Interim Results
Lloyds TSB Group PLC
30 July 2004
LLOYDS TSB GROUP PLC - RESULTS FOR HALF-YEAR TO 30 JUNE 2004
PRESENTATION OF RESULTS
In order to provide a clearer representation of the underlying performance of
the Group, the results of the Group's life and pensions, and general insurance
businesses include investment earnings calculated using longer-term investment
rates of return (page 42, note 7). 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 43, note 8), and the profit on the sale of a number of
overseas businesses in 2003 (page 43, note 9) have been separately analysed and
a reconciliation to the Group's profit before tax is shown on page 1.
Unless otherwise stated, the profit and loss analysis in this document compares
the half-year to 30 June 2004 to the corresponding period of 2003.
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.
CONTENTS
Page
Profit before tax by main businesses 1
Performance highlights 2
Summary of results 4
Group Chief Executive's review of performance 5
Segmental analysis 9
Performance by sector
- UK Retail Banking 11
- Insurance and Investments 15
- Wholesale and International Banking 20
- Central group items 23
Income
- Net interest income 24
- Other income 25
Operating expenses 27
Credit quality 29
Capital ratios 31
Consolidated profit and loss account 32
Consolidated balance sheet 33
Consolidated cash flow statement 37
Notes 38
Contacts for further information 47
LLOYDS TSB GROUP
PROFIT BEFORE TAX BY MAIN BUSINESSES
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
UK Retail Banking
Before provisions for customer redress 818 793 878
Provisions for customer redress - (200) -
818 593 878
Insurance and Investments
Before provisions for customer redress 378 345 320
Provisions for customer redress - (100) -
378 245 320
Wholesale and International Banking (continuing operations) 616 488 550
Central group items (167) 145 (157)
Profit before tax from continuing operations, excluding changes in 1,645 1,471 1,591
economic assumptions, investment variance and (loss) profit on sale of
businesses 7 (8) (14)
Changes in economic assumptions (page 43, note 8)
Investment variance (page 42, note 7) (72) 42 83
Loss on sale of businesses in 2004 (16) - -
Discontinued operations in 2003 - 177 1,006
Profit before tax 1,564 1,682 2,666
2003 figures have been restated to reflect changes in the Group's segmental
analysis following the introduction, in 2004, of the management of the Group's
distribution channels as profit centres, and other changes in internal pricing
arrangements. These changes have not resulted in any restatement to Group
profit before tax.
Page 1 of 47
LLOYDS TSB GROUP
PERFORMANCE HIGHLIGHTS
This analysis compares the half-year to 30 June 2004 to the corresponding period
in 2003.
Results - statutory
• Profit before tax decreased by £118 million, or 7 per cent, to
£1,564 million.
• Profit attributable to shareholders decreased by £75 million, or 6
per cent, to £1,083 million.
• Earnings per share decreased by 6 per cent to 19.4p.
• Post-tax return on average shareholders' equity 22.1 per cent.
• Total capital ratio 10.6 per cent, Tier 1 capital ratio 9.5 per
cent.
• Interim dividend of 10.7p per share (2003: 10.7p).
Results - continuing operations excluding investment variance, changes in
economic assumptions and loss on sale of businesses
• Profit before tax increased by £174 million, or 12 per cent, to
£1,645 million.
• Earnings per share increased by 13 per cent to 20.6p.
• Economic profit increased by 10 per cent to £710 million.
• Post-tax return on average shareholders' equity 23.5 per cent.
• Post-tax return on average risk-weighted assets increased to 1.95
per cent.
Key achievements - continuing operations
• The Group has continued to improve its market share in key product
areas.
• Good franchise growth with customer lending up by 9 per cent to
£142 billion and customer deposits up by 4 per cent to £118 billion.
• Income growth exceeded cost growth as strict cost control has been
maintained in all businesses, (page 45, note 12).
• Asset quality remains strong.
• Capital ratios remain strong.
Page 2 of 47
LLOYDS TSB GROUP
PERFORMANCE HIGHLIGHTS - CONTINUING OPERATIONS
Key achievements - UK Retail Banking
• Strong balance growth in mortgages, credit cards, personal loans
and current account deposits.
- Mortgage balances increased by 13 per cent to £76.3 billion.
- Credit card balances increased by 31 per cent to £7.2 billion, or by 14
per cent excluding the Goldfish acquisition.
- Personal loan balances increased by 12 per cent to £10.0 billion.
- Current account deposits increased by 10 per cent to £18.2 billion.
• 20 per cent increase in sales from direct channels.
• 13 per cent increase in quality customer current account
recruitment.
• Profit before tax, excluding customer redress provisions,
increased by 3 per cent to £818 million.
Key achievements - Insurance and Investments
• New business contribution in Scottish Widows increased by 7 per
cent.
• Life and pensions new business margin increased to 24.3 per cent,
from 23.4 per cent in the first half of 2003.
• Improvements made in the bancassurance product offer, including
new product launches.
• 24 per cent increase in weighted sales in second quarter of 2004,
compared to the first quarter of 2004.
• Scottish Widows remains on track to pay a 2004 dividend to Lloyds
TSB Group.
• Profit before tax, excluding customer redress provisions, changes
in economic assumptions and investment variance, increased by 10 per cent to
£378 million.
Key achievements - Wholesale and International Banking
• Good progress in delivering our strategy of leveraging existing
business and corporate customer relationships.
• 10 per cent increase in corporate relationship banking income.
• All businesses performing well; strong new business pipeline.
• Strong market share growth in motor finance.
• Cost control maintained.
• Significant improvement in asset quality.
• Improved capital efficiency - return on risk-weighted assets,
excluding loss on sale of businesses, improved to 1.44 per cent, from 1.11 per
cent in the first half of 2003.
• Profit before tax, excluding loss on sale of businesses, increased
by 26 per cent to £616 million.
Page 3 of 47
LLOYDS TSB GROUP
SUMMARY OF RESULTS
Half-year to Half-year to
30 June Increase 31 December
2004 2003 (Decrease) 2003
Results - statutory £m £m % £m
Total income 4,530 4,937 (8) 4,971
Operating expenses 2,363 2,627 (10) 2,546
Trading surplus 2,167 2,310 (6) 2,425
Provisions for bad and doubtful debts 442 470 (6) 480
Profit before tax 1,564 1,682 (7) 2,666
Profit attributable to shareholders 1,083 1,158 (6) 2,096
Economic profit (page 41, note 4) 643 788 (18) 1,705
Earnings per share (pence) 19.4 20.7 (6) 37.6
Post-tax return on average shareholders' equity (%) 22.1 28.1 48.3
Results - continuing operations, excluding investment variance, changes
in economic assumptions and (loss) profit on sale of businesses
Total income 4,595 4,528 1 4,624
Operating expenses 2,363 2,484 (5) 2,417
Trading surplus 2,232 2,044 9 2,207
Provisions for bad and doubtful debts 442 430 3 457
Profit before tax 1,645 1,471 12 1,591
Economic profit 710 647 10 682
Earnings per share (pence) 20.6 18.2 13 19.2
Post-tax return on average shareholders' equity (%) 23.5 n/a n/a
Balance sheet £m £m £m
Shareholders' equity 10,098 8,603 17 9,624
Net assets per share (pence) 178 152 17 170
Total assets 266,861 264,476 1 252,012
Loans and advances to customers 141,508 141,990 - 135,251
Customer deposits 118,300 121,433 (3) 116,496
Risk asset ratios % % %
Total capital 10.6 10.1 11.3
Tier 1 capital 9.5 8.1 9.5
Shareholder value
Closing market price per share (period-end) 431.75p 430p 448p
Total market value of shareholders' equity £24.2bn £24.0bn £25.1bn
Dividends per share 10.7p 10.7p 23.5p
Page 4 of 47
LLOYDS TSB GROUP
GROUP CHIEF EXECUTIVE'S REVIEW OF PERFORMANCE
Lloyds TSB has continued to make good progress in implementing the key
priorities that were set out in 2003 to provide the framework for profitable
franchise growth. The Group's results for the first half of the year have been
significantly affected by the impact of the overseas business disposals made in
the second half of 2003. However the Group has continued to make financial and
strategic progress in each of its three business areas, notwithstanding net
interest margin pressures in the retail business.
During the first half of 2004, statutory profit before tax decreased by £118
million, or 7 per cent, to £1,564 million, largely as a result of the impact of
the overseas business disposals made last year and a negative investment
variance in the Group's insurance businesses in the first half of 2004. Profit
attributable to shareholders was 6 per cent lower at £1,083 million and earnings
per share decreased by 6 per cent to 19.4p. The post-tax return on average
shareholders' equity was 22.1 per cent.
To enable meaningful comparisons to be made with prior periods it is appropriate
to exclude the impact of business disposals, investment variances and changes in
economic assumptions in the Group's insurance businesses. On this basis, profit
before tax increased by £174 million, or 12 per cent, to £1,645 million. In key
product areas the Group continued to grow market share, particularly in
mortgages and credit cards. As a result, on a continuing operations basis, over
the last twelve months customer lending grew by 9 per cent to £142 billion, and
customer deposits increased by 4 per cent to £118 billion. On the same basis,
the Group net interest margin was 2.89 per cent, compared to 2.92 per cent. The
strong growth in lending and deposit volumes, however, ensured that this
reduction in the Group net interest margin was more than compensated for by
volume growth, resulting in an overall increase in net interest income from
continuing operations of 7 per cent.
As a result of the Group's constant focus on cost control the cost:income ratio
improved to 51.4 per cent, compared with 52.7 per cent. Total income, on a
consistent basis, increased by 6 per cent, whilst operating expenses increased
by 3 per cent (page 45, note 12).
Management priorities
In 2003, the management team set a series of priorities to guide the Group and
provide a framework to build the franchise. The three key themes are:
• to manage actively the portfolio of businesses and to reduce risk and
earnings volatility,
• to maintain and build profitability, and,
• to deliver profitable growth.
We have continued to make good progress in each of these priorities and the main
achievements over the last six months are summarised below.
Page 5 of 47
LLOYDS TSB GROUP
Managing the business portfolio
Having disposed of a number of overseas businesses in 2003, the Group has now
completed the disposal of its businesses in Panama and Guatemala, and the sale
of the Group's business in Honduras, which remains subject to approval by
regulatory authorities, is expected to be completed during the second half of
2004. In July 2004, the Group also announced the sale, subject to regulatory
approvals, of its businesses in Argentina and Colombia. The Group's exposure to
Latin America has been significantly reduced over the last twelve months,
reducing potential sources of earnings volatility and allowing the Group to
concentrate its resources on its core retail and corporate customer franchises.
We have also continued to make progress in improving our risk management
processes through effectively embedding the Group's new risk infrastructure and
governance framework, improving our reporting of the Group's consolidated risk
position, and enhancing our planning procedures. Credit quality is strong and
we maintain tight control over risk positions and quality.
We continue to build on our customer development programme designed to guide the
organisation into building deeper long-term relationships which will both
further strengthen our customer franchise and address the risks of regulatory
censure.
Maintaining and building profitability
In our key financial measures of performance, during the first half of 2004 the
Group's continuing operations, excluding investment variance, changes in
economic assumptions and loss on sale of businesses, have delivered a 10 per
cent increase in economic profit to £710 million, and a post-tax return on
equity of 23.5 per cent. In all areas of our business the Group has continued
to focus on capital efficient profit growth and, as a result, the Group's return
on average risk-weighted assets, on the same basis, increased to 1.95 per cent,
from 1.86 per cent in the first half of 2003. In our life assurance business we
have continued to focus on more profitable and capital efficient business and,
consequently, we have achieved increases in both the contribution from new
business and in the life and pensions new business margin.
Our cost performance continues to be strong and strict cost control remains a
high priority throughout the Group. In the first half of 2004, operating
expenses in the Group's continuing operations, excluding customer redress
provisions, increased by 3 per cent. Our focus on reducing day-to-day operating
costs has continued and during the last six months we have extended the use of
our quality approach to process management to cover over 50 per cent of the
Group's transactions. In the first half of the year the Group improved its
quality measures and this has resulted in an improvement in both customer
satisfaction and our operational efficiency.
Asset quality has remained strong and the Group's charge for provisions for bad
and doubtful debts, from continuing operations, improved to 0.63 per cent,
compared to 0.66 per cent in the first half of last year. Non-performing
lending as a percentage of total lending decreased to 0.8 per cent from 1.0 per
cent 12 months ago, largely reflecting the improved quality of the Group's
corporate lending portfolio.
Page 6 of 47
LLOYDS TSB GROUP
Delivering growth
In UK Retail Banking we have focused our attention on delivering strong
franchise growth during a period of extensive business re-engineering. During
the first half of the year, the Group undertook a pilot in Central London which
has significantly increased the autonomy and accountability of business managers
within their local markets. The change has been accompanied by a move from just
measuring sales volumes to measuring value creation. The results have already
led to an improved performance in quality customer recruitment, new product
sales and staff and customer service levels, and we will be managing all our
branch network on this business model during the second half of 2004.
There was strong growth in credit card balances, up 31 per cent, and in personal
loan balances outstanding, up 12 per cent, (14 per cent and 11 per cent
respectively excluding the impact of the Goldfish lending portfolios which were
acquired in the second half of 2003). Current account deposit balances
increased by 10 per cent. In the mortgages business net new lending was a
record £5.5 billion, resulting in an estimated market share of net new lending
of 10.4 per cent. These good levels of franchise growth were however partly
offset by a reduction in the net interest margin. Costs remained tightly
controlled and asset quality remains satisfactory. Excluding the £200 million
provision for customer redress taken in the first half of 2003, pre-tax profit
from UK Retail Banking increased by £25 million, or 3 per cent, to £818 million.
In Insurance and Investments we have increased our focus on more profitable and
capital efficient products and have seen good improvements in profitability in
many product areas. The Group has continued its focus on multi-channel
distribution and, in particular, has made progress in repositioning the Group's
offer through the branch network. We have improved the efficiency of the
salesforce, launched a number of new products specifically designed for
distribution through the branch network, and are in the process of simplifying
sales processes.
Excluding investment variance, changes in economic assumptions and the £100
million provision for customer redress taken in the first half of 2003, pre-tax
profits from Insurance and Investments increased by 10 per cent to £378 million.
New business contribution increased by 7 per cent and the margin on new
business increased to 24.3 per cent, from 23.4 per cent in the first half of
2003. Overall, weighted sales in the Group's life, pensions and unit trust
businesses in the first half of 2004 were slightly lower at £354.6 million.
There was however a 24 per cent increase in weighted sales in the second quarter
of 2004, compared with the first quarter of 2004. In the Group's general
insurance operations, continued growth in household insurance revenues, which
increased by 8 per cent, was partly offset by a reduction in creditor insurance
revenues.
In Wholesale and International Banking, our key focus has been on leveraging our
existing business and corporate customer franchises to deepen relationships. We
have broadened our product range, and positive results are emerging from the
closer co-ordination of our Corporate and Financial Markets businesses. The
Wholesale Bank has delivered good performance in all major business units during
the first half of 2004, and has improved capital efficiency and returns.
Page 7 of 47
LLOYDS TSB GROUP
The post-tax return on average risk-weighted assets for Wholesale and
International continuing operations, excluding loss on sale of businesses,
increased to 1.44 per cent from 1.11 per cent.
Wholesale and International Banking pre-tax profit from continuing operations,
excluding loss on sale of businesses, increased by 26 per cent to £616 million,
largely as a result of an increase of 10 per cent in corporate relationship
banking revenues, strong profit growth in the asset finance and development
capital businesses and a reduction in provisions for bad and doubtful debts.
The division has a strong new business pipeline going into the second half of
the year.
Capital position
Over the last twelve months the Group's capital position has strengthened
considerably. At 30 June 2004, the total capital ratio was 10.6 per cent (30
June 2003: 10.1 per cent) and the Tier 1 capital ratio was 9.5 per cent (30 June
2003: 8.1 per cent). The Group continues to plan for risk-weighted asset growth
of mid-to-high single digits over the next few years, and expected profit
retentions are sufficient to support this level of risk-weighted asset growth
within the Group's current capital management policy. Scottish Widows remains
one of the most strongly capitalised life assurance companies in the UK, and we
remain satisfied with Scottish Widows' overall capital position calculated using
the Financial Services Authority's new 'realistic' basis of balance sheet
reporting. On a market consistent basis, we estimate a 'realistic' surplus
within the long-term fund of Scottish Widows which is more than three times the
required risk capital margin. Scottish Widows remains on track to pay a 2004
dividend to Lloyds TSB.
The Group continues to generate strong cash flows from its banking operations
and remains one of the most profitable major banks in the world. Lloyds TSB
continues to be one of only two large commercially owned banks in the world, and
the only UK bank, to have a 'triple A' rating from Moody's. The Group has a
clear focus on delivering organic growth, however, we also wish to maintain the
flexibility to make value enhancing 'in market' acquisitions such as Goldfish
and the asset finance businesses. The Board has decided to maintain the interim
dividend at 10.7p per share.
Looking forward
During the first half of 2004 we have continued to focus on growth, against a
backdrop of substantial economic, regulatory and competitive pressures, and have
made good progress in all key areas. The continuing evolution and
implementation of our organic growth strategies through the targeted delivery of
profitable top line revenue growth in excess of cost growth, should ensure the
Group can successfully combine sustainable growth in economic profit and a
continuing high return on equity. Despite the increasingly challenging external
environment, we are establishing a track record of earnings growth and remain
well positioned to deliver an improved trading performance in the second half of
2004 and beyond.
J Eric Daniels
Group Chief Executive
Page 8 of 47
LLOYDS TSB GROUP
SEGMENTAL ANALYSIS (unaudited)
Half-year to Wholesale
30 June 2004 Insurance and Central
and International
UK Retail Investments Banking group Continuing Discontinued
Banking items operations operations Total
£m £m £m £m £m £m £m
Net interest income 1,589 50 967 (168) 2,438 - 2,438
Other finance income - - - 19 19 - 19
Other income 767 582 785 4 2,138 - 2,138
Total income 2,356 632 1,752 (145) 4,595 - 4,595
Operating expenses 1,193 133 1,015 22 2,363 - 2,363
Trading surplus (deficit) 1,163 499 737 (167) 2,232 - 2,232
General insurance claims - 121 - - 121 - 121
Bad debt provisions 344 - 98 - 442 - 442
Amounts written off fixed asset
investments - - 23 - 23 - 23
Share of results of joint ventures (1) - - - (1) - (1)
Profit (loss) before tax* 818 378 616 (167) 1,645 - 1,645
Loss on sale of businesses - - (16) - (16) - (16)
Changes in economic
assumptions - 7 - - 7 - 7
Investment variance - (72) - - (72) - (72)
Profit (loss) before tax 818 313 600 (167) 1,564 - 1,564
Half-year to Wholesale
30 June 2003+ Insurance and Central
and International
UK Retail Investments Banking group Continuing Discontinued
Banking items operations operations Total
£m £m £m £m £m £m £m
Net interest income 1,515 39 898 (167) 2,285 286 2,571
Other finance income - - - 17 17 - 17
Other income 741 447 750 288 2,226 89 2,315
Total income 2,256 486 1,648 138 4,528 375 4,903
Operating expenses 1,354 133 991 6 2,484 143 2,627
Trading surplus 902 353 657 132 2,044 232 2,276
General insurance claims - 108 - - 108 - 108
Bad debt provisions 298 - 145 (13) 430 40 470
Amounts written off fixed asset
investments - - 24 - 24 - 24
Share of results of joint ventures (11) - - - (11) - (11)
Profit before tax* 593 245 488 145 1,471 192 1,663
Loss on sale of businesses - - - - - (15) (15)
Changes in economic
assumptions - (8) - - (8) - (8)
Investment variance - 42 - - 42 - 42
Profit before tax 593 279 488 145 1,505 177 1,682
*excluding loss on sale of businesses, changes in economic assumptions and investment variance
+restated (page 38, note 1)
Page 9 of 47
LLOYDS TSB GROUP
SEGMENTAL ANALYSIS (unaudited)
Half-year to Wholesale
31 December 2003+ Insurance and Central
and International
UK Retail Investments Banking group Continuing Discontinued
Banking items operations operations Total
£m £m £m £m £m £m £m
Net interest income 1,622 42 977 (182) 2,459 225 2,684
Other finance income - - - 17 17 - 17
Other income 792 534 811 11 2,148 53 2,201
Total income 2,414 576 1,788 (154) 4,624 278 4,902
Operating expenses 1,229 128 1,057 3 2,417 129 2,546
Trading surplus (deficit) 1,185 448 731 (157) 2,207 149 2,356
General insurance claims - 128 - - 128 - 128
Bad debt provisions 296 - 161 - 457 23 480
Amounts written off fixed asset
investments - - 20 - 20 - 20
Share of results of joint ventures (11) - - - (11) - (11)
Profit (loss) before tax* 878 320 550 (157) 1,591 126 1,717
Profit on sale of businesses - - - - - 880 880
Changes in economic
assumptions - (14) - - (14) - (14)
Investment variance - 83 - - 83 - 83
Profit (loss) before tax 878 389 550 (157) 1,660 1,006 2,666
*excluding profit on sale of businesses, changes in economic assumptions and investment variance
+restated (page 38, note 1)
PERIOD END ASSETS BY MAIN BUSINESSES
30 June 31 December
2004 2003 2003
£m £m £m
UK Retail Banking 96,843 85,651 90,541
Insurance and Investments* 9,728 9,400 9,844
Wholesale and International Banking (continuing operations) 109,386 105,427 101,286
Central group items 281 356 263
Total assets - continuing operations* 216,238 200,834 201,934
Discontinued operations - 15,951 -
Total assets* 216,238 216,785 201,934
*excluding long-term assurance assets attributable to policyholders
Page 10 of 47
LLOYDS TSB GROUP
PERFORMANCE BY SECTOR
UK Retail Banking
(covering the Group's UK retail businesses, providing banking and financial
services to personal customers; mortgages; and private banking)
Half-year to Half-year to
30 June 31 December
2004 2003+ 2003+
£m £m £m
Net interest income 1,589 1,515 1,622
Other income 767 741 792
Total income 2,356 2,256 2,414
Operating expenses:
Before provisions for customer redress 1,193 1,154 1,229
Provisions for customer redress - 200 -
1,193 1,354 1,229
Trading surplus 1,163 902 1,185
Provisions for bad and doubtful debts 344 298 296
Share of results of joint ventures (1) (11) (11)
Profit before tax 818 593 878
Profit before tax, before provisions for customer redress 818 793 878
Cost:income ratio, before provisions for customer redress 50.6% 51.2% 50.9%
Total assets (period-end) £96.8bn £85.7bn £90.5bn
Total risk-weighted assets (period-end) £57.6bn £51.9bn £54.1bn
+restated (page 38, note 1)
Profit before tax from UK Retail Banking increased by £225 million, or 38 per
cent, to £818 million, compared to £593 million in the first half of 2003,
supported by continued strong growth in the Group's consumer lending portfolios,
particularly mortgages and credit cards, higher current account credit balances,
a strict focus on cost control and the absence of a provision for customer
redress. Excluding the impact of the £200 million provision for customer
redress taken in the first half of 2003, profit before tax from UK Retail
Banking increased by 3 per cent, as the good levels of franchise growth were
partly offset by product margin erosion. Income growth of 4 per cent exceeded
cost growth, excluding customer redress provisions, of 3 per cent.
The UK Retail Banking strategy focuses on the delivery of tailored and
personalised customer offers and products to recruit and retain quality
customers by meeting their individual needs and deepening our relationship with
them.
Page 11 of 47
LLOYDS TSB GROUP
UK Retail Banking (continued)
As part of our focus on delivering value, we are becoming increasingly customer
focused. All distribution channels are now profit centres, rather than cost
centres, resulting in greater accountability for the distribution profit of all
retail products including bancassurance products. We have fundamentally
restructured our retail branch network through the establishment of 165 profit
centred local markets, moving decision making closer to the customers and
investing in more front line staff at the expense of regional and head office
jobs. As part of this exercise, during the first half of 2004, we have focused
on developing our business in the London and South East markets where Lloyds TSB
is currently under represented.
We have introduced commission based payments to our distribution channels for
new business, and further improved our sales capabilities within our telephony
and internet channels. We continue to leverage our multi-channel capability to
provide convenient service to customers whilst migrating activities to lower
cost channels where appropriate. More than 1.5 million customers are now active
users of internet banking.
Over the last six months, we have maintained or increased our leading market
share in key product areas including personal loans, credit cards, mortgages and
current accounts. Within personal loans, key initiatives include the use of
behavioural and risk-based pricing, leveraging our data advantage to identify
key target segments, enabling the Group to deliver more competitive pricing to
quality customers and to price by distribution channel within the Lloyds TSB
franchise, whilst continuing to avoid sub-prime lending.
Customers are increasingly choosing to buy via direct channels and continued
investment in our direct channel capabilities has supported good levels of
business growth. In the first half of 2004, some 500,000 product sales were
achieved through the internet channel, an increase of 27 per cent compared with
the first half of 2003, and 160 million transactions were processed through
internet banking, an increase of 28 per cent on the first half of 2003. Sales
through direct channels represented 49 per cent of total sales in the first half
of 2004.
We have continued to grow the credit card franchise, in a highly competitive
environment, through the use of multiple brands with flexible offers for
targeted segments, whilst continuing to rationalise back office operations to
improve efficiency and levels of customer service and satisfaction.
The Group's 'Plus' range of interest-bearing current accounts continues to
support the retention of high quality customers within the retail banking
franchise, as well as enabling the Group to attract new-to-brand customers
through a competitively priced offer. Quality customer current account
recruitment increased by 13 per cent, compared with the first half of 2003,
whilst quality current account attrition was 12 per cent lower reflecting the
improvements which have been made in levels of service and customer
satisfaction, together with the Group's improved range of personalised product
offers. Lloyds TSB has maintained its clear market leadership in the added
value current account market, with over 4 million customers.
Page 12 of 47
LLOYDS TSB GROUP
UK Retail Banking (continued)
The popularity of the Premier Banking products for the mass affluent segment
continues to grow, with some 41,000 customers selecting this offer since its
launch in March 2003. This is complemented by a private banking service for
high net worth customers.
Half-year to Half-year to
30 June 31 December
2004 2003 2003
Mortgages £m £m £m
Gross new mortgage lending £13.6bn £12.0bn £12.2bn
Market share of gross new mortgage lending 9.4% 9.7% 7.9%
Net new mortgage lending £5.5bn £4.8bn £3.5bn
Market share of net new mortgage lending 10.4% 10.9% 6.1%
Mortgages outstanding (period-end) £76.3bn £67.3bn £70.8bn
Market share of mortgages outstanding 9.2% 9.3% 9.1%
Gross new mortgage lending increased by 13 per cent to a record £13.6 billion,
compared with £12.0 billion in the first half of 2003. Net new lending
increased to £5.5 billion resulting in an estimated market share of net new
lending of 10.4 per cent. Over the last 12 months, mortgage balances
outstanding increased by 13 per cent to £76.3 billion.
C&G continues to operate a successful multi-channel distribution strategy
through the Lloyds TSB branch network, C&G branches, intermediaries, telephone
and the internet. The Group continues to be one of the most efficient mortgage
providers in the UK and C&G total costs as a percentage of mortgage assets were
0.5 per cent in the first half of 2004.
C&G has a wide range of mainstream mortgage offers, enhanced by the launch of '
First Time Buyer' and 'Offset' products during the first half of 2004. C&G
focuses on prime lending market segments, and has continued its policy of not
exceeding a 95 per cent loan-to-value ratio on new lending. The average indexed
loan-to-value ratio on the C&G mortgage portfolio was 42 per cent (30 June 2003:
44 per cent), and the average loan-to-value ratio for C&G mortgage business
written during the first half of 2004 was 65 per cent (2003 first half: 65 per
cent). At 30 June 2004, 88.6 per cent of C&G mortgage balances had an indexed
loan-to-value ratio of less than 80 per cent and only 0.1 per cent of balances
had a loan-to-value ratio in excess of 95 per cent.
Asset quality remains strong. A slight improvement in arrears and the
beneficial effect of house price increases have meant that bad debt provisions
remained at low levels. New provisions were more than offset by releases and
recoveries resulting in a £12 million net provisions release for the half-year,
compared with a net release of £5 million in the first half of 2003.
Page 13 of 47
LLOYDS TSB GROUP
UK Retail Banking (continued)
Half-year to Half-year to
30 June 31 December
2004 2003 2003
Provisions for bad and doubtful debts by product £m £m £m
Personal loans/overdrafts 236 218 212
Credit cards 120 85 97
Mortgages (12) (5) (13)
344 298 296
Charge as a percentage of average lending* % % %
Personal loans/overdrafts 4.34 4.44 4.08
Credit cards 3.51 3.34 3.08
Mortgages (0.03) (0.02) (0.04)
*annualised
Bad debt provisions increased by £46 million, or 15 per cent, to £344 million.
£21 million of this increase reflected the acquisition in the second half of
2003 of the Goldfish credit card and personal lending portfolios and the
residual increase largely reflected volume related asset growth in personal loan
and credit card lending. The provisions charge as a percentage of average
lending for personal loans and overdrafts fell to 4.34 per cent, from 4.44 per
cent in the first half of 2003, while the charge in the credit card portfolio
increased to 3.51 per cent, from 3.34 per cent in the first half of 2003. In
the mortgages business, there was a net provision release of £12 million.
Overall, the provisions charge as a percentage of average lending was 0.76 per
cent, compared to 0.75 per cent in the first half of 2003.
During the first half of 2004 there has been an increase in the level of
complaints relating to sales and performance of certain endowment based savings
products. The Group maintains provisions for customer redress in respect of
these past product sales and, at 30 June 2004, these provisions had not been
fully utilised. The Group will continue to review the adequacy of these
provisions.
Page 14 of 47
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)
Half-year to Half-year to
30 June 31 December
2004 2003+ 2003+
£m £m £m
Life, pensions and unit trusts
Scottish Widows 256 226 192
Abbey Life 38 41 52
Provisions for customer redress - (100) -
294 167 244
General insurance 82 80 73
Operating profit from Insurance 376 247 317
Scottish Widows Investment Partnership 2 (2) 3
Profit before tax* 378 245 320
Profit before tax, before provisions for customer redress* 378 345 320
*excluding changes in economic assumptions and investment variance
+restated (page 38, note 1)
Profit before tax from Insurance and Investments, excluding changes in economic
assumptions and investment variance, increased by £133 million, or 54 per cent,
to £378 million, from £245 million in the first half of 2003. Profit before tax
from our life, pensions and unit trust businesses increased by £127 million, or
76 per cent, to £294 million.
The market for medium and long-term investments has continued to be adversely
affected by uncertainties in global stock markets although, based on Scottish
Widows' sales performance, there have been signs in the second quarter of 2004
of some confidence returning to the long-term savings and investment markets.
Our strategy of increasing the Group's focus on more profitable and capital
efficient business has resulted in an increase in market share in protection and
specialist pension products whilst reducing emphasis on some lower return
products such as individual stakeholder pensions. As a result, the life and
pensions new business contribution rose by 7 per cent and the new business
margin increased to 24.3 per cent from 23.4 per cent in the first half of 2003.
Overall, weighted sales in the first half of 2004 were £354.6 million compared
to £366.6 million in the first half of last year, a reduction of 3 per cent. In
life and pensions, weighted sales increased by 3 per cent to £305.0 million
whilst unit trust sales decreased by 31 per cent to £49.6 million. In the
second quarter of 2004, however, the Group has delivered a significant increase
of 24 per cent in weighted sales to £196.2 million compared to £158.4 million in
the first quarter of 2004. This reflected growth of 29 per cent via Independent
Financial Advisors, an increase of 55 per cent through direct channels, and 9
per cent growth in sales through the branch network.
Page 15 of 47
LLOYDS TSB GROUP
Insurance and Investments (continued)
The Group's estimated share of the life and pensions market in the first quarter
of 2004 increased to 6.7 per cent, from 6.4 per cent in the first quarter of
2003. However, as a result of lower sales of unit trusts and equity-based ISAs,
the Group's estimated share of the life, pensions and unit trusts market in the
first quarter of 2004 fell to 4.9 per cent, from 5.4 per cent in the first
quarter of 2003. Scottish Widows remains, however, one of the leading unit
trust and equity-based ISA providers in the UK.
In the branch network, weighted sales were 12 per cent lower as a result of a
significant reduction in the sales of single premium unit trusts. However, our
market share of life and pensions in the branch network and direct distribution
channels grew to 8.7 per cent in the first quarter of 2004, compared to 7.1 per
cent in the first quarter of 2003.
Profit before tax from general insurance, excluding investment variance,
increased by £2 million, or 3 per cent, to £82 million as continued revenue
growth from home insurance more than offset lower levels of creditor insurance.
Sales from direct channels continued to grow, increasing by 9 per cent, compared
to the first half of 2003.
Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased to
£2 million, reflecting more buoyant market conditions and increased revenues
from new mandates. SWIP achieved a significant increase in gross new external
mandates which totalled £1.5 billion during the first half of 2004, largely
reflecting an increase in the number of institutional client mandates. SWIP is
the tenth largest fund manager in the United Kingdom with £77 billion under
management. Fixed income and property investment performance continues to be
strong, and over the three year period to 30 June 2004, 68 per cent of retail
assets under management achieved above median performance. SWIP is currently in
the process of introducing a new fund range as a key component of Lloyds TSB's
bancassurance strategy.
Page 16 of 47
LLOYDS TSB GROUP
Insurance and Investments (continued)
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Total new business premium income
Regular premiums:
Life - mortgage related 20.7 21.7 22.2
- non-mortgage related 19.0 28.0 23.4
Pensions 125.0 111.1 125.6
Health 2.3 3.2 2.7
Total regular premiums 167.0 164.0 173.9
Single premiums:
Life 574.3 438.3 408.4
Annuities 234.5 271.4 241.1
Pensions 571.0 597.0 682.1
Total single premiums 1,379.8 1,306.7 1,331.6
External unit trust sales:
Regular payments 18.1 22.0 19.0
Single amounts 315.6 499.5 407.8
Total external unit trust sales 333.7 521.5 426.8
Weighted sales (regular + 1/10 single)
Life and pensions 305.0 294.7 307.0
Unit trusts 49.6 71.9 59.8
Life, pensions and unit trusts 354.6 366.6 366.8
Weighted sales by distribution channel
Branch network 122.1 139.3 139.5
Independent financial advisors 198.3 197.5 194.1
Direct 33.9 28.9 32.7
Other, including International 0.3 0.9 0.5
Life, pensions and unit trusts 354.6 366.6 366.8
Group funds under management £bn £bn £bn
Scottish Widows Investment Partnership 77 73 77
UK Wealth Management 11 10 11
International 14 16 15
102 99 103
Page 17 of 47
LLOYDS TSB GROUP
Insurance and Investments (continued)
Life, pensions and unit trusts
Half-year to Half-year to
30 June 31 December
2004 2003+ 2003+
£m £m £m
New business income 195 173 223
Life and pensions distribution costs (121) (104) (137)
New business contribution 74 69 86
Existing business
- expected return 132 133 150
- experience variances (13) - (16)
- assumption changes and other items 6 (21) (54)
- provisions for customer redress - (100) -
125 12 80
Development costs (4) (3) (10)
Investment earnings 80 77 76
275 155 232
Unit trusts 32 32 30
Unit trust distribution costs (13) (20) (18)
19 12 12
Profit before tax* 294 167 244
Profit before tax, excluding provisions
for customer redress* 294 267 244
New business margin (life and pensions) 24.3% 23.4% 28.0%
*excluding changes in economic assumptions and investment variance
+restated (page 38, note 1)
New business income increased by 13 per cent as a result of a 3 per cent
increase in weighted sales from life and pensions products and an increase in
the life and pensions new business margin, as a result of an improved
performance in the more profitable life products. The new business contribution
increased by 7 per cent to £74 million. The life and pensions new business
margin, defined as new business contribution divided by weighted sales,
increased to 24.3 per cent, from 23.4 per cent in the first half of 2003. The
improvement reflects our strategy to focus on more profitable and capital
efficient business, improving the Group's product mix, particularly in moving to
higher margin protection and specialist pension products.
Profit before tax from existing business, excluding provisions for customer
redress, increased by £13 million, or 12 per cent, to £125 million. The
expected return from existing business, which largely reflects the unwinding of
the long-term discount rate applied to the expected cash flows from the Group's
portfolio of in-force business, was broadly unchanged at £132 million. During
the first half of 2004, there was a reduction of £7 million from changes in
actuarial assumptions and experience variances, compared to a reduction of £21
million in the first half of 2003.
Page 18 of 47
LLOYDS TSB GROUP
Insurance and Investments (continued)
General insurance
Half-year to Half-year to
30 June 31 December
2004 2003+ 2003+
£m £m £m
Premium income from underwriting
Creditor 55 52 52
Home 218 198 212
Health 16 22 21
Reinsurance premiums (13) (11) (11)
276 261 274
Commissions from insurance broking
Creditor 166 190 161
Home 12 14 16
Health 9 8 8
Other 57 77 130
244 289 315
Distribution commissions to UK Retail Banking 272 298 320
Profit before tax* 82 80 73
*excluding investment variance
+restated (page 38, note 1)
Profit before tax, excluding investment variance, from our general insurance
operations increased by £2 million, or 3 per cent, to £82 million.
Premium income from underwriting increased by £15 million, or 6 per cent,
largely as a result of higher home insurance income which increased by 10 per
cent, largely as a result of an improvement in product margins and levels of
business retention. Insurance broking commission income decreased by £45
million, as a result of a £24 million fall in income from creditor insurance and
a £20 million reduction in other commissions, largely reflecting lower
retrospective commissions. Telephone and internet sales continue to grow with a
9 per cent increase in gross written premiums from new policies sold through
direct channels in the first half of 2004. Gross written premiums for new
policies sold via the internet increased by 44 per cent.
As a result of a lower level of branch network sales, distribution commissions
to UK Retail Banking reduced by £26 million to £272 million. Claims were £13
million higher at £121 million, compared to the first half of 2003, reflecting
higher values of underwritten business and higher weather related claims. The
overall claims ratio remained low at 42 per cent but was slightly higher than in
the first half of last year (40 per cent).
Page 19 of 47
LLOYDS TSB GROUP
Wholesale and International Banking
(banking, treasury, structured finance, venture capital, acquisition finance,
large value lease finance, share registration and stockbroking, long-term
agricultural finance and other related services for major UK and multinational
companies, financial institutions, and small and medium-sized UK businesses;
Lloyds TSB Asset Finance; and banking and financial services overseas in The
Americas and Europe and Offshore Banking worldwide).
Half-year to Half-year to
30 June 31 December
2004 2003+ 2003+
£m £m £m
Net interest income 967 898 977
Other income 785 750 811
Total income 1,752 1,648 1,788
Operating expenses 1,015 991 1,057
Trading surplus 737 657 731
Provisions for bad and doubtful debts 98 145 161
Amounts written off fixed asset investments 23 24 20
Profit before tax* - continuing operations 616 488 550
(Loss) profit on sale of businesses (16) (15) 880
Trading results of discontinued operations - 192 126
Profit before tax 600 665 1,556
Cost:income ratio* 57.9% 60.1% 59.1%
Total assets (period-end) - continuing operations £109.4bn £105.4bn £101.3bn
Total risk-weighted assets (period-end) - continuing operations £64.5bn £63.6bn £62.8bn
*excluding (loss) profit on sale of businesses and trading results of discontinued operations
+restated (page 38, note 1)
Wholesale and International Banking pre-tax profit, excluding loss on sale of
businesses and trading results of discontinued operations, increased by £128
million, or 26 per cent, to £616 million, from £488 million in the first half of
2003. This resulted from a strong performance from most major businesses, and a
significantly enhanced focus on leveraging underexploited opportunities in our
corporate franchises. Income growth of 6 per cent exceeded cost growth of 2 per
cent, leading to an improvement in the cost:income ratio to 57.9 per cent. Our
focus on capital efficiency has led to an increase in the post-tax return on
average risk-weighted assets to 1.44 per cent compared with 1.11 per cent in the
first half of 2003. In Wholesale, there was strong profit growth particularly
in corporate banking, business banking and asset finance, and a reduction in
provisions for bad and doubtful debts.
Page 20 of 47
LLOYDS TSB GROUP
Wholesale and International Banking (continued)
Excluding the trading results of discontinued operations net interest income
increased by £69 million, or 8 per cent, reflecting higher income from improved
margins in corporate banking, business banking and the asset finance businesses,
and strong growth in customer lending in asset finance. Other income increased
by £35 million, largely as a result of a £27 million increase in the gains on
realisation of venture capital investments by Lloyds TSB Development Capital.
The charge for provisions for bad and doubtful debts decreased by £47 million to
£98 million. The charge in Wholesale fell by £11 million to £134 million, as a
result of a decrease in provisions from the corporate lending portfolio. In
International Banking there was a credit of £36 million mainly reflecting a £30
million release from the general provision against the Group's exposures in
Argentina.
In Corporate Banking, profit before tax grew by 30 per cent from £164 million in
the first half of 2003 to £214 million, reflecting an increase in the
contribution from both relationship and transactional business driven by a
combination of higher income, controlled costs, and a £20 million reduction in
provisions.
We continue to deepen existing customer relationships, with increased
cross-selling income and referral activity, supported by the co-location of
corporate relationship managers and Financial Markets sales teams in regional
centres. During the first half of 2004, Lloyds TSB was the number one lead
arranger of syndicated loans for investment-grade companies in the UK by number
of deals, we have grown market share in acquisition finance, and we are seeing a
strong pipeline of business across the structured finance product areas.
In Financial Markets pre-tax profits were flat at £68 million, as income growth
was offset by higher levels of investment spend, including a significant
expansion of the regional salesforce, to support the delivery of our strategy to
increase sales to corporate customers.
Profit before tax in Business Banking grew by £10 million, or 19 per cent to £62
million, reflecting good income growth and tight control of costs. Customer
deposits rose by 7 per cent to £10.8 billion and customer lending increased by 2
per cent to £5.7 billion. Business Banking continued to grow its customer
franchise and the Group's share of the start-up market was 20 per cent in the
first half of 2004.
Pre-tax profit in Lloyds TSB Asset Finance increased by 46 per cent to £99
million, compared with £68 million in 2003, reflecting the continued profitable
development of the motor and leisure, and personal and retail finance
businesses. The motor and leisure business continues to be the largest
independent lender in the UK motor and leisure point of sale market, and has
performed strongly in a growing market, increasing market share to 20 per cent
of the Finance & Leasing Association total car market. Personal and Retail
Finance has also achieved increased market share. New business levels in these
two divisions grew by 12 per cent and 21 per cent respectively in the first half
of 2004.
Page 21 of 47
LLOYDS TSB GROUP
Wholesale and International Banking (continued)
The new business environment for asset based lending provided by Lloyds TSB
Commercial Finance remains more challenging, though good progress has been made
in growing our existing business and corporate customer franchises, with an
increased level of new business introductions.
In International Banking, profit before tax, excluding the loss on sale of
businesses and trading results of discontinued operations, increased by £46
million, or 77 per cent, to £106 million, partly as a result of a £30 million
general provision release in Argentina, but also reflecting lower costs in
Argentina and Paraguay and higher income in international private banking.
Pre-tax profits in Offshore Banking increased by £3 million to £59 million,
compared with £56 million in the first half of 2003.
The Group completed the disposal of its businesses in Panama and Guatemala on 30
April 2004 and 4 June 2004 respectively resulting in a net loss on disposal of
£3 million. The sale of the Group's business in Honduras, which remains subject
to approval by the relevant regulatory authorities, is expected to be completed
during the second half of 2004. In July 2004, the Group announced the sale of
its businesses in Argentina and Colombia, subject to approval by the relevant
regulatory authorities. As a result, a £13 million goodwill write-off has been
recognised in the profit and loss account for the first half of 2004.
Page 22 of 47
LLOYDS TSB GROUP
Central group items
(earnings on capital and the emerging markets debt investment portfolio, central
costs and other unallocated items)
Half-year to Half-year to
30 June 31 December
2004 2003+ 2003+
£m £m £m
Accrual for payment to Lloyds TSB Foundations (16) (16) (15)
Other finance income 19 17 17
Earnings on capital and the emerging markets debt
investment portfolio (165) 140 (190)
Central costs and other unallocated items (5) 4 31
(167) 145 (157)
+restated (page 38, note 1)
The four independent Lloyds TSB Foundations support registered charities
throughout the UK that enable people, particularly disabled and disadvantaged,
to play a fuller role in society. The Foundations receive 1 per cent of the
Group's pre-tax profit, averaged over three years, instead of the dividend on
their shareholdings, making them in aggregate one of the largest independent
grant giving bodies in the UK. In the first half of 2004, the Group accrued £16
million for payment to the Lloyds TSB Foundations.
Other finance income represents income from the expected return on the Group's
pension fund assets less the charge for unwinding the discount on the pension
fund liabilities.
Earnings on capital and the emerging markets debt investment portfolio reflect
earnings on capital held at the Group centre, less the funding cost of recent
acquisitions, and profits from the Group's investment portfolio of emerging
markets debt securities. During the first half of 2003 improved secondary bond
market conditions allowed the Group to sell its remaining portfolio of emerging
markets debt securities. Profits on bond sales, and certain closed foreign
exchange positions, in the first half of 2003 totalled £295 million.
Page 23 of 47
LLOYDS TSB GROUP
INCOME
Group net interest income
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Continuing operations
Net interest income 2,438 2,285 2,459
Average balances
Short-term liquid assets 254 2,598 2,317
Loans and advances 155,224 140,598 145,042
Debt securities 14,360 14,714 13,519
Total interest-earning assets 169,838 157,910 160,878
Net interest margin (%) 2.89 2.92 3.03
Statutory
Net interest income 2,438 2,571 2,684
Total interest-earning assets 169,838 172,082 173,697
Financed by:
Interest-bearing liabilities 162,559 164,454 166,753
Interest-free liabilities 7,279 7,628 6,944
Average rates % % %
Gross yield on interest-earning assets 5.66 5.87 5.87
Cost of interest-bearing liabilities 2.90 2.99 2.92
Interest spread 2.76 2.88 2.95
Contribution of interest-free liabilities 0.13 0.13 0.12
Net interest margin 2.89 3.01 3.07
Group net interest income decreased by £133 million, or 5 per cent, to £2,438
million, largely as a result of the sale of a number of overseas businesses in
the second half of 2003.
On a continuing operations basis, net interest income increased by £153 million,
or 7 per cent, and average interest-earning assets increased by 8 per cent to
£170 billion. Within UK Retail Banking, continued strong growth led to
increases of £2.8 billion in average personal lending and credit card balances
and £8.0 billion in average mortgage balances. Within Wholesale and
International Banking, average interest-earning assets increased by £763
million, largely reflecting growth in asset finance balances.
The Group net interest margin from continuing operations decreased by 3 basis
points, in part caused by lower margins earned in the Group's credit card,
personal lending and mortgages portfolios as a result of competitive pressures,
as well as mix and funding effects. This was partly offset however by higher
corporate banking margins and a positive mix effect from strong growth in the
asset finance businesses.
Page 24 of 47
LLOYDS TSB GROUP
Other income
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Fees and commissions receivable:
UK current account fees 312 316 307
Other UK fees and commissions 620 569 604
Insurance broking 244 289 315
Card services 237 202 237
International fees and commissions 71 74 74
1,484 1,450 1,537
Fees and commissions payable (372) (326) (362)
Dealing profits (before expenses):
Foreign exchange income 85 140 83
Securities and other gains 43 255 34
128 395 117
Income from long-term assurance business 296 135 211
General insurance premium income 276 261 274
Other operating income 326 311 371
Total other income - continuing operations* 2,138 2,226 2,148
Investment variance (72) 42 83
Changes in economic assumptions 7 (8) (14)
Discontinued operations - 89 53
Total other income 2,073 2,349 2,270
*excluding investment variance and changes in economic assumptions
Other income from continuing operations, excluding investment variance and
changes in economic assumptions, decreased by £88 million, or 4 per cent, to
£2,138 million as a result of the absence of income totalling £301 million from
the sale, in the first half of 2003, of the Group's portfolio of emerging
markets debt bonds, and certain closed foreign exchange positions partly offset
by the absence of a £100 million customer redress provision charged against
income from long-term assurance business. Excluding these items other income
increased by 6 per cent.
From the Group's continuing operations, fees and commissions receivable
increased by £34 million, or 2 per cent, to £1,484 million, largely reflecting
good growth in other UK fees and commissions and higher income from credit and
debit card services, which more than offset a reduction in insurance broking
commissions. Other UK fees and commissions increased by £51 million, or 9 per
cent, to £620 million. There was an increase of £9 million in mortgage related
fees, reflecting the growth in new mortgage lending during the first half of the
year, and an increase in fees from large corporate and factoring activity,
reflecting increased transaction volumes.
Page 25 of 47
LLOYDS TSB GROUP
Other income (continued)
Insurance broking commission income decreased by £45 million, partly as a result
of a £24 million fall in income from creditor insurance, reflecting a reduction
in sales through the branch network. Income from credit and debit card services
increased by £35 million mainly as a result of a growth in interchange income,
partly reflecting the acquisition of the Goldfish credit card portfolio in
September 2003.
Fees and commissions payable increased by £46 million as a result of a £27
million increase in commissions paid to motor dealers by the asset finance
operation, reflecting the growth in the levels of new business, and higher costs
relating to legal expenses and valuation fee incentives supporting the strong
mortgage growth. Fees payable in respect of the credit and debit card business
also increased, mainly reflecting volume growth and the acquisition of Goldfish.
Dealing profits decreased by £267 million compared with the first half of 2003
as a result of the absence of gains on the sale of the emerging markets debt
portfolio and certain closed foreign exchange positions. Income from long-term
assurance business increased by £161 million, largely as a result of the absence
of a customer redress provision which reduced income from long-term assurance
business by £100 million in the first half of 2003.
Premium income from general insurance underwriting increased by £15 million, or
6 per cent, to £276 million, compared to £261 million in the first half of 2003.
This was largely as a result of growth in premiums from home insurance
products, reflecting successful cross-selling to the Group's mortgage customers
and the continued strength of the UK housing market, as well as an improvement
in product margins and levels of business retention.
Page 26 of 47
LLOYDS TSB GROUP
OPERATING EXPENSES
Operating expenses
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Administrative expenses:
Staff:
Salaries 877 832 843
National insurance 67 69 68
Pensions 165 156 186
Restructuring 5 10 45
Other staff costs 118 107 115
1,232 1,174 1,257
Premises and equipment:
Rent and rates 138 137 134
Hire of equipment 9 10 7
Repairs and maintenance 64 61 62
Other 58 58 56
269 266 259
Other expenses:
Communications and external data processing 207 194 217
Advertising and promotion 87 81 79
Professional fees 61 49 69
Provisions for customer redress - 200 -
Other 196 191 193
551 715 558
Administrative expenses 2,052 2,155 2,074
Depreciation 289 311 322
Amortisation of goodwill 22 18 21
Total operating expenses - continuing operations 2,363 2,484 2,417
Discontinued operations - 143 129
Total operating expenses 2,363 2,627 2,546
Cost:income ratio 52.2% 53.2% 51.2%
Cost:income ratio* 51.4% 52.7% 52.3%
*continuing operations, excluding investment variance, changes in economic assumptions, customer redress provisions
and sale of EMD bonds/certain closed foreign exchange positions in 2003
Page 27 of 47
LLOYDS TSB GROUP
Operating expenses (continued)
Total operating expenses decreased by £264 million, or 10 per cent, to £2,363
million compared to £2,627 million in the first half of 2003, reflecting a
reduction of £143 million as a result of the disposal of a number of overseas
businesses during 2003, and the absence of provisions for customer redress which
in the first half of 2003 totalled £200 million. On a continuing operations
basis, and excluding the customer redress provisions, operating expenses
increased by £79 million, or 3 per cent, to £2,363 million. Staff costs were
£58 million higher at £1,232 million largely reflecting higher salary costs.
Professional fees increased by £12 million, to £61 million, due to greater use
of external consultants on a number of major projects. Depreciation decreased
by £22 million, largely as a result of a decrease of £26 million in operating
lease depreciation. Goodwill amortisation was £4 million higher.
The cost:income ratio was 52.2 per cent, compared to 53.2 per cent in the first
half of 2003. On a continuing operations basis, excluding investment variance,
changes in economic assumptions, customer redress provisions and the sale of
emerging markets debt bonds and certain closed foreign exchange positions, the
cost:income ratio improved to 51.4 per cent, compared to 52.7 per cent in the
first half of last year.
The Group has embarked on a programme of offshoring a number of its processing
and back office operations. Our pilot operation in Bangalore has been running
for over a year and has demonstrated that it is possible to provide customer
service levels comparable to the UK. As a result, we have expanded the work we
carry out in India and in May 2004 our telephony operations went live in Mumbai.
Number of employees (full-time equivalent)
Staff numbers increased by 212 to 71,821 during the first half of the year.
Within UK Retail Banking staff numbers increased by 269, reflecting an increase
in customer facing staff partly offset by a reduction in regional and head
office staff. In Insurance and Investments there was a decrease of 184 staff,
reflecting operational efficiencies within Scottish Widows and the general
insurance business. In Wholesale and International Banking staff numbers
increased by 55, largely to support the growth in new business volumes.
30 June 31 December
2004 2003
UK Retail Banking 44,576 44,307
Insurance and Investments 5,610 5,794
Wholesale and International Banking 19,809 19,754
Other 1,826 1,754
Total number of employees (full-time equivalent) 71,821 71,609
Page 28 of 47
LLOYDS TSB GROUP
CREDIT QUALITY
Charge for bad and doubtful debts
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
UK Retail Banking 344 298 296
Wholesale and International Banking - continuing operations 98 145 161
Central group items - (13) -
Total charge - continuing operations 442 430 457
Discontinued operations - 40 23
Total charge 442 470 480
Specific provisions 477 466 480
General provisions (35) 4 -
Total charge 442 470 480
Charge as % of average lending*: % % %
UK Retail Banking 0.76 0.75 0.69
Wholesale and International Banking - continuing operations 0.39 0.59 0.63
Total charge - continuing operations 0.63 0.66 0.67
*annualised
The total charge for bad and doubtful debts decreased by £28 million, or 6 per
cent, to £442 million. From continuing operations, the provisions charge
increased by £12 million, or 3 per cent, to £442 million. The charge within UK
Retail Banking increased by £46 million largely as a result of the Goldfish
acquisition and volume related growth in the personal loan and credit card
portfolios. There was a net release of £12 million from the provisions held
against the mortgages portfolio, compared to a net release of £5 million in the
first half of 2003, mainly reflecting an increase in the value of the property
held as security.
In Wholesale and International Banking the provisions charge fell by £47 million
to £98 million. The charge within Wholesale fell by £11 million as the level of
new provisions required against corporate customers reduced. Within
International Banking there was a credit of £36 million largely as a result of a
release of £30 million from the general provision required against the Group's
exposures in Argentina.
The Group's charge for bad and doubtful debts, on a continuing operations basis,
as a percentage of average lending decreased to 0.63 per cent, compared to 0.66
per cent in the first half of 2003.
Page 29 of 47
LLOYDS TSB GROUP
Movements in provisions for bad and doubtful debts
Half-year to Half-year to Half-year to
30 June 2004 30 June 2003 31 December 2003
Specific General Specific General Specific
General
£m £m £m £m £m £m
At beginning of period 1,313 382 1,334 433 1,385 437
Exchange and other
adjustments (4) - 13 - (14) -
Transfer from general to
specific provisions 3 (3) - - 50 (50)
Adjustments on
acquisitions and
disposals (2) - (1) - (48) (5)
Advances written off (486) - (514) - (631) -
Recoveries of advances
written off in previous
years 77 - 87 - 91 -
Charge to profit and loss
account:
New and additional
provisions 745 5 769 4 783 5
Releases and recoveries (268) (40) (303) - (303) (5)
477 (35) 466 4 480 -
At end of period 1,378 344 1,385 437 1,313 382
1,722 1,822 1,695
Closing provisions as %
of lending (excluding
unapplied interest)
Specific:
Domestic 1,238 (0.9%) 1,081 (0.9%) 1,132 (0.9%)
International 140 (2.3%) 304 (1.6%) 181 (2.8%)
1,378 (1.0%) 1,385 (0.9%) 1,313 (0.9%)
General 344 (0.2%) 437 (0.3%) 382 (0.3%)
Total 1,722 (1.2%) 1,822 (1.2%) 1,695 (1.2%)
At the end of June 2004 provisions for bad and doubtful debts totalled £1,722
million. This represented 1.2 per cent of total lending (31 December 2003: 1.2
per cent). Non-performing lending increased to £1,225 million from £1,218
million in December 2003, largely reflecting general portfolio growth in the
consumer lending portfolios. Non-performing lending represented 0.8 per cent of
total lending, down from 0.9 per cent at 31 December 2003. At the end of the
half-year, specific provisions represented over 100 per cent of non-performing
loans (31 December 2003: over 100 per cent).
Page 30 of 47
LLOYDS TSB GROUP
CAPITAL RATIOS
Risk asset ratios
30 June 31 December
2004 2003
£m £m
Capital
Tier 1 11,645 11,223
Tier 2 8,481 8,935
20,126 20,158
Supervisory deductions (7,115) (6,898)
Total capital 13,011 13,260
Risk-weighted assets £bn £bn
UK Retail Banking 57.6 54.1
Insurance and Investments 0.2 0.2
Wholesale and International Banking 64.5 62.8
Central group items 0.5 0.6
Total risk-weighted assets 122.8 117.7
Risk asset ratios
Total capital 10.6% 11.3%
Tier 1 9.5% 9.5%
Half-year to Half-year to
30 June 30 June
2004 2003
Post-tax return on average risk-weighted assets 1.84% 1.91%
Post-tax return on average risk-weighted assets - continuing operations* 1.95% 1.86%
*excluding investment variance, changes in economic assumptions and profit (loss) on sale of businesses
At the end of June 2004 the risk asset ratios were 10.6 per cent for total
capital and 9.5 per cent for Tier 1 capital. During the first half of 2004,
total capital for regulatory purposes decreased by £249 million to £13,011
million. Tier 1 capital increased by £422 million, mainly from retained
profits, whilst Tier 2 capital reduced by £454 million, as a result of the
repayment of Tier 2 capital instruments upon maturity. Supervisory deductions
increased by £217 million, largely as a result of an increase in the Group's
embedded value to £6,641 million, from £6,481 million in December 2003.
Risk-weighted assets increased by 4 per cent to £122.8 billion, reflecting
strong growth in consumer lending and mortgages in the UK and growth in lending
within the asset finance businesses. The post-tax return on average
risk-weighted assets, on a continuing operations basis, excluding investment
variance, changes in economic assumptions and profit (loss) on sale of
businesses, increased to 1.95 per cent, from 1.86 per cent the first half of
2003.
Page 31 of 47
LLOYDS TSB GROUP
CONSOLIDATED PROFIT AND LOSS ACCOUNT (unaudited)
Half-year to Half-year to 30 June
30 June Continuing Discontinued
operations operations Total
2004 2003 2003 2003
£m £m £m £m
Interest receivable:
Interest receivable and similar income
arising from debt securities 189 208 37 245
Other interest receivable and similar
income 4,595 4,112 652 4,764
Interest payable 2,346 2,035 403 2,438
Net interest income 2,438 2,285 286 2,571
Other finance income 19 17 - 17
Other income
Fees and commissions receivable 1,484 1,450 59 1,509
Fees and commissions payable (372) (326) (17) (343)
Dealing profits (before expenses) 123 397 30 427
Income from long-term assurance
business 236 167 8 175
General insurance premium income 276 261 - 261
Other operating income 326 311 9 320
2,073 2,260 89 2,349
Total income 4,530 4,562 375 4,937
Operating expenses
Administrative expenses 2,052 2,155 130 2,285
Depreciation 289 311 7 318
Amortisation of goodwill 22 18 6 24
Depreciation and amortisation 311 329 13 342
Total operating expenses 2,363 2,484 143 2,627
Trading surplus 2,167 2,078 232 2,310
General insurance claims 121 108 - 108
Provisions for bad and doubtful debts
Specific 477 426 40 466
General (35) 4 - 4
442 430 40 470
Amounts written off fixed asset
investments 23 24 - 24
Operating profit 1,581 1,516 192 1,708
Share of results of joint ventures (1) (11) - (11)
Loss on sale of businesses (16) - (15) (15)
Profit on ordinary activities before tax 1,564 1,505 177 1,682
Tax on profit on ordinary activities 449 428 63 491
Profit on ordinary activities after tax 1,115 1,077 114 1,191
Minority interests - equity 10 10 - 10
- non-equity 22 23 - 23
Profit for the period attributable to
shareholders 1,083 1,044 114 1,158
Dividends 599 597
Profit for the period 484 561
Earnings per share 19.4p 20.7p
Diluted earnings per share 19.3p 20.6p
Page 32 of 47
LLOYDS TSB GROUP
CONSOLIDATED BALANCE SHEET
30 June 30 June 31 December
2004 2003 2003
(unaudited) (unaudited) (audited)
£m £m £m
Assets
Cash and balances at central banks 892 857 1,195
Items in course of collection from banks 1,879 2,433 1,447
Treasury bills and other eligible bills 142 3,577 539
Loans and advances to banks 26,891 18,306 15,547
Loans and advances to customers 141,508 141,990 135,251
Debt securities 26,421 28,682 28,669
Equity shares 351 230 458
Interests in joint ventures 53 38 54
Intangible assets 2,485 2,615 2,513
Tangible fixed assets 4,063 3,974 3,918
Other assets 2,983 5,609 3,944
Prepayments and accrued income 1,929 2,127 1,918
Long-term assurance business attributable to the
shareholder 6,641 6,347 6,481
216,238 216,785 201,934
Long-term assurance assets attributable to policyholders 50,623 47,691 50,078
Total assets 266,861 264,476 252,012
Liabilities
Deposits by banks 37,575 23,882 23,955
Customer accounts 118,300 121,433 116,496
Items in course of transmission to banks 765 981 626
Debt securities in issue 27,355 34,498 25,922
Other liabilities 4,889 8,422 7,007
Accruals and deferred income 3,074 3,458 3,206
Post-retirement benefit liability 2,097 2,168 2,139
Provisions for liabilities and charges:
Deferred tax 1,361 1,269 1,376
Other provisions for liabilities and charges 358 532 402
Subordinated liabilities:
Undated loan capital 5,850 6,063 5,959
Dated loan capital 3,933 4,733 4,495
Minority interests:
Equity 47 47 44
Non-equity 536 696 683
583 743 727
Called-up share capital 1,419 1,417 1,418
Share premium account 1,144 1,121 1,136
Merger reserve 343 343 343
Profit and loss account 7,192 5,722 6,727
Shareholders' funds (equity) 10,098 8,603 9,624
216,238 216,785 201,934
Long-term assurance liabilities to policyholders 50,623 47,691 50,078
Total liabilities 266,861 264,476 252,012
Page 33 of 47
LLOYDS TSB GROUP
OVERVIEW OF CONSOLIDATED BALANCE SHEET
Review of balance sheet at 30 June 2004, compared to 31 December 2003
Assets
Total assets increased by £14,849 million to £266,861 million, reflecting strong
growth in loans and advances to banks and customers, partly offset by a
reduction in debt securities.
Cash and balances at central banks reduced by £303 million, or 25 per cent, to
£892 million as cash balances held at the year-end are usually higher, to cater
for anticipated demand over the year-end holiday period. Loans and advances to
banks increased by £11,344 million to £26,891 million, largely reflecting an
increase in reverse repos, partly replacing treasury bills and debt securities
held for liquidity purposes, but also in relation to the Group's increased
funding requirements.
Loans and advances to customers increased by £6,257 million, or 5 per cent, to
£141,508 million. This growth largely reflects strong growth in UK retail
lending, particularly mortgages, credit cards and personal loans.
Debt securities decreased by £2,248 million, or 8 per cent, to £26,421 million,
largely reflecting the increased use of reverse repos for liquidity purposes.
Intangible assets declined by £28 million to £2,485 million reflecting
amortisation of £22 million and a charge of £10 million relating to the
impairment of goodwill in Colombia. Tangible fixed assets increased by £145
million to £4,063 million reflecting net additions of £441 million, largely in
relation to operating leases, offset by depreciation of £289 million.
Other assets decreased by £961 million to £2,983 million, largely as a result of
a decrease of £917 million in mark-to-market balances in respect of external
derivatives.
Long-term assurance business attributable to the shareholder increased by £160
million to £6,641 million reflecting the after tax profit in the Group's life
assurance businesses.
Page 34 of 47
LLOYDS TSB GROUP
Assets (continued)
30 June 31 December
2004 2003 2003
£m £m £m
Loans and advances to customers
Domestic:
Agriculture, forestry and fishing 2,075 2,089 2,025
Manufacturing 3,090 3,572 3,211
Construction 1,647 1,634 1,497
Transport, distribution and hotels 5,010 4,915 4,741
Property companies 4,808 4,222 4,577
Financial, business and other services 8,011 8,351 9,652
Personal : mortgages 76,316 67,316 70,750
: other 21,535 17,798 20,139
Lease financing 6,378 6,940 6,470
Hire purchase 4,829 4,453 4,701
Other 4,043 3,499 3,351
Total domestic 137,742 124,789 131,114
International:
Latin America 425 1,470 557
New Zealand - 11,939 -
United States of America 2,576 3,018 2,681
Europe 1,883 2,053 1,981
Rest of the world 611 586 623
Total international 5,495 19,066 5,842
143,237 143,855 136,956
Provisions for bad and doubtful debts* (1,707) (1,808) (1,677)
Interest held in suspense* (22) (57) (28)
Total loans and advances to customers 141,508 141,990 135,251
*figures exclude provisions and interest held in suspense relating to loans and advances to banks
Liabilities
Deposits by banks increased by £13,620 million to £37,575 million, largely
reflecting increased repo funding to finance asset growth.
Customer deposits increased by £1,804 million to £118,300 million, as growth of
£2,331 million in current account credit balances was partly offset by
reductions in some offshore deposits, and following completion of the sale of
the Group's businesses in Panama and Guatemala.
Page 35 of 47
LLOYDS TSB GROUP
Liabilities (continued)
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 3,173 2,420 3,115
Interest bearing current accounts 29,539 26,815 27,266
Savings and investment accounts 56,106 56,195 55,990
Other customer deposits 17,133 16,242 17,605
Total sterling 105,951 101,672 103,976
Currency 12,349 19,761 12,520
Total deposits - customer accounts 118,300 121,433 116,496
Debt securities in issue increased by £1,433 million to £27,355 million. Other
liabilities decreased by £2,118 million to £4,889 million, as a result of a
reduction of £1,510 million in mark-to-market balances in respect of external
derivatives and a lower interim dividend accrual than that for the final
dividend. Accruals and deferred income reduced by £132 million to £3,074
million as a result of lower interest payable.
The post-retirement benefit liability decreased by £42 million to £2,097
million. The after-tax impact of cash contributions and other finance income
more than offset the regular pensions cost. Provisions for liabilities and
charges fell by £59 million to £1,719 million, largely reflecting cash payments
against the customer remediation provision.
Subordinated liabilities fell by £671 million to £9,783 million due to
repayments of £500 million and exchange rate movements. Minority interests
decreased by £144 million to £583 million, largely reflecting the termination of
certain structured finance transactions.
Shareholders' funds were up £474 million to £10,098 million, principally due to
retentions.
Page 36 of 47
LLOYDS TSB GROUP
CONSOLIDATED CASH FLOW STATEMENT (unaudited)
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Net cash inflow (outflow) from operating activities 696 4,670 (3,898)
Dividends received from associated undertakings - 5 -
Returns on investments and servicing of finance:
Dividends paid to equity minority interests (8) - (14)
Payments made to non-equity minority interests (23) (40) (41)
Interest paid on subordinated liabilities (loan capital) (298) (297) (303)
Net cash outflow from returns on investments and servicing
of finance (329) (337) (358)
Taxation:
UK corporation tax (344) (205) (393)
Overseas tax (62) (119) (67)
Total taxation (406) (324) (460)
Capital expenditure and financial investment:
Additions to fixed asset investments (6,113) (19,519) (15,901)
Disposals of fixed asset investments 6,161 18,656 17,625
Additions to tangible fixed assets (637) (346) (432)
Disposals of tangible fixed assets 115 154 133
Net cash (outflow) inflow from capital expenditure and (474) (1,055) 1,425
financial investment
Acquisitions and disposals:
Additions to interests in joint ventures - (6) (6)
Acquisition of group undertakings and businesses (9) (1) (1,105)
Disposal of group undertakings and businesses 17 - 2,382
Net cash inflow (outflow) from acquisitions and disposals 8 (7) 1,271
Equity dividends paid (1,314) (1,311) (597)
Net cash (outflow) inflow before financing (1,819) 1,641 (2,617)
Financing:
Issue of subordinated liabilities (loan capital) - 533 -
Cash proceeds from issue of ordinary share capital and sale
of own shares held in respect of employee share schemes 10 26 6
Repayment of subordinated liabilities (loan capital) (500) (55) (20)
Repayment of minority investment in subsidiaries (132) - -
Capital element of finance lease rental payments - (1) -
Net cash (outflow) inflow from financing (622) 503 (14)
(Decrease) increase in cash (2,441) 2,144 (2,631)
Page 37 of 47
LLOYDS TSB GROUP
NOTES
1. Accounting policies and presentation
Accounting policies are unchanged from 2003.
The Group has not revised the valuation of its pension schemes to
reflect the circumstances prevailing at 30 June 2004. In accordance with FRS 17
the valuations will be formally updated at the year-end.
2003 figures have been restated to reflect changes in the Group's
segmental analysis following the introduction, in 2004, of the management of the
Group's distribution channels as profit centres, and other changes in internal
pricing arrangements. These changes have not resulted in any change to Group
profit before tax.
2. Future accounting developments
FRED 34 'Life Assurance'
On 21 July 2004, the UK Accounting Standards Board ('ASB') issued an
exposure draft of an accounting standard which will amend the basis of
accounting for entities with a life assurance business. The exposure draft,
which is in part a response to the concerns raised by the Penrose report into
Equitable Life, proposes to change the way in which embedded value is calculated
to exclude the effect of future investment margins and limit the value
attributed to the contractual rights to future investment management fees to
their fair value, as implied by a comparison with current fees charged by other
market participants for similar services. It is also proposed that the
liabilities of with-profits funds falling within the scope of the FSA's
realistic capital regime should be incorporated into the balance sheet on this
basis, including options and guarantees at their fair value, and a capital
position statement provided setting out total available capital compared to
regulatory requirements with a sensitivity analysis to changes in key variables.
The ASB has requested comments on the exposure draft by early October
and changes may be made to the proposals once these have been considered; it is
expected that the resulting accounting standard will be effective for the 2004
full year results and is likely to require the figures for the first half of the
year and prior periods to be restated. The ASB's proposals are currently being
reviewed to assess the potential implications for the Group's accounts, although
this exercise is not yet complete.
Page 38 of 47
LLOYDS TSB GROUP
2. Future accounting developments (continued)
International Accounting Standards ('IAS')
Work continues throughout the Group in preparation for the adoption of
IAS with effect from 1 January 2005 and good progress is being made.
There remains some uncertainty since the European Commission has still
not endorsed IAS 39, the Standard dealing with the recognition and measurement
of financial instruments, following objections raised by a minority of member
states. In the limited time remaining before implementation is due, it is not
clear whether it will be possible to address all of these concerns leaving open
the possibility of partial or non-endorsement.
In overall terms, we expect that the introduction of IAS will lead to
increased volatility in the Group's profit and loss account, although this will
be mitigated by changes being considered to our hedging processes. The
appearance of our accounts will also change as we will be required to
consolidate our life assurance businesses on a line-by-line basis instead of the
one-line basis of consolidation currently adopted.
Discussions have been held with the FSA to obtain their initial views
on the effects of IAS upon prudential regulation, and we believe that our
capital position will remain satisfactory under the new regime.
3. Profit and loss account for the six months ended 31 December 2003
An analysis of the Group's consolidated profit and loss account by continuing
operations and discontinued operations for the second half of 2003 is given
below.
Page 39 of 47
LLOYDS TSB GROUP
CONSOLIDATED PROFIT AND LOSS ACCOUNT (unaudited)
Half-year to 31 December
Continuing Discontinued
operations operations Total
2003 2003 2003
£m £m £m
Interest receivable:
Interest receivable and similar income
arising from debt securities 181 26 207
Other interest receivable and similar
income 4,372 561 4,933
Interest payable 2,094 362 2,456
Net interest income 2,459 225 2,684
Other finance income 17 - 17
Other income
Fees and commissions receivable 1,537 53 1,590
Fees and commissions payable (362) (17) (379)
Dealing profits (before expenses) 128 5 133
Income from long-term assurance
business 269 9 278
General insurance premium income 274 - 274
Other operating income 371 3 374
2,217 53 2,270
Total income 4,693 278 4,971
Operating expenses
Administrative expenses 2,074 117 2,191
Depreciation 322 6 328
Amortisation of goodwill 21 6 27
Depreciation and amortisation 343 12 355
Total operating expenses 2,417 129 2,546
Trading surplus 2,276 149 2,425
General insurance claims 128 - 128
Provisions for bad and doubtful debts
Specific 457 23 480
General - - -
457 23 480
Amounts written off fixed asset
investments 20 - 20
Operating profit 1,671 126 1,797
Share of results of joint ventures (11) - (11)
Profit on sale of businesses - 880 880
Profit on ordinary activities before tax 1,660 1,006 2,666
Tax on profit on ordinary activities 503 31 534
Profit on ordinary activities after tax 1,157 975 2,132
Minority interests - equity 12 - 12
- non-equity 24 - 24
Profit for the period attributable to shareholders 1,121 975 2,096
Dividends 1,314
Profit for the period 782
Earnings per share 37.6p
Diluted earnings per share 37.5p
Page 40 of 47
LLOYDS TSB GROUP
4. 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 half-year and is based on a cost
of equity of 9 per cent (2003: 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.
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Average shareholders' equity 9,840 8,301 8,616
Profit attributable to shareholders 1,083 1,158 2,096
Less: notional charge (440) (370) (391)
Economic profit 643 788 1,705
The notional charge has been calculated by multiplying average
shareholders' equity by the cost of equity.
5. Earnings per share
Half-year to Half-year to
30 June 31 December
2004 2003 2003
Basic
Profit attributable to shareholders £1,083m £1,158m £2,096m
Weighted average number of ordinary shares in issue 5,589m 5,581m 5,581m
Earnings per share 19.4p 20.7p 37.6p
Fully diluted
Profit attributable to shareholders £1,083m £1,158m £2,096m
Weighted average number of ordinary shares in issue 5,625m 5,617m 5,583m
Earnings per share 19.3p 20.6p 37.5p
Page 41 of 47
LLOYDS TSB GROUP
6. Tax
The effective rate of tax was 28.7 per cent compared to an effective rate of tax
of 29.2 per cent in the first half of 2003, and the standard UK corporation tax
rate of 30 per cent.
A reconciliation of the charge that would result from applying the standard UK
corporation tax rate to profit before tax to the tax charge, is given below:
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Profit on ordinary activities before tax 1,564 1,682 2,666
Tax charge thereon at UK corporation tax rate of 30% 469 504 800
Factors affecting charge:
Goodwill amortisation 5 5 4
Overseas tax rate differences (3) 3 (12)
Gains exempted or covered by capital losses (6) 1 (277)
Tax deductible coupons on non-equity minority interests (6) (6) (6)
Life companies rate differences (3) (10) 26
Other items (7) (6) (1)
Tax charge 449 491 534
7. Investment variance
In accordance with generally accepted accounting practice in the UK, it is the
Group's accounting policy to carry the investments comprising the reserves held
by its life companies at market value. The reserves held to support the
with-profits business of Scottish Widows are substantial and changes in market
values will result in significant volatility in the Group's embedded value
earnings, which are beyond the control of management. Consequently, in order to
provide a clearer representation of the underlying performance, the results of
the life and pensions, and general insurance businesses are separately analysed
to include investment earnings calculated using longer-term investment rates of
return. This investment variance represents the difference between the actual
investment return in the year on investments backing shareholder funds and the
expected return based upon the economic assumptions made at the beginning of the
year, and the effect of these fluctuations on the value of in-force business.
The effects of other changes in economic circumstances beyond the control of
management are also reflected in the investment variance. The longer-term rates
of return for the period are consistent with those used by the Group in the
calculation of the embedded value at the beginning of the period, which were
7.45 per cent for equities and 4.85 per cent for Gilts.
Page 42 of 47
LLOYDS TSB GROUP
7. 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 the first half of 2004 there was a negative investment variance of £72
million, primarily as a result of the impact of a reduction in the value of
fixed interest investments.
8. Changes in economic assumptions
In accordance with the Association of British Insurers' detailed guidance for
the preparation of figures using the achieved profits method of accounting the
Group has reviewed the economic assumptions used in the embedded value
calculations. The guidance requires that the assumptions should be reviewed at
each reporting date.
The main economic assumptions were revised at 30 June 2004 as follows:
30 June 31 December
2004 2003
% %
Risk-adjusted discount rate (net of tax) 7.77 7.60
Return on equities (gross of tax) 7.69 7.45
Return on fixed interest securities (gross of tax) 5.09 4.85
Expenses inflation 3.90 3.80
9. Loss on sale of businesses
During the first half of 2004, the Group disposed of its businesses in
Panama and Guatemala and a loss of £3 million was recognised in the profit and
loss account. In July 2004, the Group announced the sale of its businesses in
Argentina and Colombia, subject to approval by the relevant regulatory
authorities. As a result, a £13 million goodwill write-off has been recognised
in the profit and loss account for the first half of 2004. During 2003, the
Group disposed of a number of its overseas businesses and, as a result, a loss
of £15 million was recognised in the Group's profit and loss account in the
first half of 2003, and a net profit of £880 million was recognised in the
second half of 2003. An itemised breakdown is provided below.
Page 43 of 47
LLOYDS TSB GROUP
9. Loss on sale of businesses (continued)
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
French wealth management businesses - (15) -
Brazilian businesses - - (41)
The National Bank of New Zealand - - 921
Panama and Guatemala (3) - -
Colombia (13) - -
(16) (15) 880
10. Free Asset Ratio
The free asset ratio is a common measure of financial strength in the UK for
long-term insurance businesses. It is the ratio of assets less liabilities
(including actuarial reserves but before the required regulatory minimum
solvency margin) expressed as a percentage of the liabilities. At 30 June 2004,
the free asset ratio of Scottish Widows plc was an estimated 14.0 per cent,
compared with 13.6 per cent at 31 December 2003. After adjusting for the
required regulatory minimum solvency margin, the Scottish Widows plc ratio,
expressed as a percentage of total assets, was an estimated 8.7 per cent at 30
June 2004, compared with 8.3 per cent at 31 December 2003.
11. Reconciliation of movements in shareholders' funds
Half-year to Year ended
30 June 31 December
2004 2003
£m £m
Profit attributable to shareholders 1,083 3,254
Dividends (599) (1,911)
Profit for the period 484 1,343
Currency translation differences on foreign currency net investments
(17) 118
Actuarial losses recognised in post-retirement benefit schemes - (4)
Issue of shares 9 45
Movements in relation to own shares (5) (2)
Goodwill written-back on sale of businesses 3 181
Net increase in shareholders' funds 474 1,681
Shareholders' funds at beginning of period 9,624 7,943
Shareholders' funds at end of period 10,098 9,624
Page 44 of 47
LLOYDS TSB GROUP
12. Income and expenses reconciliation
To facilitate comparisons with prior periods, certain income and expense
comparisons have been made excluding discontinued operations, changes in
economic assumptions, investment variance, customer redress provisions and the
sale of emerging markets debt bonds and certain closed foreign exchange
positions. Reconciliations are detailed below:
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Income, excluding discontinued operations, changes in economic
assumptions, investment variance, customer redress provisions, and the
sale of emerging markets debt bonds and certain closed foreign exchange
positions 4,595 4,333 4,624
Discontinued operations - 375 278
Changes in economic assumptions 7 (8) (14)
Investment variance (72) 42 83
Customer redress provisions - (100) -
Sale of emerging markets debt bonds and certain closed foreign exchange
positions - 295 -
Total income 4,530 4,937 4,971
Half-year to Half-year to
30 June 31 December
2004 2003 2003
£m £m £m
Expenses, excluding discontinued operations and customer redress
provisions 2,363 2,284 2,417
Discontinued operations - 143 129
Customer redress provisions - 200 -
Total operating expenses 2,363 2,627 2,546
Page 45 of 47
LLOYDS TSB GROUP
13. Dividend
An interim dividend for 2004 of 10.7p per share (2003: 10.7p), will be paid on 6
October 2004.
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 11 August
Record date 13 August
Final date for joining or leaving the dividend reinvestment plan 8 September
Interim dividend paid 6 October
14. Other information
Results for the half-year ended 30 June were approved by the directors on 29
July 2004.
Statutory accounts for the year ended 31 December 2003 were delivered to the
registrar of companies. The auditors' report on these accounts was unqualified
and did not include a statement under sections 237(2) (accounting records or
returns inadequate or accounts not agreeing with records and returns) or 237 (3)
(failure to obtain necessary information and explanations) of the Companies Act
1985.
Page 46 of 47
CONTACTS
For further information please contact:-
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, 25 Gresham Street, London EC2V 7HN. The full news release can also
be found on the Group's website - www.lloydstsb.com.
Information about the Group's role in the community and copies of the Group's
code of business conduct and its environmental report may be obtained by writing
to Public Affairs, Lloyds TSB Group plc, 25 Gresham Street, London EC2V 7HN.
This information is also available on the Group's website.
Page 47 of 47
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