force business, increased by GBP3
million, to GBP276 million as lower restructuring costs in 2003 more than offset
a reduction in the income from the unwind of the long-term discount rate. During
2003, there was a reduction of GBP91 million from changes in actuarial
assumptions and experience variances, compared to a benefit of GBP77 million in
2002, partly reflecting the capitalisation of pension scheme contributions,
following their recommencement in 2003, within the Group's embedded value
calculations and an increase in assumed lapse rates for term assurance business.
Page 25 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
General insurance
2003 2002
GBPm GBPm
Premium income from underwriting
Creditor 104 107
Home 410 350
Health 43 44
Reinsurance premiums (22) (15)
535 486
Commissions from insurance broking
Creditor 351 426
Home 30 44
Health 16 17
Other 207 160
604 647
Profit before tax*
Underwriting 219 198
Broking 501 555
720 753
*excluding investment variance
Profit before tax, excluding investment variance, from our general insurance
operations, comprising both underwriting and broking activities, decreased by
GBP33 million, or 4 per cent, to GBP720 million. This comprised a pre-tax profit
of GBP219 million from general insurance underwriting and GBP501 million from
broking activities.
The pre-tax profit of the underwriting business, at GBP219 million, increased by
GBP21 million, or 11 per cent, from GBP198 million in 2002. Premium income from
underwriting increased by GBP49 million, or 10 per cent, largely as a result of
higher home insurance income which increased by 17 per cent. Claims were GBP7
million higher at GBP236 million than in 2002. The overall claims ratio of 42
per cent was lower than last year (46 per cent) as portfolio growth exceeded the
rise in claims, generally reflecting more favourable weather conditions. Profit
before tax from the general insurance broking business decreased by GBP54
million, or 10 per cent, to GBP501 million, from GBP555 million in 2002.
Commissions from insurance broking decreased by GBP43 million, or 7 per cent,
largely as a result of lower levels of creditor insurance, which were partly
offset by higher retrospective commissions.
Overall, sales from direct channels (direct mail, telephone, affinity and
internet) continue to grow strongly with over 1 million new policies sold
through direct channels in 2003, an increase of 14 per cent compared to 2002.
Sales through the internet distribution channel almost doubled in 2003.
Page 26 of 52
LLOYDS TSB GROUP
Wholesale and International Banking
(banking, treasury, large value lease finance, long-term agricultural finance,
share registration, venture capital, and other related services for major UK and
multinational companies, banks and financial institutions, and small and
medium-sized UK businesses; Lloyds TSB Asset Finance; and banking and financial
services overseas in three main areas: The Americas, New Zealand, and Europe and
Offshore Banking)
2003 2002
GBPm GBPm
Net interest income 2,387 2,458
Other income 1,656 1,588
Total income 4,043 4,046
Operating expenses 2,300 2,185
Trading surplus 1,743 1,861
Provisions for bad and doubtful debts 369 540
Amounts written off fixed asset investments 44 57
1,330 1,264
Profit on sale of businesses 865 -
Profit before tax 2,195 1,264
Efficiency ratio 56.9% 54.0%
Total assets (year-end) GBP101.6bn GBP117.1bn
Total risk-weighted assets (year-end) GBP63.1bn GBP73.0bn
Wholesale and International Banking pre-tax profit increased by GBP931 million,
to GBP2,195 million, largely reflecting the GBP865 million profit on the
disposal of a number of overseas businesses. In Wholesale, the impact of the
Competition Commission's SME report remedies and lower income in Financial
Markets was more than offset by strong profit growth in asset finance and a
reduction in provisions for bad and doubtful debts. This led to an increase of 1
per cent in profit before tax from GBP883 million in 2002, to GBP890 million in
2003. In International Banking profit before tax increased by GBP924 million, to
GBP1,305 million, largely as a result of the GBP865 million overseas business
disposal profits, and a lower provisions charge in Argentina.
Net interest income decreased by GBP71 million reflecting higher income in the
asset finance businesses which was more than offset by a reduction of GBP169
million following the implementation of the Competition Commission's SME
remedies. Other income increased by GBP68 million, largely as a result of the
acquisition of First National Vehicle Holdings and Abbey National Vehicle
Finance in April 2002, and the Dutton-Forshaw Group in December 2002. Operating
expenses increased by GBP115 million, compared with last year, of which GBP71
million related to the asset finance acquisitions, and GBP44 million reflected a
combination of volume growth, local inflation, and the impact of exchange rate
movements in the Group's international businesses.
Page 27 of 52
LLOYDS TSB GROUP
Wholesale and International Banking (continued)
The charge for provisions for bad and doubtful debts decreased by GBP171 million
to GBP369 million. The charge in Wholesale fell by GBP78 million to GBP300
million, despite a small increase in provisions within the asset finance
businesses reflecting portfolio growth. In 2002, provisions against Group loans
and advances to certain large US corporate customers totalled some GBP100
million and these were not repeated, to the same extent, in 2003. In
International Banking the charge decreased by GBP93 million, to GBP69 million
partly reflecting the absence in 2003 of an increase in the general provision in
Argentina. Amounts written off fixed asset investments decreased by GBP13
million.
Total assets fell by GBP15,511 million, or 13 per cent, to GBP101,555 million
largely reflecting a reduction of GBP14,602 million as a result of overseas
business disposals. In Wholesale, assets reduced by 1 per cent to GBP94,812
million, a decrease of GBP956 million. Strong growth in the asset finance
businesses in 2003 was more than offset by a reduction in finer margin loans and
debt securities in Financial Markets. In International Banking there was a
reduction of GBP14,555 million in assets, to GBP6,743 million, largely as a
result of the disposals of The National Bank of New Zealand, and substantially
all of the Group's businesses in Brazil.
In Financial Markets pre-tax profits decreased by 22 per cent to GBP149 million,
compared with GBP192 million in 2002 reflecting less favourable trading
conditions, lower money market income and finer margins on interest rate
derivatives.
Structured Asset Finance, incorporating Lloyds TSB Leasing, remains one of the
UK's leading big-ticket lessors. In support of corporate customers, Capital
Markets improved market share in the UK loan syndications market, achieving
third place for the number of Lead Arranger roles for UK investment grade
companies. Lloyds TSB Development Capital achieved a pre-tax profit of GBP16
million, compared to a loss of GBP19 million in 2002. This was largely
attributable to higher realisations of venture capital gains. Record levels of
new acquisition finance deals and commitments were achieved in 2003, with a
lower level of provisions. The launch of a new conduit securitisation vehicle
during 2003 has enabled the Group to provide a complete, and competitive,
product solution to corporate clients covering a wide range of asset based
lending from invoice discounting and factoring to securitisation.
Lloyds TSB Registrars' share of the registration market for FTSE 100 companies
increased to 59 per cent, its market leadership in employee share administration
services was maintained, and customer take-up of Shareview Dealing, the Group's
telephone and internet-based retail sharedealing service, has been good,
following its launch in March 2003. However, a significant reduction in levels
of corporate transaction activity led to a reduction in pre-tax profits to GBP29
million, from GBP45 million in 2002.
Pre-tax profits in Lloyds TSB Asset Finance increased by 145 per cent to GBP162
million, compared with GBP66 million last year. This reflects strong growth in
the motor and leisure business and growth in the consumer and commercial finance
businesses, in addition to the impact of the acquisition of First National
Vehicle Holdings and Abbey National Vehicle Finance in April 2002, and the
Dutton-Forshaw Group in December 2002. These businesses have been successfully
integrated into Lloyds TSB Asset Finance, where Lloyds TSB autolease is now the
largest contract hire operator in the UK. The Group has maintained market
leadership, and continues to grow market share, in point-of-sale motor finance.
Page 28 of 52
LLOYDS TSB GROUP
Wholesale and International Banking (continued)
The number of businesses using asset based finance continues to grow strongly,
and Lloyds TSB Commercial Finance and its specialist factoring division, Alex
Lawrie Factors, have maintained a 19 per cent market share in invoice
discounting and factoring in the UK. Data from The Factors and Discounters
Association confirms Lloyds TSB Commercial Finance's market leadership position.
Business Banking continued to grow its customer franchise, with a 6 per cent
increase in customer recruitment in 2003 and a 9 per cent reduction in customer
attrition. Customer deposits rose by 6 per cent to GBP10,006 million, from
GBP9,412 million in December 2002, however customer lending decreased to
GBP5,466 million, from GBP5,487 million in December 2002.
Pre-tax profits from The National Bank of New Zealand totalled GBP255 million,
compared to GBP218 million in 2002, and the Group's businesses in Brazil made a
pre-tax profit of GBP64 million, compared with GBP79 million in 2002.
The Group's international wealth management businesses have been adversely
impacted by low interest rates and equity market volatility and, as a result,
Offshore Banking and European Private Banking pre-tax profits fell by GBP43
million to GBP127 million, compared with 2002, which benefited from a GBP21
million profit on the sale and leaseback of premises, compared to a benefit of
GBP4 million in 2003.
In May 2003 Lloyds TSB agreed the sale of its French fund management and private
banking businesses, including its subsidiaries, Lloyds Bank SA, Chaillot
Assurances SA and Capucines Investissements SA, to UBS (France) SA. On 1
December 2003, the Group completed the disposal of its subsidiary, NBNZ Holdings
Limited ('NBNZ'), comprising the Group's New Zealand banking and insurance
operations, to Australia and New Zealand Banking Group Limited.
In December 2003, the Group also completed the sale, to HSBC, of its Brazilian
subsidiaries Banco Lloyds TSB S.A. and Losango Promotora de Vendas Ltda,
together with substantially all of the business of its Brazilian branch, and
certain offshore Brazilian assets. In aggregate, a profit before tax on
disposals of GBP865 million has been recognised in the 2003 profit and loss
account. The sale of The National Bank of New Zealand created a profit before
tax of GBP921 million, whilst the sale of the Group's French fund management and
private banking businesses and Brazilian businesses led to losses before tax of
GBP15 million and GBP41 million respectively.
On 1 December 2003, the Group announced that it had agreed to dispose of its
businesses in Guatemala, Honduras and Panama, together with certain offshore
assets, for a cash consideration equivalent to some GBP47 million. The sale of
these businesses, which remains subject to approval by the relevant regulatory
authorities, is expected to be completed during 2004.
Page 29 of 52
LLOYDS TSB GROUP
Central group items
(earnings on surplus capital and the emerging markets debt investment portfolio,
central costs and other unallocated items)
2003 2002
GBPm GBPm
Accrual for payment to Lloyds TSB Foundations (31) (33)
Other finance income 34 165
Earnings on surplus capital and the emerging markets debt
investment portfolio (50) (105)
Central costs and other unallocated items (18) (23)
(65) 4
The four independent Lloyds TSB Foundations support registered charities
throughout the UK that enable people, particularly disabled and disadvantaged,
to play a fuller role in society. The Foundations receive 1 per cent of the
Group's pre-tax profit, averaged over three years, instead of the dividend on
their shareholdings, making them in aggregate one of the largest independent
grant giving bodies in the UK. In 2003, the Group accrued GBP31 million for
payment to the Lloyds TSB Foundations.
Other finance income represents income from the expected return on the Group's
pension fund assets less the charge for unwinding the discount on the pension
fund liabilities. The significant reduction in income in 2003 reflects the
combined impact of a reduction in the expected return on lower pension scheme
assets as a result of the continuing weakness in global equity markets, and
increased pension fund liabilities caused by the expected greater lifespan of
pension scheme members.
Earnings on surplus capital and the emerging markets debt investment portfolio
reflect earnings on capital held at the Group centre, less the funding cost of
recent acquisitions, and profits from the Group's investment portfolio of
emerging markets debt securities. During the first half of 2003 improved
secondary bond market conditions allowed the Group to sell its portfolio of
emerging markets debt securities. Profits on bond sales, and certain closed
foreign exchange positions, in 2003 totalled GBP295 million, compared to GBP212
million in 2002. The Group will not achieve any further contribution from the
emerging markets debt portfolio.
Page 30 of 52
LLOYDS TSB GROUP
Income
Group net interest income
2003 2002
GBPm GBPm
Net interest income 5,255 5,171
Average balances
Short-term liquid assets 2,778 3,514
Loans and advances 155,591 143,621
Debt securities 14,527 14,683
Total interest-earning assets 172,896 161,818
Financed by:
Interest-bearing liabilities 165,613 150,203
Interest-free liabilities 7,283 11,615
Average rates % %
Gross yield on interest-earning assets 5.87 6.52
Cost of interest-bearing liabilities 2.96 3.58
Interest spread 2.91 2.94
Contribution of interest-free liabilities 0.13 0.26
Net interest margin 3.04 3.20
Group net interest income increased by GBP84 million, or 2 per cent, to GBP5,255
million, despite a reduction of GBP259 million caused by a 16 basis points
reduction in the net interest margin. The implementation of the Competition
Commission's SME report remedies reduced Group net interest income by GBP169
million, and the net interest margin by some 10 basis points in 2003.
Average interest-earning assets increased by 7 per cent to GBP173 billion.
Within UK Retail Banking and Mortgages, continued strong growth led to increases
of GBP2,173 million in average personal lending and credit card balances and
GBP7,424 million in average mortgage balances. Within Wholesale and
International Banking, average interest-earning assets increased by GBP2,010
million, reflecting growth in asset finance balances and structured finance
products which has more than offset a reduction in balances within the Group's
treasury operations due to fewer market opportunities in 2003. Overseas, growth
in balances in New Zealand, principally due to exchange rate movements, was
partly offset by reductions in Latin America as the Group's exposures to Brazil
and Argentina have been further reduced. There was also a reduction of GBP1,207
million following the disposal of the Group's portfolio of emerging markets debt
securities.
Excluding the Competition Commission impact, the 6 basis points decrease in the
overall net interest margin reflected a lower contribution from interest-free
liabilities, partly caused by the fall in average UK interest rates, and a
reduction of 3 basis points in the interest spread. The mix effect from the
higher levels of growth in the mortgage portfolio and some mortgage margin
erosion was partly offset by an improvement in the margin in the asset finance
businesses.
Page 31 of 52
LLOYDS TSB GROUP
Domestic net interest income
2003 2002
GBPm GBPm
Net interest income 4,556 4,425
Average balances
Short-term liquid assets 2,237 2,608
Loans and advances 134,600 123,633
Debt securities 9,863 8,661
Total interest-earning assets 146,700 134,902
Financed by:
Interest-bearing liabilities 143,077 125,964
Interest-free liabilities 3,623 8,938
Average rates % %
Gross yield on interest-earning assets 5.79 6.10
Cost of interest-bearing liabilities 2.75 3.02
Interest spread 3.04 3.08
Contribution of interest-free liabilities 0.07 0.20
Net interest margin 3.11 3.28
Domestic net interest income increased by GBP131 million, or 3 per cent, to
GBP4,556 million, notwithstanding a reduction of GBP229 million caused by a 17
basis points reduction in the net interest margin. This represents 87 per cent
of total Group net interest income.
Average interest-earning assets increased by GBP12 billion, or 9 per cent, to
GBP147 billion. Within UK Retail Banking and Mortgages balances increased by
GBP9,590 million largely as a result of growth in the consumer lending and
mortgages portfolios, helped by the acquisition during the year of the credit
card and personal loan portfolios of Goldfish Bank. In Wholesale balances
increased by GBP1,558 million mainly due to growth in asset finance balances and
structured transactions.
The net interest margin decreased by 17 basis points reflecting a reduction in
the contribution of interest-free liabilities and the impact of the
implementation of the remedies suggested by the Competition Commission,
following its investigation into the supply of banking services to small and
medium size enterprises. In UK Retail Banking and Mortgages there was a 19
basis point decrease in the net interest margin which was caused by finer
margins being earned in the mortgage business as a result of competitive
pressures and the effect of lower average interest rates reducing the benefit of
low cost and interest-free funds. This was partly offset by improved margins on
personal loans reflecting the lower funding cost. Within Wholesale the margin
fell by 21 basis points as the effect of the Competition Commission's SME report
remedies and continuing growth in finer margin structured transactions was only
partly offset by an improved margin in the asset finance businesses.
Page 32 of 52
LLOYDS TSB GROUP
International net interest income
2003 2002
GBPm GBPm
Net interest income 699 746
Average balances
Short-term liquid assets 541 906
Loans and advances 20,991 19,988
Debt securities 4,664 6,022
Total interest-earning assets 26,196 26,916
Financed by:
Interest-bearing liabilities 22,536 24,239
Interest-free liabilities 3,660 2,677
Average rates % %
Gross yield on interest-earning assets 6.33 8.63
Cost of interest-bearing liabilities 4.26 6.51
Interest spread 2.07 2.12
Contribution of interest-free liabilities 0.60 0.65
Net interest margin 2.67 2.77
Net interest income from international operations decreased by GBP47 million, or
6 per cent, to GBP699 million. This represents 13 per cent of total Group net
interest income.
In sterling terms average interest-earning assets decreased by GBP720 million,
or 3 per cent, to GBP26.2 billion. Average balances in New Zealand increased by
GBP1,974 million mainly as a result of positive exchange rate movements.
Balances in Latin America fell by GBP765 million as the Group has sought to
reduce its exposure to this region, and wholesale balances, principally in the
US, fell by GBP456 million as growth in local currency terms was more than
offset by movements in exchange rates. The reclassification to trading assets
and subsequent disposal of the Group's portfolio of emerging markets debt
securities reduced average interest-earning assets by GBP1,207 million.
The net interest margin reduced by 10 basis points largely as a result of the
sale of the Group's portfolio of emerging markets debt securities.
Page 33 of 52
LLOYDS TSB GROUP
Other income
2003 2002
GBPm GBPm
Fees and commissions receivable:
UK current account fees 623 579
Other UK fees and commissions 1,173 1,163
Insurance broking 604 647
Card services 460 414
International fees and commissions 239 250
3,099 3,053
Fees and commissions payable (722) (645)
Dealing profits (before expenses):
Foreign exchange income 228 173
Securities and other gains 332 15
560 188
Income from long-term assurance business 453 (294)
General insurance premium income 535 486
Other operating income 694 763
Total other income 4,619 3,551
Other income increased by GBP1,068 million, or 30 per cent, to GBP4,619 million.
Fees and commissions receivable increased by GBP46 million, or 2 per cent, to
GBP3,099 million, largely reflecting good growth in UK current account fees and
higher income from credit and debit card services, which more than offset a
reduction in insurance broking commissions. UK current account fee income rose
by GBP44 million, largely reflecting increased fee income from growth in the
number of added value current accounts. Other UK fees and commissions increased
by GBP10 million, or 1 per cent, to GBP1,173 million. There was an increase of
GBP20 million in mortgage related fees, reflecting the growth in new mortgage
lending during the year, and an increase of GBP16 million in fees from large
corporate and factoring activity, reflecting increased transaction volumes. This
growth has been largely offset by a further reduction of GBP27 million in unit
trust and asset management fees reflecting lower average fund values and the
continued weakness of the long-term savings market. Fee income in Lloyds TSB
Registrars also fell as levels of corporate activity remained subdued. Income
from credit and debit card services increased by GBP46 million mainly as a
result of a growth in interchange income, partly reflecting the acquisition of
the Goldfish credit card portfolio during 2003, and higher overseas use
commission and other fees.
Insurance broking commission income decreased by GBP43 million, as a GBP75
million fall in income from creditor insurance, reflecting a reduction in the
level of sales achieved through the branch network, and a further allowance of
GBP35 million in respect of the clawback of commissions relating to the early
settlement of personal loans, more than offset a GBP55 million increase in
retrospective commissions. International fees and commissions reduced by GBP11
million partly due to the disposal of the Group's fund management business in
France.
Page 34 of 52
LLOYDS TSB GROUP
Other income (continued)
Fees and commissions payable increased by GBP77 million as a result of a GBP36
million increase in commissions paid to motor dealers by the asset finance
operation, reflecting the growth in the levels of new business, and higher costs
relating to legal expenses and valuation fee incentives supporting the strong
mortgage growth. Fees payable in respect of the credit and debit card business
also increased, mainly reflecting volume growth and the cost of customer
incentives.
Dealing profits increased by GBP372 million compared with 2002 as a result of an
increase of GBP55 million in foreign exchange income and an increase of GBP317
million in gains from securities trading, largely reflecting earnings from the
portfolio of emerging markets debt investments which, at the end of 2002, was
reclassified as a trading portfolio. In 2002, earnings from emerging markets
debt investments were primarily reported within other operating income. Income
from long-term assurance business increased by GBP747 million, largely
reflecting the absence of the negative investment variance reported in 2002.
Premium income from general insurance underwriting increased by GBP49 million,
or 10 per cent, to GBP535 million, compared to GBP486 million in 2002. There was
growth of GBP60 million in premiums from home insurance products, reflecting
successful cross-selling to the Group's mortgage customers and the continued
strength of the UK housing market, partly offset by a GBP7 million increase in
reinsurance premiums.
Other operating income decreased by GBP69 million to GBP694 million, reflecting
the reclassification of earnings on the emerging markets debt investment
portfolio to dealing profits, and a reduction of GBP28 million in profits on the
sale and leaseback of premises which, in 2003, totalled GBP4 million. These
decreases more than offset a GBP51 million increase in income from the sale of
cars following the acquisition of the Dutton-Forshaw Group in December 2002, and
a GBP26 million increase in the gains on realisation of venture capital
investments by Lloyds TSB Development Capital. There were also gains of GBP34
million following the sale of a number of leases by Lloyds TSB Leasing.
Page 35 of 52
LLOYDS TSB GROUP
OPERATING EXPENSES
Operating expenses
2003 2002
GBPm GBPm
Administrative expenses:
Staff:
Salaries 1,801 1,758
National insurance 143 134
Pensions 353 318
Restructuring 57 105
Other staff costs 234 202
2,588 2,517
Premises and equipment:
Rent and rates 281 280
Hire of equipment 18 18
Repairs and maintenance 127 131
Other 118 114
544 543
Other expenses:
Communications and external data processing 446 446
Advertising and promotion 172 147
Professional fees 123 113
Provisions for customer redress 200 -
Other 403 446
1,344 1,152
Administrative expenses 4,476 4,212
Depreciation 646 642
Amortisation of goodwill 51 59
Total operating expenses 5,173 4,913
Efficiency ratio 52.2% 55.3%
Total operating expenses increased by GBP260 million, or 5 per cent, to GBP5,173
million compared to GBP4,913 million in 2002. The impact of acquisitions
increased operating expenses by GBP110 million in 2003, and there was a GBP200
million provision for customer redress. Excluding these two items, operating
expenses reduced by 1 per cent.
Page 36 of 52
LLOYDS TSB GROUP
Operating expenses (continued)
Administrative expenses increased by GBP264 million to GBP4,476 million, largely
reflecting the GBP200 million provision for customer redress. Staff costs were
GBP71 million higher at GBP2,588 million. Salaries were GBP43 million, or 2 per
cent, higher as the impact of the annual pay review and the acquisitions made
during 2002 have more than offset the impact of an underlying reduction in staff
numbers of 1,209. The cost of bonuses and other performance related payments
remained broadly unchanged. National insurance costs grew by GBP9 million
reflecting the higher overall salary bill and the increase in employers'
contribution rates which took effect in April 2003. Pension costs increased by
GBP35 million, or 11 per cent, reflecting growth in the current service cost as
interest rates have fallen and an increase in the level of cash contributions
being made into defined contribution schemes in the UK. Other staff costs grew
by GBP32 million because of increased use of agency and other contract staff to
support a number of major IT development projects and a significant increase in
training costs, particularly for staff working in the branch network. These
factors have been partly offset by a GBP48 million reduction in severance and
related costs following the completion of a number of major initiatives.
Premises and equipment costs were GBP1 million higher. There was little change
in costs during 2003 as the effect of branch closures offset the impact of
acquisitions made during 2002.
Other expenses increased by GBP192 million, largely as a result of the GBP200
million provision for customer redress. Advertising expenditure increased by
GBP25 million mainly reflecting promotional expenditure incurred in connection
with the credit card and mortgage businesses and also wider use of television
advertising during 2003. Professional fees increased by GBP10 million, to GBP123
million, due to greater use of external consultants on a number of major
projects. This has been offset by a GBP43 million reduction in other expenses.
There has been a reduction in the processing charges paid to iPSL, the Group's
clearings joint venture, and reduced credit and debit card fraud losses.
Depreciation rose by GBP4 million. Operating lease depreciation increased by
GBP19 million as an accelerated charge was recorded following the reassessment
of the carrying value on a small number of big ticket operating lease assets.
This was offset by a GBP15 million reduction in the charge on other fixed
assets, mainly reflecting the accelerated write-off of certain software
development costs in 2002. Goodwill amortisation was GBP8 million lower.
The efficiency ratio was 52.2 per cent, compared to 55.3 per cent in 2002.
Page 37 of 52
LLOYDS TSB GROUP
Operating expenses (continued)
Number of employees (full-time equivalent)
Staff numbers decreased by 7,928 to 71,609 during the year, largely as a result
of the disposal during 2003 of the Group's businesses in New Zealand, Brazil and
France which led to a reduction in staff numbers of 7,103. Excluding the impact
of acquisitions and disposals, there was an underlying reduction of 1,209 in
Group staff numbers.
Within UK Retail Banking and Mortgages staff numbers decreased by 146, as
planned improvements to customer service were more than offset by reductions in
back office operations. In Insurance and Investments there was a decrease of
138 staff reflecting service efficiency improvements. In Wholesale and
International Banking staff numbers decreased by 7,485, largely as a result of
the disposals of overseas businesses.
31 December 31 December
2003 2002
UK Retail Banking and Mortgages 44,478 44,624
Insurance and Investments 5,783 5,921
Wholesale and International Banking 19,414 26,899
Other 1,934 2,093
Total number of employees (full-time equivalent) 71,609 79,537
Page 38 of 52
LLOYDS TSB GROUP
CREDIT QUALITY
Charge for bad and doubtful debts
2003 2002
GBPm GBPm
UK Retail Banking and Mortgages 594 496
Wholesale and International Banking 369 540
Central group items (13) (7)
Total charge 950 1,029
Specific provisions 946 965
General provisions 4 64
Total charge 950 1,029
Charge as % of average lending: % %
Domestic 0.69 0.70
International 0.40 1.28
Total charge 0.66 0.77
The total charge for bad and doubtful debts decreased by GBP79 million, or 8 per
cent, to GBP950 million. In UK Retail Banking and Mortgages the provisions
charge increased to GBP594 million, from GBP496 million in 2002. The charge
within UK Retail Banking increased by GBP115 million mainly due to an increase
in the provisions required against the personal loan and credit card portfolios,
largely attributable to the growth in the size of these portfolios and an
increase in fraud related losses. There was a net release of GBP18 million from
the provisions held against the mortgages portfolio, compared to a net release
of GBP1 million in 2002, mainly reflecting an improved arrears position and the
increase in the value of the property held as security.
In Wholesale and International Banking the provisions charge fell by GBP171
million to GBP369 million. The charge within Wholesale fell by GBP78 million as
the level of new provisions required against corporate customers reduced. In
2002 provisions totalling some GBP100 million were made against certain large US
corporate exposures which have not been repeated, to the same extent, during
2003. Within International Banking the charge fell by GBP93 million mainly as a
result of a reduction of GBP79 million in the new provisions required against
the Group's exposures in Argentina as economic conditions in that country have
started to stabilise. There has also been a reduction in the charge in other
Latin American businesses as specific cases requiring provisions in 2002 have
not been repeated.
Within Central group items there was a net release of provisions of GBP13
million from the provisions held against medium-term debt in the emerging
markets portfolio. This portfolio has now either been disposed of, or the
lending has been repaid.
The Group's charge for bad and doubtful debts as a percentage of average lending
decreased to 0.66 per cent, compared to 0.77 per cent in 2002.
Page 39 of 52
LLOYDS TSB GROUP
Movements in provisions for bad and doubtful debts
2003 2002
Specific General Specific General
GBPm GBPm GBPm GBPm
At beginning of year 1,334 433 1,099 369
Exchange and other adjustments (1) - (55) (3)
Transfer from general to specific provisions 50 (50) - -
Adjustments on acquisitions and disposals (49) (5) - 3
Advances written off (1,145) - (878) -
Recoveries of advances written off in 178 - 203 -
previous years
Charge to profit and loss account:
New and additional provisions 1,552 9 1,544 64
Releases and recoveries (606) (5) (579) -
946 4 965 64
At end of year 1,313 382 1,334 433
1,695 1,767
Closing provisions as % of lending
(excluding unapplied interest)
Specific:
Domestic 1,132 (0.9%) 1,016 (0.8%)
International 181 (2.8%) 318 (1.7%)
1,313 (0.9%) 1,334 (1.0%)
General 382 (0.3%) 433 (0.3%)
Total 1,695 (1.2%) 1,767 (1.3%)
At the end of December 2003 provisions for bad and doubtful debts totalled
GBP1,695 million. This represented 1.2 per cent of total lending (December 2002:
1.3 per cent). Non-performing lending decreased to GBP1,218 million from
GBP1,414 million in December 2002, largely reflecting the impact of business
disposals and lower levels of non-performing lending in the Group's corporate
portfolio, which were partly offset by general portfolio growth in the consumer
lending portfolios. Non-performing lending represented 0.9 per cent of total
lending, unchanged from December 2002. At the end of the year, specific
provisions represented over 100 per cent of non-performing loans (December 2002:
over 90 per cent).
Page 40 of 52
LLOYDS TSB GROUP
CAPITAL RATIOS
Risk asset ratios
31 December 31 December
2003 2002
GBPm GBPm
Capital
Tier 1 11,223 9,442
Tier 2 8,935 8,846
20,158 18,288
Supervisory deductions (6,898) (6,573)
Total capital 13,260 11,715
Risk-weighted assets GBPbn GBPbn
UK Retail Banking and Mortgages 53.8 48.4
Insurance and Investments 0.2 0.2
Wholesale and International Banking 63.1 73.0
Central group items 0.6 0.8
Total risk-weighted assets 117.7 122.4
Risk asset ratios
Total capital 11.3% 9.6%
Tier 1 9.5% 7.7%
Post-tax return on average risk-weighted assets 2.63% 1.62%
At the end of December 2003 the risk asset ratios were 11.3 per cent for total
capital and 9.5 per cent for tier 1 capital.
During 2003, total capital for regulatory purposes increased by GBP1,545 million
to GBP13,260 million. Tier 1 capital increased by GBP1,781 million, mainly from
retained profits. Tier 2 capital increased by GBP89 million, as a result of the
issue of new tier 2 capital instruments. Supervisory deductions increased by
GBP325 million, as a result of an increase in the Group's embedded value to
GBP6,481 million, from GBP6,213 million in December 2002.
Risk-weighted assets decreased by 4 per cent to GBP118 billion, as strong growth
in consumer lending and mortgages in the UK was more than offset by the impact
of a number of overseas business disposals. The post-tax return on average
risk-weighted assets increased to 2.63 per cent.
Page 41 of 52
LLOYDS TSB GROUP
OVERVIEW OF CONSOLIDATED BALANCE SHEET
Review of balance sheet at 31 December 2003, compared to 31 December 2002
Assets
Total assets decreased by GBP549 million to GBP252,012 million, reflecting a
reduction of GBP14,602 million as a result of overseas business disposals,
largely offset by strong growth in underlying loans and advances to customers.
Cash and balances at central banks increased by GBP55 million, or 5 per cent, to
GBP1,195 million as a result of higher balances held to cater for anticipated
demand over the year-end holiday period. Treasury bills and other eligible bills
decreased to GBP539 million from GBP2,409 million reflecting lower liquidity
management balances and a reduction of GBP501 million from business disposals.
Loans and advances to banks decreased by GBP1,982 million to GBP15,547 million
partly for liquidity management purposes, and partly as a result of business
disposals.
Loans and advances to customers increased by GBP777 million, or 1 per cent, to
GBP135,251 million, despite a reduction of GBP11,322 million as a result of
business disposals. The underlying growth largely reflects strong growth in UK
retail lending, particularly mortgage and consumer lending. Domestic customer
lending increased by 11 per cent whilst international customer lending fell by
GBP12,398 million mainly reflecting business disposals.
Debt securities decreased by GBP645 million to GBP28,669 million as a reduction
of GBP1.1 billion on sales of emerging market debt investments and the impact of
disposals was partly offset by new structured finance transactions and increased
holdings for liquidity management purposes.
Intangible assets declined by GBP121 million to GBP2,513 million as the
reduction of GBP189 million due to business sales and amortisation of GBP51
million was partly offset by new goodwill of GBP96 million arising on the
acquisition of the Goldfish business. Tangible fixed assets fell by GBP178
million to GBP3,918 million as the impact of disposals of GBP80 million and
depreciation of GBP646 million was partially offset by net additions of GBP605
million.
Other assets decreased by GBP1,295 million to GBP3,944 million, largely as a
result of decreases of GBP522 million related to business disposals and GBP523
million in mark-to-market balances in respect of derivatives.
Long-term assurance business attributable to the shareholder increased by GBP268
million to GBP6,481 million reflecting the after tax profit in the Group's life
assurance businesses for the year of GBP296 million, and a small reduction
reflecting the disposal of the life operations of The National Bank of New
Zealand.
Page 42 of 52
LLOYDS TSB GROUP
Assets (continued)
31 December 31 December
2003 2002
GBPm GBPm
Loans and advances to customers
Domestic:
Agriculture, forestry and fishing 2,025 2,076
Manufacturing 3,211 3,373
Construction 1,497 1,482
Transport, distribution and hotels 4,741 4,696
Property companies 4,577 4,008
Financial, business and other services 9,652 8,352
Personal : mortgages 70,750 62,467
: other 20,139 16,579
Lease financing 6,470 7,285
Hire purchase 4,701 4,342
Other 3,351 3,397
Total domestic 131,114 118,057
International:
Latin America 557 1,591
New Zealand - 10,447
United States of America 2,681 3,412
Europe 1,981 2,142
Rest of the world 623 648
Total international 5,842 18,240
136,956 136,297
Provisions for bad and doubtful debts* (1,677) (1,766)
Interest held in suspense* (28) (57)
Total loans and advances to customers 135,251 134,474
*figures exclude provisions and interest held in suspense relating to loans and
advances to banks
Liabilities
Deposits by banks fell by GBP1,488 million to GBP23,955 million. Disposals
resulted in a reduction of GBP985 million and there was a decrease of GBP651
million in the Group's treasury operations reflecting reduced business volumes.
Customer deposits increased by GBP162 million to GBP116,496 million despite a
reduction of GBP6,636 million as a result of business disposals. Sterling
deposits increased by GBP6,381 million, or 7 per cent, to GBP103,976 million,
partly reflecting growth of GBP2,530 million in current account credit balances.
Savings and investment accounts balances increased by GBP2,767 million.
Page 43 of 52
LLOYDS TSB GROUP
Liabilities (continued)
31 December 31 December
2003 2002
GBPm GBPm
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 3,115 2,211
Interest bearing current accounts 27,266 25,640
Savings and investment accounts 55,990 53,223
Other customer deposits 17,605 16,521
Total sterling 103,976 97,595
Currency 12,520 18,739
Total deposits - customer accounts 116,496 116,334
Debt securities in issue decreased by GBP4,333 million to GBP25,922 million,
largely as a result of a reduction of GBP3,907 million relating to business
disposals.
Other liabilities decreased by GBP1,277 million to GBP7,007 million, of which
GBP761 million related to business disposals, and GBP447 million to a reduction
in mark-to-market balances in respect of derivatives. Accruals and deferred
income reduced by GBP453 million to GBP3,206 million largely as a result of
business disposals and lower interest payable. The post-retirement benefit
liability increased by GBP62 million to GBP2,139 million. In provisions for
liabilities and charges, deferred tax rose by GBP63 million to GBP1,376 million.
Other provisions for liabilities and charges increased by GBP41 million to
GBP402 million reflecting the establishment of the provision for customer
redress.
Subordinated liabilities increased by GBP286 million to GBP10,454 million
largely as a result of a new issue of undated loan capital to fund balance sheet
expansion and replace existing issues approaching maturity.
Minority interests decreased by GBP4 million to GBP727 million reflecting the
minority share of profit after tax, and positive exchange rate movements, being
more than offset by the payment of dividends to minority shareholders.
Shareholders' funds were up GBP1,681 million to GBP9,624 million principally due
to retentions.
Page 44 of 52
LLOYDS TSB GROUP
NOTES
1. Accounting policies and presentation
During 2003 the Group has implemented the requirements of Urgent Issues
Task Force Abstracts 37 'Purchases and sales of own shares' and 38 '
Accounting for ESOP trusts'. As a result, own shares held, which were
previously shown as an asset on the balance sheet, are now deducted from
shareholders' funds. Shares in Lloyds TSB Group plc held by the long-term
assurance funds are also included in the deduction, and an appropriate
adjustment is made to liabilities to policyholders. A prior year
adjustment, reducing shareholders' funds at 1 January 2002 by GBP2 million,
has been made to reflect the revised policy. Profit before tax for the
year ended 31 December 2003 is unchanged (2002: increased by GBP9 million).
The impact on the Group's balance sheet at 31 December 2003 has been to
reduce total assets by GBP164 million (2002: GBP160 million), to reduce
shareholders' funds by GBP6 million (2002: GBP3 million) and to reduce
long-term assurance liabilities to policyholders by GBP122 million
(2002: GBP122 million).
It has been the Group's policy to defer certain expenses incurred in
connection with the acquisition of new asset finance and unit trust
business and charge these costs to the profit and loss account over the
expected life of the related transactions. Following a review of the
Group's accounting policies this treatment is no longer considered to be
the most appropriate and these costs will now be charged to the profit and
loss account as incurred. The effect of this change in policy has been to
increase profit before tax in 2003 by GBP10 million (2002: GBP2 million).
A prior year adjustment reducing shareholders' funds at 1 January 2002 by
GBP28 million has been made. The effect upon the Group's balance sheet at
31 December 2003 has been to reduce total assets by GBP27 million (2002:
GBP37 million) and reduce shareholders' funds by GBP19 million (2002:
GBP26 million).
Comparative figures for 2002 have been restated in respect of the above.
During 2003, Lloyds TSB disposed of a number of its overseas businesses
including The National Bank of New Zealand and substantially of its
businesses in Brazil. An analysis of the Group's profit and loss account
by continuing operations and discontinued operations is given below.
Page 45 of 52
LLOYDS TSB GROUP
Continuing Discontinued
operations operations Total
2003 2003 2003
GBPm GBPm GBPm
Interest receivable:
Interest receivable and similar income arising from securities
debt securities 389 63 452
Other interest receivable and similar income 8,484 1,213 9,697
Interest payable 4,129 765 4,894
Net interest income 4,744 511 5,255
Other finance income 34 - 34
Other income
Fees and commissions receivable 2,987 112 3,099
Fees and commissions payable (688) (34) (722)
Dealing profits (before expenses) 525 35 560
Income from long-term assurance business 436 17 453
General insurance premium income 535 - 535
Other operating income 682 12 694
4,477 142 4,619
Total income 9,255 653 9,908
Operating expenses
Administrative expenses 4,229 247 4,476
Depreciation 633 13 646
Amortisation of goodwill 39 12 51
Depreciation and amortisation 672 25 697
Total operating expenses 4,901 272 5,173
Trading surplus 4,354 381 4,735
General insurance claims 236 - 236
Provisions for bad and doubtful debts
Specific 883 63 946
General 4 - 4
887 63 950
Amounts written off fixed asset investments 44 - 44
Operating profit 3,187 318 3,505
Share of results of joint ventures (22) - (22)
Profit on sale of businesses - 865 865
Profit on ordinary activities before tax 3,165 1,183 4,348
Tax on profit on ordinary activities 1,025
Profit on ordinary activities after tax 3,323
Minority interests - equity 22
- non-equity 47
Profit for the year attributable to shareholders 3,254
Dividends 1,911
Profit for the year 1,343
Page 46 of 52
LLOYDS TSB GROUP
2. Economic profit
In pursuit of our aim to maximise shareholder value, we use a system of
value based management as a framework to identify and measure value in
order to help us make better business decisions. Accounting profit is of
limited use as a measure of value creation and performance as it ignores
the cost of the equity capital that has to be invested to generate the
profit. We choose economic profit as a measure of performance because it
captures both growth in investment and return. Economic profit represents
the difference between the earnings on the equity invested in a business
and the cost of the equity. Our calculation of economic profit uses
average equity for the year and is based on a cost of equity of 9 per cent
(2002: 9 per cent).
Economic profit instils a rigorous financial discipline in determining
investment decisions throughout the Group. It enables us to evaluate
alternative strategies objectively, with a clear understanding of the value
created by each strategy, and then to select the strategy which creates the
greatest value.
2003 2002
GBPm GBPm
Average shareholders' equity 8,460 10,672
Profit attributable to shareholders 3,254 1,790
Less: notional charge (761) (960)
Economic profit 2,493 830
The notional charge has been calculated by multiplying average
shareholders' equity by the cost of equity. The reduction in average
shareholders' equity in 2003 largely reflects actuarial losses in the
Group's pension schemes recognised at the end of 2002.
3. Earnings per share
2003 2002
Basic
Profit attributable to shareholders GBP3,254m GBP1,790m
Weighted average number of ordinary shares in issue 5,581m 5,570m
Earnings per share 58.3p 32.1p
Fully diluted
Profit attributable to shareholders GBP3,254m GBP1,790m
Weighted average number of ordinary shares in issue 5,599m 5,597m
Earnings per share 58.1p 32.0p
Page 47 of 52
LLOYDS TSB GROUP
4. Tax
The effective rate of tax was 23.6 per cent compared to an effective rate
of tax of 29.3 per cent in 2002, and the standard UK corporation tax rate
in 2003 of 30 per cent. The lower effective rate of tax in 2003 was
primarily due to the gain on the disposal of The National Bank of New
Zealand, which was exempt from taxation.
A reconciliation of the charge that would result from applying the standard
UK corporation tax rate to profit before tax to the tax charge, is given
below:
2003 2002
GBPm GBPm
Profit on ordinary activities before tax 4,348 2,618
Tax charge thereon at UK corporation tax rate of 30% 1,304 785
Factors affecting charge:
Goodwill amortisation 9 9
Overseas tax rate differences (9) 24
Non-allowable and non-taxable items (10) (28)
Gains exempted or covered by capital losses (276) (23)
Tax deductible coupons on non-equity minority interests (12) (12)
Payments to employee trust - (20)
Life companies rate differences 16 43
Other items 3 (12)
Tax charge 1,025 766
5. Investment variance
In accordance with generally accepted accounting practice in the UK, it is
the Group's accounting policy to carry the investments comprising the
reserves held by its life companies at market value. The reserves held to
support the with-profits business of Scottish Widows are substantial and
changes in market values will result in significant volatility in the
Group's embedded value earnings, which are beyond the control of
management. Consequently, in order to provide a clearer representation of
the underlying performance, the results of the life and pensions, and
general insurance businesses are separately analysed to include investment
earnings calculated using longer-term investment rates of return. This
investment variance represents the difference between the actual investment
return in the year on investments backing shareholder funds and the
expected return based upon the economic assumptions made at the beginning
of the year, and the effect of these fluctuations on the value of in-force
business. The effects of other changes in economic circumstances beyond the
control of management are also reflected in the investment variance. The
longer-term rates of return for the period are consistent with those used
by the Group in the calculation of the embedded value at the beginning of
the period, which were 7.10 per cent for equities and 4.50 per cent for
Gilts.
Page 48 of 52
LLOYDS TSB GROUP
5. Investment variance (continued)
Lloyds TSB General Insurance also holds investments to support its
underwriting business; these are carried at market value and gains and
losses included within dealing profits. Consistent with the approach
adopted for the life and pensions business, an operating profit for the
general insurance business is calculated including investment earnings
normalised using the same long-term rates of return.
During 2003 there was a positive investment variance of GBP125 million, as
an increase of 17 per cent in the FTSE All-Share index was partially offset
by the impact of a reduction in the value of fixed interest investments.
6. Changes in economic assumptions
In accordance with the Association of British Insurers' detailed guidance
for the preparation of figures using the achieved profits method of
accounting the Group has reviewed the economic assumptions used in the
embedded value calculations. The guidance requires that the assumptions
should be reviewed at each reporting date.
The main economic assumptions were revised at 31 December 2003 as follows:
2003 2002
% %
Risk-adjusted discount rate (net of tax) 7.60 7.35
Return on equities (gross of tax) 7.45 7.10
Return on fixed interest securities (gross of tax) 4.85 4.50
Expenses inflation 3.80 3.30
At 31 December 2003 the review of the assumptions led to changes in all
of the main economic assumptions. This has resulted in a charge to the
profit and loss account in 2003 of GBP22 million, GBP21 million of which
related to the increase in the rate of expenses inflation from 3.30 per
cent to 3.80 per cent.
7. Profit on sale of businesses
During the year, the Group disposed of a number of its overseas businesses
and, as a result, a net profit of GBP865 million was recognised in the
Group's profit and loss account in 2003. An itemised breakdown is provided
below.
2003 2002
GBPm GBPm
French wealth management businesses (15) -
Brazilian businesses (41) -
The National Bank of New Zealand 921 -
865 -
Page 49 of 52
LLOYDS TSB GROUP
8. Free Asset Ratio
The free asset ratio is a common measure of financial strength in the UK
for long-term insurance businesses. It is the ratio of assets less
liabilities (including actuarial reserves but before the required
regulatory minimum solvency margin) expressed as a percentage of the
liabilities. At 31 December 2003, the free asset ratio of Scottish Widows
plc was an estimated 13.5 per cent, compared with 12.2 per cent at 31
December 2002. After adjusting for the required regulatory minimum
solvency margin, the Scottish Widows plc ratio, expressed as a percentage
of total assets, was an estimated 8.3 per cent at 31 December 2003,
compared with 7.3 per cent at 31 December 2002.
9. Reconciliation of movements in shareholders' funds
2003 2002
GBPm GBPm
Profit attributable to shareholders 3,254 1,790
Dividends (1,911) (1,908)
Profit (loss) for the year 1,343 (118)
Currency translation differences on foreign currency net investments 118 (3)
Actuarial losses recognised in post-retirement benefit schemes (4) (2,331)
Issue of shares 45 139
Movements in relation to own shares (2) (70)
Goodwill written-back on sale of businesses 181 -
Net increase (decrease) in shareholders' funds 1,681 (2,383)
Shareholders' funds at beginning of year 7,943 10,356
Prior year adjustment at 1 January 2002 (page 45, note 1) - (30)
Shareholders' funds at end of year 9,624 7,943
Page 50 of 52
LLOYDS TSB GROUP
10. Dividend
A final dividend for 2003 of 23.5p per share (2002: 23.5p), will be paid on
5 May 2004, making a total for the year of 34.2p (2002: 34.2p).
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Shareholders
who have not joined the plan and wish to do so may obtain an application
form from Lloyds TSB Registrars, The Causeway, Worthing, West Sussex,
BN99 6DA (telephone 0870 6003990). Key dates for the payment of the
dividend are:
Shares quoted ex-dividend 17 March
Record date 19 March
Final date for joining or leaving the dividend reinvestment plan 7 April
Final dividend paid 5 May
11. Other information
The financial information included in this news release does not constitute
statutory accounts within the meaning of section 240 of the Companies Act
1985. Statutory accounts for the year ended 31 December 2003 were approved
by the directors on 5 March 2004 and will be delivered to the registrar
of companies following publication on 3 April 2004. The auditors' report
on these accounts was unqualified and did not include a statement under
sections 237(2) accounting records or returns inadequate or accounts not
agreeing with records and returns) or 237(3) (failure to obtain necessary
information and explanations) of the Companies Act 1985.
A report on Form 20-F will be filed with the Securities and Exchange
Commission in the United States.
Page 51 of 52
LLOYDS TSB GROUP
CONTACTS
For further information please contact:-
Michael Oliver
Director of Investor Relations
Lloyds TSB Group plc
020 7356 2167
E-mail: [email protected]
Terrence Collis
Director of Group Corporate Communications
Lloyds TSB Group plc
020 7356 2078
E-mail: [email protected]
Copies of this news release may be obtained from Investor Relations, Lloyds TSB
Group plc, 25 Gresham Street, London EC2V 7HN. The full news release can also
be found on the Group's website - www.lloydstsb.com.
Information about the Group's role in the community and copies of the Group's
code of business conduct and its environmental report may be obtained by writing
to Public Affairs, Lloyds TSB Group plc, 25 Gresham Street, London EC2V 7HN.
This information is also available on the Group's website.
Page 52 of 52
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LLOYDS TSB GROUP plc
(Registrant)
By: M D Oliver
Name: M D Oliver
Title: Director of Investor Relations
Date: 08 March 2004