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
23 February 2007
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 23 February 2007
re: Final Results
LLOYDS TSB GROUP PLC - 2006 RESULTS
PRESENTATION OF RESULTS
The impact of the implementation of International Financial Reporting Standards
(IFRS) in 2005, and in particular the increased use of fair values, has led to
greater earnings volatility than was previously the case under UK GAAP. In
order to provide a more comparable representation of underlying business
performance, this volatility has been separately analysed for the Group's
insurance and banking businesses (page 35, note 2). In addition, the profit and
loss on the sale and closure of businesses in 2005 has been separately analysed
in the Group's results. A reconciliation of this basis of presentation to the
statutory profit before tax is shown on page 1. Certain commentaries separately
analyse the impact in 2006 of the one-off pension schemes related credit and, in
2005, of customer redress provisions and the strengthening of reserves for
annuitant mortality.
For 2006, the Group has introduced supplementary financial reporting relating to
Scottish Widows Group using European Embedded Value ('EEV') Principles as
published by the Chief Financial Officers Forum in 2004. The Group has also
aligned the accounting for insurance products which are recognised on an
embedded value basis under IFRS to a basis consistent with relevant EEV
Principles.
Unless otherwise stated the analysis throughout this document compares the year
ended 31 December 2006 to the year ended 31 December 2005.
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.
The 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 filed with the US Securities and Exchange Commission for a discussion of
such factors. The forward looking statements contained in this announcement are
made as at the date of this announcement, and the Group undertakes no obligation
to update any of its forward looking statements.
CONTENTS
Page
Profit analysis by division 1
Assets by division 1
Performance highlights 2
Summary of results 3
Group Chief Executive's statement 4
Summarised segmental analysis 8
Group Finance Director's review of financial performance 9
Divisional performance: 13
- UK Retail Banking 13
- Insurance and Investments 17
- Wholesale and International Banking 23
Consolidated income statement - statutory 27
Consolidated balance sheet - statutory 28
Consolidated statement of changes in equity - statutory 29
Consolidated cash flow statement - statutory 30
Condensed segmental analysis - statutory 31
Notes 33
Contacts for further information 52
PROFIT ANALYSIS BY DIVISION
2006 2005 Change
GBPm GBPm %
UK Retail Banking (page 13)
- Before provisions for customer redress 1,549 1,470 5
- Provisions for customer redress - (150)
1,549 1,320 17
Insurance and Investments (page 17)
- Before strengthening of reserves for mortality 973 880 11
- Strengthening of reserves for mortality - (155)
973 725 34
Wholesale and International Banking (page 23) 1,640 1,524 8
Central group items
- Before pension schemes related credit (449) (424) (6)
- Pension schemes related credit 128 -
(321) (424) 24
Profit before tax - excluding volatility and 3,841 3,145 22
profit on sale and closure of businesses
Volatility (page 35, note 2)
- Banking (3) (124)
- Insurance 84 438
- Policyholder interests 326 311
Profit on sale and closure of businesses (page 43, note 13) - 50
Profit before tax 4,248 3,820 11
Taxation (1,341) (1,265)
Profit for the year 2,907 2,555 14
Profit attributable to minority interests 104 62
Profit attributable to equity shareholders 2,803 2,493 12
Profit for the year 2,907 2,555
Earnings per share (page 44, note 15) 49.9p 44.6p 12
ASSETS BY DIVISION
31 December 31 December
2006 2005 Change
GBPm GBPm %
UK Retail Banking 108,381 102,945 5
Insurance and Investments 86,074 80,148 7
Wholesale and International Banking 147,836 124,044 19
Central group items 1,307 2,617
Total assets 343,598 309,754 11
Page 1 of 52
PERFORMANCE HIGHLIGHTS
Commenting on the results Lloyds TSB Group chairman, Sir Victor Blank said:-
"I am delighted to report that the Group has delivered another strong
performance in 2006 - building on the improved earnings momentum that has been
achieved over the last few years. We have a high quality, balanced set of
businesses, demonstrating increased trading momentum and I believe Lloyds TSB is
in great shape for 2007 and beyond."
Results - statutory
- Profit before tax increased by GBP428 million, or 11 per cent, to
GBP4,248 million.
- Profit attributable to equity shareholders increased by 12 per cent
to GBP2,803 million.
- Earnings per share increased by 12 per cent to 49.9p.
- Post-tax return on average shareholders' equity increased to 26.6
per cent, from 25.6 per cent.
- Total capital ratio 10.7 per cent, tier 1 capital ratio 8.2 per
cent.
- Final dividend of 23.5p per share, making a total of 34.2p for the
year.
Results - excluding volatility, pension schemes related credit and, in 2005,
profit on sale and closure of businesses, customer redress provisions and
strengthening of reserves for mortality
- Income growth of 6 per cent exceeded cost growth of 2 per cent.
Cost:income ratio improved to 50.8 per cent, from 52.8 per cent.
- Trading surplus increased by GBP519 million, or 11 per cent, to
GBP5,268 million.
- Profit before tax increased by GBP263 million, or 8 per cent, to
GBP3,713 million.
- Earnings per share increased by 6 per cent to 46.9p.
- Economic profit increased by 6 per cent to GBP1,692 million.
- Post-tax return on average shareholders' equity was broadly stable
at 25.1 per cent.
Key operating highlights
- Balanced and continuing trading momentum with income up 6 per cent
and trading surplus up 11 per cent. All divisions showing good
growth.
- Excellent cost control. Income growth exceeded cost growth of 2 per
cent, delivering widened positive jaws. Group-wide productivity
improvement programme ahead of schedule. In 2008, the net annual
benefits of this programme are expected to increase to GBP250
million.
- Strong second half performance. Income growth of 7 per cent
exceeded cost growth of 3 per cent, compared to the second half of
2005.
- Accelerating income momentum in UK Retail Banking, with a more
balanced sales mix. Overall product sales up 16 per cent. Income
up 4 per cent, costs reduced by 2 per cent resulting in trading
surplus increasing by 10 per cent. Second half income growth
accelerated to 6 per cent.
- Excellent growth in Scottish Widows with a 24 per cent increase in
the present value of new business premiums. Insurance and
Investments profit before tax, adjusting for the impact of capital
repatriation in 2005 and insurance grossing, increased by 15 per
cent.
- Continued strong trading momentum in Wholesale and International
Banking supported by a 46 per cent increase in cross-selling income.
Income growth of 8 per cent exceeded cost growth of 4 per cent;
trading surplus increased by 14 per cent.
- Overall credit quality remains satisfactory. Strong corporate asset
quality continues; retail impairment charge lower in the second half
of 2006, compared to the first half. Rate of growth in unsecured
retail lending impairment charge in 2007 expected to be
significantly lower than in 2006.
Page 2 of 52
SUMMARY OF RESULTS
2006 2005 Change
GBPm GBPm %
Results - statutory
Total income, net of insurance claims 11,104 10,540 5
Operating expenses 5,301 5,471 3
Trading surplus 5,803 5,069 14
Impairment losses on loans and advances 1,555 1,299 (20)
Profit before tax 4,248 3,820 11
Economic profit (page 44, note 14) 1,855 1,616 15
Profit attributable to equity shareholders 2,803 2,493 12
Earnings per share (page 44, note 15) 49.9p 44.6p 12
Post-tax return on average shareholders' equity 26.6% 25.6%
Results - excluding volatility, pension schemes related credit and, in 2005, profit on sale and closure of
businesses, customer redress provisions and strengthening of reserves for mortality
Total income, net of insurance claims 10,697 10,070 6
Operating expenses 5,429 5,321 (2)
Trading surplus 5,268 4,749 11
Impairment losses on loans and advances 1,555 1,299 (20)
Profit before tax 3,713 3,450 8
Economic profit 1,692 1,601 6
Earnings per share 46.9p 44.2p 6
Post-tax return on average shareholders' equity 25.1% 25.5%
Shareholder value
Closing market price per share (year end) 571.5p 488.5p 17
Total market value of shareholders' equity GBP32.2bn GBP27.4bn 18
Proposed dividend per share (page 51, note 20) 34.2p 34.2p
Total shareholder return 24.8% 10.9%
31 December 31 December
2006 2005 Change
GBPm GBPm %
Balance sheet - statutory
Shareholders' equity 11,155 10,195 9
Net assets per share (pence) 195 180 8
Total assets 343,598 309,754 11
Loans and advances to customers 188,285 174,944 8
Customer deposits 139,342 131,070 6
Risk asset ratios
Total capital 10.7% 10.9%
Tier 1 capital 8.2% 7.9%
Page 3 of 52
GROUP CHIEF EXECUTIVE'S STATEMENT+
2006 was another strong year for the Group as we continued to make progress
against our strategic plan and delivered both good growth and high returns. We
are reporting a growth in profits of 8 per cent and a 25.1 per cent return on
equity, building on the momentum established in recent years. We also achieved
a total return for shareholders of 24.8 per cent, which compares very favourably
to our peers.
The results reflect a strong performance across each of our three divisions, as
we delivered good profitable growth in each, and once again we delivered
positive jaws as the rate of growth in income exceeded that of costs.
Our business model is based on building long lasting relationships with our
customers, meeting more of their financial needs and thereby generating
sustainable, high quality earnings growth. Our success is reflected in higher
customer satisfaction scores, rising levels of customer recruitment and a
significant increase in sales. We are continuing to grow strong customer
franchises that support our future development.
We have established a strong track record of driving efficiency improvements and
I am pleased that in 2006 we improved our cost:income ratio to 50.8 per cent,
from 52.8 per cent in 2005. This was achieved by our continued commitment to a
range of quality improvement programmes such as lean manufacturing, which enable
us to enhance the service we deliver to our customers at a lower cost. We have
extended our Groupwide efficiency programme that is also allowing us to
structurally reduce our cost base. As we continue to improve our efficiency and
effectiveness, we are creating additional capacity for further investment to
support our future growth plans.
As we expected, we have seen signs of stabilisation in the unsecured consumer
portfolio, which resulted in a reduction in retail impairments in the second
half of the year. This reflects our long established focus on lending to
existing customers, where we have better information, and tightening in our
credit criteria in previous periods. Our secured consumer portfolios remain in
good shape, reflecting our traditional emphasis on the prime mortgage
marketplace. In the Corporate sector, asset quality has remained strong, with
the increase in impairments reflecting a reduction in recoveries, compared to
last year.
One of the cornerstones of our business model is engaging our staff as we
believe this is critical to driving customer satisfaction. I am pleased that we
again achieved record employee engagement scores in 2006. These scores match
those achieved by other high performing companies, and reflect the focus we
place on developing our people in support of our strategy. We have also
continued to strengthen the broader management team, which is enhancing our
ability to grow the business in a sustainable fashion.
I am pleased with the progress we made during the year. In line with the second
phase of our strategic plan, we are building strong customer franchises,
improving our product capabilities, enhancing our processing efficiency and
working our capital harder. We have made considerable progress across each of
the divisions.
The Retail Bank delivered a 5 per cent improvement in profit before tax, as the
rate of revenue growth accelerated from 3 per cent in the first half to 6 per
cent in the second. The strong growth in the trading surplus, up 10 per cent,
was underpinned by positive jaws of 6 percentage points as income growth of 4
per cent was accompanied by productivity improvements that led to costs being
reduced by 2 per cent.
+ see footnote on page 7
Page 4 of 52
The Retail Bank has made considerable progress against its key priorities. By
enhancing our customer service, re-engineering processes and developing a series
of new and innovative products and services, we are able to offer customers
compelling reasons to choose Lloyds TSB.
The success is reflected, for instance, in increased levels of new target
current account customer recruitment, which rose 59 per cent year on year. In
addition, total sales volumes in the Retail Bank grew by 16 per cent, led by a
30 per cent increase in branch sales. Of particular note has been the change in
the sales mix and the development of better quality, more annuity-like revenue
streams through increased volumes of savings and bancassurance products.
In Insurance and Investments, profit before tax on a like-for-like basis
increased by 15 per cent. We have excellent income growth, of 12 per cent, and
firm cost control, which resulted in positive jaws of 6 percentage points. Each
of the businesses within the division performed strongly and we saw good
profitable growth through both the branch network and IFA distribution channels.
Scottish Widows delivered another very good performance, with sales rising 24
per cent on the prior year and we increased our new business profit by 36 per
cent. We continue to deliver on our bancassurance performance, with a 62 per
cent increase in sales, supported by our simplified product range and new
customer offers. In the IFA channel, our emphasis is on growing the business
profitably and we saw an increase in sales of 14 per cent.
Scottish Widows remains very well capitalised and in addition to the payment of
a GBP206 million regular dividend to the Group in March 2006, a further GBP540
million distribution was made in December 2006. We continue to explore a number
of opportunities to repatriate further surplus capital from Scottish Widows in
2007.
Our General Insurance business continued to grow successfully, delivering a 16
per cent growth in profits. The results particularly reflect the growth in
sales to our franchise customers in retail and Business Banking, as well as
continued investment in enhancing our service performance and claims processing
capacity.
In Wholesale and International Banking, we made further excellent progress in
our core businesses with the division delivering an 8 per cent increase in
profit before tax. This has been built on our two key franchises, Corporate
Markets and Business Banking, and they again delivered excellent levels of
profitable growth. Whilst we are continuing to invest in these franchises to
support our growth ambitions, this was achieved within our discipline of
positive jaws with income growth of 8 per cent whilst costs grew by 4 per cent.
The division also includes the Asset Finance business, which was affected by the
market-wide slowdown in consumer lending and increased impairments in its retail
portfolios.
Our Corporate Markets business delivered another excellent performance, with a
13 per cent improvement in profits, supported by a 48 per cent increase in
cross-selling income. The improvement in profitability reflects the success of
our strategy of integrating our product and relationship businesses to meet our
customers' needs. We are continuing to receive external recognition for our
achievements and we were especially pleased to be awarded the CBI Corporate Bank
of the Year Award for the second year running in 2006. We are maintaining our
focus on building relationships and this is helping us to sustain strong asset
quality performance in this portfolio.
Page 5 of 52
The performance in Business Banking is again underpinned by a very good
performance in sales, as we continue to attract a market leading share of
business start-ups. We are delivering on our strategy of building deeper
customer relationships, with good levels of growth in customer lending and
deposits, as well as continuing to raise the level of fee income. This helped
to drive growth in profits of 26 per cent.
Outlook
Turning to 2007, we are well positioned to drive further growth as we continue
to embed our business model. Whilst we are likely to face challenges in terms
of the slower rate of growth in the unsecured consumer credit market and the
increasing cost of regulation, each of the divisions has now established a
strong track record for delivering enhanced customer satisfaction and an
improved sales performance, which is resulting in profitable business growth.
We will also continue to deliver on our productivity programmes across the
business. In addition to improving our efficiency and effectiveness, these also
result in better customer satisfaction and enhance our ability to fund increased
investment for future growth.
We are a customer focused organisation, and our improved customer satisfaction
scores are an important factor in our continued success. In 2007, we will
implement a further range of new products and services that meet the needs of
our customers, which are underpinned by our 'treating customers fairly'
principles and that reinforce our strategy of developing deep, long-lasting
customer relationships. Over the past few years, we have developed a strong
risk and control infrastructure and this plays an important role in enabling us
to drive profitable growth in a controlled and sustainable fashion.
The Group's key market place is the UK, in the retail and corporate banking, and
insurance sectors. Retail banking markets have shown strong rates of growth in
recent years, notably in unsecured consumer borrowing but the combination of
higher interest rates and higher living costs have started to normalise future
growth expectations. We forecasted this change last year and have increasingly
focused our strategies towards non-lending related product sales and have made
good progress in growing current account, bank savings and bancassurance product
sales. The markets for mortgage lending, bank savings and life, pensions and
investment products are expected to continue to show good rates of growth over
the next few years and this will support our growth plans.
Wholesale markets have shown strong growth over the past several years, and
cyclically low levels of bad debt. Our opportunities in these markets centre on
deepening our customer relationships and cross-selling more fee-based products
to our corporate and small business customers. Over the last few years, we have
increased cross-selling income substantially, and we believe there is still a
great opportunity.
In the competitive financial services market, and with customers able to
exercise choice amongst alternative providers, shareholder and customer value
creation are closely linked. Shareholder value is created by attracting and
retaining customers and winning a greater share of their financial services
business. We have a significant opportunity to leverage our customer
relationships to build market share in other products. We have significant
strengths, in our portfolio of high quality brands, our customer franchises, our
multi-channel distribution capability, our high levels of customer satisfaction
and our knowledge and understanding of our customers. Our growth will come from
leveraging these key strengths.
We believe that successful banks benefit from operating in a vibrant and healthy
society. Many thousands of our staff participate in activities that make a
significant contribution to the communities in which they live and work. In
addition, the four Lloyds TSB Foundations have played a significant role in
supporting a broad range of charities, across the United Kingdom, and make a
critical difference to many thousands of people.
Page 6 of 52
Summary
In summary, 2006 was another strong year for the Group. We have delivered a
good financial performance whilst continuing to build our customer franchises to
support future earnings growth. We will continue to extend the reach and depth
of our customer relationships whilst improving productivity and efficiency in
2007 and beyond. In doing so, I believe that we can deliver sustained
double-digit economic profit growth over time.
Finally, let me again express my continued thanks to all of the staff who work
for the Lloyds TSB Group. They deliver great service for our customers and
their wonderful efforts drive our growing success. Many thousands of our staff
are also shareholders in the Group, and I am delighted that they continue to
participate in the success of the company.
J Eric Daniels
Group Chief Executive
+ to enable meaningful comparisons to be made with 2005, the commentaries in
this statement exclude volatility, the 2006 pension schemes related credit and,
in 2005, profit on sale and closure of businesses, customer redress provisions
and the strengthening of reserves for annuitant mortality.
Page 7 of 52
SUMMARISED SEGMENTAL ANALYSIS
2006 Wholesale Group
UK Insurance and Central excluding
Retail and International group insurance Insurance
Banking Investments** Banking items gross up gross up** Group
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,642 56 2,385 (457) 5,626 78 5,704
Other income 1,621 1,740 1,827 68 5,256 8,306 13,562
Total income 5,263 1,796 4,212 (389) 10,882 8,384 19,266
Insurance claims - (200) - - (200) (8,369) (8,569)
Total income, net of 5,263 1,596 4,212 (389) 10,682 15 10,697
insurance claims
Operating expenses (2,476) (646) (2,264) (51) (5,437) 8 (5,429)
Trading surplus (deficit) 2,787 950 1,948 (440) 5,245 23 5,268
Impairment losses on loans (1,238) - (308) (9) (1,555) - (1,555)
and advances
Profit (loss) before tax+ 1,549 950 1,640 (449) 3,690 23 3,713
Pension schemes related
credit
- - - 128 128 - 128
Profit (loss) before tax* 1,549 950 1,640 (321) 3,818 23 3,841
Volatility
- Banking - - - (3) (3) - (3)
- Insurance - 84 - - 84 - 84
- Policyholder interests - - - - - 326 326
Profit (loss) before tax 1,549 1,034 1,640 (324) 3,899 349 4,248
2005
Net interest income 3,483 79 2,265 (393) 5,434 310 5,744
Other income 1,574 1,587 1,628 39 4,828 11,684 16,512
Total income 5,057 1,666 3,893 (354) 10,262 11,994 22,256
Insurance claims - (197) - - (197) (11,989) (12,186)
Total income, net of 5,057 1,469 3,893 (354) 10,065 5 10,070
insurance claims
Operating expenses (2,522) (607) (2,181) (24) (5,334) 13 (5,321)
Trading surplus (deficit) 2,535 862 1,712 (378) 4,731 18 4,749
Impairment losses on (1,065) - (188) (46) (1,299) - (1,299)
loans and advances
Profit (loss) before tax+ 1,470 862 1,524 (424) 3,432 18 3,450
Customer redress (150) - - - (150) - (150)
provisions
Strengthening of reserves
for mortality
- (155) - - (155) - (155)
Profit (loss) before tax* 1,320 707 1,524 (424) 3,127 18 3,145
Volatility
- Banking - - - (124) (124) - (124)
- Insurance - 438 - - 438 - 438
- Policyholder interests - - - - - 311 311
Profit (loss) on sale and - - (6) 56 50 - 50
closure of businesses
Profit (loss) before tax 1,320 1,145 1,518 (492) 3,491 329 3,820
* excluding volatility and, in 2005, profit (loss) on sale and closure of
businesses; + also excludes pension schemes related credit and, in 2005,
customer redress provisions and the strengthening of reserves for mortality.
** the Group's income statement includes substantial amounts of income and
expenditure which are attributable to the policyholders of the Group's long-term
assurance funds. These items have no impact upon the profit attributable to
equity shareholders and are separately analysed within the segmental analysis in
order to provide a clearer representation of the underlying trends within the
Insurance and Investments segment.
In the summarised segmental analysis above, the results of the Goldfish
business, which was sold in December 2005, are included in Central group items.
Page 8 of 52
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
In 2006, statutory profit before tax was GBP4,248 million, an increase of GBP428
million, or 11 per cent, compared to GBP3,820 million in 2005. Profit
attributable to equity shareholders increased by GBP310 million, or 12 per cent,
to GBP2,803 million and earnings per share increased by 12 per cent to 49.9p.
To enable meaningful comparisons to be made with 2005, the income statement
commentaries below exclude volatility, the 2006 pension schemes related credit
and, in 2005, profit on sale and closure of businesses, customer redress
provisions and the strengthening of reserves for annuitant mortality.
Continued earnings momentum
Profit before tax increased by GBP263 million, or 8 per cent, to GBP3,713
million, underpinned by continued momentum in all divisions. Revenue growth of 6
per cent exceeded cost growth of 2 per cent, with each division delivering
stronger year-on-year revenue growth than cost growth. Our strategy to deepen
customer relationships at the same time as improving productivity has led to
strong levels of trading surplus growth in each division. Earnings per share
increased by 6 per cent to 46.9p and economic profit also increased by 6 per
cent to GBP1,692 million. The post-tax return on average shareholders' equity
remains strong at 25.1 per cent.
Balanced income growth
Overall income growth of 6 per cent reflects good progress in delivering our
strategies of increasing income from both new and existing customers, with good
growth in both assets and liabilities, as well as increased fee income.
Group net interest income, excluding insurance grossing, increased by GBP192
million, or 4 per cent. Strong levels of customer lending growth in Business
Banking and Corporate Markets, and good growth in mortgages, more than offset
the expected slowdown in the rate of growth in unsecured personal lending.
Total assets increased by 11 per cent to GBP344 billion, with an 8 per cent
increase in loans and advances to customers. Customer deposits increased by 6
per cent to GBP139 billion, supported by good growth in current account credit
balances and savings balances in the retail bank.
The net interest margin from our banking businesses (page 37, note 4) decreased
by 11 basis points, from 3.11 per cent in 2005 to 3.00 per cent in 2006. Whilst
individual product margins were broadly stable, stronger growth in finer margin
mortgage and corporate lending led to a negative mix effect which accounted for
8 basis points of the margin decline.
Other income, net of insurance claims and excluding insurance grossing,
increased by GBP425 million, or 9 per cent, to GBP5,056 million. This reflected
an improvement in fees and commissions receivable as a result of higher income
from strong growth in added value current accounts and private banking fees, and
an increase in Open-ended Investment Company (OEIC) sales. In addition, good
growth was achieved in cross-selling income from sales and structuring, and debt
capital markets activities within Corporate Markets.
Page 9 of 52
Excellent cost control
The Group continues to make significant investment in improving levels of
service quality and processing efficiency, the benefits of which are seen in an
excellent cost performance. During 2006, operating expenses increased by only 2
per cent to GBP5,429 million. Over the last 12 months, staff numbers have fallen
by 4,167 (6 per cent) to 62,630, largely as a result of greater efficiency in
back office processing centres, where the unit costs of transaction processing
continue to fall, and the increased automation of administration carried out in
the branch network. These improvements in operational effectiveness have
resulted in a Group cost:income ratio which is 2 percentage points lower at 50.8
per cent.
The Group's programme of productivity improvement initiatives has exceeded its
2006 target, delivering net benefits of GBP47 million, largely reflecting
earlier than expected procurement benefits. In 2006 we invested GBP95 million in
a number of initiatives, and delivered benefits of GBP142 million. During 2007,
we expect net benefits to total approximately GBP125 million and, in 2008, the
Group expects to increase the net annual benefits of the programme to circa
GBP250 million.
Satisfactory asset quality
Impairment losses on loans and advances increased by 20 per cent to GBP1,555
million. Our impairment charge expressed as a percentage of average lending was
0.83 per cent, compared to 0.76 per cent in 2005 (page 40, note 9). Impaired
assets were 3 per cent lower at GBP4,006 million, and now represent 2.0 per cent
of total lending, down from 2.3 per cent at 31 December 2005.
In UK Retail Banking, impairment losses on loans and advances increased by
GBP173 million, or 16 per cent, to GBP1,238 million, reflecting more customers
with higher levels of indebtedness experiencing repayment difficulties, as well
as higher levels of customer insolvency. As a result of tightening our credit
criteria the quality of new business written over the last two years has
improved. This, as well as improvements in the Group's collection procedures and
better than assumed recoveries, has resulted in a reduction in the retail
impairment charge in the second half of 2006, compared to the first half.
Towards the end of 2006 we experienced some signs of stabilisation in the rate
of our customers filing for bankruptcy and a slowdown in the rate of growth in
Individual Voluntary Arrangements (IVAs). In addition, the increased sharing of
industry-wide customer data, particularly with regard to credit card use, has
improved our customer understanding further and this has led to a reduction in a
number of credit limits. Whilst the rate of growth in the number of customers
filing for bankruptcy and IVAs remains a key factor in the outlook for retail
impairment, we expect that the rate of growth in the unsecured retail lending
impairment charge in 2007 will be significantly lower than that experienced in
2006.
As expected, the Wholesale and International Banking charge for impairment
losses on loans and advances increased by GBP120 million to GBP308 million,
reflecting lower levels of releases and recoveries in Corporate Markets than in
2005, and a higher level of consumer finance lending impairment in the Asset
Finance business. Overall asset quality remains good and the level of new
corporate provisions remained at a low level in 2006, although we expect a
return to more normal levels of impairment over time.
Page 10 of 52
Capital position remains robust
At the end of December 2006, the total capital ratio was 10.7 per cent and the
tier 1 ratio 8.2 per cent. During the year, risk-weighted assets increased by 8
per cent to GBP156.0 billion, as strong growth in our mortgage and Corporate
Markets businesses was partly offset by the impact of the Group's new
securitisation programme. The Board has decided to maintain the final dividend
at 23.5p per share, to make a total for the year of 34.2p. This represents a
dividend yield for shareholders of 6 per cent, calculated using the 31 December
2006 share price of 571.5p.
Over the last 12 months, we have significantly improved our capital flexibility
through the initiation of our securitisation programme and the repatriation of
further capital from Scottish Widows to the Group. We have also increased the
variety and flexibility of our capital raising programme, with the issuance of
both sterling and US dollar preference shares, resulting in a more balanced
capital structure. During 2006, we completed two mortgage securitisation
transactions totalling over GBP10 billion as well as a GBP1 billion synthetic
securitisation of commercial banking loans. Over the next few years, we expect
to expand our securitisation programme to include a broader range of asset
classes.
Scottish Widows remains strongly capitalised and, at the end of December 2006,
the working capital ratio of the Scottish Widows Long Term Fund was an estimated
18.9 per cent (page 45, note 16) and the risk capital margin was covered over 17
times. In the second half of 2006, an additional capital repatriation of GBP540
million was made to the Group, bringing the total for the year to approximately
GBP750 million. This is in addition to capital repatriation of GBP1 billion in
2005. We continue to examine opportunities to improve our capital efficiency
and have work under way that we believe will allow Scottish Widows to repatriate
further capital to the Group in 2007, whilst maintaining a strong capital
position.
The Group is making good progress in its preparations for the introduction of
Basel 2. We commenced parallel running at the end of 2006, and our credit risk
waiver application was submitted in December 2006. Whilst our work is well
advanced, some uncertainty remains with regard to the regulatory treatment of
certain issues for capital purposes. The Group expects to maintain satisfactory
capital ratios throughout the transition to Basel 2 in 2008, and continues to
expect no deduction of investments in insurance subsidiaries from tier 1 capital
until at least 2012.
Introduction of EEV reporting
Under IFRS, only insurance policies and discretionary participating investment
business are accounted for on an embedded value basis. In 2006, this basis has
been revised to be consistent with relevant EEV Principles. Although there is
no impact on the 2005 income statement, the impact on the 2006 income statement
is to reduce profit before tax, excluding volatility, by GBP18 million (page 34,
note 1). In line with industry best practice, the Group has introduced
supplementary disclosures which show life, pension and OEIC products accounted
for on an EEV basis, as we believe that EEV reporting provides for increased
clarity, transparency and comparability of financial information.
On an IFRS basis, Scottish Widows' 2006 profit before tax, excluding volatility,
totalled GBP730 million, whilst on an EEV basis, 2006 profit before tax,
excluding volatility and other non-recurring items, was GBP852 million.
Similarly, the embedded value on an EEV basis at 31 December 2006 was GBP6,413
million (2005: GBP6,386 million), compared to the embedded value on an IFRS
basis of GBP5,368 million (2005: GBP5,478 million).
Page 11 of 52
Improved Group pension schemes position
The Group's defined benefit pension schemes' gross deficit at 31 December 2006
improved by GBP1,195 million to GBP2,099 million, comprising net recognised
liabilities of GBP2,362 million partly offset by unrecognised actuarial gains of
GBP263 million (page 41, note 10). This improvement largely reflects continued
strong returns from the schemes' assets, Group contributions to the schemes and
an increase in the real discount rate used to value the schemes' liabilities.
The decision to stop augmenting the pension entitlement of employees taking
early retirement reduced the pension deficit by GBP129 million.
In 2006, the Group reached agreement with the Trustees of the Group's two
principal pension schemes to fund the schemes' actuarial funding deficits of
approximately GBP1.5 billion, as at 30 June 2005, over a period of ten years.
The Group also indicated that it expected to continue making additional
voluntary contributions to the schemes. Further interim actuarial valuations of
the schemes were carried out on behalf of the schemes' Trustees as at 30 June
2006; these valuations showed a significant reduction in the deficits to
approximately GBP0.3 billion.
Delivering strong and balanced trading momentum
During 2006, the Group has delivered strong and balanced trading momentum, with
good sales growth, across all of the divisions. Substantial improvements in
productivity and operational efficiency have resulted in excellent cost control
and widened positive jaws. Asset quality remains satisfactory, our post-tax
return on equity remains high, economic profit continues to increase and we have
a robust capital position.
Helen A Weir
Group Finance Director
Page 12 of 52
DIVISIONAL PERFORMANCE
UK RETAIL BANKING
2006 2005 Change
GBPm GBPm %
Net interest income 3,642 3,483 5
Other income 1,621 1,574 3
Total income 5,263 5,057 4
Operating expenses (2,476) (2,522) 2
Trading surplus 2,787 2,535 10
Impairment losses on loans and advances (1,238) (1,065) (16)
Profit before tax, before provisions for customer redress 1,549 1,470 5
Provisions for customer redress - (150)
Profit before tax* 1,549 1,320 17
*excluding profit on sale and closure of businesses
Cost:income ratio, before provisions for customer redress 47.0% 49.9%
31 December 31 December
2006 2005
Total assets GBP108.4bn GBP102.9bn 5
Risk-weighted assets - post securitisation GBP59.1bn GBP60.4bn (2)
Risk-weighted assets - pre securitisation GBP64.2bn GBP60.4bn 6
Customer deposits GBP75.7bn GBP71.0bn 7
Key highlights
- Good income growth of 4 per cent, supported by a second half
acceleration to 6 per cent.
- Strong sales growth in each key distribution channel beginning to
drive higher revenue growth. Overall sales up 16 per cent.
Significant progress in the rebalancing of sales mix towards a
broader set of products, with a continued focus on non-lending
related revenue streams.
- Excellent progress in growing the current account customer
franchise, with a 59 per cent increase in target customer current
account recruitment.
- Excellent cost control, with a clear focus on improving processing
efficiency and service quality. 2006 costs 2 per cent lower than in
2005. Positive jaws widened. Substantial improvement in cost:income
ratio.
- Rate of growth in impairment charge expected to slow significantly
in 2007. Impairment charge up 16 per cent, reflecting marketwide
deterioration in retail credit quality, however second half charge
lower than that in the first half.
- Continued improvements in levels of customer satisfaction.
Page 13 of 52
UK RETAIL BANKING (continued)
Profit before tax from UK Retail Banking, before provisions for customer
redress, increased by GBP79 million, or 5 per cent, to GBP1,549 million, as
strong levels of business growth were partly offset by the impact of higher
impairment losses. Increased income from the Group's mortgage lending and
customer deposit portfolios more than offset the impact of lower levels of
unsecured consumer lending and related insurance products. Total income
increased by GBP206 million, or 4 per cent, notwithstanding a significant
decrease in income from creditor insurance, whilst costs fell by 2 per cent. As
a result, the trading surplus increased by 10 per cent.
Product net interest banking margins remained broadly stable as lower personal
loan margins were offset by improved deposit and credit card margins. The
adverse mix effect of finer margin mortgages growing faster than unsecured
personal lending led to a slight overall reduction in the divisional margin.
Operating expenses, excluding provisions for customer redress, remained very
well controlled, decreasing by 2 per cent. The significant improvements made in
the rationalisation of back office operations to improve efficiency have been
combined with a substantial improvement in the levels of customer service and
satisfaction. We continue to increase the proportion of front office to back
office staff in the branch network and have substantially improved our sales
productivity.
During 2006, UK Retail Banking has made substantial progress in each of its key
strategic priorities: growing income from its existing customer base; expanding
its customer franchise; and improving productivity and efficiency. In each of
these areas, a key focus has been on improving sales of recurring income
products, such as savings and bancassurance products. This has started to
generate a better quality, more annuity-like, revenue stream and has supported
the accelerating rate of revenue growth in the second half of 2006, compared to
that in the first half of the year.
Growing income from the customer base
Overall sales increased by 16 per cent, with strong performance improvements in
each key distribution channel and over a broad range of products, particularly
current accounts, bank savings and OEICs. This growth has been supported by
higher levels of new product innovation during the year with the launch, for
example, of enhanced regular savings products. In addition, a number of
improved service initiatives, such as the introduction of instant cheque value
and the recent 'Save the Change' launch, have been made. These have improved
both customer value and our brand perception and will, we believe, create
further shareholder value over time.
Over the last 12 months, substantial progress has been made in re-balancing the
sales mix towards an increasing focus on non-lending related income streams,
with a significant year-on-year increase in the sale of added value current
accounts, bank savings products, bancassurance products and in the level of
retail bank customer introductions to the Group's wealth management business.
Our wider savings product range has led to an improved market share of bank
savings and an increase in savings margins. Credit balances on current accounts
and savings and investment accounts increased by 7 per cent to GBP75.7 billion,
supported by good growth in Wealth Management and bank savings. Branch network
sales rose by 30 per cent and product sales via the internet and telephone
increased by 33 per cent as customers increasingly choose to buy through direct
channels as well as through our branches. These increases were offset by a 15
per cent reduction in sales from direct mail, following a significant reduction
in our direct mailing activity, particularly in the credit card market.
Page 14 of 52
UK RETAIL BANKING (continued)
The Group has also continued to deliver good levels of growth in the mortgage
business, particularly focusing on better quality, prime mortgage business and
seeking to maintain economic returns in what, in 2006, was a competitive market.
Gross new mortgage lending for the Group totalled GBP27.6 billion (2005: GBP26.0
billion). Mortgage balances outstanding increased by 8 per cent to GBP95.3
billion and net new lending totalled GBP6.9 billion, resulting in a market share
of net new lending of approximately 10 per cent of the prime mortgage market and
6.3 per cent of the overall mortgage market.
In unsecured consumer lending, tightening of credit criteria over the last two
years, together with the slowdown in consumer demand, has led to unsecured
consumer credit balances remaining at broadly the same level as last year end.
Personal loan balances outstanding at the year end were GBP11.1 billion, an
increase of 1 per cent, and credit card balances totalled GBP6.9 billion, a
decrease of 5 per cent.
Expanding the customer franchise
In addition to growing product sales from existing customers, the Group has made
excellent progress in expanding its customer franchise. Target customer current
account recruitment increased by 59 per cent, compared with last year. With a
renewed focus on the student and graduate market, the Group has also made
considerable progress, and this has led to a 133 per cent increase in student
account recruitment and a doubling of market share in this market.
Wealth Management continues to make strong progress. The Investment Portfolio
Service (IPS), launched in 2005, continues to attract both existing and new
clients. Approximately two thirds of our existing clients have now moved across
to IPS whilst new client recruitment is up 86 per cent and new funds under
management have grown by 88 per cent. Wealth protection sales have also seen
good growth and banking deposits are up 16 per cent. This trend is expected to
continue as we roll out further expansion plans, which include making more
Private Bankers accessible to customers in key locations and reducing the
complexity and cost of our private banking offers.
Improving productivity and efficiency
During 2006 we have made significant progress in reducing levels of
administration and processing work carried out in branches, and increasing the
number of branch network staff in customer facing areas and activities. This
has resulted in a significant increase in sales and service resource, a higher
level of product sales and a reduction of approximately 1,900 branch back-office
administration roles. In addition, substantial progress has been made in
improving and streamlining sales processes leading to a significant increase in
seller effectiveness, with more product sales per customer interview, and
significant reductions in the time taken to, for example, open a current account
or transfer an account to us from another banking provider.
Page 15 of 52
UK RETAIL BANKING (continued)
Impairment growth expected to slow significantly in 2007
Impairment losses on loans and advances increased by GBP173 million, or 16 per
cent, to GBP1,238 million, reflecting the impact of more customers with higher
levels of indebtedness experiencing repayment difficulties, and higher levels of
bankruptcies and IVAs. The impairment charge as a percentage of average lending
was 1.18 per cent, compared to 1.09 per cent last year. Over 99 per cent of new
personal loans and 84 per cent of new credit cards sold during 2006 were to
existing customers, where the Group has a better understanding of an individual
customer's total financial position. Mortgage credit quality remains good and,
as a result, the impairment charge was GBP5 million lower at GBP8 million for
the year.
The rate of growth in the number of our customers filing for bankruptcy and IVAs
remains a key factor in the outlook for retail impairment. Towards the end of
2006 we experienced some signs of stabilisation in the rate of customer
bankruptcies and a slowdown in the rate of growth in IVAs. As a result, we
believe that the rate of growth in the retail lending impairment charge in 2007
will be significantly lower than that experienced in 2006.
Page 16 of 52
INSURANCE AND INVESTMENTS
Excluding volatility 2006 2005 Change
GBPm GBPm %
Net interest income 56 79 (29)
Other income 1,740 1,587 10
Total income 1,796 1,666 8
Insurance claims (200) (197) (2)
Total income, net of insurance claims 1,596 1,469 9
Operating expenses (646) (607) (6)
Insurance grossing adjustment (see page 8) 23 18
Profit before tax, before strengthening of reserves for 973 880 11
mortality
Strengthening of reserves for mortality - (155)
Profit before tax 973 725 34
Profit before tax analysis
Life, pensions and OEICs* 701 655 7
General insurance 243 209 16
Scottish Widows Investment Partnership 29 16 81
Profit before tax* 973 880 11
Present value of new business premiums (PVNBP) 9,740 7,842 24
PVNBP new business margin (EEV basis) 3.6% 3.2%
*excluding, in 2005, strengthening of reserves for mortality
Key highlights
- Significantly improved profit performance. Profit before tax,
excluding strengthening of reserves for mortality, increased by 11
per cent to GBP973 million. On a like-for-like basis, adjusting for
the impact of the GBP800 million capital repatriation in December
2005, profit before tax increased by 15 per cent.
- Good income growth. On a similar like-for-like basis, income, net
of insurance claims, increased by 12 per cent, exceeding cost growth
of 6 per cent.
- Excellent sales performance. 24 per cent increase in Scottish
Widows' present value of new business premiums.
- Excellent progress in increasing bancassurance sales, up
62 per cent, with OEIC sales more than doubled.
- Good momentum maintained in sales through Independent
Financial Advisers. Sales increased by 14 per cent,
reflecting excellent growth in the sales of corporate
pension products.
- Improved profitability. Life, pensions and OEICs new business
profit in Scottish Widows increased by 36 per cent and the post-tax
return on embedded value increased to 9.3 per cent. Good
improvement in new business margin, on an EEV basis, to 3.6 per
cent.
- Excellent capital position of Scottish Widows maintained. Scottish
Widows continues to deliver improving capital efficiency and
self-financing growth, and a further GBP540 million of capital was
repatriated to the Group in the second half of 2006.
Good progress with General Insurance's strategy to develop its manufacturing
business and build distribution capability. Clear focus on improving
underwriting, supply chain efficiency and claims management contributed to
profit before tax increasing by 16 per cent.
Page 17 of 52
INSURANCE AND INVESTMENTS (continued)
Scottish Widows Life, Pensions and OEICs
Profit before tax increased by GBP46 million, or 7 per cent, to GBP701 million.
In December 2005, Scottish Widows repatriated GBP800 million of surplus capital
to the Group as part of a capital restructuring programme. This capital
repatriation has the effect of reducing investment earnings and increasing
funding charges by a total of GBP38 million in 2006. Adjusting 2005 for this
impact, profit before tax increased by 14 per cent.
During 2006 Scottish Widows has made strong progress in each of its key business
priorities: to maximise bancassurance success; to profitably grow IFA sales; to
improve service and operational efficiency and to optimise capital management.
Maximising bancassurance success
In 2006, Scottish Widows' bancassurance sales increased by 62 per cent, building
on the success of the simplified product range for distribution through the
Lloyds TSB branch network, Business Banking and Wealth Management channels.
Sales of OEICs were particularly strong, more than doubling year on year through
the bancassurance channel. Towards the end of 2006, Scottish Widows launched a
new protection product platform 'Protection for Life', which is expected to
result in an increase in protection sales during 2007. In addition, in early
2007 a new protected OEIC product was launched in the bancassurance market to
support sales of savings and investment products.
Profitably growing IFA sales
Sales through the IFA distribution channel increased by 14 per cent, largely
reflecting the introduction of improved product and service offerings for
corporate pensions which, together with increased promotional activity, resulted
in excellent growth in corporate pension sales via the IFA channel, and good
levels of post A-Day growth in retirement income products. Scottish Widows has
also developed a new pensions platform for launch in early 2007 to support
future pre and post retirement sales, and continues to increase its segmental
focus on the IFA market to ensure maximum value is obtained from this market.
Improving service and operational efficiency
Operational efficiencies have continued to improve during 2006, and expense
growth has been controlled to significantly below the rate of income growth.
Scottish Widows' customer satisfaction levels continued to improve, as did
levels of IFA satisfaction. Scottish Widows has again won a significant number
of awards for service quality.
Optimising capital management
Scottish Widows' strong capital management has been reinforced by continuing to
deliver improving capital efficiency and self-financing growth, a more capital
efficient product profile, and improved internal rates of return and new
business margins. As a result, the post-tax return on embedded value increased
to 9.3 per cent, from 8.0 per cent last year. During 2006, surplus capital
generated, excluding volatility and non-recurring items, in excess of the
regular annual dividend totalled GBP227 million. GBP540 million of capital was
repatriated to Lloyds TSB in December 2006, giving a total capital repatriation
to the Group of over GBP1.7 billion over the last two years. We continue to
explore a number of opportunities to repatriate surplus capital from Scottish
Widows, in order to further improve capital efficiency.
Page 18 of 52
INSURANCE AND INVESTMENTS (continued)
Industry practice has historically been to measure new business sales on a
weighted Annual Premium Equivalent (APE) basis, where APE is calculated as the
value of regular premium sales plus 10 per cent of single premium sales (page
50, note 18). Industry practice is moving towards an alternative basis of
calculation - Present Value of New Business Premiums (PVNBP). This is
calculated as the value of single premiums plus the discounted present value of
future expected regular premiums. An analysis of new business sales on a PVNBP
basis can be found in the following table.
Present value of new business premiums (PVNBP) 2006 2005 Change
GBPm GBPm %
Life and pensions:
Savings and investments 1,300 1,465 (11)
Protection 232 255 (9)
Individual pensions 2,219 2,197 1
Corporate and other pensions 1,961 1,517 29
Retirement income 960 658 46
Managed fund business 348 535 (35)
Life and pensions 7,020 6,627 6
OEICs 2,720 1,215 124
Life, pensions and OEICs 9,740 7,842 24
Single premium business 7,321 5,636 30
Regular premium business 2,419 2,206 10
Life, pensions and OEICs 9,740 7,842 24
Bancassurance 3,421 2,114 62
Independent financial advisers 5,358 4,698 14
Direct 613 495 24
Managed fund business 348 535 (35)
Life, pensions and OEICs 9,740 7,842 24
New business margin (PVNBP) 3.6% 3.2%
Overall, sales in 2006 increased by 24 per cent reflecting, in particular,
strong growth in the sales of OEICs and corporate pension products.
Bancassurance sales improved significantly and were 62 per cent higher at
GBP3,421 million, including excellent growth in the sales of OEICs through the
branch network and to Lloyds TSB private banking clients. IFA sales grew 14 per
cent to GBP5,358 million, supported by significant product and service
enhancements in pensions and retirement income. Sales of savings and investment
products declined during the year, following the limiting of investment in the
Property Fund in June 2006, but this reduction was more than offset by a
significant increase in the sale of OEIC and pension products.
Page 19 of 52
INSURANCE AND INVESTMENTS (continued)
Results on a European Embedded Value (EEV) basis
In May 2004, the Chief Financial Officers Forum ('CFO Forum') published its
European Embedded Value Principles and Guidance which set out a series of agreed
standards for embedded value reporting. These EEV Principles establish a
consistent treatment for the financial information provided for insurance and
investment contracts and, in our view, allow a fuller recognition of the
economic value being created. Compared with traditional embedded value, EEV
Principles also provide a more appropriate valuation of in-force business
which explicitly takes into account the cost of financial options and
guarantees, and required capital, as well as non-market risks, such as
mortality.
Lloyds TSB continues to report under IFRS, however, in line with industry best
practice, the Group has introduced supplementary financial reporting relating to
Scottish Widows on an EEV basis. The following EEV supplementary results have
been prepared in accordance with the CFO Forum's EEV Principles and Guidance.
Full details of the Group's adoption of EEV Principles are available on the
Group's website at www.investorrelations.lloydstsb.com
Page 20 of 52
INSURANCE AND INVESTMENTS (continued)
2006 2005
Life and OEICS Total Life and Total Change
Pensions Pensions OEICS %
GBPm GBPm GBPm GBPm GBPm GBPm
New business profit 287 59 346 231 23 254 36
Existing business
- Expected return 361 42 403 330 31 361 12
- Experience variances 35 34 69 5 7 12
- Assumption changes (129) (4) (133) (147) - (147)
267 72 339 188 38 226 50
Expected return on 160 7 167 202 7 209 (20)
shareholders' net assets
Profit before tax, 714 138 852 621 68 689 24
adjusted for capital
repatriation*
Impact of GBP800 million - - - 38 - 38
capital repatriation to
Group
Profit before tax* 714 138 852 659 68 727 17
New business margin (PVNBP) 4.1% 2.2% 3.6% 3.5% 1.9% 3.2%
Post-tax return on 9.3% 8.0%
embedded value*
*excluding volatility, other items and, in 2005, the strengthening of reserves for mortality.
Adjusting for the impact of last year's capital repatriation, EEV profit before
tax from the Group's life, pensions and OEICs business increased by 24 per cent
to GBP852 million. The Group's strategy to improve its returns by focusing on
more profitable, less capital intensive, business whilst constantly seeking to
improve process and distribution efficiency has led to a 36 per cent increase in
new business profit to GBP346 million. As a result of improvements in key
individual product margins and strong sales of corporate pensions and OEICs the
new business margin increased to 3.6 per cent, compared with 3.2 per cent for
2005.
Existing business profit increased by 50 per cent. Expected return has
increased by 12 per cent to GBP403 million reflecting higher earnings on the
larger value of in-force business at the start of the year. Positive experience
variances were driven by lower than expected take-up rates on guaranteed annuity
options in Life and Pensions and by favourable lapse experience in OEICs. These
were more than offset by negative assumption changes, primarily in respect of
lapse assumptions in Life and Pensions, and resulted in an overall net charge
for experience variances and assumption changes, on an EEV basis, of GBP64
million. The equivalent net charge on an IFRS basis was GBP7 million. The
expected return on shareholders' net assets has decreased, largely as a result
of lower assumed rates of return on free assets.
Overall the post-tax return on embedded value increased to 9.3 per cent from 8.0
per cent.
Scottish Widows Investment Partnership
Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased to
GBP29 million, compared with GBP16 million in 2005, reflecting increased
revenues from higher funds under management throughout the period. SWIP's assets
under management increased by 7 per cent to GBP102 billion, and Groupwide funds
under management increased by 4 per cent to GBP126 billion.
Page 21 of 52
INSURANCE AND INVESTMENTS (continued)
General insurance
2006 2005 Change
GBPm GBPm %
Commission receivable 629 681 (8)
Commission payable (664) (695) 4
Underwriting income (net of reinsurance) 600 562 7
Other income 35 18
Net operating income 600 566 6
Claims paid on insurance contracts (net of reinsurance) (200) (197) (2)
Operating income, net of claims 400 369 8
Operating expenses (157) (160) 2
Profit before tax 243 209 16
Claims ratio 32% 34%
Combined ratio 80% 81%
Profit before tax from our general insurance operations increased by GBP34
million, or 16 per cent, to GBP243 million. Operating income, net of claims,
increased by 8 per cent whilst costs fell by 2 per cent. Good progress
continues to be made in implementing new platforms for underwriting and claims
processes.
Net operating income improved by GBP34 million, or 6 per cent, as 7 per cent
growth in underwriting income was offset by a reduction in broking commissions,
particularly relating to creditor insurance, and associated profit sharing
commissions. The Group's corporate partnering capability was further extended
during 2006 with new distribution agreements secured with Argos and Pearl Group.
Excluding the impact of lower creditor insurance business, new sales through the
UK Retail Bank have been robust, with a 42 per cent increase in home insurance
gross written premiums. Our presence in the small business insurance market
continues to improve with an increase of 10 per cent in new business gross
written premiums. Internet sales are becoming increasingly important and now
represent 33 per cent of direct sales volumes.
Whilst claims increased slightly to GBP200 million, the claims ratio improved to
32 per cent (2005: 34 per cent), as further progress in re-engineering the
claims process and improvements in the cost effectiveness of the claims supply
chain offset the impact of higher subsidence related claims. The combined ratio
relating to the underwriting business improved to 80 per cent.
Page 22 of 52
WHOLESALE AND INTERNATIONAL BANKING
2006 2005 Change
GBPm GBPm %
Net interest income 2,385 2,265 5
Other income 1,827 1,628 12
Total income 4,212 3,893 8
Operating expenses (2,264) (2,181) (4)
Trading surplus 1,948 1,712 14
Impairment losses on loans and advances (308) (188) (64)
Profit before tax 1,640 1,524 8
Cost:income ratio 53.8% 56.0%
31 December 31 December
2006 2005
Total assets GBP147.8bn GBP124.0bn 19
Risk-weighted assets - post securitisation GBP91.8bn GBP80.1bn 15
Risk-weighted assets - pre securitisation GBP92.6bn GBP80.1bn 16
Customer deposits GBP61.2bn GBP57.9bn 6
Profit before tax by business unit
Corporate Markets 1,105 976 13
Business Banking 247 196 26
Asset Finance 190 219 (13)
International Banking and other businesses 98 133 (26)
1,640 1,524 8
Key highlights
- Continued strong trading momentum. Substantial increase in trading
surplus, up 14 per cent, to GBP1,948 million, and an 8 per cent
increase in profit before tax.
- Strong income growth, up 8 per cent, supported by a 46 per cent
increase in cross-selling income and higher Corporate Markets and
Business Banking volumes.
- Widening of positive jaws. Income growth exceeded cost growth of 4
per cent. Improving business momentum has led to an accelerated
investment in people and systems to support new product
capabilities.
- Corporate asset quality remains strong, despite a rise of GBP120
million in impairment losses, as a result of the high level of
corporate releases and recoveries in 2005 not being repeated, and
higher levels of impairment in the Asset Finance consumer
portfolios.
- Further good progress in building our Corporate Markets business,
with a 19 per cent increase in Corporate Markets trading surplus.
- Continued strong franchise growth in Business Banking, with 23 per
cent growth in trading surplus, and 26 per cent growth in profit
before tax. Lloyds TSB has retained its leading position as the bank
of choice for start-up businesses.
Page 23 of 52
WHOLESALE AND INTERNATIONAL BANKING (continued)
In Wholesale and International Banking, the Group has continued to make
significant progress in its strategy to leverage the Group's strong corporate
and small business customer franchises and, in doing so, become the best UK
mid-market focused wholesale bank. We have continued to develop new product
revenue streams, particularly in areas such as securitisation, structured credit
and credit loan trading which, coupled with a strong focus on targeted corporate
customer segments and Corporate Markets' cross-selling income growth remaining
strong, has supported good levels of overall income growth. Revenue growth has
continued to exceed cost growth notwithstanding significant investment being
made in the enhancement of our product and distribution capabilities,
particularly in the Corporate Markets business.
Profit before tax increased by GBP116 million, or 8 per cent, to GBP1,640
million. Good trading momentum has continued and has generated strong income
growth of 8 per cent, driven by Corporate Markets income growth of 15 per cent.
This exceeded cost growth of 4 per cent, leading to a reduction in the
cost:income ratio to 53.8 per cent, from 56.0 per cent last year. Trading
surplus increased by GBP236 million, or 14 per cent, to GBP1,948 million.
Net interest income increased by GBP120 million, or 5 per cent, reflecting
higher income from strong growth in customer lending and customer deposits. The
banking net interest margin reduced, largely reflecting the mix effect of slower
growth in the wider margin Asset Finance business, and lower Corporate Markets
and Business Banking margins reflecting a higher proportion of finer margin
secured lending being written. Other income increased by GBP199 million, or 12
per cent, as a result of good levels of growth in financial markets product
sales and credit structuring. In addition, fee and other transactional income
throughout the division benefited from volume growth across a broad range of
customer activity. Costs were 4 per cent higher at GBP2,264 million, reflecting
higher staff costs resulting from the continuing investment in people, processes
and systems, as the Group builds up its Corporate Markets product capability and
expertise. This increased investment was mitigated by operational efficiencies
achieved in Business Banking and Asset Finance.
As expected, the charge for impairment losses on loans and advances increased by
GBP120 million to GBP308 million, as a result of the high level of releases and
recoveries in Corporate Markets in 2005 which were not repeated in 2006, and a
higher level of consumer finance lending impairment in the Asset Finance
business. Whilst overall corporate and small business asset quality remains
strong and the level of new corporate provisions remained at a low level in
2006, we continue to expect some normalisation in the impairment charge over the
next few years.
Page 24 of 52
WHOLESALE AND INTERNATIONAL BANKING (continued)
Corporate Markets
2006 2005 Change
GBPm GBPm %
Net interest income 891 777 15
Other income 923 807 14
Total income 1,814 1,584 15
Operating expenses (722) (665) (9)
Trading surplus 1,092 919 19
Net impairment credit on loans and advances 13 57 (77)
Profit before tax 1,105 976 13
In Corporate Markets, profit before tax grew by 13 per cent, driven by strong
levels of income growth. Income increased by 15 per cent, supported by
significantly higher levels of cross-selling income. By building new product
revenue streams in areas such as structured products and debt capital markets,
and targeting and developing relationships in selected corporate customer
segments, Corporate Markets has created a broader, more diversified stream of
revenues to underpin future revenue growth. There has also been significant
progress in the delivery of our strategy focused on improved origination and
distribution capabilities in the mid-sized corporate business. Operating
expenses increased by 9 per cent to GBP722 million, reflecting further
investment in people, premises and systems to support ongoing business growth.
The trading surplus increased by 19 per cent. The net impairment credit reduced
to GBP13 million, reflecting the lower level of releases and recoveries.
Business Banking
2006 2005 Change
GBPm GBPm %
Net interest income 596 551 8
Other income 255 248 3
Total income 851 799 7
Operating expenses (517) (527) 2
Trading surplus 334 272 23
Impairment losses on loans and advances (87) (76) (14)
Profit before tax 247 196 26
Profit before tax in Business Banking grew by GBP51 million, or 26 per cent,
reflecting strong growth in business volumes, further improvements in growing
the Business Banking customer franchise and progress in improving operational
efficiency. Strong income growth combined with tight cost control led to an
improvement of over 5 percentage points in the cost:income ratio. Costs remain
tightly controlled and were 2 per cent lower. Business Banking continued to
develop and grow its customer franchise strongly, with customer recruitment of
some 118,000 during 2006, reflecting a market-leading position in the start-up
market. Asset quality in the Business Banking portfolios remains strong. The
impairment charge increased by GBP11 million to GBP87 million, largely
reflecting a lower level of releases and recoveries than in 2005.
Page 25 of 52
WHOLESALE AND INTERNATIONAL BANKING (continued)
Asset Finance
2006 2005 Change
GBPm GBPm %
Net interest income 600 640 (6)
Other income 418 366 14
Total income 1,018 1,006 1
Operating expenses (583) (582) -
Trading surplus 435 424 3
Impairment losses on loans and advances (245) (205) (20)
Profit before tax 190 219 (13)
Profit before tax in Asset Finance decreased by 13 per cent to GBP190 million,
reflecting higher levels of consumer finance impairment losses. Income increased
by GBP12 million, or 1 per cent, as good fee income growth in the consumer
lending business and growth in the asset backed lending and contract hire
businesses, was largely offset by the impact of the tightening of lending credit
criteria in the consumer lending portfolios. Lloyds TSB Commercial Finance has
continued to be a major presence in its market, with a 19 per cent market share
measured by client numbers, and the motor and leisure business continues to be
the largest independent lender in the UK motor and leisure point-of-sale market
with a share of 15 per cent. Costs were held flat, leading to a 3 per cent
growth in the trading surplus. The impairment charge increased by GBP40 million
to GBP245 million, reflecting the ongoing impact of higher levels of retail
consumers experiencing repayment difficulties.
Page 26 of 52
CONSOLIDATED INCOME STATEMENT - STATUTORY
2006 2005
GBPm GBPm
Interest and similar income 14,316 12,589
Interest and similar expense (8,779) (6,918)
Net interest income 5,537 5,671
Fee and commission income 3,116 2,990
Fee and commission expense (846) (842)
Net fee and commission income 2,270 2,148
Net trading income 6,341 9,298
Insurance premium income 4,719 4,469
Other operating income 806 1,140
Other income 14,136 17,055
Total income 19,673 22,726
Insurance claims (8,569) (12,186)
Total income, net of insurance claims 11,104 10,540
Operating expenses (5,301) (5,471)
Trading surplus 5,803 5,069
Impairment losses on loans and advances (1,555) (1,299)
Profit on sale and closure of businesses - 50
Profit before tax 4,248 3,820
Taxation (1,341) (1,265)
Profit for the year 2,907 2,555
Profit attributable to minority interests 104 62
Profit attributable to equity shareholders 2,803 2,493
Profit for the year 2,907 2,555
Basic earnings per share 49.9p 44.6p
Diluted earnings per share 49.5p 44.2p
Total dividend per share for the year* 34.2p 34.2p
Total dividend for the year* GBP1,927m GBP1,915m
*total dividend for the year represents the interim dividend paid in October 2006 and the final dividend which will
be paid and accounted for in May 2007.
Page 27 of 52
CONSOLIDATED BALANCE SHEET - STATUTORY
31 December 31 December
2006 2005
Assets GBPm GBPm
Cash and balances at central banks 1,898 1,156
Items in course of collection from banks 1,431 1,310
Trading securities and other financial
assets at fair value through profit or loss 67,695 60,374
Derivative financial instruments 5,565 5,878
Loans and advances to banks 40,638 31,655
Loans and advances to customers 188,285 174,944
Available-for-sale financial assets 19,178 14,940
Investment property 4,739 4,260
Goodwill 2,377 2,373
Value of in-force business 2,723 2,922
Other intangible assets 138 50
Tangible fixed assets 4,252 4,291
Other assets 4,679 5,601
Total assets 343,598 309,754
Equity and liabilities
Deposits from banks 36,394 31,527
Customer accounts 139,342 131,070
Items in course of transmission to banks 781 658
Trading and other liabilities at fair value through profit or loss 1,184 -
Derivative financial instruments 5,763 6,396
Debt securities in issue 54,118 39,346
Liabilities arising from insurance contracts and
participating investment contracts 41,445 40,550
Liabilities arising from non-participating
investment contracts 24,370 21,839
Unallocated surplus within insurance businesses 683 518
Other liabilities 10,985 9,843
Retirement benefit obligations 2,462 2,910
Current tax liabilities 817 552
Deferred tax liabilities 1,416 1,145
Other provisions 259 368
Subordinated liabilities 12,072 12,402
Total liabilities 332,091 299,124
Equity
Share capital 1,429 1,420
Share premium account 1,266 1,170
Other reserves 355 383
Retained profits 8,105 7,222
Shareholders' equity 11,155 10,195
Minority interests 352 435
Total equity 11,507 10,630
Total equity and liabilities 343,598 309,754
Page 28 of 52
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - STATUTORY
Attributable to equity shareholders
Share capital Other Retained Minority
and premium reserves profits interests Total
GBPm GBPm GBPm GBPm GBPm
Balance at 1 January 2005 2,564 371 6,554 81 9,570
Movement in available-for-sale - 8 - - 8
financial assets, net of tax
Movement in cash flow hedges, - 11 - - 11
net of tax
Currency translation differences - (7) 24 - 17
Net income recognised directly in equity - 12 24 - 36
Profit for the year - - 2,493 62 2,555
Total recognised income for the year - 12 2,517 62 2,591
Dividends - - (1,914) (37) (1,951)
Purchase/sale of treasury shares - - 18 - 18
Employee share option schemes:
- value of employee services - - 47 - 47
- proceeds from shares issued 26 - - - 26
Capital invested by minority - - - 329 329
shareholders
Balance at 31 December 2005 2,590 383 7,222 435 10,630
Movement in available-for-sale - (31) - - (31)
financial assets, net of tax
Movement in cash flow hedges, net of tax - 1 - - 1
Currency translation differences - 2 (31) (4) (33)
Net income recognised directly in equity - (28) (31) (4) (63)
Profit for the year - - 2,803 104 2,907
Total recognised income for the year - (28) 2,772 100 2,844
Dividends - - (1,919) (32) (1,951)
Purchase/sale of treasury shares - - (35) - (35)
Employee share option schemes:
- value of employee services - - 65 - 65
- proceeds from shares issued 105 - - - 105
Repayment of capital to minority - - - (151) (151)
shareholders
Balance at 31 December 2006 2,695 355 8,105 352 11,507
Page 29 of 52
CONSOLIDATED CASH FLOW STATEMENT - STATUTORY
2006 2005
GBPm GBPm
Profit before tax 4,248 3,820
Adjustments for:
Change in operating assets (31,995) (17,158)
Change in operating liabilities 33,069 10,039
Non-cash and other items 1,555 4,364
Tax paid (798) (708)
Net cash provided by operating activities 6,079 357
Cash flows from investing activities
Purchase of available-for-sale financial assets (23,448) (10,108)
Proceeds from sale and maturity of available-for-sale financial 18,106 10,266
assets
Purchase of fixed assets (1,724) (1,843)
Proceeds from sale of fixed assets 1,257 1,073
Acquisition of businesses, net of cash acquired (20) (27)
Disposal of businesses, net of cash disposed 936 (4)
Net cash used in investing activities (4,893) (643)
Cash flows from financing activities
Dividends paid to equity shareholders (1,919) (1,914)
Dividends paid to minority interests (32) (37)
Interest paid on subordinated liabilities (713) (668)
Proceeds from issue of subordinated liabilities 1,116 1,361
Proceeds from issue of ordinary shares 105 26
Repayment of subordinated liabilities (759) (232)
Capital element of finance lease rental payments - (2)
Capital invested by minority shareholders - 329
Repayment of capital to minority shareholders (151) -
Net cash used in financing activities (2,353) (1,137)
Effects of exchange rate changes on cash and cash equivalents (148) (20)
Change in cash and cash equivalents (1,315) (1,443)
Cash and cash equivalents at beginning of year 26,753 28,196
Cash and cash equivalents at end of year 25,438 26,753
Cash and cash equivalents comprise cash and balances at central banks (excluding
mandatory deposits) and amounts due from banks with a maturity of less than
three months.
Page 30 of 52
CONDENSED SEGMENTAL ANALYSIS - STATUTORY
Lloyds TSB Group is a leading UK-based financial services group, whose
businesses provide a wide range of banking and financial services in the UK and
in certain locations overseas. The Group's activities are organised into three
segments: UK Retail Banking, Insurance and Investments and Wholesale and
International Banking. Central group items includes the funding cost of certain
acquisitions less earnings on capital, central costs and accruals for payment to
the Lloyds TSB Foundations.
Services provided by UK Retail Banking encompass the provision of banking and
other financial services to personal customers, private banking, stockbroking
and mortgages. Insurance and Investments offers life assurance, pensions and
savings products, general insurance and asset management services. Wholesale
and International Banking provides banking and related services for major UK and
multinational companies, banks and financial institutions, and small and
medium-sized UK businesses. It also provides asset finance to personal and
corporate customers, manages the Group's activities in financial markets and
provides banking and financial services overseas.
During 2006, the bases adopted for allocating income and costs between the
different segments were consistent with those used in 2005 and set out in the
2005 Annual Report and Accounts.
Year ended UK General Life, Insurance Wholesale Central
31 December 2006 Retail Insurance pensions and and group
Banking and asset Investments International items*
management Banking Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar income 6,913 24 820 844 8,806 (2,247) 14,316
*
Interest and similar (3,271) - (741) (741) (6,421) 1,654 (8,779)
expense*
Net interest income 3,642 24 79 103 2,385 (593) 5,537
Other income (net of fee
and commission expense)
1,621 594 9,893 10,487 1,827 201 14,136
Total income 5,263 618 9,972 10,590 4,212 (392) 19,673
Insurance claims - (200) (8,369) (8,569) - - (8,569)
Total income, net of 5,263 418 1,603 2,021 4,212 (392) 11,104
insurance claims
Operating expenses (2,476) (157) (481) (638) (2,264) 77 (5,301)
Trading surplus (deficit) 2,787 261 1,122 1,383 1,948 (315) 5,803
Impairment losses on loans (1,238) - - - (308) (9) (1,555)
and advances
Profit (loss) before tax 1,549 261 1,122 1,383 1,640 (324) 4,248
External revenue 8,136 1,249 10,888 12,137 8,867 158 29,298
Inter-segment revenue* 698 19 199 218 2,276 (3,192) -
Segment revenue 8,834 1,268 11,087 12,355 11,143 (3,034) 29,298
*Central group items on this and the following page includes inter-segment consolidation adjustments within
interest and similar income and within interest and similar expense as follows: interest and similar income GBP
(3,241) million (2005: GBP(2,975) million); interest and similar expense GBP3,241million (2005: GBP2,975 million).
There is no impact on net interest income. Similarly, Central group items includes inter-segment revenue
adjustments of GBP(4,102) million (2005: GBP(3,951) million).
Page 31 of 52
CONDENSED SEGMENTAL ANALYSIS - STATUTORY (continued)
Year ended UK General Life, Insurance Wholesale Central
31 December 2005 Retail Insurance pensions and and group
Banking and asset Investments International items*
management Banking Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar income 6,652 27 850 877 6,944 (1,884) 12,589
*
Interest and similar (3,131) (4) (478) (482) (4,679) 1,374 (6,918)
expense*
Net interest income 3,521 23 372 395 2,265 (510) 5,671
Other income (net of fee
and commission expense)
1,605 571 13,288 13,859 1,628 (37) 17,055
Total income 5,126 594 13,660 14,254 3,893 (547) 22,726
Insurance claims - (197) (11,989) (12,186) - - (12,186)
Total income, net of 5,126 397 1,671 2,068 3,893 (547) 10,540
insurance claims
Operating expenses (2,697) (160) (434) (594) (2,181) 1 (5,471)
Trading surplus (deficit) 2,429 237 1,237 1,474 1,712 (546) 5,069
Impairment losses on loans (1,111) - - - (188) - (1,299)
and advances
Profit (loss) on sale and 76 - - - (6) (20) 50
closure of businesses
Profit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820
External revenue 7,833 1,272 14,127 15,399 7,283 (29) 30,486
Inter-segment revenue* 744 16 330 346 1,686 (2,776) -
Segment revenue 8,577 1,288 14,457 15,745 8,969 (2,805) 30,486
Page 32 of 52
NOTES
Page
1 Accounting policies, presentation and estimates 34
2 Volatility 35
3 Mortgage lending 36
4 Group net interest income 37
5 Other income 38
6 General insurance income 38
7 Operating expenses 39
8 Number of employees (full-time equivalent) 39
9 Impairment losses on loans and advances 40
10 Retirement benefit obligations 41
11 Capital ratios 42
12 Balance sheet information 43
13 Profit on sale and closure of businesses 43
14 Economic profit 44
15 Earnings per share 44
16 Scottish Widows - realistic balance sheet information 45
17 European Embedded Value reporting - results for year ended 31 December 2006 46
18 Scottish Widows - weighted sales 50
19 Taxation 50
20 Dividend 51
21 Other information 51
Page 33 of 52
1. Accounting policies, presentation and estimates
The 2006 results have been prepared in accordance with International Financial
Reporting Standards ('IFRS') as adopted by the European Union (EU). Except as
noted below, the accounting policies adopted in the preparation of these results
are unchanged from those disclosed in the Group's consolidated financial
statements for the year ended 31 December 2005 copies of which can be found on
the Group's website at www.investorrelations.lloydstsb.com/ir/
company_reports_page.asp or are available on request from the Company
Secretary's Department, Lloyds TSB Group plc, 25 Gresham Street, London EC2V
7HN.
The following IFRS pronouncements relevant to the Group for the first time have
been adopted in preparing these results:
(i) Amendment to IAS 19 Actuarial Gains and Losses, Group Plans and
Disclosures. The Group has not changed its accounting policy for the
recognition of actuarial gains and losses as a result of this amendment; the
additional disclosures required will be provided in the Group's consolidated
financial statements for the year ended 31 December 2006.
(ii) Amendment to IAS 39 Financial Instruments: Recognition and Measurement
- The Fair Value Option. This amendment, which was effective from 1 January
2006, changed the criteria for financial assets to be designated at fair value
through profit or loss and permitted financial liabilities meeting certain
criteria to be designated at fair value for the first time. The adoption of
these requirements had no effect upon the classification or valuation of those
financial assets that were designated at fair value through profit or loss prior
to 1 January 2006; at 31 December 2006, GBP1.2 billion of financial liabilities
had been designated at inception into this category during the year. This
change has had no material effect upon the Group's income statement.
(iii) Amendment to IAS 39 Financial Instruments: Recognition and Measurement
and IFRS 4 Insurance Contracts - Financial Guarantee Contracts. Since 1 January
2006, all of the Group's financial guarantee contracts have been accounted for
as financial instruments. This change has had no material effect upon the
Group's financial statements.
(iv) IFRIC Interpretation 4 Determining Whether an Arrangement Contains a
Lease. The Group has reviewed the terms of all contracts potentially affected
by this interpretation; its adoption has had no material effect upon the Group's
financial statements.
For 2006, the Group has also introduced supplementary financial reporting
relating to Scottish Widows Group using European Embedded Value ('EEV')
Principles as published by the Chief Financial Officers Forum ('CFO Forum') in
2004. The Group has also aligned the accounting for insurance products which
are recognised on an embedded value basis under IFRS to a basis consistent with
relevant EEV Principles. The impact of this change has been to reduce profit
before tax for the year ended 31 December 2006 by GBP18 million.
Page 34 of 52
2. Volatility
Banking volatility
In accordance with IFRS, it is the Group's policy to recognise all derivatives
at fair value. The banking businesses manage their interest rate and other
market risks primarily through the use of intra-Group derivatives, with the
resulting net positions managed centrally using external derivatives. IFRS does
not, however, permit the intra-Group derivatives to be used in a hedge
relationship for reporting purposes. Although fair value accounting can have a
significant impact on reported earnings, it does not impact on the business
fundamentals or cash flows of the businesses. The Group has, therefore,
implemented an internal pricing arrangement whereby divisions transfer to
Central group items the volatility associated with marking to market derivatives
held for risk management purposes where, as far as possible, the effect is
minimised by establishing IAS 39 compliant hedge accounting relationships. The
net result is separately disclosed as banking volatility.
During 2006, profit before tax included banking volatility of GBP(3) million,
being a charge of GBP136 million to net interest income and a credit of GBP133
million to other income, (2005: GBP(124) million, being a charge of GBP79
million to net interest income and a charge of GBP45 million to other income).
The significant reduction in this source of volatility reflects the beneficial
effect of rising interest rates which has had the result of changing the way in
which the gradual unwind of the Group's fair value hedging relationships has
impacted the income statement.
Insurance volatility
The Group's insurance businesses have liability products that are supported by
substantial holdings of investments, including equities, property and fixed
interest investments, all of which have a volatile fair value. The liabilities
and supporting investments do not move exactly in line as the fair value of
investments changes, yet IFRS requires that the changes in both the value of the
liabilities and investments be reflected within the income statement. As these
investments are substantial and movements in their fair value can have a
significant impact on the profitability of the Insurance and Investments
division, management believes that it is appropriate to disclose the division's
results on the basis of an expected return in addition to the actual return.
The difference between the actual return on these investments and the expected
return based upon economic assumptions made at the beginning of the period is
included within insurance volatility.
Changes in market variables also affect the realistic valuation of the
guarantees and options embedded within products written in the Scottish Widows
With Profit Fund, the value of the in-force business and the value of
shareholders' funds. Fluctuations in these values caused by changes in market
variables are also included within insurance volatility.
The expected investment returns used to determine the normalised profit of the
business, which are based on prevailing market rates and published research into
historic investment return differentials are set out below:
2007 2006 2005
% % %
Gilt yields (gross) 4.62 4.12 4.57
Equity returns (gross) 7.62 6.72 7.17
Dividend yield 3.00 3.00 3.00
Property return (gross) 7.62 6.72 7.17
Corporate bonds (gross) 5.22 4.72 5.17
Page 35 of 52
2. Volatility (continued)
During 2006, profit before tax included positive insurance volatility of GBP84
million, being a credit of GBP2 million to net interest income and a credit of
GBP82 million to other income (2005: GBP438 million, being a credit of GBP6
million to net interest income and a credit of GBP432 million to other income).
Returns in 2005 benefited from rising stock markets and rising gilt values.
Although equity values continued to rise in 2006, this was less marked than in
2005 and the effect was partly offset by falling gilt values and a charge
following the change in the economic assumptions used to calculate the value of
in-force business at 31 December 2006.
Policyholder interests volatility
As a result of the requirement contained in IFRS to consolidate the Group's life
and pensions businesses on a line by line basis, the Group's income statement
includes amounts attributable to policyholders which affect profit before tax;
the most significant of these items is policyholder tax.
Under IFRS, tax on policyholder investment returns is required to be included in
the Group's tax charge rather than being offset against the related income, as
it is in actual distributions made to policyholders. The impact is, therefore,
to either increase or decrease profit before tax with a corresponding change in
the tax charge. Other items classified within policyholder interests volatility
include the effects of investment vehicles which are only majority owned by the
long-term assurance funds. In the case of these vehicles, the Group's profit for
the year includes the minorities' share of the profits earned. As these amounts
do not accrue to the equity holders, management believes a clearer
representation of the underlying performance of the Group's life and pensions
businesses is presented by excluding policyholder interests volatility.
During 2006, profit before tax included positive policyholder interests
volatility of GBP326 million, being a charge of GBP33 million to net interest
income and a credit of GBP359 million to other income (2005: GBP311 million,
being a credit to other income). The increase reflects an improved return from a
property partnership majority owned by the policyholders, which more than offset
a reduction in the policyholder tax charge as a result of a fall in the capital
values of gilts and bonds and a smaller rise in equity markets.
3. Mortgage lending
2006 2005
Gross new mortgage lending GBP27.6bn GBP26.0bn
Market share of gross new mortgage lending 8.0% 9.0%
Redemptions GBP20.7bn GBP17.7bn
Market share of redemptions 8.8% 9.0%
Net new mortgage lending GBP6.9bn GBP8.3bn
Market share of net new mortgage lending 6.3% 9.1%
Mortgages outstanding (period-end)* GBP95.3bn GBP88.4bn
Market share of mortgages outstanding 8.8% 9.1%
*excluding the effect of IFRS related adjustments in order to conform with industry statistics.
In Cheltenham & Gloucester, the average indexed loan-to-value ratio on the
mortgage portfolio was 44 per cent (31 December 2005: 43 per cent), and the
average loan-to-value ratio for new mortgages and further advances written
during 2006 was 64 per cent (2005: 64 per cent). At 31 December 2006, only 0.6
per cent of balances had an indexed loan-to-value ratio in excess of 95 per cent
(31 December 2005: 0.6 per cent).
Page 36 of 52
4. Group net interest income
2006 2005
GBPm GBPm
Banking margin - new basis
Net interest income 5,122 4,904
Average interest-earning assets, excluding reverse repos 170,743 157,455
Net interest margin 3.00% 3.11%
Banking margin - previous basis
Net interest income 5,662 5,398
Average interest-earning assets, excluding reverse repos 217,076 194,264
Net interest margin 2.61% 2.78%
Statutory basis
Net interest income 5,537 5,671
Average interest-earning assets, excluding reverse repos 226,990 201,813
Net interest margin 2.44% 2.81%
The Group's net interest income includes certain amounts attributable to
policyholders, in addition to the interest earnings on shareholders' funds held
in the Group's insurance businesses. In addition, the introduction of IFRS has
significantly affected the Group net interest margin with regard to the
accounting treatment of a number of Financial Markets, Structured Finance and
other products, principally those where funding costs are treated as an interest
expense and related revenues are recognised within other income. In order to
enhance comparability in the Group's banking net interest margin these items
have been excluded from the previous reporting basis in determining both net
interest income and average interest-earning assets on the new basis.
A reconciliation of banking net interest income to Group net interest income
follows:
2006 2005
GBPm GBPm
Banking net interest income - new basis 5,122 4,904
Products and Markets, and other 540 494
Banking net interest income - previous basis 5,662 5,398
Volatility (167) (73)
Insurance grossing adjustment 78 310
Other (36) 36
Group net interest income 5,537 5,671
Page 37 of 52
5. Other income
2006 2005
GBPm GBPm
Excluding volatility
Fees and commissions receivable:
UK current account fees 652 593
Other UK fees and commissions 1,210 1,041
Insurance broking 629 681
Card services 493 545
International fees and commissions 132 130
3,116 2,990
Fees and commissions payable (846) (842)
Net fees and commissions income 2,270 2,148
Net trading income 5,848 8,859
Insurance premium income 4,719 4,469
Other operating income 725 881
Total other income* 13,562 16,357
Insurance claims (8,569) (12,186)
Total other income, net of insurance claims* 4,993 4,171
Volatility
- Banking 133 (45)
- Insurance 82 432
- Policyholder interests 359 311
Total other income, net of insurance claims 5,567 4,869
*excluding volatility. For statutory reporting purposes, volatility totalling GBP574 million in 2006 (2005: GBP698
million) is included in total other income; comprising net trading income of GBP493 million (2005: GBP439 million) and
other operating income of GBP81 million (2005: GBP259 million).
6. General insurance income
2006 2005
GBPm GBPm
Premium income from underwriting
Creditor 180 127
Home 424 441
Health 13 16
Reinsurance premiums (17) (22)
600 562
Commissions from insurance broking
Creditor 377 396
Home 47 49
Health 13 15
Other 192 221
629 681
Page 38 of 52
7. Operating expenses
2006 2005
GBPm GBPm
Administrative expenses:
Staff:
Salaries 2,117 2,068
National insurance 161 154
Pensions
- Before pension schemes related credit 293 308
- Pension schemes related credit (128) -
165 308
Other staff costs 298 325
2,741 2,855
Premises and equipment:
Rent and rates 310 305
Hire of equipment 15 13
Repairs and maintenance 165 136
Other 149 152
639 606
Other expenses:
Communications and external data processing 499 467
Advertising and promotion 184 207
Professional fees 231 216
Provisions for customer redress - 150
Other 388 325
1,302 1,365
Administrative expenses 4,682 4,826
Depreciation and amortisation 619 639
Impairment of goodwill - 6
Total operating expenses 5,301 5,471
Cost:income ratio - statutory basis* 47.7% 51.9%
Cost:income ratio - excluding volatility, provisions for customer 50.8% 52.8%
redress, the strengthening of reserves for mortality and pension
schemes related credit*
*total operating expenses divided by total income, net of insurance claims.
8. Number of employees (full-time equivalent)
2006 2005
UK Retail Banking 30,903 33,253
Insurance and Investments 5,837 6,131
Wholesale and International Banking 19,260 19,716
Other, largely IT and Operations 9,499 10,678
65,499 69,778
Agency staff (FTE) (2,869) (2,981)
Total number of employees (full-time equivalent) 62,630 66,797
Page 39 of 52
9. Impairment losses on loans and advances
2006 2005
GBPm GBPm
Impairment losses on loans and advances (see below) 1,560 1,302
Other credit risk provisions (5) (3)
1,555 1,299
Impairment losses on loans and advances
UK Retail Banking
Personal loans/overdrafts 740 656
Credit cards 490 396
Mortgages 8 13
1,238 1,065
Wholesale and International Banking 313 191
Central group items 9 46
Total charge 1,560 1,302
Charge as % of average lending: % %
Personal loans/overdrafts 5.85 5.33
Credit cards 6.99 5.80
Mortgages 0.01 0.02
UK Retail Banking 1.18 1.09
Wholesale and International Banking 0.39 0.28
Total charge 0.83 0.76
In the analysis of impairment losses set out above, the losses attributable to
the Goldfish business, which was sold in December 2005, have been transferred
into Central group items in order to allow a meaningful comparison of the
results of UK Retail Banking.
Page 40 of 52
10. Retirement benefit obligations
The amounts recognised in the balance sheet are as follows:
31 December 31 December
2006 2005
GBPm GBPm
Defined benefit pension schemes
Present value of scheme liabilities 17,378 17,320
Fair value of scheme assets (15,279) (14,026)
Net defined benefit scheme deficit 2,099 3,294
Unrecognised actuarial gains (losses) 263 (485)
Net recognised defined benefit scheme deficit 2,362 2,809
Other post-retirement benefit schemes 100 101
Net recognised liability 2,462 2,910
Deferred tax (739) (873)
Recognised liability after tax 1,723 2,037
The Group's defined benefit pension schemes' gross deficit at 31 December 2006
improved by GBP1,195 million to GBP2,099 million, comprising net recognised
liabilities of GBP2,362 million partly offset by unrecognised actuarial gains of
GBP263 million. This improvement largely reflects continued strong returns from
the schemes' assets, Group contributions to the schemes and an increase in the
real discount rate used to value the schemes' liabilities, which exceeded the
cost of accruing benefits. The decision to stop augmenting the pension
entitlement of employees taking early retirement reduced the pension deficit by
GBP129 million.
In 2006, the Group reached agreement with the trustees of the Group's two
principal pension schemes to fund the schemes' actuarial funding deficits of
approximately GBP1.5 billion, as at 30 June 2005, over a period of ten years.
The Group also indicated that it expected to continue making additional
voluntary contributions to the schemes. Further interim actuarial valuations of
the schemes were carried out on behalf of the schemes' Trustees as at 30 June
2006; these valuations showed a significant reduction in the deficits to
approximately GBP0.3 billion.
The Group's contributions to its pension schemes are as follows:
2006 2005
GBPm GBPm
Normal service contributions 242 195
Past service costs 32 15
Agreed deficit contributions 195 65
Additional voluntary contributions 81 144
550 419
Page 41 of 52
11. Capital ratios
31 December 31 December
2006 2005
Capital GBPm GBPm
Tier 1
Share capital and reserves 11,155 10,195
Less: AFS revaluation reserve and cash flow hedging reserve (12) (40)
Regulatory post-retirement benefit adjustments 1,041 1,372
Core tier 1 capital instruments 1,610 577
Innovative tier 1 capital instruments 1,372 1,905
Less: restriction in amount eligible - (183)
Goodwill (2,377) (2,373)
Other items 39 25
Total tier 1 capital 12,828 11,478
Tier 2
Undated loan capital 4,390 4,551
Dated loan capital 3,624 3,903
Innovative capital restricted from tier 1 - 183
Collectively assessed provisions 1,951 1,782
AFS revaluation reserve in respect of equities - 28
Total tier 2 capital 9,965 10,447
22,793 21,925
Supervisory deductions
Life and pensions businesses (5,368) (5,478)
Other deductions (790) (682)
Total supervisory deductions (6,158) (6,160)
Total capital 16,635 15,765
Risk-weighted assets GBPbn GBPbn
UK Retail Banking 59.1 60.4
Insurance and Investments 3.1 2.6
Wholesale and International Banking 91.8 80.1
Central group items 2.0 1.8
Total risk-weighted assets 156.0 144.9
Risk asset ratios
Total capital 10.7% 10.9%
Tier 1 8.2% 7.9%
2006 2005
Post-tax return on average risk-weighted assets 1.89% 1.81%
Post-tax return on average risk-weighted assets* 1.72% 1.77%
*excluding volatility, pension schemes related credit and, in 2005, profit on sale and closure of
businesses, customer redress provisions and strengthening of reserves for mortality.
Page 42 of 52
12. Balance sheet information
31 December 31 December
2006 2005
GBPm GBPm
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 3,739 3,604
Interest bearing current accounts 40,906 37,976
Savings and investment accounts 64,380 60,522
Other customer deposits 19,134 16,809
Total sterling 128,159 118,911
Currency 11,183 12,159
Total deposits - customer accounts 139,342 131,070
Loans and advances to customers
Domestic:
Agriculture, forestry and fishing 2,905 2,451
Energy and water supply 2,024 1,592
Manufacturing 7,513 7,923
Construction 2,332 2,222
Transport, distribution and hotels 10,490 9,465
Postal and communications 831 546
Property companies 12,896 8,713
Financial, business and other services 22,999 21,261
Personal : mortgages 95,601 88,895
: other 23,025 23,280
Lease financing 4,802 5,815
Hire purchase 5,060 4,853
190,478 177,016
Allowance for impairment losses on loans and advances (2,193) (2,072)
Total loans and advances to customers 188,285 174,944
Total loans and advances to customers in our international businesses totalled
GBP5,589 million (2005: GBP4,819 million).
13. Profit on sale and closure of businesses
In December 2005, the Group announced the disposal of its Goldfish credit card
business and this, together with additional costs incurred in relation to
business closures or previous disposals, led to a net profit of GBP50 million
being recognised in the income statement for the year ended 31 December 2005.
Page 43 of 52
14. Economic profit
2006 2005
GBPm GBPm
Statutory basis
Average shareholders' equity 10,531 9,747
Profit attributable to equity shareholders 2,803 2,493
Less: notional charge (948) (877)
Economic profit 1,855 1,616
Excluding volatility, profit on sale and closure of businesses, customer
redress provisions, strengthening of reserves for mortality and pension
schemes related credit
Average shareholders' equity 10,490 9,716
Profit attributable to equity shareholders 2,636 2,475
Less: notional charge (944) (874)
Economic profit 1,692 1,601
Economic profit represents the difference between the earnings on the equity
invested in a business and the cost of the equity. The notional charge has been
calculated by multiplying average shareholders' equity by the cost of equity
used by the Group of 9 per cent (2005: 9 per cent).
15. Earnings per share
Statutory basis 2006 2005
Basic
Profit attributable to equity shareholders GBP2,803m GBP2,493m
Weighted average number of ordinary shares in issue 5,616m 5,595m
Earnings per share 49.9p 44.6p
Fully diluted
Profit attributable to equity shareholders GBP2,803m GBP2,493m
Weighted average number of ordinary shares in issue 5,667m 5,639m
Earnings per share 49.5p 44.2p
Excluding volatility, profit on sale and closure of businesses,
customer redress provisions, strengthening of reserves for mortality
and pension schemes related credit
Profit attributable to equity shareholders GBP2,636m GBP2,475m
Weighted average number of ordinary shares in issue 5,616m 5,595m
Earnings per share 46.9p 44.2p
Page 44 of 52
16. Scottish Widows - realistic balance sheet information
Financial Services Authority (FSA) returns for large with-profits companies now
include realistic balance sheet information. The information included in FSA
returns concentrates on the position of the With Profits Fund. However, under
the Scottish Widows demutualisation structure, which was court approved, the
fund is underpinned by certain assets outside the With Profits Fund and it is
more appropriate to consider the long-term fund position as a whole to measure
the realistic capital position of Scottish Widows. The estimated position at 31
December 2006, allowing for a proposed transfer of GBP750 million from the
Long-Term Fund to the Shareholder Fund, is shown below, together with the actual
position at 31 December 2005.
31 December 2006 (estimated) With Profit Long Term
Fund Fund
GBPbn GBPbn
Available assets, including support account 19.3 22.3
Realistic value of liabilities (18.2) (18.1)
Working capital for fund 1.1 4.2
Working capital ratio 5.8% 18.9%
Risk capital margin cover 5.3 times 17.4 times
31 December 2005 With Profit Long Term
Fund Fund
GBPbn GBPbn
Available assets, including support account 20.4 23.2
Realistic value of liabilities (19.3) (19.1)
Working capital for fund 1.1 4.1
Working capital ratio 5.5% 17.7%
Risk capital margin cover 3.6 times 11.9 times
Page 45 of 52
17. European Embedded Value reporting - results for year ended 31 December
2006
This section provides further details of the Scottish Widows' EEV financial
information.
Composition of EEV balance sheet
2006 2005
GBPm GBPm
Value of in-force business (certainty 3,220 3,466
equivalent)
Value of financial options and guarantees (56) (193)
Cost of capital (248) (262)
Non-market risk (75) (70)
Total value of in-force business 2,841 2,941
Shareholders' net assets 3,572 3,445
Total EEV of covered business 6,413 6,386
Reconciliation of opening EEV balance sheet to closing EEV balance sheet on
covered business
Value of
Shareholders' in-force
net assets business Total
GBPm GBPm GBPm
As at 1 January 2005 3,880 2,581 6,461
Total profit after tax 565 360 925
Dividends (1,000) - (1,000)
As at 31 December 2005 3,445 2,941 6,386
Total profit after tax 873 (100) 773
Dividends (746) - (746)
As at 31 December 2006 3,572 2,841 6,413
During 2006, Scottish Widows adopted the FSA's Policy Statement 06/14 which
amends the reserving requirements for non with-profits business written by life
companies. This has increased shareholders' net assets and reduced the value of
in-force business by approximately GBP400 million.
Analysis of shareholders' net assets on an EEV basis on covered business
Required Free Shareholders'
capital surplus net assets
GBPm GBPm GBPm
As at 1 January 2005 3,058 822 3,880
Total profit after tax (105) 670 565
Debt issued (560) 560 -
Dividends - (1,000) (1,000)
As at 31 December 2005 2,393 1,052 3,445
Total profit after tax (186) 1,059 873
Dividends - (746) (746)
As at 31 December 2006 2,207 1,365 3,572
Page 46 of 52
17. European Embedded Value reporting - results for year ended 31 December
2006 (continued)
2006 summary income statement on an EEV basis
2006 2005
GBPm GBPm
New business profit 346 254
Existing business profit
- Expected return 403 390
- Experience variances 69 12
- Assumption changes (133) (147)
Expected return on shareholders' net assets 167 218
Profit before tax, excluding volatility and other items 852 727
Volatility 176 584
Strengthening of annuitant mortality reserves - (162)
Other items* 76 172
Total profit before tax 1,104 1,321
Attributed shareholder tax (331) (396)
Total profit after tax 773 925
*other items represent amounts not considered attributable to the underlying
performance of the business. The figure in 2006 represents the benefits of the
FSA's Policy Statement 06/14 and an intra-Group transfer of a portfolio of
OEICs. The figure in 2005 represents a similar intra-Group transfer of OEICs,
the capitalisation impact of a lower cost of capital following debt issuance,
and an increase in the value of deferred tax assets.
Page 47 of 52
17. European Embedded Value reporting - results for year to 31 December 2006
(continued)
Economic assumptions
A bottom up approach is used to determine the economic assumptions for valuing
the business in order to determine a market consistent valuation.
The risk-free rate assumed in valuing in-force business is 10 basis points over
the 15 year gilt yield. In valuing financial options and guarantees the
risk-free rate is derived from gilt yields plus 10 basis points, in line with
Scottish Widows' FSA realistic balance sheet assumptions. The table below shows
the range of resulting yields and other key assumptions.
31 December 31 December
2006 2005
% %
isk-free rate (value of in-force) 4.72 4.22
Risk-free rate (financial options and guarantees) 3.91 to 5.41 3.9 to 4.3
Retail price inflation 3.23 2.89
Expense inflation 4.13 3.79
Non-market risk
An allowance for non-market risk is made through the choice of best estimate
assumptions based upon experience, which generally will give the mean expected
financial outcome for shareholders and hence no further allowance for non-market
risk is required. However, in the case of operational risk and the with-profits
fund these are asymmetric in the range of potential outcomes for which an
explicit allowance is made.
Non-economic assumptions
Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed
each year and are based on an analysis of past experience and on management's
view of future experience. These assumptions are intended to represent a best
estimate of future experience as at 31 December 2006.
For OEIC business, the lapse assumption is based on experience which has been
collected over a 20 month period. To recognise that this is a shorter period
than that normally available for life and pensions business, and that this
period has coincided with favourable investment conditions, management have used
a best estimate of the long-term lapse assumption which is higher than indicated
by this 20 month experience. In management's view, the approach and lapse
assumption are both reasonable.
Page 48 of 52
17. European Embedded Value reporting - results for year to 31 December 2006
(continued)
Sensitivity analysis
The table below shows the sensitivity of the EEV and the new business profit
before tax to movements in some of the key assumptions. The impact of a change
in the assumption has only been shown in one direction. The impact can be
assumed to be reasonably symmetrical.
Impact on new
Impact business profit
on EEV before tax
GBPm GBPm
2006 EEV/new business profit before tax 6,413 346
(1) 100 basis points reduction in risk-free rates 237 10
(2) 10% reduction in market values of equity and property assets (228) n/a
(3) 10% reduction in expenses 82 35
(4) 10% reduction in lapses 95 21
(5) 5% reduction in annuitant mortality (88) (5)
(6) 5% reduction in mortality and morbidity (excluding annuitants) 28 3
(7) 100 basis points increase in equity and property returns nil nil
(1) In this sensitivity the impact takes into account the change in the value
of in-force business, financial options and guarantee costs, statutory reserves
and asset values.
(2) The reduction in market values is assumed to have no corresponding change
in dividend or rental yields. The impact on EEV of GBP(228) million comprises a
GBP177 million reduction in the value of in-force business and a GBP51 million
reduction in the shareholders' net assets.
(3) This sensitivity shows the impact of reducing new business and maintenance
expenses to 90 per cent of the expected rate.
(4) This sensitivity shows the impact of reducing lapse and surrender rates to
90 per cent of the expected rate.
(5) This sensitivity shows the impact on our annuity and deferred annuity
business of reducing mortality rates to 95 per cent of the expected rate.
(6) This sensitivity shows the impact of reducing mortality rates on
non-annuity business to 95 per cent of the expected rate.
(7) Under a market consistent valuation, changes in assumed equity and
property returns have no impact on the EEV.
In scenarios (3) to (6) assumptions have been flexed on the basis used to
calculate the value of in-force business and the realistic and the statutory
reserving bases. A change in risk discount rates is not relevant as the risk
discount rate is not an input to a market consistent valuation.
Page 49 of 52
18. Scottish Widows - weighted sales
2006 2005 Change
Weighted sales (regular + 1/10 single) GBPm GBPm %
Life and pensions:
Savings and investments 128 144 (11)
Protection 49 57 (14)
Individual pensions 270 271 -
Corporate and other pensions 322 214 50
Retirement income 98 68 44
Managed fund business 35 50 (30)
Life and pensions 902 804 12
OEICs 290 148 96
Life, pensions and OEICs 1,192 952 25
Bancassurance 403 274 47
Independent financial advisers 679 562 21
Direct 75 66 14
Managed fund business 35 50 (30)
Life, pensions and OEICs 1,192 952 25
New business margin (life and pensions) 31.8% 28.7%
19. Taxation
Under IFRS the Group is required to include in income tax expense the tax
attributable to UK life insurance policyholder earnings and its interests in
Open-ended Investment Companies (OEICs).
The effective tax rate of the Group, excluding the gross policyholder and OEIC
interests from profit before tax and the tax charge, was 28.0 per cent (2005:
27.0 per cent) compared to the standard UK corporation tax rate of 30 per cent.
The effective tax rate including policyholder and OEIC interests was 31.6 per
cent, compared to 33.1 per cent in 2005.
A reconciliation of the charge that would result from applying the standard UK
corporation tax rate to profit before tax to the tax charge, including
policyholder and OEIC interests, is given below:
2006 2005
GBPm GBPm
Profit before tax 4,248 3,820
Tax charge thereon at UK corporation tax rate of 30% 1,274 1,146
Factors affecting charge:
Disallowed and non-taxable items (8) (47)
Overseas tax rate differences (2) (1)
Net tax effect of disposals and unrealised gains (78) (59)
Policyholder and OEIC interests 139 223
Other items 16 3
Tax charge 1,341 1,265
Page 50 of 52
20. Dividend
A final dividend for 2006 of 23.5p (2005: 23.5p) will be paid on 2 May 2007,
making a total for the year of 34.2p (2005: 34.2p).
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Key dates for the
payment of the dividend are:
Shares quoted ex-dividend 7 March 2007
Record date 9 March 2007
Final date for joining or leaving the dividend reinvestment plan 4 April 2007
Final dividend paid 2 May 2007
Annual general meeting 9 May 2007
21. 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 2006 were approved by the
directors on 22 February 2007 and will be delivered to the Registrar of
Companies following publication on 31 March 2007. 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.
Page 51 of 52
contacts
For further information please contact:-
Michael Oliver
Director of Investor Relations
Lloyds TSB Group plc
020 7356 2167
Email: [email protected]
Sarah Pollard
Senior Manager, Investor Relations
Lloyds TSB Group plc
020 7356 1571
Email: [email protected]
Mary Walsh
Director of Corporate Relations
Lloyds TSB Group plc
020 7356 2121
Email: [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.
A copy of the Group's corporate responsibility report may be obtained by writing
to Corporate Responsibility, Lloyds TSB Group plc, 25 Gresham Street, London
EC2V 7HN. This information together with the Group's code of business conduct
is also available on the Group's website.
Registered office: Lloyds TSB Group plc, Henry Duncan House, 120 George Street,
Edinburgh, EH2 4LH. Registered in Scotland no. 95000.
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: 23 February 2007