2002 Results
Lloyds TSB Group PLC
13 February 2003
Lloyds TSB Group plc
2002 Results
PRESENTATION OF RESULTS
During 2002 the Group implemented a number of changes in accounting policies
following the issue of new accounting standards and guidelines: Urgent Issues
Task Force Abstract 33 - Obligations in Capital Instruments, FRS 17 - Retirement
Benefits, FRS 19 - Deferred Tax, and detailed guidance from the Association of
British Insurers (ABI) for best practice in the preparation of results using the
achieved profits method of accounting. In accordance with the requirements of
accounting standards, the Group has restated comparative figures to reflect
these changes (page 44, note 1).
In order to provide a clearer representation of the underlying performance, the
results of the Group's life and pensions business include investment earnings
calculated using longer-term investment rates of return and annual management
charges based on unsmoothed fund values (page 48, note 5). The difference
between the normalised investment earnings and the actual return ("the
investment variance") together with the impact of changes in the economic
assumptions used in the embedded value calculation (page 49, note 6) have been
separately analysed and a reconciliation to the Group's profit before tax is
given on page 15.
CONTENTS
Page
Performance highlights and Chairman's comments 1
Group Chief Executive's statement 2
Summary of results 6
Review of financial performance 7
Consolidated profit and loss account 11
Consolidated balance sheet 12
Other statements 13
Consolidated cash flow statement 14
Profit before tax by main businesses 15
Performance by sector 17
Income 32
Operating expenses 37
Number of employees 39
Credit quality 40
Capital ratios 42
Balance sheet information 43
Notes 44
Contacts for further information 52
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the
business, strategy and plans of the Lloyds TSB Group, its current goals and
expectations relating to its future financial condition and performance. By
their nature, forward looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
Lloyds TSB Group's actual future results may differ materially from the
results expressed or implied in these forward looking statements as a result of
a variety of factors, including UK domestic and global economic and business
conditions, risks concerning borrower credit quality, market related risks such
as interest rate risk and exchange rate risk in its banking business and equity
risk in its insurance businesses, changing demographic trends, unexpected
changes to regulation or regulatory actions, changes in customer preferences,
competition and other factors. Please refer to the latest Annual Report on Form
20-F of Lloyds TSB Group filed with the US Securities and Exchange Commission
for a discussion of such factors.
LLOYDS TSB GROUP 2002 RESULTS
PERFORMANCE HIGHLIGHTS
Results
• Total income decreased by £11 million to £8,878 million.
• Operating expenses increased by 3 per cent to £4,915 million.
• Trading surplus decreased by 4 per cent to £3,963 million.
• Profit before tax decreased by £554 million to £2,607 million.
Excluding changes in economic assumptions and investment variance,
profit before tax decreased by £516 million, or 13 per cent,
to £3,504 million.
• Profit attributable to shareholders decreased by 20 per cent to
£1,781 million.
• Earnings per share decreased by 21 per cent to 32.0p.
• Economic profit decreased by 27 per cent to £821 million.
• Post-tax return on average shareholders' equity 16.7 per cent.
Excluding changes in economic assumptions and investment variance,
post-tax return on average shareholders' equity was 23.0 per cent.
• Total capital ratio 9.6 per cent, tier 1 capital ratio 7.8 per cent.
• Final dividend of 23.5p per share, making a total of 34.2p for the
year, an increase of 1.5 per cent.
Achievements in 2002 include:
• Total income, adjusted for investment variance, acquisitions and
other specified items, increased by 2 per cent to £9,484 million
(page 50, note 8).
• Operating expenses, excluding the impact of acquisitions and the
netting of operating lease depreciation, were flat at £4,580 million
(page 50, note 8).
• Customer lending grew by 9 per cent to £134.5 billion and customer
deposits increased by 7 per cent to £116.3 billion.
• Significant repositioning of UK Retail Banking to support customer
franchise development and growth.
• Improved market share in many key product areas, including personal
lending, credit cards, life, pensions and long-term savings and, in
the fourth quarter of 2002, mortgages.
Commenting on the results Lloyds TSB Group chairman, Maarten van den Bergh said:
-
"Against a background of significant stockmarket turbulence and uncertainty in
global economies, Lloyds TSB has produced a satisfactory underlying performance
despite the reduction in Group profits. The Group's core businesses continued
to perform well with good customer lending and deposit growth, and some strong
market share gains, accompanied by rigorous cost control."
Page 1 of 52
LLOYDS TSB GROUP
GROUP CHIEF EXECUTIVE'S STATEMENT
The trading environment of 2002 has been a substantial challenge for both the
financial services industry and, within it, Lloyds TSB. In order to prosper in
such a challenging environment it remains essential that the Lloyds TSB Group
has in place a clearly defined strategy. To this end we remain committed to
maximising shareholder value over time through leveraging world class leadership
and management of our people to achieve our three strategic aims. We have made
progress in a number of areas.
The year has been characterised by some encouraging features but also by a
number of issues which have adversely affected the profit and loss account. The
encouraging side of the story is the growth in market share in personal loans,
credit cards, general insurance, and life and pensions, and the fact that we
sold more products to more people than we have ever done before, with a record
net increase in products of 1.6 million compared with 1.3 million last year.
Our improved cross-selling ratio of 2.5 products per customer remains industry
leading. Customer lending increased by 9 per cent and customer deposits
increased by 7 per cent. Our efficiency programme delivered benefits in 2002 in
line with our forecasts resulting in a significant improvement in our underlying
efficiency. Excluding the impact of acquisitions and operating lease
depreciation, operating costs were flat in comparison with 2001, and there was a
reduction in our headcount of over 4,000. At the same time we have continued to
invest heavily in improving our service to customers.
All these factors augur well for future sustainable growth. However, we have
also had to absorb a number of significant hits to our profit and loss account.
During the year we have experienced a reduction in profit of £952 million as a
result of the adverse investment variance following the 24 per cent fall in the
FT All Share Index during 2002. We have increased the Group's general provision
by £50 million in respect of our business in Argentina and significantly
increased our provisions in respect of certain US corporate customers as a
result of their accounting and other irregularities. In addition, we have
absorbed provisions totalling £205 million for redress to past purchasers of
pensions and Abbey Life endowment and long-term savings products, much of which
relates to policies written in the late 1980s and early 1990s. The Group has
also experienced a reduction of £59 million in unit trust and asset management
fees, largely as a result of stockmarket falls, a cost of £57 million to reflect
the implementation of revised mortality assumptions in the Group's life
businesses, and a £142 million reduction in income as a result of lower other
finance income, following the adoption of Financial Reporting Standard 17. The
overall impact of these issues meant that the Group's statutory pre-tax profits
fell to £2,607 million from £3,161 million in 2001, and earnings per share fell
by 21 per cent to 32.0p. Our post-tax return on equity was 16.7 per cent.
Excluding changes in economic assumptions and investment variance, our post-tax
return on equity was 23.0 per cent.
Within our businesses, the performance of retail banking is now benefiting from
the substantial investments we have made to reposition the business for
profitable growth. Product sales were at an all time high during 2002 and the
Group continues to grow its current account customer franchise in the light of
intense competition. Scottish Widows, in line with the rest of the life
assurance industry, has experienced difficult trading conditions as a result of
the considerable fall in equity markets. However, we believe the long-term
growth prospects for this sector of the market, and for Scottish Widows in
particular, remain good. The long-term winners will be those with extensive
customer franchises and distribution reach, augmented by economies of scale and
strong brand power.
Page 2 of 52
LLOYDS TSB GROUP
We have these in abundance. Our market leading general insurance business has
continued to prosper and delivered very strong profitable growth, with pre-tax
profits increasing by 16 per cent, compared with 2001.
In our wholesale markets and international banking businesses good growth has
continued to be achieved in a number of our specialist businesses, although this
growth has been offset by a significant increase in the level of corporate bad
and doubtful debt provisions. Whilst overall credit quality continues to be
robust, the Group does have a cautious outlook on a number of corporate sectors
and exposures which has led to these higher levels of corporate provisioning.
The economic situation in Argentina continues to be difficult and the outlook is
likely to remain uncertain at least until after the new Argentine government
takes office during 2003. During 2002 the Group increased its general provision
for its exposure to Argentina by £50 million and the Group's total exposure to
Argentina at the end of the year had been reduced to £190 million, net of
provisions and charges, compared to £610 million a year ago.
Against the volatile background, it is essential that we are not swayed from the
successful implementation of our vision and strategic aims.
As a Group we have a unifying vision whereby our first strategic aim is to be
first choice for our customers because we understand and meet their needs more
effectively than any of our competitors. It is a vision of a business where we
truly create value for our customers; where our customers trust us enough to
give us the privilege of looking after more of their business. It is a vision
of a business where our staff understand the Group's strategy, understand what
we are seeking to do, agree with it and know that what they do is vital to our
future success. Our second strategic aim of being a leader in our chosen
markets also links in to the customer. Market leaders earn higher returns and
generate greater value, some of which can be passed on to the customer. Our
third strategic aim of driving down day-to-day operational costs allows the
Group to create headroom to invest for the future. Throughout the Group these
three themes underpin the development of our businesses and in the last twelve
months considerable progress has been made to meet these strategic aims and our
world class aspirations.
First choice for our customers
The Group's strategy of maximising shareholder value over time can only be
sustainably achieved by putting our customers at the heart of everything we do.
Lloyds TSB's multi-channel banking infrastructure, including internet and
telephony services, means that the Group can provide its customers with
significant options in terms of both convenience and choice. The knowledge and
expertise of our staff ensures that the Group provides comprehensive financial
solutions to meet the needs of all of our customers. But the environment in
which we work is changing rapidly as customer needs are evolving and as
customers continue to seek greater value in terms of the benefits they receive
from their products and services. Customers expect excellent customer service
and error free operation of their banking arrangements. Those organisations
that can develop a reputation for providing excellent customer service will
retain existing customers and attract new ones. Over the last twelve months
Lloyds TSB has made considerable progress in addressing customer service issues,
and these improvements in customer service during 2002 have been a significant
contributory factor to strong recruitment of new customers during the year and
the improvement in the Group's cross selling rates.
Page 3 of 52
LLOYDS TSB GROUP
A leader in our chosen markets
The Group continues to strengthen its market position in many of its key product
areas despite high levels of competition throughout our business. In retail
banking we continue to grow our customer franchise and during 2002 saw income
growth of 5 per cent from our retail banking business. Our personal loan and
credit card portfolios grew by 15 per cent and by 27 per cent respectively,
again showing significant improvements in our market share. In Scottish Widows
the second half of the year showed a good improvement in market share
notwithstanding the very difficult stockmarket environment. In our general
insurance business the Group further enhanced its UK market leadership position
in the distribution of home and creditor insurance to deliver growth in premium
and commission income of 19 per cent. Within asset finance, the Group has
acquired First National Vehicle Holdings, Abbey National Vehicle Finance and the
Dutton-Forshaw Group. These acquisitions have further enhanced the Group's
leading position in UK motor finance. So, in most areas of our business, the
Group continues to maintain and develop market leading positions to enable high
levels of returns to be sustained, or improved.
Driving down our day-to-day costs
The Group is already amongst the leaders in cost efficiency. However, in a
relatively low growth, low inflation and low interest rate macro-economic
environment, cost control remains critically important. Augmented by our
efficiency programmes the Group's control and focus on costs has meant that in
2002 costs, excluding the impact of acquisitions and operating lease
depreciation, were held flat. Overall Group staff numbers decreased by 4,191 to
79,537 during 2002, after adjusting for an increase of 2,328 from acquisitions
during the year. The Group will, of course, continue its significant programme
of investment in improved efficiency, to support business growth.
The Group continues to generate strong cashflows from its banking businesses
and, excluding investment variance, the profit attributable to shareholders in
2002 was £2,496 million. The Board has decided to maintain the final dividend
at 23.5p, to make a total for the year of 34.2p, an increase of 1.5 per cent.
The Board is mindful of the level of dividend cover and, consequently, profit
growth may not necessarily result in increases in dividend. The Board
recognises the importance attached by shareholders to the Group's dividend.
On a personal note, we announced in December last year that I will retire as
Group Chief Executive on 31 May 2003, shortly after my 60th birthday. I have
thoroughly enjoyed my time at Lloyds TSB and it has been a great privilege to
lead this organisation as Chief Executive for the last six years. I am
delighted to hand over the mantle to Eric Daniels, who shares my passion for
this organisation, and my drive to create value for our customers and
shareholders by providing excellent products and superior service. He will be
supported by a fantastic team of over 79,000 people across the Group to whom my
heartfelt thanks go for their help and support over the years.
Page 4 of 52
LLOYDS TSB GROUP
Lloyds TSB is an extremely successful organisation with strong returns on
shareholders' equity and a first class efficiency ratio. However, the Group
does operate in a world of greater competitive ferocity, greater regulation and
a tough global economic environment, exacerbated by concerns over geo-political
stability. The Group has continued to strive constantly to refresh existing and
new revenue streams, build upon its financial and intellectual capital and
optimally manage risk and cost. These are not easy times but we have three
businesses, UK Retail Banking and Mortgages, Insurance and Investments, and
Wholesale Markets and International Banking, all of which have considerable
scope for sustainable profitable growth and which can build on the track record
in income growth which the Group has seen over the last six years, with costs
growing at a considerably slower pace. For any successful business to maintain
and improve on such an excellent track record it is important to go forward with
realism, confidence and excitement about the future. This, we do.
Peter Ellwood
Group Chief Executive
Page 5 of 52
LLOYDS TSB GROUP 2002 RESULTS
SUMMARY OF RESULTS
Increase
2002 2001 (Decrease)
Results £m £m %
Total income 8,878 8,889 -
Operating expenses 4,915 4,776 3
Trading surplus 3,963 4,113 (4)
Provisions for bad and doubtful debts 1,029 747 38
Profit before tax 2,607 3,161 (18)
Profit attributable to shareholders 1,781 2,229 (20)
Economic profit (page 47, note 2) 821 1,119 (27)
Earnings per share (pence) 32.0 40.3 (21)
Post-tax return on average shareholders' equity (%) 16.7 18.1
Shareholder value
Closing market price per share (year-end) 446p 746p (40)
Total market value of shareholders' equity £24.8bn £41.5bn (40)
Dividends per share 34.2p 33.7p 1.5
Balance sheet
Shareholders' equity 7,972 10,356 (23)
Total assets 252,758 235,793 7
Net assets per share (pence) 141 184 (23)
Risk asset ratios % %
Total capital 9.6 8.8
Tier 1 capital 7.8 7.8
Page 6 of 52
LLOYDS TSB GROUP
REVIEW OF FINANCIAL PERFORMANCE
In 2002 the Group's profit before tax decreased by £554 million to £2,607
million from £3,161 million in 2001. Total income decreased by £11 million
whilst operating expenses increased by £139 million, or 3 per cent. Excluding
changes in economic assumptions, investment variance, endowment and pension
related provisions, investment returns on the Group's pension scheme assets, the
netting of operating lease depreciation and the impact of acquisitions, total
income increased by 2 per cent whilst total costs, excluding the impact of
acquisitions and operating lease depreciation, were held flat. Customer lending
and deposits continue to grow well with further growth in market share being
achieved in a number of our core markets. Customer lending grew by 9 per cent
to £134.5 billion and customer deposits increased by 7 per cent to £116.3
billion. The Group net interest margin was 3.20 per cent, compared with 3.40
per cent in 2001. This reduction was more than compensated for by increased
volumes, resulting in an increase of 5 per cent in net interest income.
Profit attributable to shareholders was 20 per cent lower at £1,781 million and
earnings per share decreased by 21 per cent to 32.0p. Shareholders' equity
decreased by £2,384 million to £7,972 million following a reduction of £2,331
million in the value of the Group's pension schemes, largely caused by the
significant reduction in equity market values (page 44, note 1). These pension
scheme related movements are ignored for regulatory capital purposes and,
excluding these market movements, shareholders' equity decreased by £53 million.
The post-tax return on average shareholders' equity was 16.7 per cent,
compared to 18.1 per cent in 2001. Excluding changes in economic assumptions
and investment variance, post-tax return on average shareholders' equity was
23.0 per cent. Economic profit decreased by 27 per cent to £821 million. The
post-tax return on average assets was 0.93 per cent, and the post-tax return on
average risk-weighted assets was 1.61 per cent.
Pre-tax profit from UK Retail Banking and Mortgages decreased by £33 million to
£1,172 million, compared to £1,205 million in 2001. Excluding the impact of a
reduction of £57 million in profits from the sale and leaseback of premises and
the non-recurrence of certain provision releases in 2001, profit before tax
increased by £96 million, or 9 per cent. There was strong growth in personal
loans, up 15 per cent, and in credit card lending, up 27 per cent. Current
account and savings and investment account balances, within Retail Banking,
increased by 10 per cent. Overall, retail banking product sales were 6 per cent
higher than in 2001. Costs remained tightly controlled and asset quality
generally remains satisfactory, notwithstanding the general slowdown in economic
activity within the UK. Provisions for bad and doubtful debts increased by £148
million to £563 million, as a result of volume related asset growth in the
personal loan and credit card portfolios and a lower level of recoveries and
releases than in 2001. Overall the arrears position was stable. An improved
arrears position in personal lending was offset by a slight deterioration in the
credit card portfolio.
In the Mortgages business, gross new lending increased by 36 per cent to a
record £19.0 billion, compared with £14.0 billion a year ago. Net new lending
was £5.9 billion, compared with £3.9 billion in 2001, resulting in a market
share of net new lending of 7.5 per cent. The Group's current mortgage pipeline
is at record levels and its market share of net new lending in the second half
of 2002, at 8.8 per cent, was considerably better than in the first half of the
year. Net new lending in the second half of 2002 was £3.9 billion, compared
with £2.0 billion in the first half of the year. The Group's market share of
net new lending in the fourth quarter of 2002 was 10.0 per cent.
Page 7 of 52
LLOYDS TSB GROUP
Profit before tax, excluding changes in economic assumptions and investment
variance, from Insurance and Investments decreased by £190 million, or 13 per
cent, to £1,231 million, partly as a result of a £135 million increase in
provisions for redress to past purchasers of endowment and pension products to
£205 million, and a reduction of £55 million in benefits from experience
variances and assumption changes, largely reflecting the implementation of
revised actuarial mortality assumptions. Overall weighted sales in the Group's
life, pensions and unit trust businesses were £767.6 million compared to £754.7
million last year, an increase of 2 per cent. This increase in weighted sales
reflected a 7 per cent increase in weighted sales from life and pensions, partly
offset by a 13 per cent reduction in weighted sales from unit trusts, largely
caused by the continuing stockmarket volatility which has significantly reduced
customer demand for equity-based ISA products. In the second half of 2002,
weighted sales of £394.9 million were 10 per cent higher than the £358.9 million
in the second half of 2001, and 6 per cent higher than the £372.7 million in the
first half of 2002. Weighted sales from independent financial advisors rose by
25 per cent. There was further strong profit growth from the Group's general
insurance operations. A 19 per cent growth in the combined premium income from
underwriting and commissions from insurance broking led to an increase in profit
before tax of £103 million, or 16 per cent, to £754 million.
Wholesale Markets pre-tax profit decreased by £226 million, or 27 per cent, to
£626 million, partly as a result of a substantial increase in provisions for bad
and doubtful debts. Growth in customer lending, increased operating lease
assets and the impact of acquisitions in the asset finance business resulted in
a £174 million, or 9 per cent, increase in total income. Operating expenses
increased by £202 million, again largely as a result of the asset finance
acquisitions and higher operating lease depreciation. The provisions charge for
bad and doubtful debts increased by £156 million. In 2002, provisions against
Group loans and advances to certain large US corporate customers, caused by
accounting and operational irregularities, totalled some £100 million. There
was also an increase in provisions within the corporate lending portfolio,
reflecting weak equity markets and the slowdown in economic activity in the UK.
In the less favourable economic and trading environment, all the individual
businesses continued to perform well.
International Banking pre-tax profit was £22 million, or 6 per cent, higher at
£379 million compared with 2001. Profits from New Zealand increased by 32 per
cent to £218 million as a result of good growth in all core businesses. Our
consumer finance business in Brazil, Losango Consumer Finance, performed well,
notwithstanding difficult local economic circumstances, and increased pre-tax
profits on a local currency basis by 14 per cent. After the impact of adverse
exchange rate movements, which were partly hedged, Losango made a pre-tax profit
of £40 million, compared with £43 million in 2001.
The total Group charge for bad and doubtful debts was 38 per cent higher at
£1,029 million, compared with £747 million in 2001. In UK Retail Banking the
provisions charge increased by £125 million, or 28 per cent, to £564 million,
largely as a result of volume related asset growth in the personal loan and
credit card portfolios, which grew by 15 per cent and 27 per cent respectively.
In Wholesale Markets the provisions charge increased by £156 million to £311
million, reflecting the higher provisions against certain large US customers and
an increase in the provisions charge from the corporate lending portfolio,
reflecting weak equity markets and the slowdown in economic activity in the UK.
Page 8 of 52
LLOYDS TSB GROUP
International Banking provisions decreased to £162 million from £183 million, as
a result of lower specific provisions in Losango, our consumer finance business
in Brazil, largely reflecting exchange rate movements. The Group's charge for
bad and doubtful debts, expressed as a percentage of average lending, was 0.77
per cent compared to 0.62 per cent in 2001. At the end of the year provisions
for bad and doubtful debts for the Group totalled £1,767 million, representing
over 120 per cent of non-performing loans (2001: 120 per cent), and the level of
non-performing loans increased to £1,414 million, compared with £1,222 million
in December 2001, largely reflecting higher levels of non-performing lending in
the corporate portfolio, and general portfolio growth throughout the Group.
Importantly, non-performing lending as a percentage of total lending was
unchanged at 1.0 per cent. The Group's customer lending portfolio continues to
be heavily influenced by our high quality, relatively low risk, mortgage
business and, as a result, the Group remains well positioned to withstand a
continued economic slowdown.
Since the October presidential election in Brazil the economic situation has
somewhat stabilised. The Group reduced its total exposure to Brazil, net of
provisions, to £1.9 billion during 2002, from £3.3 billion at the end of 2001,
largely from not replacing maturing Government bonds. Economic activity in
Brazil has remained reasonably robust and we believe this relative strength in
the local economy, in conjunction with the significant International Monetary
Fund support package which the newly elected president and incoming government
have indicated they will support, should alleviate current concerns about the
Brazilian economy. The economic situation in Argentina continues to be
difficult and the outlook is likely to remain uncertain at least until after the
new Argentine government takes office during 2003. In 2002 the Group increased
its general provision relating to its exposure to Argentina by £50 million and
the Group's total exposure to Argentina at the end of the year was some £190
million, net of provisions and charges, compared with £610 million at the end of
2001. The Group has now provided for some 50 per cent of its total exposure to
Argentina.
In common with a number of companies in the life assurance industry, the Group
has been carrying out a review of the past sales of certain endowment based and
long-term savings products. As a result the Group has made a provision of £165
million to cover its liability for redress to policyholders in respect of past
sales made, primarily in the late 1980s and early 1990s, by the Abbey Life
salesforce prior to its disposal by the Group in February 2000. The adequacy of
the provision for redress to past purchasers of pension policies has been
reviewed as lower stockmarket levels have increased the expected remaining cost
of redress. The Group has made a final provision for this purpose of £40
million. The Group is also carrying out, in conjunction with the regulator, an
investigation into the appropriateness of sales of a stockmarket related
investment product, the Extra Income & Growth Plan. This investigation is
expected to be completed during 2003, when the Group will be in a position to
estimate the financial effect.
The total capital ratio was 9.6 per cent and the tier 1 capital ratio was 7.8
per cent. Balance sheet assets increased by £17 billion, or 7 per cent, to £253
billion from £236 billion at the end of 2001. Loans and advances to customers
increased by £11.5 billion, or 9 per cent. Risk-weighted assets increased by 13
per cent to £122 billion, from £108 billion at the end of 2001. At the end of
December 2002, the Scottish Widows free asset ratio was an estimated 10.0 per
cent, compared to 11.5 per cent at the end of 2001 (page 50, note 7).
Page 9 of 52
LLOYDS TSB GROUP
Scottish Widows' investment policy for the with-profit fund is determined, in
conjunction with the views of the fund's investment advisors, taking into
account the long-term commitments of the fund. From time to time investment
policy necessitates the use of derivatives and other hedging instruments, and at
the end of 2002 such instruments were held to provide some protection against
the short-term volatility in the UK equity markets. The Group keeps its
investment policy under review. The equity backing ratio for traditional
with-profits policies at 31 December 2002 was 53 per cent (equities 40 per cent;
property 13 per cent). Scottish Widows remains sufficiently well capitalised to
be able to sustain further stockmarket falls without an injection of capital.
During 2002 the Group has not needed to inject additional capital from outside
the Group's insurance businesses into Scottish Widows. Scottish Widows is,
however, well positioned to participate in a rapidly changing market and to
support business growth, as well as maintaining prudent financial management.
The Group may inject some capital into Scottish Widows if the level of the FTSE
100 index falls to, and remains at, approximately 3,000. At this FTSE 100 level
the capital injection is unlikely to exceed £300 million. To optimise the
financial management of the Group's life businesses Lloyds TSB Life was
transferred into the ownership of Scottish Widows in December 2002.
Page 10 of 52
LLOYDS TSB GROUP
CONSOLIDATED PROFIT AND LOSS ACCOUNT
2002 2001
£m £m
Interest receivable:
Interest receivable and similar income arising from
debt securities 567 530
Other interest receivable and similar income 9,982 10,834
Interest payable 5,378 6,442
Net interest income 5,171 4,922
Other finance income 165 307
Other income
Fees and commissions receivable 3,053 2,922
Fees and commissions payable (645) (602)
Dealing profits (before expenses) 188 233
Income from long-term assurance business (303) (29)
General insurance premium income 486 428
Other operating income 763 708
3,542 3,660
Total income 8,878 8,889
Operating expenses
Administrative expenses 4,214 4,226
Depreciation 642 511
Amortisation of goodwill 59 39
Depreciation and amortisation 701 550
Total operating expenses 4,915 4,776
Trading surplus 3,963 4,113
General insurance claims 229 174
Provisions for bad and doubtful debts
Specific 965 736
General 64 11
1,029 747
Amounts written-off fixed asset investments 87 60
Operating profit 2,618 3,132
Income from joint ventures (11) (10)
Profit on sale of businesses - 39
Profit on ordinary activities before tax 2,607 3,161
Tax on profit on ordinary activities 764 875
Profit on ordinary activities after tax 1,843 2,286
Minority interests - equity 19 17
- non-equity 43 40
Profit for the year attributable to shareholders 1,781 2,229
Dividends 1,908 1,872
(Loss) profit for the year (127) 357
Earnings per share 32.0p 40.3p
Diluted earnings per share 31.8p 39.9p
Page 11 of 52
LLOYDS TSB GROUP
CONSOLIDATED BALANCE SHEET
31 December 31 December
2002 2001
Assets £m £m
Cash and balances at central banks 1,140 1,240
Items in course of collection from banks 1,757 1,664
Treasury bills and other eligible bills 2,409 4,412
Loans and advances to banks 17,529 15,224
Loans and advances to customers 134,498 123,059
Non-returnable finance (24) (124)
134,474 122,935
Debt securities 29,314 24,225
Equity shares 206 225
Interests in joint ventures 45 39
Intangible assets 2,634 2,566
Tangible fixed assets 4,096 3,365
Own shares 18 23
Other assets 5,263 4,468
Prepayments and accrued income 2,305 2,296
Post-retirement benefit asset - 356
Long-term assurance business attributable to the shareholder 6,228 6,366
207,418 189,404
Long-term assurance assets attributable to policyholders 45,340 46,389
Total assets 252,758 235,793
Liabilities
Deposits by banks 25,443 24,310
Customer accounts 116,334 109,116
Items in course of transmission to banks 775 534
Debt securities in issue 30,255 24,420
Other liabilities 8,289 6,673
Accruals and deferred income 3,696 3,563
Post-retirement benefit liability 2,077 75
Provisions for liabilities and charges:
Deferred tax 1,317 1,411
Other provisions for liabilities and charges 361 292
Subordinated liabilities:
Undated loan capital 5,496 4,102
Dated loan capital 4,672 4,006
Minority interests:
Equity 37 37
Non-equity 694 509
731 546
Called-up share capital 1,416 1,411
Share premium account 1,093 959
Merger reserve 343 343
Profit and loss account 5,120 7,643
Shareholders' funds (equity) 7,972 10,356
207,418 189,404
Long-term assurance liabilities to policyholders 45,340 46,389
Total liabilities 252,758 235,793
Page 12 of 52
LLOYDS TSB GROUP
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
2002 2001
£m £m
Profit attributable to shareholders 1,781 2,229
Currency translation differences on foreign currency net investments (3) (86)
Actuarial losses recognised in post-retirement benefit schemes (3,299) (2,873)
Deferred tax thereon 968 863
(2,331) (2,010)
Total recognised gains and losses relating to the year (553) 133
Prior year adjustment at 1 January 2002 in respect of current year changes in (404) -
accounting policy (page 44, note 1)
Prior year adjustment in respect of the adoption of FRS 18 - 248
Total gains and losses recognised during the year (957) 381
HISTORICAL COST PROFITS AND LOSSES
There was no material difference between the results as reported and the results
that would have been reported on an unmodified historical cost basis.
Accordingly, no note of historical cost profits and losses has been included.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
2002 2001
£m £m
Profit attributable to shareholders 1,781 2,229
Dividends (1,908) (1,872)
(Loss) profit for the year (127) 357
Currency translation differences on foreign currency net investments (3) (86)
Actuarial losses recognised in post-retirement benefit schemes (2,331) (2,010)
Issue of shares 77 194
Net decrease in shareholders' funds (2,384) (1,545)
Shareholders' funds at beginning of year 10,356 10,024
Prior year adjustment at 1 January 2001 (page 44, note 1) - 1,877
Shareholders' funds at end of year 7,972 10,356
Page 13 of 52
LLOYDS TSB GROUP
CONSOLIDATED CASH FLOW STATEMENT
2002 2001
£m £m
Net cash inflow from operating activities 5,394 9,927
Dividends received from associated undertakings 2 2
Returns on investments and servicing of finance:
Dividends paid to equity minority interests (18) (17)
Payments made to non-equity minority interests (43) (40)
Interest paid on subordinated liabilities (loan capital) (463) (514)
Interest element of finance lease rental payments - (1)
Net cash outflow from returns on investments and
servicing of finance (524) (572)
Taxation:
UK corporation tax (758) (682)
Overseas tax (193) (147)
Total taxation (951) (829)
Capital expenditure and financial investment:
Additions to fixed asset investments (46,830) (47,049)
Disposals of fixed asset investments 45,507 40,530
Additions to tangible fixed assets (1,315) (1,157)
Disposals of tangible fixed assets 359 285
Capital injections to life fund (140) (100)
Net cash outflow from capital expenditure
and financial investment (2,419) (7,491)
Acquisitions and disposals:
Additions to interests in joint ventures (21) (44)
Acquisition of group undertakings (117) (180)
Disposal of group undertakings and businesses - 40
Net cash outflow from acquisitions and disposals (138) (184)
Equity dividends paid (1,903) (1,738)
Net cash outflow before financing (539) (885)
Financing:
Issue of subordinated liabilities (loan capital) 2,120 742
Issue of ordinary share capital net of £62 million
(2001: £185 million) charge in respect of the QUEST 77 194
Repayments of subordinated liabilities (loan capital) (55) (131)
Minority investment in subsidiaries 167 -
Capital element of finance lease rental payments (4) (20)
Net cash inflow from financing 2,305 785
Increase (decrease) in cash 1,766 (100)
Page 14 of 52
LLOYDS TSB GROUP
PROFIT BEFORE TAX BY MAIN BUSINESSES
Increase
2002 2001 (Decrease)
£m £m %
UK Retail Banking and Mortgages 1,172 1,205 (3)
Insurance and Investments 1,231 1,421 (13)
Wholesale Markets 626 852 (27)
International Banking 379 357 6
Central group items 96 185 (48)
Profit before tax, excluding changes in economic assumptions
and investment variance 3,504 4,020 (13)
Changes in economic assumptions (page 49, note 6) 55 -
Investment variance (page 48, note 5) (952) (859)
Profit before tax 2,607 3,161 (18)
2001 figures have been restated to incorporate efficiency programme related
restructuring costs within business units, and the reclassification of emerging
markets debt earnings from International Banking to Central group items.
YEAR END ASSETS BY MAIN BUSINESSES
2002 2001
£m £m
UK Retail Banking 23,279 21,124
Mortgages 62,589 56,858
UK Retail Banking and Mortgages 85,868 77,982
Insurance and Investments* 9,161 9,270
Wholesale Markets 89,066 79,370
International Banking 21,779 21,407
Central group items 1,544 1,375
Total assets* 207,418 189,404
*excluding long-term assurance assets attributable to policyholders
Page 15 of 52
LLOYDS TSB GROUP
SEGMENTAL ANALYSIS
UK Retail
Banking Insurance
and and Wholesale International Central
Mortgages Investments Markets Banking group items Total
Year ended 31 December 2002 £m £m £m £m £m £m
Net interest income 3,340 74 1,158 745 (146) 5,171
Other finance income - - - - 165 165
Other operating income 1,076 1,876 975 374 138 4,439
Total income 4,416 1,950 2,133 1,119 157 9,775
Operating expenses 2,670 490 1,139 578 38 4,915
Trading surplus 1,746 1,460 994 541 119 4,860
General insurance claims - 229 - - - 229
Bad debt provisions 563 - 311 162 (7) 1,029
Amounts written-off
fixed asset investments - - 57 - 30 87
Income from joint ventures (11) - - - - (11)
Profit before tax* 1,172 1,231 626 379 96 3,504
Changes in economic
assumptions - 55 - - - 55
Investment variance - (952) - - - (952)
Profit before tax 1,172 334 626 379 96 2,607
UK Retail
Banking Insurance
and and Wholesale International Central
Mortgages Investments Markets Banking group items Total
Year ended 31 December 2001 £m £m £m £m £m £m
Net interest income 3,102 80 1,096 749 (105) 4,922
Other finance income - - - - 307 307
Other operating income 1,135 2,006 863 345 170 4,519
Total income 4,237 2,086 1,959 1,094 372 9,748
Operating expenses 2,607 491 937 586 155 4,776
Trading surplus 1,630 1,595 1,022 508 217 4,972
General insurance claims - 174 - - - 174
Bad debt provisions 415 - 155 183 (6) 747
Amounts written-off
fixed asset investments - - 15 7 38 60
Income from joint ventures (10) - - - - (10)
Profit on sale of businesses - - - 39 - 39
Profit before tax* 1,205 1,421 852 357 185 4,020
Investment variance - (859) - - - (859)
Profit before tax 1,205 562 852 357 185 3,161
*excluding investment variance and changes in economic assumptions
Page 16 of 52
LLOYDS TSB GROUP
PERFORMANCE BY SECTOR
UK Retail Banking and Mortgages
(covering the Group's UK retail businesses, providing banking and financial
services to personal and small business customers; mortgages; private banking
and stockbroking)
2002 2001
£m £m
Net interest income 3,340 3,102
Other income 1,076 1,135
Total income 4,416 4,237
Operating expenses 2,670 2,607
Trading surplus 1,746 1,630
Provisions for bad and doubtful debts 563 415
Income from joint ventures (11) (10)
Profit before tax 1,172 1,205
Efficiency ratio 60.5% 61.5%
Total assets (period-end) £85.9bn £78.0bn
Total risk-weighted assets (period-end) £54.2bn £48.3bn
Profit before tax from UK Retail Banking and Mortgages decreased by £33 million
to £1,172 million, compared with £1,205 million in 2001. Strong growth in the
Group's consumer lending portfolios and a focus on cost control were offset by
the impact of a number of special items. These included a reduction of £57
million in profits from the sale and leaseback of premises and, in the mortgage,
personal lending and credit card portfolios, the non-recurrence of provision
releases totalling £72 million in 2001. Excluding these items pre-tax profits
increased by 9 per cent.
Total income increased by £179 million, or 4 per cent, to £4,416 million.
Excluding the 2001 profits from the sale and leaseback of premises, total income
grew by 6 per cent. Net interest income increased by £238 million, or 8 per
cent, to £3,340 million. Personal loans and credit card lending increased by 15
per cent and 27 per cent respectively and, within Retail Banking, balances on
current accounts and savings and investment accounts grew by 10 per cent.
Mortgage balances outstanding increased by 10 per cent to £62.5 billion.
Other income decreased by £59 million to £1,076 million. There was an
improvement in income earned from credit and debit cards, and increased income
from added value current accounts, but this was offset by a higher level of fees
and commissions payable and a reduction of £57 million in profits from the sale
and leaseback of premises, as the Group's strategy of converting much of its
branch portfolio from freehold tenure to leasehold is almost complete.
Page 17 of 52
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
Operating expenses increased by £63 million, or 2 per cent, to £2,670 million
during 2002, compared to £2,607 million in 2001. Staff numbers decreased by
3,329 to 47,895. The trading surplus increased by £116 million, or 7 per cent,
to £1,746 million. Bad debt provisions increased by £148 million to £563
million, as a result of volume related asset growth in the personal loan and
credit card portfolios and a lower level of recoveries and releases than in
2001. Excluding the impact of the non-recurrence of provision releases
totalling £72 million in 2001, the provisions charge as a percentage of average
lending for personal loans and overdrafts decreased to 3.73 per cent, from 3.88
per cent in 2001, and the charge in the credit card portfolio decreased to 3.52
per cent, from 3.60 per cent in 2001. Overall the arrears position remained
stable.
Provisions for bad and doubtful debts by product 2002 2001
Charge as a percentage of average lending* % %
Personal loans/overdrafts 3.73 3.88
Credit cards 3.52 3.60
Business Banking 1.22 1.05
Mortgages 0.00 0.01
*excluding the impact of the non-recurrence of provision releases totalling £72 million in 2001
UK Retail Banking has the responsibility for managing the core relationship with
our current account customers and, therefore, acts as the principal gateway for
the cross-sale of our full range of bancassurance products and services. As
such it contributes significantly to the profitability of other businesses.
There were good market share gains, particularly in customer deposits, credit
cards and personal lending, and greater unit cost efficiencies, offset by the
higher level of provisions for bad and doubtful debts. The Group is now
starting to see the benefit of recent investments made in the strategic
repositioning of the retail bank, which is well positioned to capture the
benefits of future customer franchise development and growth.
We continue to offer a comprehensive multichannel distribution service to our
customers. In addition to our network of over 2,000 branches, lloydstsb.com,
our internet banking system, continues to grow and remains one of the most
visited financial websites in Europe. Over 450,000 product sales were achieved
via the internet in 2002, more than four times the number achieved in 2001. Our
telephone banking operation, comprising PhoneBank and PhoneBank Express, is one
of the largest in the UK with over 3 million registered customers. Our
telephone banking contact centres handled some 46 million calls in 2002, making
extensive use of interactive voice recognition technology to improve efficiency
and service.
The retail bank continued to develop its strategy of building deeper customer
relationships, particularly with our higher value customers, which has resulted
in good growth in customer lending and deposit balances. Our relationship
offers will be extended further in 2003 with the launch of the Premier Service,
which has been successfully piloted in 2002, and the extension of our existing
Personal Choice programme. Results from both of these programmes have already
shown improved business flows and enhanced customer loyalty as we seek to meet a
greater share of our customers' financial needs, supported by the application of
our advanced customer relationship management tools.
Page 18 of 52
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
The recent launch of the Group's new, market leading, credit interest current
account reflects the Group's continuing commitment to invest in developing its
retail banking franchise by attracting new high quality customers, and rewarding
both new and existing customers for using lower cost distribution channels.
Business Banking continued to grow its customer franchise with customer deposits
growing by 8 per cent to £9,412 million from £8,715 million in December 2001,
and customer lending by 1 per cent to £5,487 million from £5,435 million in
December 2001. Following the launch of the Group's unique segmentation strategy
for the Business Banking market in 2001, roll-out to all existing customers is
complete with customers now migrated to their choice of relationship offer.
Underpinning these offers, and central to ensuring that our customers continue
to grow their businesses successfully, is RouteMap, a suite of diagnostic tools
to help and support customers. Use of success4business.com, our small business
portal, also continues to grow.
In March 2002, the Competition Commission's report, following its investigation
into the supply of banking services to small and medium size enterprises (SMEs),
was published by the government. The Group has implemented the remedies
suggested by the Competition Commission and, as a result, it is likely that the
annualised impact on profit before tax will be a reduction of some £150 million,
based on the Group's forecast level of interest rates.
Page 19 of 52
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
Mortgages 2002 2001
Gross new mortgage lending £19.0bn £14.0bn
Market share of gross new mortgage lending 8.7% 8.7%
Net new mortgage lending £5.9bn £3.9bn
Market share of net new mortgage lending 7.5% 7.2%
Mortgages outstanding (period-end) £62.5bn £56.6bn
Market share of mortgages outstanding 9.3% 9.5%
Gross new lending increased by 36 per cent to a record £19.0 billion, compared
with £14.0 billion a year ago. Net new lending increased to £5.9 billion
resulting in a market share of net new lending of 7.5 per cent. Mortgage
balances outstanding increased by 10 per cent to £62.5 billion.
Mortgages remain a key recruitment vehicle in support of the Group's cross-sell
targets and, during 2002, the Group's key objective in the mortgage business has
been to achieve an appropriate balance between market share growth and
profitability. Gross new mortgage lending of £19.0 billion during the year was
a record for the Group, and the Group's market share of net new lending in the
second half of 2002, at 8.8 per cent, was considerably better than in the first
half of the year. Net new lending in the second half of 2002 was £3.9 billion,
compared with £2.0 billion in the first half of the year. The Group's market
share of net new lending in the fourth quarter of 2002 was 10.0 per cent.
The Group continues to be one of the most efficient mortgage providers in the
UK. C&G continues to benefit from mortgage sales distribution through the
Lloyds TSB branch network, the IFA market and from the strength of the C&G
brand. In addition C&G Teledirect, its internet and telephone operation,
continued to perform strongly. Business levels sourced from intermediaries
remain strong and, for the eighth consecutive year, C&G received a 5-star award
from the Association of Independent Financial Advisors, an achievement
unequalled by any UK financial services provider.
A slightly improved arrears position and the beneficial effect of house price
increases have meant that bad debt provisions remained at low levels. New
provisions were offset by releases and recoveries resulting in a £1 million net
provisions release for the year, compared with a net release of £24 million in
2001 which resulted from a release of £32 million of the Group's mortgage
general provision. The quality of our mortgage lending continues to be
satisfactory. The average indexed loan-to-value ratio on the C&G mortgage
portfolio was 46 per cent and the average loan-to-value ratio for C&G mortgage
business written during 2002 was 67 per cent. C&G has a policy of not exceeding
a 95 per cent loan-to-value ratio on new lending.
Page 20 of 52
LLOYDS TSB GROUP
Insurance and Investments
(the life, pensions and unit trust businesses of Scottish Widows and Abbey Life;
general insurance underwriting and broking; and Scottish Widows Investment
Partnership)
2002 2001
£m £m
Net interest income 74 80
Other income 1,876 2,006
Total income 1,950 2,086
Operating expenses 490 491
Trading surplus 1,460 1,595
General insurance claims 229 174
Profit before tax* 1,231 1,421
Changes in economic assumptions 55 -
Investment variance (952) (859)
*excluding changes in economic assumptions and investment variance
2002 2001
£m £m
Life, pensions and unit trusts
Scottish Widows 573 585
Abbey Life (98) 175
475 760
General insurance 754 651
Operating profit from Insurance 1,229 1,411
Scottish Widows Investment Partnership 2 10
Profit before tax* 1,231 1,421
*excluding changes in economic assumptions and investment variance
Profit before tax from Insurance and Investments, excluding changes in economic
assumptions and investment variance, decreased by £190 million, or 13 per cent,
to £1,231 million, from £1,421 million in 2001. On the same basis, profit
before tax from our life, pensions and unit trust businesses decreased by £285
million, or 38 per cent, to £475 million, partly as a result of a £135 million
increase in provisions for redress to past purchasers of endowment and pension
products, but also following a reduction of £55 million in benefits from
experience variances and actuarial assumption changes. The market for medium
and long-term investments continued to be adversely affected by the continued
volatility in global stockmarkets. Total sales from the Group's life, pensions
and unit trust businesses were £4,456.3 million, compared with £4,423.5 million
in 2001, an increase of 1 per cent. Overall weighted sales were £767.6 million
compared to £754.7 million last year, an increase of 2 per cent. This increase
in weighted sales reflected a 7 per cent increase in weighted sales from life
and pensions, partly offset by a 13 per cent reduction in weighted sales from
unit trusts and equity-based ISAs, largely caused by the continuing volatility
in global stockmarkets throughout 2002. In the second half of 2002, weighted
sales of £394.9 million were 10 per cent higher than the £358.9 million in the
second half of 2001, and 6 per cent higher than the £372.7 million in the first
half of 2002.
Page 21 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
The Group's market share of the life, pensions and unit trusts market to
September 2002 was 5.3 per cent, with a market share in the third quarter of
2002 of 5.9 per cent. By distribution channel, weighted sales from independent
financial advisors rose by 25 per cent as a result of strong life and pensions
sales. This compares with an increase of 11 per cent in the first half of the
year, compared with the first half of 2001. Our share of the IFA market to
September 2002 was 4.5 per cent, a significant improvement on the 3.8 per cent
market share in 2001. In the branch network weighted sales were 7 per cent
lower, as a result of the substantial reduction in sales of unit trusts, in
comparison to a 10 per cent reduction in the first half of the year, compared
with the first half of 2001. Scottish Widows remains the leading equity-based
ISA provider in the UK as confirmed by the Investment Management Association
(IMA) and the Group remains well placed in this sector of the market.
A major programme to convert our unit trust range of some 80 funds into a range
of Open Ended Investment Companies (OEICs) has now been completed and the
resulting simpler range of mutual funds means that the Group is well positioned
to take advantage of the likely changes in the market place, in particular the
proposals outlined in the recently published Sandler report.
Profit before tax from general insurance operations, excluding investment
variance, rose by £103 million, or 16 per cent, to a record £754 million, mainly
as a result of continued strong revenue growth from creditor and home insurance.
With over 9 million general insurance policies in force, we estimate that the
Group has market leadership positions in the distribution of home and creditor
insurance.
The principal focus of Scottish Widows Investment Partnership (SWIP) is the
delivery of consistently superior investment performance. Pre-tax profits from
SWIP for the year were £2 million compared with £10 million in 2001, the
reduction in profitability being driven primarily by lower stockmarket levels
and significant investment in new infrastructure to support future business
growth. At the end of the year SWIP had £70 billion of funds under management
out of Groupwide funds under management totalling £98 billion. Overall fund
management performance in 2002 showed a significant improvement. SWIP's largest
UK equity fund, the UK Growth Fund, has achieved a top quartile performance
within its sector over six and twelve months. This improvement in performance
is also reflected in each of SWIP's mainstream, actively managed, UK equity
funds which have all achieved top quartile performance, over a twelve month
period, within their sector. In addition, SWIP now has a total of 14 funds
rated A and above by Standard and Poor's. A number of new products have been
launched during the year, most notably the SWIP Global Liquidity Fund, one of
the largest sterling Institutional Money Market Funds, and the UK Balanced
Property Trust, an innovative closed-end commercial property fund.
The Financial Services Authority has announced the abolition of the polarisation
regime and the Group has been positioning itself to achieve competitive
advantage in the new depolarised world. The Lloyds TSB Group has extensive
interests in both the manufacture and distribution of long-term saving products.
With Scottish Widows continuing to be the best recognised brand in the medium
to long-term savings market and the actions already taken to improve choice by
offering a range of externally managed funds alongside those offered by Scottish
Widows Investment Partnership, the Group remains well placed to prosper in a
depolarised world. In particular, Scottish Widows' unique multi-manager
partnership with Frank Russell has been well received both in the IFA market and
by our own customers.
Page 22 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
2002 2001
£m £m
Total new business premium income
Regular premiums:
Life - mortgage related 35.0 24.7
- non-mortgage related 32.7 19.9
Pensions 212.7 232.8
Health 5.9 4.6
Total regular premiums 286.3 282.0
Single premiums:
Life 1,531.8 1,684.2
Annuities 497.0 338.6
Pensions 1,060.2 718.2
Total single premiums 3,089.0 2,741.0
External unit trust sales:
Regular payments 71.5 65.0
Single amounts 1,009.5 1,335.5
Total external unit trust sales 1,081.0 1,400.5
Weighted sales (regular + 1/10 single)
Life and pensions 595.2 556.1
Unit trusts 172.4 198.6
Life, pensions and unit trusts 767.6 754.7
Weighted sales by distribution channel
Branch network 350.6 376.2
Independent financial advisors 348.5 279.8
Direct 68.5 98.7
Life, pensions and unit trusts 767.6 754.7
Group funds under management £bn £bn
Scottish Widows Investment Partnership 70 78
UK Wealth Management 10 11
International 18 20
98 109
Page 23 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
Life, pensions and unit trusts
2002 2001
£m £m
New business income 398 358
Existing business
- expected return 273 307
- experience variances (1) 37
- assumption changes and other items 78 95
- pension provisions (40) (70)
- Abbey Life endowment provision (165) -
145 369
Investment earnings 214 247
Life and pensions distribution costs (283) (255)
474 719
Unit trusts 90 141
Unit trust distribution costs (89) (100)
1 41
Profit before tax* 475 760
New business margin (life and pensions) 19.3% 18.5%
*excluding changes in economic assumptions and investment variance
New business income increased by 11 per cent supported by a 7 per cent growth in
weighted sales from life and pensions products, and an improved performance in
the more profitable life products. The life and pensions new business margin,
defined as new business income less distribution costs divided by weighted
sales, increased to 19.3 per cent, from 18.5 per cent in 2001. The improvement
largely arose from an improved product mix, particularly higher margin
protection and regular premium life products. The new business margin improved
in all distribution channels.
Profit before tax from existing business fell by 61 per cent to £145 million,
reflecting the £135 million increase in provisions for redress to past
purchasers of endowment and pension products, and a reduction of £55 million in
benefits from experience variances and actuarial assumption changes, largely
reflecting the implementation of revised actuarial mortality assumptions. The
expected return from existing business, which reflects the unwinding of the
long-term discount rate applied to the expected cash flows from the Group's
portfolio of in-force business, decreased by £34 million, or 11 per cent, to
£273 million. This reduction reflects the lower value of in-force business at
the beginning of the year, caused by the effect of lower stockmarkets on annual
management charges.
Page 24 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
Life, pensions and unit trusts (continued)
The Group has, along with other companies in the life assurance industry, been
reviewing the past sales of certain endowment based and long-term savings
products. As a result the Group has made a provision of £165 million to cover
its liability for redress to policyholders in respect of past sales made,
primarily in the late 1980s and early 1990s, by the Abbey Life salesforce prior
to its disposal by the Group in February 2000. The adequacy of the provision
for redress to past purchasers of pension policies has been reviewed as lower
stockmarket levels have increased the expected remaining cost of redress. The
Group has made a final provision for this purpose of £40 million. The Group is
also carrying out, in conjunction with the regulator, an investigation into the
appropriateness of sales of a stockmarket related investment product, the Extra
Income & Growth Plan. This investigation is expected to be completed during
2003, when the Group will be in a position to estimate the financial effect.
Page 25 of 52
LLOYDS TSB GROUP
Insurance and Investments (continued)
General Insurance
2002 2001
£m £m
Premium income from underwriting
Creditor 107 110
Home 350 281
Health 44 45
Re-insurance premiums (15) (8)
486 428
Commissions from insurance broking
Creditor 426 323
Home 44 41
Health 17 22
Other 160 142
647 528
Profit before tax* 754 651
*excluding investment variance
Profit before tax, excluding investment variance, from our general insurance
operations, comprising both underwriting and broking activities, rose by £103
million, or 16 per cent, to £754 million.
Total income increased to a record £1.1 billion. Premium income from
underwriting increased by £58 million, or 14 per cent, largely as a result of
higher home insurance income which increased by 25 per cent. Commissions from
insurance broking increased by £119 million, or 23 per cent, largely as a result
of higher levels of creditor insurance.
New business sales of 2.8 million products were 6 per cent higher than last year
with home, creditor and motor business all growing strongly, particularly
through direct channels (direct mail, telephone, affinity and internet) where
sales grew by 11 per cent. Overall income from creditor insurance increased by
23 per cent, reflecting higher personal sector loan and credit card volumes and
an improved personal lending penetration rate. Home insurance income increased
by 22 per cent, with sales volumes increasing by 7 per cent to 1.2 million
policies.
Claims were £55 million, or 32 per cent, higher at £229 million than in 2001.
The overall claims ratio of 46 per cent was higher than in 2001 (40 per cent)
largely as a result of increased property claims which reflected a 26 per cent
growth in the home underwritten portfolio, and higher weather and flood related
insurance claims.
As a leading distributor of general insurance products, Lloyds TSB now has over
9 million policies in force and we estimate that the Group is a UK market leader
in the distribution of home and creditor insurance.
Page 26 of 52
LLOYDS TSB GROUP
Wholesale Markets
(banking, treasury, large value lease finance, long-term agricultural finance,
share registration, venture capital, and other related services for major UK and
multinational companies, banks and financial institutions, and medium-sized UK
businesses; and Lloyds TSB Asset Finance)
2002 2001
£m £m
Net interest income 1,158 1,096
Other income 975 863
Total income 2,133 1,959
Operating expenses 1,139 937
Trading surplus 994 1,022
Provisions for bad and doubtful debts 311 155
Amounts written-off fixed asset investments 57 15
Profit before tax 626 852
Efficiency ratio 53.4% 47.8%
Total assets (period-end) £89.1bn £79.4bn
Total risk-weighted assets (period-end) £52.9bn £45.4bn
Wholesale Markets pre-tax profit decreased by £226 million, or 27 per cent, to
£626 million. The acquisitions during the year of First National Vehicle
Holdings, Abbey National Vehicle Finance and the Dutton-Forshaw Group had a
significant impact on the figures within Wholesale Markets. In 2002 these
acquisitions contributed £101 million of income, and £102 million of operating
expenses, including goodwill amortisation of £3 million, resulting in a loss
before tax of £1 million. The acquisitions are expected to achieve substantial
synergies in 2003 and beyond.
Net interest income increased by £62 million resulting primarily from asset
growth. Other income increased by £112 million, as an increase in operating
lease rentals of £111 million, largely as a result of the asset finance
acquisitions, and a higher level of insurance commission and corporate banking
fees, were offset by a reduction in the realisations of venture capital gains,
after record gains in 2001. Operating expenses increased by £202 million of
which £102 million reflected the asset finance acquisitions, and a further £33
million reflected an increase in operating lease depreciation.
The charge for provisions for bad and doubtful debts in Wholesale Markets
increased by £156 million. The charge relating to the Group's corporate lending
portfolio increased by £145 million largely as a result of provisions against
the Group's loans and advances to certain large US corporate customers, which
totalled some £100 million, and an increase in the provisions charge against the
corporate lending portfolio, reflecting weak equity markets and the slowdown in
economic activity in the UK. Amounts written-off fixed asset investments
increased by £42 million, as a result of a £21 million write-down relating to
operating irregularities on one specific securitisation issue, and portfolio
growth related write-downs in the Lloyds TSB Development Capital investment
portfolio.
Page 27 of 52
LLOYDS TSB GROUP
Wholesale Markets (continued)
Assets grew by 12 per cent to £89 billion, an increase of £10 billion. Of this
increase, some £5 billion resulted from a growth in debt securities, reflecting
an increase in the Group's portfolio of asset backed securities, most of which
were triple A rated, and £2.6 billion from an increase in customer lending. The
Group's policy to grow its asset backed securities portfolio is conservative,
only targeting high quality tranches of asset backed securities issues,
concentrating on mainstream asset classes such as mortgages, credit cards,
student loans and retail car loans. The portfolio allows the Group to provide a
securitised asset funding service for its corporate clients and to participate
in structured deals with a limited number of global financial institutions. The
high level of recent growth in the portfolio largely reflects the development of
the Group's capability in this market and, having now achieved a meaningful
presence in the market, it is not intended that recent rates of portfolio growth
will continue into 2003 and beyond.
Our Treasury operations had another good year, however, primarily as a result of
less favourable trading conditions, pre-tax profits decreased by 16 per cent to
£196 million, compared with a record £233 million in 2001. The Group's
risk-based activity in the derivatives markets continues to remain largely
focused on straight cash based products in support of our customers'
transactions.
Lloyds TSB Leasing maintained its position as the largest "big ticket" leasing
company in the UK and continued to develop its position as an established
provider of operating leases within its chosen market sectors. Pre-tax profits
were £60 million compared to £67 million in 2001. At the end of the year,
Lloyds TSB Registrars' registration market share of FTSE 100 companies was 57
per cent, and its market leadership in employee share administration services
continued to strengthen, having achieved market leadership in the new Share
Incentive Plan market. Lower transactional activity, however, led to a
reduction in pre-tax profits to £48 million, from £54 million in 2001.
Lloyds TSB Development Capital achieved record levels of venture capital
investment, however, in a difficult market for disposals, realisations of
venture capital gains were £35 million lower than in 2001. During the year,
Lloyds TSB Development Capital was named Private Equity House of the Year for
2001.
Pre-tax profits in Lloyds TSB Asset Finance, which incorporates the Group's
asset finance and receivables finance businesses, were £86 million, compared
with £87 million in 2001. Lloyds TSB Commercial Finance and Alex Lawrie Factors
continued to expand their customer base, including a new venture in Germany
through an agreement with Bertelsmann Finanz. In April 2002 Lloyds TSB Asset
Finance acquired First National Vehicle Holdings and Abbey National Vehicle
Finance, both previously wholly owned subsidiaries of Abbey National plc, for a
provisional cash consideration of £47 million. The premium on acquisition was
£86 million. The businesses have been combined with Lloyds TSB autolease to
create the leader in the UK contract hire and fleet management markets. In
December 2002, the Group also acquired the Dutton-Forshaw Group, one of the
leading motor dealer groups in the UK with 38 franchised dealerships
representing 14 manufacturers, for a cash consideration of £49 million. Our
CarSelect and Cars4Staff initiatives continue to expand rapidly through a range
of channels, supplying new and used cars to Group staff, customers, and
employees of our corporate customers. Over 5,000 cars were supplied during
2002.
Page 28 of 52
LLOYDS TSB GROUP
International Banking
(banking and financial services overseas in three main areas: The Americas, New
Zealand, and Europe and Offshore Banking)
2002 2001
£m £m
Net interest income 745 749
Other income 374 345
Total income 1,119 1,094
Operating expenses 578 586
Trading surplus 541 508
Provisions for bad and doubtful debts 162 183
Amounts written-off fixed asset investments - 7
379 318
Profit on sale of Lloyds TSB Asset Management S.A. - 39
Profit before tax 379 357
Efficiency ratio 51.7% 53.6%
Total assets (period-end) £21.8bn £21.4bn
Total risk-weighted assets (period-end) £14.3bn £13.2bn
International Banking pre-tax profit was £22 million, or 6 per cent, higher at
£379 million compared with 2001, despite a profit in 2001 of £39 million from
the sale of the Group's Brazilian fund management business.
Net interest income decreased by £4 million to £745 million as volume growth in
New Zealand and Brazil was offset by the impact of adverse exchange rate
movements. Other income increased by £29 million, or 8 per cent, to £374
million, as a result of profits on the sale and leaseback of premises totalling
£32 million. Operating expenses reduced by £8 million as increased local
currency costs in New Zealand, which supported higher business volumes, and in
Argentina, were more than offset by favourable exchange rate movements.
Provisions for bad and doubtful debts were £21 million lower, as a result of
lower specific provisions in Losango, our consumer finance business in Brazil,
largely reflecting exchange rate movements.
Pre-tax profits from The National Bank of New Zealand increased by 32 per cent
to £218 million as a result of asset growth across all business sectors, growth
in the number of personal customers and higher levels of retail deposits and
residential mortgages. Our consumer finance business in Brazil, Losango
Consumer Finance, performed well, notwithstanding difficult local economic
circumstances, and increased pre-tax profits on a local currency basis by 14 per
cent. After the impact of adverse exchange rate movements, which were partly
hedged, Losango made a pre-tax profit of £40 million, compared with £43 million
in 2001.
The Group's offshore banking operations increased their pre-tax profits by £3
million to £123 million. In Europe Private Banking, pre-tax profits were £24
million, compared to £20 million in 2001.
Page 29 of 52
LLOYDS TSB GROUP
International Banking (continued)
Since the October presidential election in Brazil the economic situation has
somewhat stabilised. The Group reduced its total exposure to Brazil, net of
provisions, to £1.9 billion during 2002 (December 2001: £3.3 billion), largely
from not replacing maturing Government bonds. Economic activity in Brazil has
remained reasonably robust, and we believe this relative strength in the local
economy, in conjunction with the significant International Monetary Fund support
package which the newly elected president and incoming government have indicated
they will support, should alleviate current concerns about the Brazilian
economy. The economic situation in Argentina continues to be difficult and the
outlook is likely to remain uncertain at least until after the new Argentine
government takes office during 2003. In 2002 the Group increased its general
provision relating to its exposure to Argentina by £50 million. The Group's
total exposure to Argentina at the end of the year was reduced to some £190
million net of provisions and charges, compared to £610 million at the end of
2001. The Group has now provided for some 50 per cent of its total exposure to
Argentina.
In October 2001, the Group sold its Brazilian fund management and private
banking business, including its subsidiary Lloyds TSB Asset Management S.A., to
Banco Itau S.A., resulting in a profit on sale of £39 million.
Page 30 of 52
LLOYDS TSB GROUP
Central group items
(earnings on surplus capital and the emerging markets debt investment portfolio,
central costs and other unallocated items)
2002 2001
£m £m
Accrual for payment to Lloyds TSB Foundations (33) (36)
Other finance income 165 307
Pension scheme benefit augmentations - (82)
Earnings on surplus capital and the emerging markets debt
investment portfolio 2 63
Abbey National offer costs - (16)
Central costs and other unallocated items (38) (51)
96 185
The four independent Lloyds TSB Foundations support registered charities
throughout the UK that enable people, particularly disabled and disadvantaged
people, to play a fuller role in society. The Foundations receive 1 per cent of
the Group's pre-tax profit, averaged over three years, instead of the dividend
on their shareholdings. In 2003 they will receive £33 million (2002: £36
million) to distribute to charities, making them in aggregate the largest
independent grant giving body in the UK.
Other finance income represents income from the expected return on the Group's
pension fund assets less the charge for unwinding the discount on the pension
fund liabilities. The significant reduction in income in 2002 reflects the
combined impact of a reduction in the expected return on lower pension scheme
assets as a result of the continuing weakness in global equity markets, and
increased pension fund liabilities caused by the expected greater lifespan of
pension scheme members.
Earnings on surplus capital and the emerging markets debt investment portfolio
largely reflect earnings on capital held at the Group centre, less the funding
cost of Scottish Widows, and profits from the Group's investment portfolio of,
largely, emerging markets debt securities. During the year the Group
accelerated its disposal programme for these investments as a result of concerns
over credit and liquidity risks, particularly in Latin America. Given the
higher level of disposals the Group has decided to mark the portfolio to market
in 2002 and in future reporting periods. This change had no profit impact in
2002. The Group does not expect to achieve similar levels of emerging markets
debt portfolio contributions, which in 2002 totalled £103 million, in 2003 and
beyond.
Page 31 of 52
LLOYDS TSB GROUP
INCOME
Group net interest income
Group net interest income increased by £249 million, or 5 per cent, to £5,171
million, despite a reduction of £290 million caused by a 20 basis point
reduction in the net interest margin. Average interest-earning assets increased
by 12 per cent to £162 billion. The 20 basis points decrease in the overall net
interest margin, to 3.20 per cent, reflected a lower contribution from
interest-free liabilities, caused by lower average interest rates, the
continuing shift in the mix of average interest-earning assets towards high
quality, but finer margin, corporate and wholesale lending, and the impact of
adverse exchange rate movements on our higher margin Latin American businesses,
which led to a 27 basis point reduction in the international net interest
margin. The interest spread reduced by 6 basis points.
2002 2001
£m £m
Net interest income 5,171 4,922
Average balances
Short-term liquid assets 3,514 3,499
Loans and advances 143,621 132,655
Debt securities 14,683 8,791
Total interest-earning assets 161,818 144,945
Financed by:
Interest-bearing liabilities 150,203 133,068
Interest-free liabilities 11,615 11,877
Average rates % %
Gross yield on interest-earning assets 6.52 7.84
Cost of interest-bearing liabilities 3.58 4.84
Interest spread 2.94 3.00
Contribution of interest-free liabilities 0.26 0.40
Net interest margin 3.20 3.40
Note: Payments made under cash gift and discount mortgage schemes are amortised
over the early redemption charge period, being a maximum of five years. If
these incentives had been fully written off as incurred, group and domestic net
interest income would have been £55 million higher in 2002 (2001: £14 million
lower). The deferred element of the expenditure amounting to £201 million at 31
December 2002 (31 December 2001: £256 million) is included within prepayments
and accrued income in the balance sheet.
Page 32 of 52
LLOYDS TSB GROUP
Domestic net interest income
Domestic net interest income increased by £223 million, or 5 per cent, to £4,425
million, notwithstanding a reduction of £226 million caused by a 19 basis point
reduction in the net interest margin. This represents 86 per cent of total
group net interest income.
Average interest-earning assets increased by £13.7 billion, or 11 per cent, to
£134.9 billion. Average personal lending and mortgage balances grew by £6.7
billion and wholesale balances increased by £7.2 billion.
The net interest margin decreased by 19 basis points reflecting a reduction in
the contribution of interest-free liabilities and the continuing shift in the
mix of average interest-earning assets towards high quality, but finer margin,
corporate and wholesale lending. In UK Retail Banking and Mortgages there was a
4 basis point decrease in the net interest margin as continued gradual erosion
of the mortgage margin was partly offset by a shift in the mix of retail
business growth towards personal lending and credit cards. In Wholesale Markets
there was an 18 basis point reduction caused by further growth in finer margin
corporate lending. The interest spread reduced by only 3 basis points.
2002 2001
£m £m
Net interest income 4,425 4,202
Average balances
Short-term liquid assets 2,608 1,858
Loans and advances 123,633 114,992
Debt securities 8,661 4,394
Total interest-earning assets 134,902 121,244
Financed by:
Interest-bearing liabilities 125,964 111,233
Interest-free liabilities 8,938 10,011
Average rates % %
Gross yield on interest-earning assets 6.10 7.38
Cost of interest-bearing liabilities 3.02 4.27
Interest spread 3.08 3.11
Contribution of interest-free liabilities 0.20 0.36
Net interest margin 3.28 3.47
Page 33 of 52
LLOYDS TSB GROUP
International net interest income
Net interest income from international operations increased by £26 million, or 4
per cent, to £746 million. This represents 14 per cent of total group net
interest income. Strong volume growth, particularly in New Zealand, was offset
by the adverse effect of exchange rate movements.
Average interest-earning assets on a local currency basis increased by 16 per
cent but again this was partly offset by the adverse effect of exchange rate
movements. The net interest margin reduced by 27 basis points as a result of
lower margins in our Latin American businesses. In particular, the effect of
adverse exchange rate movements had a significant impact on the contribution to
the interest margin from our higher margin businesses in Brazil.
2002 2001
£m £m
Net interest income 746 720
Average balances
Short-term liquid assets 906 1,641
Loans and advances 19,988 17,663
Debt securities 6,022 4,397
Total interest-earning assets 26,916 23,701
Financed by:
Interest-bearing liabilities 24,239 21,835
Interest-free liabilities 2,677 1,866
Average rates % %
Gross yield on interest-earning assets 8.63 10.19
Cost of interest-bearing liabilities 6.51 7.76
Interest spread 2.12 2.43
Contribution of interest-free liabilities 0.65 0.61
Net interest margin 2.77 3.04
Page 34 of 52
LLOYDS TSB GROUP
Other income
2002 2001
£m £m
Fees and commissions receivable:
UK current account fees 579 573
Other UK fees and commissions 1,163 1,220
Insurance broking 647 528
Card services 414 332
International fees and commissions 250 269
3,053 2,922
Fees and commissions payable (645) (602)
Dealing profits (before expenses):
Foreign exchange trading income 173 158
Securities and other gains 15 75
188 233
Income from long-term assurance business (303) (29)
General insurance premium income 486 428
Other operating income 763 708
Total other income 3,542 3,660
Other income decreased by £118 million, or 3 per cent, to £3,542 million, partly
as a result of a £38 million reduction in income from the combined effect of
changes in economic assumptions and the higher negative investment variance.
Fees and commissions receivable increased by 4 per cent to £3,053 million,
largely reflecting strong growth in income from insurance broking and card
services. Other UK fees and commissions decreased by £57 million, or 5 per
cent, from £1,220 million to £1,163 million as a result of a £59 million
reduction in unit trust and asset management fees, which reflected the impact of
the continued fall in the level of stockmarkets during 2002. There was also a
£20 million increase in fees from large corporate and factoring activity
reflecting increased transaction volumes.
Insurance broking commission income increased by £119 million, compared with
2001, with continued strong growth in creditor insurance products. Income from
credit and debit card services increased by £82 million, mainly as a result of
higher merchant service charges and fees. UK current account fee income rose by
£6 million, reversing the downward trend experienced in recent years; a £37
million increase in fee income from added value current accounts more than
offset a reduction in service charges and unauthorised borrowing and other fees.
Fees and commissions payable increased by £43 million against last year as a
result of higher reciprocity fees and an increase in package costs relating to a
number of products.
Page 35 of 52
LLOYDS TSB GROUP
Other income (continued)
Dealing profits decreased by £45 million compared with 2001 as a result of a
reduction of £60 million in gains from securities trading. Income from
long-term assurance business decreased by £274 million however, excluding
changes in economic assumptions, investment variance and the impact of a £135
million increase in provisions for redress to past purchasers of endowment and
pension products, it was £115 million lower, partly reflecting a reduction of
£55 million in benefits from experience variances and actuarial assumption
changes.
Other operating income increased by £55 million to £763 million. Increases of
£25 million in earnings on the sale and restructuring of emerging markets debt
investments and £111 million in operating lease rentals, largely as a result of
the acquisition of First National Vehicle Holdings and Abbey National Vehicle
Finance, were partly offset by a £35 million reduction in the realisation of
venture capital gains by Lloyds TSB Development Capital and a reduction of £25
million in profits on the sale and leaseback of premises.
Page 36 of 52
LLOYDS TSB GROUP
OPERATING EXPENSES
Operating expenses
2002 2001
£m £m
Administrative expenses:
Staff:
Salaries and profit sharing 1,758 1,776
National insurance 134 140
Pensions 318 347
Restructuring 105 69
Other staff costs 202 221
2,517 2,553
Premises and equipment:
Rent and rates 280 261
Hire of equipment 18 18
Repairs and maintenance 131 115
Other 114 123
543 517
Other expenses:
Communications and external data processing 446 483
Advertising and promotion 147 154
Professional fees 113 110
Other 448 409
1,154 1,156
Administrative expenses 4,214 4,226
Depreciation 642 511
Amortisation of goodwill 59 39
Total operating expenses 4,915 4,776
Efficiency ratio 55.4% 53.7%
Efficiency ratio, excluding changes in economic assumptions
and investment variance 50.3% 49.0%
Total operating expenses increased by £139 million, or 3 per cent, compared with
2001. Excluding the impact of acquisitions and operating lease depreciation,
operating expenses were flat.
Administrative expenses decreased by £12 million to £4,214 million. Staff costs
fell by £36 million to £2,517 million and other expenses decreased by £2 million
to £1,154 million. Depreciation rose by £131 million, reflecting an increase of
£95 million in operating lease depreciation. Goodwill amortisation was £20
million higher. The efficiency ratio, excluding changes in economic assumptions
and investment variance, was 50.3 per cent, compared to 49.0 per cent in 2001.
Page 37 of 52
LLOYDS TSB GROUP
Efficiency programme
In February 2000 the Group announced the commencement of a substantial
medium-term efficiency programme to improve the Group's overall efficiency, to
maintain our continuing focus on operating costs and to support increasing
levels of investment in the Group's businesses. The efficiency programme has
been a major contributing factor to the net reduction in Group staff numbers of
4,191, after adjusting for an additional 2,328 staff following a number of
acquisitions, against the targeted net reduction in staff numbers of 3,000 by
the end of 2002.
The Group remains committed to strict cost control and, largely as a result of
the continuing efficiency initiatives, we expect that the Group's operating
expenses in 2003, excluding the impact of acquisitions and operating lease
depreciation, will grow by no more than the rate of inflation. This focus on
cost control will be continued notwithstanding further significant investment
throughout the business in 2003, to support increased business volumes, further
improvements in productivity, and increases in investment in mandatory projects.
These include projects such as the Universal Banking Service, anti-money
laundering financial crimes programmes, and preparation for the forthcoming
introduction of the Basel 2 capital accord.
Page 38 of 52
LLOYDS TSB GROUP
Number of employees (full-time equivalent)
Staff numbers decreased by 1,863 to 79,537 during the year, notwithstanding an
increase of 2,328 from acquisitions made during the year. Excluding the impact
of acquisitions, staff numbers decreased by 4,191. This is significantly in
excess of the targeted net reduction of 3,000 staff.
Within UK Retail Banking staff numbers decreased by 3,513 as increases from
planned improvements to customer service and a substantial increase in our
branch sales activities have been more than offset by reductions of staff
numbers in back office operations as part of the Group's efficiency programme.
In Wholesale Markets staff numbers increased by 2,151 as a result of the asset
finance acquisitions, but reduced by 114 on an underlying basis. In
International Banking staff numbers decreased by 466.
31 December 31 December
2002 2001
UK Retail Banking* 44,184 47,697
Mortgages 3,711 3,527
Insurance and Investments 6,170 6,316
Wholesale Markets 11,385 9,234
International Banking 11,788 12,254
Other 2,299 2,372
Total number of employees (full-time equivalent) 79,537 81,400
*Although the costs of distributing mortgages and insurance through the Lloyds
TSB network are allocated to the mortgage and insurance businesses, the number
of employees involved in these activities in the network is included under UK
Retail Banking.
Page 39 of 52
LLOYDS TSB GROUP
CREDIT QUALITY
Charge for bad and doubtful debts
2002 2001
£m £m
UK Retail Banking 564 439
Mortgages (1) (24)
Wholesale Markets 311 155
International Banking 162 183
Central group items (7) (6)
Total charge 1,029 747
Specific provisions 965 736
General provisions 64 11
Total charge 1,029 747
Charge as % of average lending: % %
Domestic 0.70 0.54
International 1.28 1.10
Total charge 0.77 0.62
The total charge for bad and doubtful debts increased to £1,029 million from
£747 million. In UK Retail Banking the provisions charge increased by £125
million, from £439 million in 2001, to £564 million, as a result of volume
related asset growth in the personal loan and credit card portfolios and a lower
level of recoveries and releases. In Wholesale Markets the provisions charge
increased by £156 million to £311 million from £155 million in 2001. Provisions
against the Group's exposure to certain large US corporate customers totalled
some £100 million, and there was also an increase in the provisions charge from
the corporate lending portfolio, reflecting weak equity markets and the slowdown
in economic activity in the UK. In International Banking provisions decreased
by £21 million as a result of lower specific provisions in Losango, largely
reflecting exchange rate movements. There was also an increase of £64 million
in the Group's overall general provision reflecting a £50 million general
provision charge relating to the Group's exposure to Argentina, and a more
cautious outlook following the slowdown in economic growth in the UK.
Non-performing loans increased to £1,414 million compared with £1,222 million in
December 2001, largely reflecting higher levels of non-performing lending in the
Group's corporate portfolio and general portfolio growth throughout the Group.
In UK Retail Banking and Mortgages the overall arrears position remained stable.
An improved position in personal lending and mortgages was offset by a slight
deterioration in the credit card portfolio, largely reflecting the slowdown in
economic growth in the UK. Non-performing lending represented 1.0 per cent of
total lending, compared with 1.0 per cent in December 2001. Our lending
portfolio remains heavily influenced by our high quality, relatively low risk,
mortgage business and, as a result, we remain relatively well positioned to
withstand any continued economic slowdown.
Page 40 of 52
LLOYDS TSB GROUP
Movements in provisions for bad and doubtful debts
2002 2001
Specific General Specific General
£m £m £m £m
At 1 January 1,099 369 1,069 357
Exchange and other adjustments (55) (3) (15) 1
Adjustments on acquisition - 3 - -
Advances written off (878) - (885) -
Recoveries of advances written off in
previous years
203 - 194 -
Charge to profit and loss account:
New and additional provisions 1,544 64 1,310 64
Releases and recoveries (579) - (574) (53)
965 64 736 11
1,334 433 1,099 369
1,767 1,468
Closing provisions as % of lending
(excluding unapplied interest)
Specific:
Domestic 1,016 (0.8%) 848 (0.8%)
International 318 (1.7%) 251 (1.5%)
1,334 (1.0%) 1,099 (0.9%)
General 433 (0.3%) 369 (0.3%)
Total 1,767 (1.3%) 1,468 (1.2%)
At the end of December 2002 provisions for bad and doubtful debts totalled
£1,767 million. This represented 1.3 per cent of total lending (December 2001:
1.2 per cent). Non-performing lending increased to £1,414 million from £1,222
million in December 2001, largely reflecting higher levels of non-performing
lending in the Group's corporate portfolio, and general portfolio growth
throughout the Group. At the end of the year, total provisions represented over
120 per cent of non-performing loans (December 2001: 120 per cent).
Page 41 of 52
LLOYDS TSB GROUP
CAPITAL RATIOS
Risk asset ratios
31 December 31 December
2002 2001
£m £m
Capital
Tier 1 9,490 8,408
Tier 2 8,846 7,831
18,336 16,239
Supervisory deductions (6,588) (6,752)
Total capital 11,748 9,487
Risk-weighted assets £bn £bn
UK Retail Banking 22.7 19.6
Mortgages 31.5 28.7
UK Retail Banking and Mortgages 54.2 48.3
Insurance and Investments 0.2 0.2
Wholesale Markets 52.9 45.4
International Banking 14.3 13.2
Central group items 0.8 0.8
Total risk-weighted assets 122.4 107.9
Risk asset ratios
Total capital 9.6% 8.8%
Tier 1 7.8% 7.8%
Post-tax return on average risk-weighted assets 1.61% 2.26%
At the end of December 2002 the risk asset ratios were 9.6 per cent for total
capital and 7.8 per cent for tier 1 capital.
During 2002, total capital for regulatory purposes increased by £2,261 million
to £11,748 million. Tier 1 capital increased by £1,082 million, mainly from the
issue of new tier 1 capital instruments. The total amount of embedded value
earnings contained within the Group's tier 1 capital is now some £2.2 billion.
Tier 2 capital increased by £1,015 million and supervisory deductions decreased
by £164 million, as a result of a decrease in the Group's embedded value to
£6,228 million, from £6,366 million in December 2001.
Risk-weighted assets increased by 13 per cent to £122.4 billion and the post-tax
return on average risk-weighted assets decreased to 1.61 per cent.
Page 42 of 52
LLOYDS TSB GROUP
BALANCE SHEET INFORMATION
Total assets increased by £17 billion, or 7 per cent, to £253 billion. Loans
and advances to customers increased by £11.5 billion, or 9 per cent, to £134.5
billion. Customer deposits increased by £7.2 billion, or 7 per cent, to £116.3
billion. This reflects growth of £3.0 billion, or 12 per cent, in current
account balances and £4.3 billion, or 9 per cent, in savings and investment
account balances. There was a switch of £3.7 billion from non-interest bearing
current accounts to interest bearing current accounts to reflect the
implementation of the proposed remedies of the Competition Commission's report
into the supply of banking services to small and medium size enterprises.
31 December 31 December
2002 2001
£m £m
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 2,211 6,008
Interest bearing current accounts 25,640 18,852
Savings and investment accounts 53,223 48,969
Other customer deposits 16,521 17,682
Total sterling 97,595 91,511
Currency 18,739 17,605
Total deposits - customer accounts 116,334 109,116
Loans and advances to customers
Domestic:
Agriculture, forestry and fishing 2,076 2,074
Manufacturing 3,373 3,321
Construction 1,482 1,309
Transport, distribution and hotels 4,696 4,440
Property companies 4,008 2,907
Financial, business and other services 8,352 8,736
Personal : mortgages 62,467 56,578
: other 14,931 12,784
Lease financing 7,285 7,552
Hire purchase 5,990 5,345
Other 3,397 2,992
Total domestic 118,057 108,038
International:
Latin America 1,591 2,347
New Zealand 10,447 8,435
Rest of the world 6,202 5,651
Total international 18,240 16,433
136,297 124,471
Provisions for bad and doubtful debts* (1,766) (1,466)
Interest held in suspense* (57) (70)
Total loans and advances to customers 134,474 122,935
*figures exclude provisions and interest held in suspense relating to loans and advances to banks
Page 43 of 52
LLOYDS TSB GROUP
NOTES
1. Accounting policies and presentation
During 2002 the Group has made a number of changes in accounting policy to
implement the requirements of new accounting standards and guidelines.
Comparative figures have been restated. The effect of these changes in policy,
which were all implemented in the first half of the year, on the results for the
year and comparative period is set out below.
Urgent Issues Task Force Abstract 33 (UITF 33)
UITF 33 was issued in February 2002 and is effective for accounting periods
ending on or after 23 March 2002. Following its implementation the Group has
reclassified €750 million (£482 million) of Perpetual Capital Securities as
undated loan capital and the related cost is included within interest expense.
Previously these securities were included within minority interests in the
balance sheet and the cost was treated as a minority interest deduction.
Financial Reporting Standard 19 (FRS 19) - Deferred Tax
FRS 19 was issued in December 2000 and is effective for accounting periods
ending on or after 23 January 2002. Following its implementation, the Group
makes full provision for deferred tax assets and liabilities arising from timing
differences between the recognition of gains and losses in the financial
statements and their recognition in a tax computation. Previously provision was
only made where it was considered that there was a reasonable probability that a
liability or asset would crystallise in the foreseeable future. An adjustment
has been made increasing shareholders' equity at 31 December 2001 by £40 million
to reflect the revised policy.
Financial Reporting Standard 17 (FRS 17) - Retirement Benefits
FRS 17 replaces SSAP 24 and UITF 6 as the accounting standard dealing with
post-retirement benefits. The Group has decided to implement the requirements
of FRS 17 in 2002 to coincide with the triennial full actuarial valuations of
the Group's pension schemes and because of the significant impact that
implementation has on the Group's reported results.
The new standard requires the Group to include the assets of its defined benefit
schemes on its balance sheet together with the related liability to make benefit
payments. The profit and loss account includes a charge in respect of the cost
of accruing benefits for active employees, any benefit improvements and the cost
of severances borne by the schemes; the expected return on the schemes' assets
is included within other income less a charge in respect of the unwinding of the
discount applied to the schemes' liabilities. Under SSAP 24 the profit and loss
account included a charge in respect of the cost of accruing benefits for active
employees offset by a credit representing the amortisation of the surplus in the
Group's defined benefit schemes; a pension prepayment was included in the
Group's balance sheet together with a provision in respect of post-retirement
health care obligations. An adjustment has been made reducing shareholders'
equity at 31 December 2001 by £236 million to reflect the revised policy.
Page 44 of 52
LLOYDS TSB GROUP
1. Accounting policies and presentation (continued)
Financial Reporting Standard 17 (FRS 17) - Retirement Benefits (continued)
The amounts included in the Group's profit and loss account in 2002 are
reflected in other finance income and administrative expenses, and are
summarised as follows:
Other finance income 2002 2001
£m £m
Expected return on scheme assets 817 844
Interest cost of scheme liabilities (652) (537)
Other finance income 165 307
Administrative expenses 2002 2001
£m £m
Defined contribution schemes 25 18
Defined benefit schemes 293 329
Pension costs 318 347
At 31 December 2002 a net pension deficit of £2,077 million was included in the
Group's balance sheet, based upon actuarial valuations carried out at that date.
This reflects a fall in the value of the schemes' assets caused by the
significant reduction in equity market values. The valuations were prepared in
accordance with the requirements of the accounting standard which seek to place
a market value on the schemes' assets and liabilities at a point in time. As a
result, these valuations are not indicative of the long-term funding position of
the schemes which is assessed in the light of triennial formal actuarial
valuations of the schemes. The last formal actuarial valuation of the Group's
principal schemes was performed at 30 June 2002 and, whilst these valuations
have yet to be finalised, they disclosed that the schemes remained
satisfactorily funded although it is probable that it will be necessary to
recommence employer's cash contributions shortly. These cash contributions,
which are likely to be in the order of £150 million in 2003 and £300 million in
2004, do not affect the Group's profit and loss account as normal pension costs
are already, under FRS 17, included within the Group's operating expenses.
Investment variance
In December 2001, the Association of British Insurers (ABI) published detailed
guidance for the preparation of figures using the achieved profits method of
accounting which are published as supplementary financial information
accompanying the accounts of most listed insurance companies. The ABI guidance
recommends the use of unsmoothed fund values to calculate the value of in-force
business. To improve the comparability of the results of the Group's insurance
operations with the supplementary financial information published by listed
insurers the Group has changed the basis of its embedded value calculations to
use unsmoothed fund values; previously the effect of investment fluctuations had
been amortised in the profit and loss account over a two year period. An
adjustment has been made reducing shareholders' equity at 31 December 2001 by
£208 million to reflect the revised policy.
Page 45 of 52
LLOYDS TSB GROUP
1. Accounting policies and presentation (continued)
The following tables show the impact of the changes in accounting policies:
2002
Investment Total
UITF 33 FRS 19 FRS 17 Variance Adjustment
£m £m £m £m £m
Net interest income (31) (31)
Other finance income 165 165
Other income (104) (104)
Total income (31) 165 (104) 30
Operating expenses 323 323
Trading surplus (31) (158) (104) (293)
Provisions/claims
Joint ventures
Profit before tax (31) (158) (104) (293)
Tax (29) (47) (31) (107)
Profit after tax (31) 29 (111) (73) (186)
Minority interests (31) (31)
Attributable profit - 29 (111) (73) (155)
2001
Original Investment Restated
Results UITF 33 FRS 19 FRS 17 Variance Results
£m £m £m £m £m £m
Net interest income 4,944 (22) 4,922
Other finance income - 307 307
Other income 3,882 (222) 3,660
Total income 8,826 (22) 307 (222) 8,889
Operating expenses 4,324 452 4,776
Trading surplus 4,502 (22) (145) (222) 4,113
Provisions/claims 981 981
Joint ventures (10) (10)
Profit on sale of
business 39 39
Profit before tax 3,550 (22) (145) (222) 3,161
Tax 971 14 (43) (67) 875
Profit after tax 2,579 (22) (14) (102) (155) 2,286
Minority interests 79 (22) 57
Attributable profit 2,500 - (14) (102) (155) 2,229
Consequential adjustments have been made to the balance sheet to reflect these
changes in accounting policy.
Page 46 of 52
LLOYDS TSB GROUP
1. Accounting policies and presentation (continued)
The prior year adjustment in respect of these changes can be summarised
as follows;
Actuarial
losses
recognised in
post-
retirement
Adjustment to Impact on benefit Adjustment to
shareholders' attributable schemes for shareholders'
funds at profit for year year ended funds at
ended
1 January 31December 31 December 31 December
2001 2001 2001 2001
£m £m £m £m
FRS 19 Deferred tax 54 (14) - 40
FRS 17 Retirement benefits 1,876 (102) (2,010) (236)
ABI guidance (53) (155) - (208)
Total 1,877 (271) (2,010) (404)
2. Economic profit
In pursuit of our aim to maximise shareholder value, we use a system of value
based management as a framework to identify and measure value in order to help
us make better business decisions. Accounting profit is of limited use as a
measure of value creation and performance as it ignores the cost of the equity
capital that has to be invested to generate the profit. We choose economic
profit as a measure of performance because it captures both growth in investment
and return. Economic profit represents the difference between the earnings on
the equity invested in a business and the cost of the equity. Our calculation
of economic profit uses average equity for the year and is based on a cost of
equity of 9 per cent (2001: 9 per cent).
Economic profit instils a rigorous financial discipline in determining
investment decisions throughout the Group. It enables us to evaluate
alternative strategies objectively, with a clear understanding of the value
created by each strategy, and then to select the strategy which creates the
greatest value.
2002 2001
£m £m
Average shareholders' equity 10,672 12,338
Profit attributable to shareholders 1,781 2,229
Less: notional charge (960) (1,110)
Economic profit 821 1,119
The notional charge has been calculated by multiplying average shareholders'
equity by the cost of equity.
Page 47 of 52
LLOYDS TSB GROUP
3. Earnings per share
2002 2001
Basic
Profit attributable to shareholders £1,781m £2,229m
Weighted average number of ordinary shares in issue 5,570m 5,533m
Earnings per share 32.0p 40.3p
Fully diluted
Profit attributable to shareholders £1,781m £2,229m
Weighted average number of ordinary shares in issue 5,597m 5,583m
Earnings per share 31.8p 39.9p
4. Tax
The effective rate of tax was 29.3 per cent (2001: 27.7 per cent). The lower
effective rate of tax, compared with the standard tax rate of 30 per cent, is
largely due to tax relief on payments to the QUEST to satisfy Save As You Earn
options, non taxable gains on disposals of properties sheltered by capital
losses, and tier one capital interest payments, partly offset by a higher
effective rate of tax in the Group's life and pensions businesses in 2002.
5. Investment variance
In accordance with generally accepted accounting practice in the UK, it is the
Group's accounting policy to carry the investments comprising the reserves held
by its life companies at market value. The reserves held to support the
with-profits business of Scottish Widows are substantial and changes in market
values will result in significant volatility in the Group's embedded value
earnings, which are beyond the control of management. Consequently, in order to
provide a clearer representation of the underlying performance, the results of
the life and pensions business are separately analysed to include investment
earnings calculated using longer-term investment rates of return, and annual
management charges based on unsmoothed fund values. This investment variance
represents the difference between the actual investment return in the year on
investments backing shareholder funds and the expected return based upon the
economic assumptions made at the beginning of the year, and the effect of these
fluctuations on the value of in-force business. The effects of other changes in
economic circumstances beyond the control of management are also reflected in
the investment variance.
The longer-term rates of return for the period are consistent with those used by
the Group in the calculation of the embedded value at the beginning of the
period, which were 8.00 per cent for equities and 5.25 per cent for gilts.
Following changes in economic assumptions made at the end of 2002 (page 49, note
6), the longer-term rates of return for 2003 have been revised to 7.10 per cent
for equities and 4.50 per cent for gilts.
Page 48 of 52
LLOYDS TSB GROUP
5. Investment variance (continued)
Lloyds TSB General Insurance also holds investments to support its underwriting
business; these are carried at market value and gains and losses included within
dealing profits. Consistent with the approach adopted for the life and pensions
business, an operating profit for the general insurance business is calculated
including investment earnings normalised using the same long-term rates of
return.
During 2002 the FTSE All-Share index fell by 24 per cent and this created an
adverse investment variance totalling £952 million. This adverse variance
should not represent a permanent impairment to the value of the Group's reserves
which fluctuate as stockmarket values fluctuate.
6. Changes in economic assumptions
In accordance with the Association of British Insurers' detailed guidance for
the preparation of figures using the achieved profits method of accounting the
Group has reviewed the way in which economic assumptions are set for the
purposes of the embedded value calculations. The guidance requires that the
assumptions should be reviewed at each reporting date. In order to comply with
the guidance, and achieve greater comparability with other major insurers, the
Group has adopted this approach.
The main economic assumptions have been revised at 31 December 2002 as follows:
2002 2001
% %
Risk-adjusted discount rate (net of tax) 7.35 8.50
Return on equities (gross of tax) 7.10 8.00
Return on fixed interest securities (gross of tax) 4.50 5.25
Expenses inflation 3.30 3.00
The revised assumptions have resulted in a net credit to the profit and loss
account in 2002 of £55 million.
Page 49 of 52
LLOYDS TSB GROUP
7. Free Asset Ratio
The free asset ratio is a common measure of financial strength in the UK for
long-term insurance businesses. It is the ratio of assets less liabilities
(including actuarial reserves but before the required regulatory minimum
solvency margin) expressed as a percentage of the liabilities. It is derived
from annual insurance returns which are due to be completed in March 2003, and
have yet to be finalised. However, based on current expectations, at 31
December 2002 the free asset ratio for Scottish Widows plc was an estimated 10.0
per cent, compared with 11.5 per cent at 31 December 2001. This free asset
ratio included some £400 million allowance for future profits (December 2001:
nil). After adjusting for the inclusion of the required regulatory minimum
solvency margin within liabilities, the Scottish Widows plc ratio was an
estimated 5.5 per cent at 31 December 2002, compared with 6.6 per cent at 31
December 2001.
8. Income and expenses reconciliations
To facilitate comparison of results, certain key financial information and
commentaries have been considered excluding changes in economic assumptions,
investment variance, pension and endowment provisions, the impact of investment
returns on the Group's pension scheme assets, operating lease depreciation, and
the impact of acquisitions. Reconciliations are detailed below.
2002 2001
£m £m
Income, excluding changes in economic assumptions,
investment variance, pension and endowment provisions,
the impact of investment returns on the Group's pension scheme assets,
operating lease depreciation and the impact
of acquisitions 9,484 9,314
Changes in economic assumptions 55 -
Investment variance (952) (859)
Pension and endowment provisions (205) (70)
Other finance income 165 307
Netting of operating lease depreciation 230 197
Acquisitions 101 -
Total income 8,878 8,889
2002 2001
£m £m
Expenses, excluding operating lease depreciation and
the impact of acquisitions 4,580 4,579
Netting of operating lease depreciation 230 197
Acquisitions 105 -
Total operating expenses 4,915 4,776
Page 50 of 52
LLOYDS TSB GROUP
9. Dividend
A final dividend for 2002 of 23.5p per share (2001: 23.5p), will be paid on 7
May 2003, making a total for the year of 34.2p (2001: 33.7p), an increase of 1.5
per cent.
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Shareholders who
have not joined the plan and wish to do so may obtain an application form from
Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA (telephone
0870 6003990). Key dates for the payment of the dividend are:
Shares quoted ex-dividend. Shares purchased before this date 26 February
qualify for the dividend
Record date. Shareholders on the register on this date are 28 February
entitled to the dividend
Final date for joining or leaving the dividend reinvestment plan 9 April
Final dividend paid 7 May
10. 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 2002 were approved by the
directors on 13 February 2003 and will be delivered to the registrar of
companies following publication on 8 March 2003. 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.
Results for the half-year to 30 June 2003 will be announced on 1 August 2003.
Page 51 of 52
LLOYDS TSB GROUP
CONTACTS
For further information please contact:-
Philip Hampton
Group Finance Director
Lloyds TSB Group plc
020 7356 1436
E-mail: philip.hampton@ltsb-finance.co.uk
Michael Oliver
Director of Investor Relations
Lloyds TSB Group plc
020 7356 2167
E-mail: michael.oliver@ltsb-finance.co.uk
Terrence Collis
Director of Group Corporate Communications
Lloyds TSB Group plc
020 7356 2078
E-mail: terrence.collis@lloydstsb.co.uk
Copies of this news release may be obtained from Investor Relations, Lloyds TSB
Group plc, 71 Lombard Street, London EC3P 3BS (from 28 March, 2003: 25 Gresham
Street, London, EC2V 7HN). The full news release can also be found on the
Group's website - www.lloydstsb.com.
Information about the Group's role in the community and copies of the Group's
code of business conduct and its environmental report may be obtained by writing
to Public Affairs, Lloyds TSB Group plc, 71 Lombard Street, London, EC3P 3BS
(from 28 March, 2003: 25 Gresham Street, London, EC2V 7HN). This information is
also available on the Group's website.
Page 52 of 52
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