Interim Results - Part 1

Lloyds TSB Group PLC 27 July 2001 PART 1 Lloyds TSB Group plc LLOYDS TSB GROUP PRESENTATION OF RESULTS In accordance with generally accepted accounting practice amongst listed insurance companies in the UK, the results of the Group's life and pensions business have been separately analysed between an operating profit, which includes investment earnings calculated using longer-term investment rates of return, and a profit before tax, separately identifying the short-term fluctuations in investment returns (page 41, note 5). In addition there were other items affecting the Group's results in the first half of 2001 when compared to the two previous half-years. In the first half of 2001 there were exceptional restructuring costs in support of the Group's extensive efficiency programme (page 43, note 8) and acquisition costs relating to the proposed acquisition of Abbey National (page 43, note 9). During 2000, the impact of a provision for redress to past purchasers of pension policies ('pension provision'), changes in the economic assumptions applied to our long-term assurance business (page 42, note 6) and a one-off charge relating to stakeholder pensions (page 42, note 7) was also significant. To facilitate comparisons of the results, certain financial information and commentaries have been presented on a 'business as usual operating profit' basis, which excludes the effect of these exceptional items. LLOYDS TSB GROUP 2001 INTERIM RESULTS PROFIT BEFORE TAX BY MAIN BUSINESSES Half-year to Half-year to 30 June 31 December 2001 2000 2000 £m £m £m UK Retail Banking 330 372 404 Mortgages 423 441 448 Insurance and Investments* 792 591 834 UK Retail Financial Services 1,545 1,404 1,686 Wholesale Markets 445 377 369 International Banking 276 261 216 Central group items (29) 7 (125) Business as usual operating profit 2,237 2,049 2,146 Short-term fluctuations in investment returns (329) (38) (56) (page 41, note 5) Exceptional restructuring costs (54) (74) (114) (page 43, note 8) Abbey National offer costs (16) - - (page 43, note 9) Changes in economic assumptions - 127 - (page 42, note 6) Pension provision (page 18) - - (100) Stakeholder pension related charge - - (80) (page 42, note 7) Statutory profit before tax 1,838 2,064 1,796 * Insurance and Investments includes 'normalised' investment returns based on long-term rates of investment return (page 41, note 5) 2000 figures have been restated to take account of the implementation of Financial Reporting Standard 18 'Accounting Policies' (page 40, note 1) and changes in internal transfer pricing. In addition, the Group's calculation of short-term fluctuations in investment returns has been modified, and comparatives restated, following experience. Page 1 of 45 LLOYDS TSB GROUP 2001 INTERIM RESULTS PERFORMANCE HIGHLIGHTS Results - business as usual basis - Total revenue increased by 12 per cent to £4,711 million. - UK Retail Financial Services profit up £141 million, or 10 per cent, to £1,545 million. - Operating profit up 9 per cent to £2,237 million from £2,049 million. - Efficiency ratio 43.8 per cent compared with 42.8 per cent in the first half of 2000, and 43.9 per cent in the second half. - Profit attributable to shareholders increased by 10 per cent to £1,600 million. - Earnings per share increased by 9 per cent to 29.0p. - Economic profit increased by 9 per cent to £1,129 million. - Post-tax return on average shareholders' equity 30.6 per cent. Results - statutory basis - Profit before tax decreased 11 per cent to £1,838 million from £2,064 million. - Earnings per share decreased by 13 per cent to 23.4p. - Total capital ratio 9.8 per cent, tier 1 capital ratio 9.0 per cent. - Interim dividend increased by 10 per cent to 10.2p per share. Other significant achievements during the period include: - In the first half of 2001, the Group sold more products to more people than in any previous half-year. - Over the last 12 months customer lending grew by 12 per cent to £119.7 billion and customer deposits increased by 8 per cent to £104.6 billion. - On a proforma basis new business premiums in the life, pensions and unit trust businesses increased by 20 per cent. - The Group has 1.6 million internet banking customers and LloydsTSB.com is now the most visited financial website in Europe. - The Group has improved market share in many key product areas. Commenting on the results Lloyds TSB Group chairman, Maarten van den Bergh, said:- 'This is another satisfactory set of results from the Group, allowing the Board to increase the interim dividend by 10 per cent to 10.2p per share. We anticipate further progress in the second half of the year.' Page 2 of 45 LLOYDS TSB GROUP GROUP CHIEF EXECUTIVE'S STATEMENT These are satisfactory results with business as usual profit before tax up by 9 per cent to £2,237 million, in part building on the various investments we have made to grow our businesses. However, we are under no illusion that we will need to do even better to achieve our objective of first quartile performance in terms of total shareholder return and in so doing underpin our Governing Objective of maximising value for shareholders. Overall, business as usual income was up by 8 per cent, and business as usual costs were up by 7 per cent, after adjusting for acquisitions. Excluding our revenue generative investment programme, underlying costs increased by only 2 per cent. Against the second half of 2000, which benefited from the full year-end actuarial review and one-off provision releases, business as usual pre-tax profits increased by 4 per cent. We were naturally disappointed by the decision of the Secretary of State to block our proposed acquisition of Abbey National. We will not contest the decision but we do not agree with it as competition in financial services has never been more fierce. We were absolutely right to pursue Abbey National when they put themselves in play as the transaction would have delivered additional value for shareholders and integrating companies is something we do very well. Whilst the acquisition of Abbey National would have complemented our Group, it was never going to be a transformational deal, nor has it sidetracked us from growing and building our business. For a service company to prosper, to grow, to create value, its management has to recognise, accept and embrace the concept that shareholder value creation starts with the customer. Financial services is no exception to this rule. We believe that if we can create true value for our customers we will maximise value for our shareholders. Our vision is to create an organisation that understands and looks after the needs of our customers, both retail and corporate, so well that they give us the privilege of looking after more of their financial affairs. There is no doubt that retail financial services is changing at a pace never previously experienced. The winners will be those who have the best information about their customers and who build the most trusted relationships with them. We believe that our investments in better understanding the needs of our customers will enable us to continue to be one of the winners. In order to bring this about we must excel in a number of related areas, namely service, distribution, product offering, segmentation and customer relationship management and, of course, in the management and performance of our staff because in a service-based business it is the staff who ultimately make the difference. It is in all these areas of our business that we have invested significantly in recent years. Page 3 of 45 LLOYDS TSB GROUP Our service delivery to our customers will be enhanced considerably by the completion in a few weeks' time of our massive IT integration programme which will give all our personal customers on-line real-time banking 7 days a week, 24 hours a day. This will enable customers to get up-to-the-minute information with their cashpoint balances, mini statements and internet statements, all including transactions that occurred just minutes earlier. It will allow immediate clearance of Lloyds TSB cheques and immediate transfer of funds between Lloyds TSB accounts. On-line banking is an essential ingredient for the fast moving world of the 21st century, and its introduction creates a real competitive advantage for the Group as no other major player offers this service. Our distribution capability is second to none. Customers demand multi-channel access; they want to do business when and where it suits them. We have, therefore, invested further in extending our capacity; we have the biggest branch network in the country which over 70 per cent of our customers visit frequently, our telephone banking business is the biggest in the UK with over 2 million customers regularly using this service, and our Internet site is the most visited financial services website in Europe with over 1.6 million customers registered. We have improved our product range to one which is more innovative and attractive than it has ever been. We are the clear market leader in fee based value added accounts. In the first half of this year we added almost 0.5 million new accounts of this type and we are well on track to achieving our target of 1 million additional accounts this year. This will give us a total of 3 million customers who choose to pay for the benefits inherent in these accounts. Our new to bank current account base is growing significantly; we recruited a record number of new current account customers in the first half of the year. Independent research confirms that we have better cross-sell rates than any of our peers, and levels of customer attrition remain low and well below the industry average. We are increasing the average number of products our customers hold with us and are on track to achieve our target of 2.5 products per customer by 2002, against an industry average today of less than 1.9. One of the key elements of our retail growth strategy has been the investment in Customer Relationship Management (CRM). Our CRM programme is now fully operative and independent benchmarking has confirmed that we are now truly world class in the deployment of CRM throughout the Group. Our CRM systems are beginning to generate substantially more sales leads than ever before and our in-branch information systems have materially enhanced the ability of our staff to identify individual customers' needs and to fulfil those needs. In addition, we continue to follow a strategy of differentiation through segmentation. We have developed our retail strategy around four principal customer segments and we are now beginning to tailor our products and services to meet the specific needs of these segments. By way of example, our Personal Choice service for high value customers is now meeting the individual needs of over 1 million customers. Page 4 of 45 LLOYDS TSB GROUP Another segment where we have significant growth opportunities is Wealth Management. Some 18 months ago we restructured our businesses to create a Wealth Management division and new strategies have been developed which are now being introduced on a phased basis. In October our new Wealth Management brand, Create, will be launched. Create aims to meet the differing needs of the Group's 1 million affluent customers by offering choices which reflect their individual preferences. A strategy of segmentation has also been adopted successfully in our business banking and mid-corporate businesses. In business banking our offers have been based around four different types of relationship support from a telephone only relationship, to a fee-based business partner relationship offering a high level of advice and support to the customer. This form of segmentation, derivatives of which are also on offer to our mid-corporate clients, is proving popular and is reflective of our philosophy of treating our customers on an increasingly individual basis and, as a consequence, we are confident of achieving further growth in these important markets. We have increased retail banking staff numbers by over 2,000 in the first half in support of our drive to increase sales and improve service. All our branch staff have undergone extensive training to enable them to better meet the needs of our customers and to help deliver the strategies which we are confident will lead to us gaining much more of our customers' business. So, in all these areas we have made sound progress which is now beginning to be reflected in our performance. Our overall sales volumes increased by 15 per cent over the first half of last year and the equivalised annual premiums of life, pensions and unit trusts increased by 20 per cent. The business as usual pre-tax profits from UK Retail Financial Services increased by £141 million, or 10 per cent, to £1,545 million from £1,404 million in the first half of 2000. However, within that figure the profits of UK Retail Banking were down on previous periods as this division has incurred much of the brunt of the additional investment expenditure. But it is important to look at the totality of Retail Financial Services as the banking, mortgage and insurance businesses are so interrelated. For instance, approximately two-thirds of sales from general insurance, where we are the UK's leading distributor of home insurance, are delivered through our UK Retail Banking outlets. Our Wholesale Markets and International businesses increased pre -tax profits by 13 per cent to £721 million in the first half of the year in comparison with the first half of 2000. In the first 6 months we were the number one arranger of syndicated loans for large UK companies, and we are the UK market leader in big-ticket leasing. Our development capital business continues to grow market share and profitability, and some 650,000 customers entrust us with their business accounts. Wholesale Markets and International Banking account for 32 per cent of Group profit. Page 5 of 45 LLOYDS TSB GROUP Over the last 12 months the Group has grown its customer lending by 12 per cent and customer deposits by 8 per cent. However, we have not grown the business at the expense of quality, indeed we remain the only AAA bank in the world in comparison with other major commercially owned banking groups. The quality of our income has also improved with 49 per cent now representing non- interest income rather than the more vulnerable net interest income. This figure is up from 41 per cent 2 years ago and 47 per cent last year. Our charge for bad and doubtful debts was higher than in the first half of 2000, largely as a result of volume growth and the acquisition of Chartered Trust, and at 0.55 per cent of average lending it compares very favourably with our peers. Our lending portfolio is heavily influenced by our mortgage business and we are well positioned for any economic slowdown. Whilst income generation is critical to our success, so is cost management. Our focus on maintaining and improving our efficiency has continued unabated and, as a consequence, we expect that our business as usual costs in the second half will grow significantly more slowly than in the first half. Going forward we expect business as usual costs to grow at a slower rate than business as usual revenues. Finally, our focus on growing our Group through acquisitions that complement our organic strategies and help provide new opportunities for growth, remains a key priority. We have made no secret of our desire to achieve an overseas deal. We have talked with our counterparts from many financial services companies, particularly in Europe, and there is no doubt that Lloyds TSB is highly regarded for our considerable selling skills and our ability to manage change effectively. We have a great deal we can contribute to any cross-border merger or acquisition, and we do expect that potential opportunities will arise in due course as consolidation throughout Europe accelerates. We believe a successful transaction can be achieved and we will continue to pursue all opportunities with vigour. In summary, the Lloyds TSB Group is in good shape. We have three very strong business divisions; UK Retail Banking and Mortgages, Insurance and Investments, and Wholesale Markets and International Banking, all of which continue to make a very significant contribution to the Group's overall earnings. We have developed the building blocks on which to grow our business and we will continue to maximise value for our shareholders by creating value for our customers. This philosophy is at the heart of all our strategies. It is, we believe, a winning formula. Peter Ellwood Group Chief Executive Page 6 of 45 LLOYDS TSB GROUP 2001 INTERIM RESULTS SUMMARY OF RESULTS Half-year to Increase Half-year to 30 June (Decrease) 31 December 2001 2000* 2000* Results (business as £m £m % £m usual basis**) Total income 4,711 4,206 12 4,465 Operating expenses 2,063 1,802 14 1,962 Trading surplus 2,648 2,404 10 2,503 Provisions for bad and doubtful debts 323 265 22 276 Operating profit 2,237 2,049 9 2,146 Profit attributable to shareholders 1,600 1,455 10 1,497 Economic profit 1,129 1,037 9 1,044 (page 40, note 2) Earnings per share (pence) 29.0 26.6 9 27.2 Post-tax return on average shareholders' equity (%) 30.6 31.3 29.8 Results (statutory basis) Profit before tax 1,838 2,064 (11) 1,796 Earnings per share (pence) 23.4 26.8 (13) 22.5 Post-tax return on average shareholders' equity (%) 25.0 31.7 24.8 Shareholder value Closing market price per share 711p 624p 14 708p Total market value of shareholders' equity £39.5bn £34.3bn 15 £39.0bn Dividends per share 10.2p 9.3p 10 21.3p Balance sheet £m £m £m Shareholders' equity 10,885 9,943 9 10,024 Total assets 229,576 210,455 9 218,393 Net assets per share (pence) 194 178 9 180 Risk asset ratios % % % Total capital 9.8 9.8 9.4 Tier 1 capital 9.0 9.6 8.5 * restated for the effect of FRS 18 (page 40, note 1) ** excluding the impact of short-term fluctuations in investment returns, exceptional restructuring costs and Abbey National offer costs and, during 2000, changes in the economic assumptions applied to our long-term assurance business, pension provision and a stakeholder pension related charge. Page 7 of 45 LLOYDS TSB GROUP REVIEW OF FINANCIAL PERFORMANCE The Group's profit before tax on a business as usual basis rose by £188 million, or 9 per cent, to £2,237 million from £2,049 million in the first half of 2000. The statutory results were lower at £1,838 million driven by adverse short-term fluctuations in investment earnings caused by the overall fall in stockmarket values. Total income on a business as usual basis increased by 12 per cent and even after allowing for the acquisition of businesses last year, the underlying growth in income was a very satisfactory 8 per cent. Total costs increased by 14 per cent but acquisitions accounted for 7 per cent of this increase. Of the underlying increase in costs of 7 per cent, the incremental investment in growth businesses accounted for 5 per cent and the remaining increase of 2 per cent primarily financed the increased sales volumes achieved in the first half of the year. Overall product sales were 15 per cent higher than in the first half of 2000. Customer lending and deposits continue to grow satisfactorily with increases in market shares being achieved in many of our core retail markets. The net interest margin, excluding the impact of the funding costs of Scottish Widows, was 3.68 per cent, compared with 3.71 per cent in the first half of 2000. This reduction was more than compensated for by increased volumes and fee based revenues. The efficiency ratio was 43.8 per cent compared with 42.8 per cent in the first half of 2000 reflecting the incremental investment in the Group's revenue growth opportunities and the impact of the Chartered Trust acquisition. Profit attributable to shareholders increased by 10 per cent, earnings per share increased by 9 per cent to 29.0p and economic profit increased by 9 per cent to £1,129 million. The post-tax return on average shareholders' equity was 30.6 per cent. The post-tax return on average assets was 1.92 per cent, and the post-tax return on average risk- weighted assets was 3.34 per cent. Our bancassurance strategy continues to deliver positive results. Profit before tax, on a business as usual basis, from UK Retail Financial Services (page 11), which encompasses UK Retail Banking, Mortgages, and Insurance and Investments, increased by £141 million, or 10 per cent, to £1,545 million from £1,404 million in the first half of 2000. - Pre-tax profit from UK Retail Banking (page 13) fell by £42 million, or 11 per cent, to £330 million. This reduction in profitability largely reflects the substantial investments that have been made to support future growth including the introduction of improved products and services. These investments will help to increase cross sales and improve customer loyalty in recognition that the retail banking business is a key recruitment vehicle for the sale of all our extensive range of bancassurance products, much of the profitability of which is reflected in other divisions. - Competition in the mortgage market remained intense and pre- tax profit from Mortgages (page 15) decreased by £18 million, or 4 per cent, to £423 million from £441 million in the first half of 2000. Gross new lending increased by 13 per cent to £6.1 billion, compared with £5.4 billion a year ago. Net new lending was £1.8 billion resulting in an estimated market share of net new lending of 8.0 per cent. Business levels improved significantly towards the end of the half-year with mortgage applications and the pipeline of new business reaching record levels. This provides a strong platform for an improved market share position in the second half of the year. Page 8 of 45 LLOYDS TSB GROUP Mortgages are also a key recruitment product for other retail products and services as we typically sell over 3.5 additional products, primarily insurance related, alongside the sale of a mortgage. One in four of all our customers with a mortgage now have their mortgage with the Group. The Group continues to be one of the most efficient mortgage providers in the United Kingdom. - Operating profit from Insurance and Investments (page 16) increased by 34 per cent to £792 million from £591 million. The Group has now started to see material benefits from the acquisition of Scottish Widows with a 20 per cent growth in half-year pro-forma weighted sales in life, pension and unit trusts to £395.8 million in the first half of 2001, compared with £331.2 million in the first half of 2000 and £379.8 million in the second half of 2000. Pre-tax profit from general insurance operations, comprising underwriting and broking, rose by £54 million, or 19 per cent, to £341 million, mainly as a result of continued strong sales growth. The Group has maintained its position as the leading distributor of home insurance in the United Kingdom. Wholesale Markets (page 21) pre-tax profit increased by £68 million, or 18 per cent, to £445 million. Total assets increased by 23 per cent and risk-weighted assets grew by 31 per cent, partly as a result of the Chartered Trust acquisition in September 2000. All businesses performed strongly. There was good customer lending growth in Corporate and Commercial Banking, and increased contributions from Corporate and Commercial Banking, Treasury Division, Lloyds TSB Asset Finance and Lloyds TSB Registrars. International Banking (page 23) pre-tax profit was £15 million higher at £276 million compared with the first half of 2000. Profits from New Zealand in local currency terms increased by 20 per cent, but after the effect of exchange rate movements profits from The National Bank of New Zealand increased by 10 per cent to £88 million. Our consumer finance business in Brazil, Losango Consumer Finance, made a pre-tax profit of £22 million, unchanged from the first half of 2000 and the Group's international private banking and offshore banking operations continued to perform well despite falling stockmarkets. The total Group charge for bad and doubtful debts (page 32) was 22 per cent higher at £323 million, compared with £265 million in the first half of 2000. The domestic charge increased to £266 million from £231 million, again largely as a result of the Chartered Trust acquisition, and provisions overseas increased to £57 million from £34 million. The Group's charge for bad and doubtful debts, expressed as a percentage of average lending, was 0.55 per cent compared to 0.50 per cent in the first half of 2000. At the end of the half-year specific provisions for bad and doubtful debts for the Group totalled £1,116 million, representing over 90 per cent of non-performing loans (2000 first half: 95 per cent). Our lending portfolio is heavily influenced by our mortgage business and we are well positioned for any economic slowdown. The total capital ratio was 9.8 per cent and the tier 1 capital ratio was 9.0 per cent. Balance sheet assets increased by £11.2 billion, or 5 per cent, to £229.6 billion from £218.4 billion at the end of 2000. Over the last 12 months, loans and advances to customers increased by £13.1 billion, or 12 per cent. Risk- weighted assets increased by 17 per cent to £102.3 billion from £87.4 billion at the end of June 2000. Page 9 of 45 LLOYDS TSB GROUP - BUSINESS AS USUAL RESULTS - BUSINESS AS USUAL Half-year to Half-year to 30 June 31 December 2001 2000* 2000* £m £m £m Interest receivable: Interest receivable and similar income arising from debt securities 202 240 203 Other interest receivable and similar income 5,647 5,116 5,495 Interest payable 3,467 3,045 3,422 Net interest income 2,382 2,311 2,276 Other income Fees and commissions receivable 1,469 1,348 1,420 Fees and commissions payable (271) (223) (256) Dealing profits (before expenses) 131 114 111 Income from long-term assurance business 402 268 467 General insurance premium income 206 200 199 Other operating income 392 188 248 2,329 1,895 2,189 Total income 4,711 4,206 4,465 Operating expenses Administrative expenses 1,785 1,642 1,736 Depreciation 259 154 210 Amortisation of goodwill 19 6 16 Depreciation and amortisation 278 160 226 Total operating expenses 2,063 1,802 1,962 Trading surplus 2,648 2,404 2,503 General insurance claims 77 71 71 Provisions for bad and doubtful debts Specific 327 264 283 General (4) 1 (7) 323 265 276 Amounts written off fixed asset investments 6 22 10 Operating profit 2,242 2,046 2,146 Income from associated undertakings and joint ventures (5) 3 - Business as usual operating profit 2,237 2,049 2,146 Short-term fluctuations in investment returns (329) (38) (56) Exceptional restructuring costs (54) (74) (114) Abbey National offer costs (16) - - Changes in economic assumptions - 127 - Pension provision - - (100) Stakeholder pension related charge - - (80) Statutory profit before tax 1,838 2,064 1,796 * restated for the effect of FRS 18 (page 40, note 1) Page 10 of 45 LLOYDS TSB GROUP - BUSINESS AS USUAL PERFORMANCE BY SECTOR UK Retail Financial Services Half-year to Half-year to 30 June 31 December 2001 2000 2000 £m £m £m Net interest income 1,549 1,505 1,534 Other income 1,601 1,367 1,619 Total income 3,150 2,872 3,153 Operating expenses 1,325 1,203 1,261 Trading surplus 1,825 1,669 1,892 General insurance claims 77 71 71 Provisions for bad and doubtful debts 198 197 135 Income from associated undertakings and joint ventures (5) 3 - Profit before tax 1,545 1,404 1,686 Total profit before tax on a business as usual basis from UK Retail Financial Services, which encompasses UK Retail Banking, Mortgages, and Insurance and Investments, increased by £141 million, or 10 per cent, to £1,545 million from £1,404 million in the first half of 2000. Over the last few years, a substantial amount of investment has been made to develop our revenue growth initiatives and underpin the future profitability of our core retail financial services business. Much of this investment has been completed, all initiatives have clearly defined payback periods and strong volume growth across all areas of UK Retail Financial Services is now beginning to be seen. We are very confident that our retail strategies will deliver superior growth in the future. One of the key elements of our retail growth strategy has been our investment in Customer Relationship Management (CRM). Our CRM programme is now fully operative and independent benchmarking has confirmed that we are now truly world class in the deployment of CRM throughout the Group. Our CRM systems are beginning to generate substantially more sales leads than ever before and our in-branch information systems have materially enhanced the ability of our staff to identify individual customers' needs and to fulfil those needs. We continue to follow a strategy of differentiation through segmentation and we have developed our retail strategy around four principal customer segments. We are now beginning to tailor our products and services to meet the specific needs of these segments and have improved our product range to one which is more innovative and attractive than it has ever been. Page 11 of 45 LLOYDS TSB GROUP - BUSINESS AS USUAL UK Retail Banking and Mortgages Half-year to Half-year to 30 June 31 December 2001 2000 2000 £m £m £m Net interest income 1,505 1,467 1,484 Other income 571 557 586 Total income 2,076 2,024 2,070 Operating expenses 1,120 1,015 1,084 Trading surplus 956 1,009 986 Provisions for bad and doubtful debts 198 197 135 Income from associated undertakings and joint ventures (5) 1 1 Profit before tax 753 813 852 Profit before tax Retail Banking 330 372 404 Mortgages 423 441 448 753 813 852 Efficiency ratio 53.9% 50.1% 52.4% Total assets (period-end) £74.1bn £68.4bn £71.3bn Total risk-weighted assets (period-end) £45.7bn £42.0bn £44.0bn Total profit before tax from UK Retail Banking and Mortgages decreased by £60 million, or 7 per cent, to £753 million, largely as a result of the Group's investment programme in e- commerce, customer relationship management and wealth management. In the first half of 2001 these costs totalled £132 million, compared with £77 million in the first half of last year. Total income increased by 3 per cent as good volume growth was offset by margin pressure. Bad debt provisions were flat at £198 million. The majority of the Group's revenue growth investment programmes have been taking place within UK Retail Banking, which is now well positioned to take advantage of these opportunities. In addition, UK Retail Banking has the responsibility for managing the core relationship with our current account customers and, therefore, acts as the principal gateway for the cross-sale of our full range of bancassurance products and services. As such it contributes significantly to the profitability of other businesses. Page 12 of 45 LLOYDS TSB GROUP - BUSINESS AS USUAL UK Retail Banking (the UK retail businesses of Lloyds TSB, providing banking and financial services to personal and small business customers; private banking; and stockbroking) Pre-tax profit from UK Retail Banking decreased by £42 million, or 11 per cent, to £330 million. This reduction in profitability largely reflects the substantial investments that have been made to support future growth and improved products and services. These investments will help to increase cross sales and improve customer loyalty in recognition that the retail banking business is a key recruitment vehicle for the sale of our extensive range of bancassurance products, much of the profitability of which is reflected in other divisions. Personal loans and credit card lending increased by 15 per cent since the end of June 2000 and balances on current accounts and savings and investment accounts grew by 11 per cent over the same period, supported by the launch of a number of new products. The popularity of the Group's Added Value current accounts continued with Lloyds TSB maintaining its market leadership in this area with over 2.5 million customers now using these accounts. The Group also continues to maintain market-leading positions in most of its core markets, including personal current accounts, savings and business banking. We have continued to develop our distribution channels in order to offer the broadest possible range of access points for our customers to improve service and to enhance revenue growth. Our branch network of over 2,100 branches provides a comprehensive base for the recruitment and the servicing of existing, and potential, customer needs through the provision of a wide range of innovative products. This is underpinned by our new online real-time banking and customer relationship management systems designed to meet the needs of our customers in the fast changing environment in which we operate. LloydsTSB.com our internet banking system continues to grow rapidly and now has 1.6 million registered customers. It is consistently the most visited financial website in Europe. In addition to being able to conduct banking transactions over the internet, our customers can purchase products and services at a time more convenient to them. PhoneBank, our telephone banking operation, is one of the largest in Europe with 1.3 million customers. In addition, PhoneBank Express, our leading edge interactive voice recognition system, now has some 0.9 million registered users. PhoneBank and PhoneBank Express handled 12 million calls during the half-year. Our extensive range of distribution channels was further extended in April this year with the launch of iTV, our digital television service. Page 13 of 45 LLOYDS TSB GROUP - BUSINESS AS USUAL UK Retail Banking (continued) Business Banking continues to increase its customer base and, during the first half of 2001, began to roll-out an innovative new customer proposition designed to help businesses become more successful. As part of this our small business portal, success4business.com, now has over 40,000 registered users. Customer deposit balances have increased by 9 per cent and lending is up 3 per cent. This growth has been accompanied by increased sales of insurance, mortgages and investment products, helped increasingly by a close working relationship with Scottish Widows. UK Private Banking continued to perform well despite difficult stockmarket conditions. Profit before tax however decreased to £40 million, from £53 million in the first half of 2000, primarily due to lower stockmarket levels, on which portfolio management revenues are generally based. During the half-year, revenues in the Group's wealth management businesses were reduced by some £20 million as a result of lower stockmarket levels. Our new Wealth Management brand, Create, will be launched in October. The Create offer aims to meet the differing needs of the Group's 1 million affluent customers by offering choices that reflect their preferences. These range from those who seek only minimal advice with efficient execution, to those who seek a financial partner to help manage their assets, and to those who want discretionary management of their total financial affairs. In October 2001, the core elements of the programme will be launched and these will include our funds hypermarket, Create Financial Market, a new Wealth Management Account that will allow consolidation of all financial products into a single account, and the Create Relationship Unit which will provide clients with a high level of professional support and investment assistance. Page 14 of 45 LLOYDS TSB GROUP - BUSINESS AS USUAL Mortgages (covering the Group's total UK mortgage business through Cheltenham & Gloucester, Lloyds TSB, Lloyds TSB Scotland, Scottish Widows Bank and C&G TeleDirect) Half-year to Half-year to 30 June 31 December 2001 2000 2000 £m £m £m Profit before tax £423m £441m £448m Efficiency ratio 21.9% 21.6% 21.7% Gross new mortgage lending £6.1bn £5.4bn £6.1bn Market share of gross new mortgage lending 8.7% 9.5% 9.7% Net new mortgage lending £1.8bn £2.1bn £2.5bn Market share of net new mortgage lending 8.0% 10.5% 12.3% Mortgages outstanding (period-end) £54.5bn £50.2bn £52.7bn Market share of mortgages outstanding 9.7% 9.7% 9.8% Intense competition in the mortgage market created continuing pressure on interest margins and pre-tax profit from Mortgages decreased by £18 million, or 4 per cent, to £423 million from £441 million in the first half of 2000. Gross new lending increased by 13 per cent to £6.1 billion, compared with £5.4 billion a year ago, and net new lending was £1.8 billion resulting in an estimated market share of net new lending of 8.0 per cent. Mortgages are also a key recruitment product for other retail products and services as we typically sell over 3.5 additional products, primarily insurance, alongside the sale of a mortgage. One in four of all our customers with a mortgage now have their mortgage with the Group. Business levels improved significantly towards the end of the half-year with mortgage applications and the pipeline of new business reaching record levels. This provides a strong platform for an improved market share position in the second half of the year. The efficiency ratio of the Group's total mortgage business was 21.9 per cent compared with 21.6 per cent in the first half of 2000. The Group continues to be one of the most efficient mortgage providers in the United Kingdom. C&G continues to benefit from mortgage sales distribution through the Lloyds TSB branch network, the IFA market and from the strength of the C&G brand. In addition C&G Teledirect, its internet and telephone operation, continued to perform strongly. Business levels sourced from intermediaries remain strong. A relatively stable arrears position and the beneficial effect of house price increases have meant that bad debt provisions remained at very low levels. New provisions were largely offset by releases and recoveries resulting in a net charge of £2 million for the half-year, compared with a net credit of £5 million in the first half of 2000. The quality of our mortgage lending remains very satisfactory. Page 15 of 45 MORE TO FOLLOW

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