Final Results - Part 3
Lloyds TSB Group PLC
16 February 2001
Part 3
LLOYDS TSB GROUP
International net interest income
Net interest income from international operations increased by
£2 million to £631 million, representing 14 per cent of total
group net interest income. Underlying growth on a local
currency basis was largely offset by a £14 million reduction
caused by exchange rate movements.
Average interest-earning assets on a local currency basis
increased by 7 per cent, helped by growth in our New Zealand
mortgage portfolio, but this increase was partly offset by the
effect of exchange rate movements. The international net
interest margin decreased by 16 basis points to 3.03 per cent.
Whilst the interest spread held up well, the gross yield on
interest-earning assets fell significantly as a result of lower
interest rates in Latin America.
2000 1999
£m £m
Net interest income 631 629
Average balances
Short-term liquid assets 1,224 1,000
Loans and advances 17,461 16,980
Debt securities 2,110 1,766
Total interest-earning assets 20,795 19,746
Financed by:
Interest-bearing liabilities 19,128 18,116
Interest-free liabilities 1,667 1,630
Average rates % %
Gross yield on interest-earning assets 10.23 12.34
Cost of interest-bearing liabilities 7.82 9.98
Interest spread 2.41 2.36
Contribution of interest-free
liabilities 0.62 0.83
Net interest margin 3.03 3.19
Page 31 of 45
LLOYDS TSB GROUP
Other income
Other income increased by £737 million, or 23 per cent, to
£3,882 million. This represented 46 per cent of total income.
Scottish Widows contributed £317 million of this increase.
Excluding short-term fluctuations in investment returns in our
insurance businesses, changes in the economic assumptions
applied to our long-term assurance business, pension provisions
and the stakeholder pension related charge in 2000, other income
increased by £837 million, or 26 per cent, to £4,054 million.
Fees and commissions receivable increased by 11 per cent
reflecting increased business volumes and strong growth in
income from insurance broking. Other UK fees and commissions
increased by 20 per cent, as a result of growth in all core UK
businesses and the impact of the acquisition of Scottish Widows.
International fees and commissions increased by 6 per cent.
Fees and commissions payable increased by £53 million against
1999, largely as a result of higher interchange fees for card
services and increased costs associated with a number of new
products.
Income from long-term assurance business increased by
£388 million, largely as a result of the impact of the
acquisition of Scottish Widows. General insurance premium
income on underwritten business increased by £9 million, or
2 per cent, against 1999.
Other operating income increased by £139 million, largely
reflecting the acquisition of Chartered Trust and increased
operating lease rental income within Lloyds TSB Leasing. There
were also higher gains on the realisation of venture capital
investments.
2000 1999
£m £m
Fees and commissions receivable:
UK current account fees 629 663
Other UK fees and commissions 1,171 978
Insurance broking 398 327
Card services 304 279
International fees and commissions 266 250
2,768 2,497
Fees and commissions payable (479) (426)
Dealing profits (before expenses):
Foreign exchange trading income 141 133
Securities and other gains 57 82
198 215
Income from long-term assurance
business:
Income before pension provisions 715 329
Pension provisions (100) (102)
615 227
General insurance premium income 399 390
Other operating income 381 242
Total other income 3,882 3,145
Page 32 of 45
LLOYDS TSB GROUP
OPERATING EXPENSES
Operating expenses
2000 1999
£m £m
Administrative expenses:
Staff:
Salaries and profit sharing 1,626 1,500
National insurance 131 125
Pensions (105) (108)
Restructuring 47 20
Other staff costs 189 180
1,888 1,717
Premises and equipment:
Rent and rates 247 250
Hire of equipment 26 33
Repairs and maintenance 115 107
Other 109 100
497 490
Other expenses:
Communications and external data
processing 394 406
Advertising and promotion 167 113
Professional fees 126 90
Other 306 324
993 933
Administrative expenses 3,378 3,140
Exceptional restructuring costs 188 -
Total administrative expenses 3,566 3,140
Depreciation 364 265
Amortisation of goodwill 22 12
Total operating expenses 3,952 3,417
Efficiency ratio 46.7% 43.1%
Efficiency ratio * 43.6% 42.7%
* excluding short-term fluctuations in investment returns,
changes in economic assumptions, exceptional restructuring
costs, pension provisions and stakeholder pension related
charge
Total operating expenses increased by £535 million, or 16 per
cent, compared with 1999. On a like-for-like basis, excluding
exceptional restructuring costs of £188 million, increased costs
following the acquisitions of Scottish Widows and Chartered
Trust of £117 million, and additional investments in revenue
growth businesses and e-commerce of £224 million (1999: £44
million), costs increased by 1 per cent to £3,423 million,
from £3,373 million in 1999, less than the underlying
rate of inflation. Reduced costs in many areas were offset by
higher staff costs, partly reflecting an increased accrual for
profit sharing and millennium weekend overtime costs, increased
advertising costs and a higher depreciation charge.
Page 33 of 45
LLOYDS TSB GROUP
Operating expenses (continued)
The exceptional restructuring costs of £188 million comprise
mainly severance, consultancy costs, the write-down of equipment
and the £21 million Chartered Trust restructuring provision.
During 2001 we expect restructuring costs relating to the
efficiency programme to be approximately £200 million, reducing
to approximately £130 million in 2002 and £60 million in 2003.
Annualised cost benefits resulting from these investments are
expected to total approximately £75 million in 2001 rising to
£410 million in 2004. Expenditure on e-commerce in 2001 is
expected to be similar to 2000 at approximately £150 million,
and we will also spend £100 million in 2001 to deliver our new
wealth management strategies. Overall, the individual
programmes associated with these costs are expected to achieve
average payback within three years.
The efficiency ratio was 46.7 per cent compared to 43.1 per cent
a year ago. Excluding short-term fluctuations in investment
returns, changes in the economic assumptions applied to our long-
term assurance business, exceptional restructuring costs,
pension provisions and the stakeholder pension related charge in
2000, the efficiency ratio deteriorated slightly to 43.6 per
cent, from 42.7 per cent in 1999.
Page 34 of 45
LLOYDS TSB GROUP
Number of employees (full-time equivalent)
Staff numbers increased by 1,484 to 77,540 during 2000.
Excluding an increase of 3,061 staff following the acquisition
of Scottish Widows, an increase of 1,775 staff following the
acquisition of Chartered Trust and a reduction of 584 on the
disposal of the new business capacity of Abbey Life, staff
numbers decreased by 2,768. Within UK Retail Banking staff
numbers decreased by 287 despite improvements to customer
service and a substantial increase in our call centre
capability. In Insurance and Investments numbers of staff
increased to reflect the acquisition of Scottish Widows, in
Wholesale Markets staff numbers increased by 1,245, reflecting
the acquisition of Chartered Trust, and in International Banking
there were lower staff numbers in Brazil and New Zealand.
Since the merger of Lloyds Bank and TSB Group at the end of
1995, there has been an underlying reduction of 20,076 staff of
which 5,407 relate to staff employed in businesses sold and
14,669 to reductions in our ongoing businesses.
31 31
December December
2000 1999
UK Retail Banking* 45,371 45,658
Mortgages 3,657 3,669
Insurance and Investments 6,420 5,187
Wholesale Markets 8,339 7,094
International Banking 12,563 13,223
Other 1,190 1,225
Total number of employees (full-time
equivalent) 77,540 76,056
* 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 networks is included under UK Retail Banking.
Page 35 of 45
LLOYDS TSB GROUP
CREDIT QUALITY
Charge for bad and doubtful debts
2000 1999
£m £m
Domestic:
UK Retail Banking 345 428
Mortgages (13) (3)
Wholesale Markets 94 75
Total domestic 426 500
International Banking 49 88
Total charge 475 588
Specific provisions 481 588
General provisions (6) -
Total charge 475 588
Charge as % of average lending: % %
Domestic 0.45 0.57
International 0.32 0.60
Total charge 0.43 0.57
The total charge for bad and doubtful debts decreased to £475
million from £588 million. The domestic charge decreased to
£426 million from £500 million largely due to the good economic
conditions during 2000, and a one-off benefit of £42 million
arising from a change in methodology for retail provisioning to
recognise more accurately the amount that the Group expects to
recover. Provisions overseas decreased to £49 million from £88
million, mainly as a result of higher Emerging Market Debt
provision releases, which offset higher provisions in Argentina.
Page 36 of 45
LLOYDS TSB GROUP
Movements in provisions for bad and doubtful debts
2000 1999
Specific General Specific General
£m £m £m £m
At 1 January 1,762 361 1,792 365
Exchange and other adjustments 111 (2) (4) (4)
Adjustments on acquisition 45 4 - -
Advances written off (748) - (744) -
Recoveries of advances written
off in previous years 165 - 130 -
Charge (release) to profit and
loss account:
New and additional provisions 1,093 7 1,087 7
Releases and recoveries (612) (13) (499) (7)
481 (6) 588 -
At 31 December 1,816 357 1,762 361
2,173 2,123
Closing provisions as % of
lending (excluding unapplied
interest)
Specific:
Domestic 774 (0.8%) 773 (0.9%)
International 1,042 (6.5%) 989 (6.6%)
1,816 (1.6%) 1,762 (1.7%)
General 357 (0.3%) 361 (0.3%)
Total 2,173 (1.9%) 2,123 (2.0%)
At the end of 2000 provisions for bad and doubtful debts
totalled £2,173 million. This represented 1.9 per cent of
total lending.
The level of specific provisions increased to £1,816 million.
Non-performing lending increased to £1,283 million from
£1,088 million in December 1999, largely reflecting the
acquisition of Chartered Trust, and represented 1.1 per cent of
total lending, compared with 1.0 per cent in December 1999. At
the end of the year, specific provisions represented over
140 per cent of non-performing loans.
Page 37 of 45
LLOYDS TSB GROUP
CAPITAL RATIOS
Risk asset ratios
31 31
December December
2000 1999*
£m £m
Capital
Tier 1 7,662 8,348
Tier 2 7,579 6,838
15,241 15,186
Supervisory deductions (6,862) (2,588)
Total capital 8,379 12,598
£bn £bn
Risk-weighted assets
UK Retail Banking 17.4 15.7
Mortgages 26.6 24.0
Insurance and Investments 0.2 0.1
UK Retail Financial Services 44.2 39.8
Wholesale Markets 36.5 31.6
International Banking 11.9 11.6
Central group items 0.9 1.1
Total risk-weighted assets 93.5 84.1
Post-tax return on average risk-weighted
assets 3.14% 3.02%
Risk asset ratios
Total capital 9.0% 15.0%
Tier 1 8.2% 9.9%
* restated (page 40, note 1)
At the end of December 2000 the risk asset ratios were 9.0 per
cent for total capital and 8.2 per cent for tier 1 capital. The
8.2 per cent tier 1 capital ratio appears higher than would
perhaps be expected for the Group. This reflects the higher
level of supervisory deductions resulting from Lloyds TSB's
significantly increased investment in life assurance following
the acquisition of Scottish Widows.
In 2000, following the acquisitions of Scottish Widows and
Chartered Trust, total capital for regulatory purposes fell by
£4,219 million to £8,379 million. Tier 1 capital was reduced by
£686 million, as retained profits and the raising of the
necessary capital required to complete the purchases of Scottish
Widows and Chartered Trust was offset by the £2.4 billion
goodwill arising on the acquisitions. Tier 2 capital increased
by £741 million and supervisory deductions increased by £4,274
million, largely resulting from the acquisition of the Scottish
Widows insurance business.
Risk-weighted assets increased to £93.5 billion and the post-tax
return on average risk-weighted assets, a key measure of
efficient use of capital, improved to 3.14 per cent from 3.02
per cent in 1999.
Page 38 of 45
LLOYDS TSB GROUP
BALANCE SHEET INFORMATION
Total assets
Total assets increased by £42 billion, or 24 per cent, from the
end of 1999 of which £25 billion represented an increase in long-
term assurance liabilities to policyholders following the
acquisition of Scottish Widows (page 13). Over the last 12
months, loans and advances to customers increased by
£12 billion, or 12 per cent, to £114 billion.
31 31
December December
Deposits - customer accounts 2000 1999
£m £m
Sterling:
Non-interest bearing current
accounts 5,504 6,012
Interest bearing current
accounts 18,221 17,461
Savings and investment accounts 45,972 41,330
Other customer deposits 16,682 14,696
Total sterling 86,379 79,499
Currency 14,359 13,352
Total deposits - customer
accounts 100,738 92,851
Loans and advances to customers
Domestic:
Agriculture,forestry and fishing 2,026 2,183
Manufacturing 3,357 3,262
Construction 1,016 754
Transport, distribution and hotels 3,836 3,540
Property companies 2,470 2,303
Financial, business and other services 9,295 6,614
Personal : mortgages 52,659 47,451
: other 11,138 10,092
Lease financing 8,070 8,369
Hire purchase 5,172 3,674
Other 2,237 1,698
Total domestic 101,276 89,940
International:
Latin America 3,016 2,558
New Zealand 7,368 7,659
Rest of the world 5,002 4,159
Total international 15,386 14,376
116,662 104,316
Provisions for bad and doubtful debts* (2,117) (2,067)
Interest held in suspense (90) (100)
Total loans and advances to customers 114,455 102,149
* Excluding provisions relating to loans and advances to banks
Page 39 of 45
LLOYDS TSB GROUP
NOTES
1. Accounting policies and presentation
During the year, the Group implemented the requirements of
Financial Reporting Standard 15, 'Tangible Fixed Assets';
this has resulted in two changes. The Group's freehold and
long leasehold premises were previously included in the
balance sheet at the last valuation on the basis of existing
use value. Following the implementation of the new standard
the Group's premises will no longer be revalued, and a prior
year adjustment has been made to restate the carrying value
to historical cost. This has resulted in the carrying value
of tangible fixed assets as at 1 January 1999 being reduced
by £112 million and an equivalent adjustment being made
against reserves. The effect of this change upon the Group's
profit and loss account is not significant.
In addition, the Group has reassessed the useful economic
lives and residual values of its freehold and long leasehold
premises and with effect from 1 January 2000, the cost of
these properties, after deducting the value of land, is being
depreciated over 50 years. Previously it was considered that
the residual values were such that depreciation was not
significant. The effect of this change has been to increase
the depreciation charge in 2000 by £8 million.
The Group has also changed its presentation of assets held
for leasing to customers under operating lease agreements.
These assets are now included within tangible fixed assets
and depreciation charged over their estimated useful economic
lives. Rental income received from customers is included
within other operating income. Operating lease assets were
previously included within loans and advances and the related
income within net interest income. This change has no effect
on profit before tax. The effect of this change on the
balance sheet has been to increase tangible fixed assets by
£1,280 million and reduce loans and advances to customers by
an equivalent amount (31 December 1999: £479
million). Comparative figures have been restated.
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 to 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 (1999: 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.
Page 40 of 45
LLOYDS TSB GROUP
3. Earnings per share
2000 1999
Basic
Profit attributable to shareholders £2,724m £2,514m
Weighted average number of ordinary
shares in issue 5,487m 5,445m
Earnings per share 49.6p 46.2p
Fully diluted
Profit attributable to shareholders £2,724m £2,514m
Weighted average number of ordinary
shares in issue 5,545m 5,546m
Earnings per share 49.1p 45.3p
4. Tax
The effective rate of tax was 28.6 per cent (1999: 30.4 per
cent), compared with an average UK corporation tax rate for
2000 of 30 per cent (1999: 30.25 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, and gains on
disposals of investments and properties sheltered by capital
losses.
5. Sale and closure of businesses 2000 1999
£m £m
Provision for closure of Lloyds TSB
Securities Services (tax: nil) - (28)
Provision for sale of Abbey Life new
business capability (tax: nil)
(including £80 million in respect of
goodwill previously written off to
reserves, and other asset write-offs) - (98)
- (126)
6. Scottish Widows
On 3 March 2000, the Group completed the transfer of the
business of Scottish Widows' Fund and Life Assurance Society
to its wholly owned subsidiaries Scottish Widows plc and
Scottish Widows Annuities Limited. The consideration for the
transfer of £5.8 billion to policyholders was paid in August.
Goodwill of £1.8 billion has been capitalised and included in
the Group's balance sheet. In view of the strength of the
Scottish Widows brand and the position of the business as one
of the leading providers of life, pensions, unit trust and
fund management products, in the opinion of the directors the
useful economic life of the goodwill is indefinite and,
consequently, no amortisation charge has been included in the
Group's results.
Page 41 of 45
LLOYDS TSB GROUP
7. Chartered Trust
On 1 September 2000, the Group announced that its subsidiary,
Lloyds UDT, had acquired Chartered Trust Group Plc and ACL
Autolease Holdings Limited, ('Chartered Trust'), the UK
consumer finance and contract hire subsidiaries of Standard
Chartered Bank, for a cash consideration of £614 million. A
restructuring provision of £21 million has been made to cover
the costs of integrating Chartered Trust and Lloyds UDT.
8. Short-term fluctuations in investment returns
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. In the past, this has not had a
significant impact upon the Group's results because of the
limited reserves necessary to support the predominantly unit
linked business of Lloyds TSB Life Assurance and Abbey Life.
However, 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. Consequently, in order to
provide a clearer representation of the underlying
performance, the results of the life and pensions business
have been analysed between an operating profit, which
includes investment earnings calculated using longer-term
rates of investment return, and a profit before tax,
separately identifying the short-term fluctuations in
investment returns and other one-off items. This approach is
already established practice amongst listed insurance
companies in the UK.
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.
These are based upon a long-term view of economic activity
and are therefore not adjusted for market movements which are
considered to be short term. This approach is considered the
most appropriate given the long-term nature of the portfolio
of products and achieves consistency in reporting from one
period to the next.
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 has been calculated including investment
earnings normalised using the same long-term rates of return.
Page 42 of 45
LLOYDS TSB GROUP
9. Changes in the economic assumptions applied to our long-term
assurance business
The shareholders' interest in the long-term assurance
business ('embedded value') is calculated on the basis of a
series of economic and actuarial assumptions. Following the
acquisition of the business of Scottish Widows, a detailed
review of the economic assumptions used in the embedded value
calculation has been carried out, to ensure that these
assumptions remain appropriate for the enlarged life and
pensions business in the context of forecast long-term
economic trends. As a result of this review certain
assumptions have been amended, including the risk-adjusted
discount rate which has been reduced from 10 per cent to 8.5
per cent. The revised assumptions, which have been used with
effect from 1 January 2000 for Abbey Life and the
bancassurance operation of Lloyds TSB Life, have resulted in
a one-off credit to the profit and loss account of
£127 million. The same assumptions have been used for the
Scottish Widows business from the date of acquisition.
10.Exceptional restructuring costs
Exceptional restructuring costs totalling £188 million were
charged to the 2000 profit and loss account. The majority of
these costs related to an efficiency programme announced in
February 2000 but there was also a £21 million restructuring
provision to cover the costs of integrating Chartered Trust
and Lloyds UDT.
The main features of the efficiency programme, which is
primarily focused on non-customer facing activities, are: -
- the centralisation of computer operations
- the further consolidation of all our large scale processing
operations and support functions including the complete
removal of all back office processing from branches
- the further streamlining of the branch network, combined
with the expansion of lower cost delivery channels such as
telephone banking and internet operations
- the further reduction of our purchasing costs
- the rationalisation of non-personal banking activities,
through the progressive sharing and consolidation of
operational functions.
During 2000, the restructuring costs relating to the
efficiency programme comprised mainly severance, consultancy
costs, and the write-down of equipment. During 2001 we
expect restructuring costs relating to the efficiency
programme to be approximately £200 million, reducing to
approximately £130 million in 2002 and £60 million in 2003.
Annualised cost benefits resulting from these investments are
expected to total approximately £75 million in 2001 rising to
£410 million in 2004. Overall, the individual programmes
associated with these costs are expected to achieve average
payback within three years.
Page 43 of 45
LLOYDS TSB GROUP
11.Dividend
A final dividend for 2000 of 21.3p per share (1999: 18.5p)
will be paid on 2 May, making a total for the year of 30.6p
(1999: 26.6p), an increase of 15 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 final dividend are:
Shares quoted ex-dividend. Shares purchased before this date
qualify for the dividend 28 February
Record date. Shareholders on the register on this date
are entitled to the dividend 2 March
Final date for joining or leaving the dividend reinvestment
plan for the final dividend 4 April
Dividend paid 2 May
12.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 2000 were approved by the
directors on 15 February 2001 and will be delivered to the
registrar of companies following publication on 10 March
2001. 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 2001 will be announced
on 27 July 2001.
Page 44 of 45
LLOYDS TSB GROUP
CONTACTS
For further information please contact:-
Kent Atkinson
Group Finance Director
Lloyds TSB Group plc
020 7356 1436
E-mail: kent.atkinson@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 (telephone 020 7356 1273).
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.
The full news release can also be found on the internet at
www.lloydstsb.com.
Page 45 of 45
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