SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
22 February 2008
LLOYDS TSB GROUP plc
(Translation of registrant's name into English)
5th Floor
25 Gresham Street
London
EC2V 7HN
United Kingdom
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F..X..Form 40-F.....
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes .....No ..X..
If "Yes" is marked, indicate below the file number
assigned to the registrant in connection with Rule
12g3-2(b): 82- ________
Index to Exhibits
Item
No. 1 Regulatory News Service Announcement, dated 22 February 2008
re: Final Results
LLOYDS TSB GROUP PLC - RESULTS 2007
CONTENTS
Page
Key highlights 1
Summary of results 2
Profit analysis by division 3
Group Chief Executive's statement 4
Group Finance Director's review of financial performance 7
Summarised segmental analysis 13
Divisional performance: 14
- UK Retail Banking 14
- Insurance and Investments 18
- Wholesale and International Banking 25
Consolidated income statement - statutory 29
Consolidated balance sheet - statutory 30
Consolidated statement of changes in equity - statutory 31
Condensed consolidated cash flow statement - statutory 32
Condensed segmental analysis - statutory 33
Notes 35
Contacts for further information 58
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the
business, strategy and plans of the Lloyds TSB Group, its current goals and
expectations relating to its future financial condition and performance. By
their nature, forward looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
The Group's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a result of a
variety of factors, including UK domestic and global economic and business
conditions, risks concerning borrower credit quality, market related risks such
as interest rate risk and exchange rate risk in its banking business and equity
risk in its insurance businesses, changing demographic trends, unexpected
changes to regulation, the policies and actions of governmental and regulatory
authorities in the UK or jurisdictions outside the UK, including other European
countries and the US, exposure to legal proceedings or complaints, changes in
customer preferences, competition and other factors. Please refer to the latest
Annual Report on Form 20-F filed with the US Securities and Exchange Commission
for a discussion of such factors. The forward looking statements contained in
this announcement are made as at the date of this announcement, and the Group
undertakes no obligation to update any of its forward looking statements.
KEY HIGHLIGHTS
Unless otherwise stated the analysis throughout this document compares the year
to 31 December 2007 with the year to 31 December 2006 and excludes the impact of
insurance related volatility, profit on disposal of businesses, settlement of
overdraft claims in 2007 and the pension schemes related credit in 2006 (page
36, note 2).
"I am delighted to report that the Group has continued to deliver a strong
trading performance, notwithstanding the significant recent turbulence in global
financial markets. Our higher quality, lower risk, business model has been
clearly demonstrated in the resilience of our earnings stream.
The Board remains confident in the Group's earnings outlook and, as a result,
has decided to increase the final dividend by 5 per cent to 24.7 pence per
share."
Sir Victor Blank
Chairman
Strong financial performance with statutory earnings per share
increased by 17 per cent to 58.3p. Economic profit increased by 21 per cent.
Statutory profit before tax was 6 per cent lower at GBP4,000 million, largely
reflecting adverse policyholder interests volatility.
- Strong underlying profit momentum. Profit before tax up 6 per cent to GBP3,919
million notwithstanding impact of global financial markets turbulence. Excluding
the impact of GBP280 million market dislocation, profit before tax increased by
13 per cent to GBP4,199 million.
- High returns maintained, with return on equity of 25.2 per cent.
Improved return on risk-weighted assets, and return on Embedded Value increased
to 9.9 per cent.
- Good income growth. Income growth of 5 per cent, reflecting the
strength and resilience of the Group's revenue base. Excluding the impact of
market dislocation and insurance grossing, income increased by 6 per cent.
- Excellent cost management. Cost growth of only 1 per cent, delivering wide
positive jaws. Cost:income ratio improved by 1.8 percentage points to 49.0 per
cent. Groupwide productivity programme exceeded 2007 expectations, and remains
on track to deliver benefits of GBP250 million in 2008.
- Satisfactory credit quality. Retail impairment charge lower than in
2006. Based on current trends, we do not expect a significant change in the
retail impairment charge in the first half of 2008, compared to the first half
of 2007. Corporate asset quality remains good.
- Strong liquidity and funding position maintained throughout the
recent global financial markets turbulence.
- Excellent capital management. Robust capital ratios maintained.
Satisfactory transition to Basel II, with tier 1 capital ratio increasing to 9.5
per cent. Over GBP3.6 billion of capital repatriated from Scottish Widows over
the last 3 years.
Page 1 of 58
SUMMARY OF RESULTS
2007 2006 Change
GBPm GBPm %
Results - statutory
Total income, net of insurance claims 10,706 11,104 (4)
Operating expenses 5,567 5,301 (5)
Trading surplus 5,139 5,803 (11)
Impairment 1,796 1,555 (15)
Profit before tax 4,000 4,248 (6)
Profit attributable to equity shareholders 3,289 2,803 17
Economic profit (page 48, note 17) 2,238 1,855 21
Earnings per share (page 48, note 18) 58.3p 49.9p 17
Post-tax return on average shareholders' equity 28.2% 26.6%
Results - excluding volatility, profit on sale of businesses,
settlement of overdraft claims in 2007 and the pension schemes
related credit in 2006
Total income, net of insurance claims 11,206 10,694 5
Operating expenses 5,491 5,429 (1)
Trading surplus 5,715 5,265 9
Impairment 1,796 1,555 (15)
Profit before tax 3,919 3,710 6
Profit attributable to equity shareholders 2,863 2,634 9
Economic profit 1,842 1,690 9
Earnings per share 50.8p 46.9p 8
Post-tax return on average shareholders' equity 25.2% 25.1%
Post-tax return on average risk-weighted assets 1.76% 1.72%
Shareholder value
Closing market price per share (year end) 472p 571.5p (17)
Total market value of shareholders' equity GBP26.7bn GBP32.2bn (17)
Total shareholder return (12.1)% 24.8%
Proposed dividend per share (page 57, note 24) 35.9p 34.2p 5
31 December 31 December
2007 2006 Change
GBPm GBPm %
Balance sheet
Shareholders' equity 12,141 11,155 9
Net assets per share 212p 195p 9
Total assets 353,346 343,598 3
Risk-weighted assets (Basel I basis) 171,971 156,043 10
Loans and advances to customers 209,814 188,285 11
Customer deposits 156,555 139,342 12
Risk asset ratios
Total capital (Basel I basis) 11.0% 10.7%
Tier 1 capital (Basel I basis) 8.1% 8.2%
Page 2 of 58
PROFIT ANALYSIS BY DIVISION
2007 2006 Change
GBPm GBPm %
UK Retail Banking (page 14) 1,808 1,549 17
Insurance and Investments (page 18) 1,056 973 9
Wholesale and International Banking (page 25)
- Before impact of market dislocation 1,717 1,640 5
- Impact of market dislocation (280) -
1,437 1,640 (12)
Central group items (382) (452)
Profit before tax* 3,919 3,710 6
Volatility (page 36, note 2)
- Insurance (267) 84
- Policyholder interests (page 37, note 2) (233) 326
Profit on sale of businesses 657 -
Settlement of overdraft claims (76) -
Pension schemes related credit - 128
Profit before tax 4,000 4,248 (6)
Taxation (page 56, note 23) (679) (1,341)
Profit for the year 3,321 2,907 14
Profit attributable to minority interests 32 104
Profit attributable to equity shareholders 3,289 2,803 17
Profit for the year 3,321 2,907 14
Earnings per share (page 48, note 18) 58.3p 49.9p 17
*Excluding volatility, profit on sale of businesses, settlement of overdraft
claims and pension schemes related credit.
Page 3 of 58
GROUP CHIEF EXECUTIVE'S STATEMENT
2007 was another good year for Lloyds TSB. We delivered strong results, despite
the more challenging operating environment that we saw in the second half of the
year. Our business performance, excluding the impact of the market dislocation,
continued its strong momentum as our relationship-based strategy serves us well.
We believe this momentum will carry through to 2008, given we have a high
quality, sustainable earnings stream, driven by the deep relationships we have
with our customers, coupled with the significant growth potential we have both
within our own franchise and in the UK market as a whole. As a result, we
remain confident as to the Group's future outlook.
Given this strong performance and confidence in our future earnings capacity,
the Board has decided to increase the final dividend by 5 per cent to 24.7 pence
per share. This brings the full year dividend to 35.9 pence per share, an
increase of 5 per cent over that paid for 2006. Going forward, the Board
expects to grow the dividend over time, whilst continuing to build dividend
cover.
Strong momentum
On an underlying basis, the Group increased profit before tax by 6 per cent to
GBP3,919 million. Excluding the GBP280 million charge arising from the market
dislocation, the Group grew profits by 13 per cent from GBP3,710 million to
GBP4,199 million. Whilst we cannot overlook the impact of the dislocation on our
results, these numbers are more reflective of the ongoing performance of the
Group.
Our lower risk strategy limited the impact of the abrupt change in the markets
and, consequently, our charge was relatively modest in comparison to our balance
sheet size, our earnings, and the charges taken by many other organisations.
This is in large part due to the conscious choice to focus the Group's strategy
on building deep, long-lasting relationships with our customers in order to
deliver high quality, sustainable results over time.
Over the last few years, the successful execution of our strategy has delivered
increasing levels of customer recruitment and enhanced sales volumes, and in
2007 we saw further progress on these leading indicators of future profit.
In the Retail Bank, we attracted over one million new current accounts and we
delivered strong flows of new business, with sales volumes rising 17 per cent.
We are now the number one provider of current accounts, cards and personal
loans. In Insurance and Investments, we have seen good progress in the sale of
bancassurance products to our franchise customers and sales volumes rose by 20
per cent, with particular success in the sale of protection products through the
branch network.
In Wholesale and International Banking, we saw similar strong progress. Our
Corporate Markets business is attracting growing numbers of new customers and
recorded a further 46 per cent improvement in cross-sales. Our Commercial
Banking business attracted good levels of the more valuable switcher accounts
and we remain the leader in terms of the share of the start-up market, at 21 per
cent.
Key to supporting our relationship-focused strategy is the efficient management
of costs and capital, allowing us to continue to invest in the franchise and
drive future growth. Once again we have delivered a strong performance in these
areas.
Page 4 of 58
Costs rose by only 1 per cent, as we continue to embed our efficiency
programmes, and our cost:income ratio improved to 49.0 per cent, from 50.8 per
cent in 2006. The extension of our lean manufacturing and sigma efficiency
programmes, the improvement of our procurement processes and the adoption of
end-to-end processing led to improvements in efficiency as well as better levels
of service quality.
Our capital position is strong. We manage our capital to support efficient
growth, directing capital to our higher growth and higher return business lines.
We continued the capital efficiency programmes in Scottish Widows, with a
further GBP1.9 billion repatriated to the Group during the year.
High quality sustainable business
Key to sustaining our strong momentum in future years are the relationships we
are building with our customers, understanding their needs and developing the
products and services to meet those needs.
As our results in recent periods show, this strategy has served us well and has
a number of benefits. A high percentage of our income is recurring customer
revenue, which is by nature more stable and sustainable. By building deep
relationships, meeting more of our customers' needs, we also benefit in that we
have a lower cost of acquiring new sales. Additionally, because we understand
our customers well, we tend to have lower impairments and thus require less
capital. Perhaps as important as the decision to pursue the relationship
strategy, was the decision not to pursue a product-led strategy which, as we
have seen of late, results in more volatile revenues and carries a significantly
higher risk profile.
Significant growth potential
The UK market represents the second largest economic profit pool for financial
services, with high levels of household financial wealth. It enjoys the lowest
level of unemployment in the G7 economies and despite a likely slow down in
2008, we are projecting good medium-term economic performance and strong
long-term savings growth.
We estimate that we currently only have a 10 per cent share of the economic
profit pool, and so we have significant potential within our existing franchise
to grow by meeting more of our customers' needs as well as through adding new
customers to our franchise.
To support this growth potential we are investing in developing the supporting
infrastructure in areas such as customer data management and account planning
tools. We continue to enhance our risk and financial systems and, together,
these areas will ensure we have the necessary platform to safely support our
future growth.
Outlook
As we look forward to 2008, we do so against a backdrop of turbulent markets and
slowing global economic growth. Despite these challenges, we are well
positioned to deliver further growth and to take advantage of the opportunities
that the current environment offers.
Page 5 of 58
Our relationship-focused strategy is delivering good results for all our
stakeholders. The events of the last year show that it is effective in
generating sustainable, high quality results through the cycle. Our prudent
approach to risk ensured we experienced minimal impact from the US sub-prime
fall-out. We have a strong capital position and this will support the future
growth of the business.
This has been a year of significant progress across the Group and let me express
my thanks to all our staff for their wonderful contribution to our success.
Relationship businesses thrive on great staff that understand customers and work
towards meeting their needs. In this last year, the performance of our staff
has been terrific.
J Eric Daniels
Group Chief Executive
Page 6 of 58
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
In 2007 the Group delivered a strong performance against the backdrop of
significant turbulence in global financial markets. Statutory profit
attributable to equity shareholders increased by GBP486 million, or 17 per cent,
to GBP3,289 million and earnings per share increased by 17 per cent to 58.3p.
Economic profit increased by 21 per cent to GBP2,238 million, and the post-tax
return on equity improved from 26.6 per cent to 28.2 per cent. Profit before
tax fell by 6 per cent to GBP4,000 million, largely as a result of significant
adverse policyholder interests volatility.
To enable meaningful comparisons to be made with 2006, the income statement
commentaries below exclude insurance related volatility, the profit on sale of
businesses, settlement of overdraft claims in 2007 and the pension schemes
related credit in 2006.
Building strong customer relationships
Lloyds TSB's strategy to build strong customer franchises and grow our business
by realising the considerable potential within those franchises continues to
deliver strong results. We have continued to extend the reach and depth of our
customer relationships, achieving good sales growth, whilst also improving
productivity and efficiency. The underlying performance of the business remains
strong with revenue growth remaining well ahead of cost growth.
Like many other financial institutions, the Group has been affected by the
recent market dislocation; however, the relationship focus of our strategy has
meant that the impact on the Group's profit before tax was limited to GBP280
million in 2007 (GBP188 million reduction in income; GBP92 million increase in
impairment).
Continued momentum throughout the business
Profit before tax increased by GBP209 million, or 6 per cent, to GBP3,919
million, underpinned by good relationship banking momentum, notwithstanding the
impact of the GBP280 million market dislocation in Corporate Markets. Revenue
growth of 5 per cent exceeded cost growth of 1 per cent, with each division
delivering stronger revenue growth than cost growth. Earnings per share
increased by 8 per cent to 50.8p and economic profit increased by 9 per cent to
GBP1,842 million. Excluding the impact of market dislocation, Group profit
before tax increased by 13 per cent to GBP4,199 million.
Good income growth
Overall, income growth of 5 per cent reflects good progress in delivering our
divisional strategies. We have increased income from both new and existing
customers, with strong growth in both assets and liabilities, as well as a
significant increase in fee-related income. Excluding the impact of market
dislocation and insurance grossing, income increased by 6 per cent.
Group net interest income, excluding insurance grossing, increased by GBP349
million, or 7 per cent, to GBP5,631 million. Customer deposits increased by 12
per cent to GBP157 billion, supported by strong growth in savings balances in
the retail bank, where bank savings increased by 15 per cent and wealth
management balances by 12 per cent. Customer deposits in our Corporate Markets,
Commercial and International businesses increased by 18 per cent.
Page 7 of 58
Strong levels of customer lending growth in Commercial Banking and Corporate
Markets, and good growth in mortgages and retail deposits, more than offset the
marketwide experience of lower unsecured personal lending balances. Total assets
increased by 3 per cent to GBP353 billion, with an 11 per cent increase in loans
and advances to customers.
The net interest margin from our banking businesses (page 39, note 4) decreased
by 9 basis points, to 2.79 per cent, with broadly stable product margins but an
adverse mix effect. Stronger growth in finer margin mortgages and flat wider
margin unsecured consumer lending contributed to the negative mix effect which
accounted for 9 basis points of margin decline. Overall product margins were 2
basis points lower, reflecting competitive pressures in the mortgage and asset
finance businesses and a move to finer margin secured lending in Commercial
Banking. Funding costs improved the margin by 2 basis points. During the
second half of 2007, product margins have started to show signs of improving,
with increased new business margins becoming evident in mortgages and corporate
lending reflecting a marketwide trend towards more appropriate pricing for risk.
Other income, net of insurance claims and excluding insurance grossing,
increased by GBP133 million, or 2 per cent, to GBP5,530 million. This reflected
higher fees and commissions receivable as a result of strong growth in added
value current accounts and higher insurance commissions in the retail bank. In
addition, good levels of growth were achieved in fee based product sales to
corporate and commercial banking customers.
Excellent cost management
The Group continues to invest in improving processing efficiency, resulting in
continued tight control over costs. During 2007, operating expenses increased
by only 1 per cent to GBP5,491 million. Over the last 12 months, staff numbers
have fallen by 4,552 (7 per cent) to 58,078, largely as a result of the disposal
of Lloyds TSB Registrars and Dutton-Forshaw and further efficiency improvements
in back-office processing centres. These improvements in operational
effectiveness have resulted in a further reduction in the Group cost:income
ratio from 50.8 per cent to 49.0 per cent.
The Group's programme of productivity initiatives has continued to deliver
significant benefits, improving underlying cost efficiency and creating greater
headroom for further investment in the business. During 2007 the programme
delivered net cost reductions of GBP145 million, exceeding the previously
indicated net benefits of approximately GBP125 million, with gross benefits of
GBP248 million and reinvestment in further programme initiatives of GBP103
million. The Group remains on track to deliver net benefits of approximately
GBP250 million in 2008.
Along with a number of other UK banks, during the year the Group has received a
number of customer claims for the repayment of overdraft fees. On 27 July 2007,
several banks, together with the Office of Fair Trading, asked the High Court of
England and Wales to clarify the legal position regarding personal current
account fees. The 2007 results include a charge of GBP76 million relating to the
settlement of claims during the year, together with related costs.
Page 8 of 58
Overall credit quality remains satisfactory
Impairment losses increased by 15 per cent to GBP1,796 million. Our impairment
charge on loans and advances expressed as a percentage of average lending was
0.82 per cent, excluding the impact of market dislocation and the 2007 Finance
Act, compared to 0.83 per cent in 2006 (page 42, note 9). Impaired assets
increased by 8 per cent to GBP5,311 million, less than the rate of lending
growth, and now represent 2.5 per cent of total lending, down from 2.6 per cent
at 31 December 2006.
In UK Retail Banking, impairment losses decreased by GBP14 million, or 1 per
cent, to GBP1,224 million. During 2007, we have seen a reduction in the level of
customer insolvencies, improvements in the Group's collections procedures and
better than assumed recoveries. The quality of new unsecured lending has
continued to be strong and our arrears and delinquency trends have improved
during the year. In addition, the asset quality of our mortgage portfolio has
remained excellent. Whilst the uncertain UK macroeconomic environment and
customer insolvency trends remain key factors in the outlook for retail
impairment, our current lead indicators are good, we are continuing to enhance
our underwriting and collections procedures and the quality of new business
remains strong. As a result, based on current trends, we do not expect a
significant change in the retail impairment charge in the first half of 2008,
compared to the first half of 2007.
The Wholesale and International Banking charge for impairment losses increased
by GBP264 million to GBP572 million, including a GBP92 million impairment charge
relating to the impact of market dislocation in the second half of 2007, and a
one-off charge of GBP28 million relating to the impact of the 2007 Finance Act
on the Group's leasing business. The increase in the impairment charge also
reflects a lower level of releases and recoveries in Corporate Markets and the
impact of recent double-digit growth rates in Corporate lending.
Limited exposure to assets affected by current capital markets uncertainties
Whilst no bank has been immune to the impact of the turbulence in global
financial markets in the second half of 2007, Lloyds TSB's high quality business
model means that the Group has relatively limited exposure to assets affected by
current capital markets uncertainties (page 46, note 15).
US sub-prime Asset Backed Securities (ABS) and ABS Collateralised Debt
Obligations (CDOs)
Lloyds TSB has no direct exposure to US sub-prime ABS and limited indirect
exposure through ABS CDOs. During the second half of 2007, the market value of
our holdings in ABS CDOs reduced and, as a result, the Group has taken an income
statement charge of GBP114 million, leaving a residual investment of GBP130
million, net of hedges. The write-down largely reflects junior tranches of CDOs
which have been written down to the expected interest payments to be received
within the next 12 months. The Group has no exposure to mezzanine ABS CDOs. The
Group's residual investment of GBP130 million is stated net of credit default
swap (CDS) protection totalling GBP470 million purchased from a 'triple A' rated
monoline Financial Guarantor. At 31 December 2007, the underlying assets
supported by this protection had fallen in value, leaving a reliance on the CDS
protection totalling GBP155 million. In addition, we have GBP1,861 million of
ABS CDOs which are fully cash collateralised by major global financial
institutions.
Page 9 of 58
Structured Investment Vehicle (SIV) Capital Notes
At 30 June 2007 the Group's exposure to SIV Capital Notes totalled GBP100
million. During the second half of 2007 the Group wrote down the value of these
assets by GBP22 million, leaving a residual exposure at 31 December 2007 of
GBP78 million. Additionally, at 31 December 2007 the Group had commercial paper
back up liquidity facilities totalling GBP370 million, of which GBP98 million
had been drawn. All of these liquidity lines are senior facilities. Since the
year end, these facilities have been reduced to GBP208 million, of which GBP115
million has been drawn. The Group has no SIV-Lite exposure.
Trading portfolio
In the second half of 2007, Corporate Markets also saw a reduction in profit
before tax of approximately GBP144 million as a result of the impact of
mark-to-market adjustments in the Group's trading portfolio, to reflect the
marketwide repricing of liquidity and credit. At 31 December 2007 the trading
portfolio contained GBP181 million of indirect exposure to US sub-prime
mortgages and ABS CDOs. This super senior exposure is protected by note
subordination.
Available-for-sale assets
At 31 December 2007, the Group's portfolio of available-for-sale assets totalled
GBP20,196 million (31 December 2006: GBP19,178 million). A significant
proportion of these assets (GBP8.3 billion) related to the ABS in Cancara. The
residual assets included GBP3.2 billion Student Loan ABS, predominantly
guaranteed by the US Government, GBP4.6 billion Government bond and short-dated
bank commercial paper and certificates of deposit and GBP4.1 billion major bank
senior paper and high quality ABS. These available-for-sale assets are intended
to be held to maturity however, under IFRS, they are marked-to-market through
reserves. During 2007, a net GBP413 million reserves adjustment, which has no
impact on the Group's capital ratios, has been made to reflect a reduction in
the value of these assets. These assets are not impaired and we expect to obtain
full value for them upon maturity.
The Group's investment in Cancara, our hybrid Asset Backed Commercial Paper
conduit, was GBP12.0 billion at 31 December 2007, comprising GBP8.3 billion ABS
and GBP3.7 billion client receivables transactions. Cancara, which is fully
consolidated in the Group's accounts, is managed in a very conservative manner,
which is demonstrated by the quality and ratings stability of its underlying
asset portfolio. At 31 December 2007, the ABS bonds in Cancara were 100 per cent
Aaa/AAA rated by Moody's and Standard & Poor's respectively, and there was no
exposure either directly or indirectly to sub-prime US mortgages within the ABS
portfolio. Since the year end, ABS totalling GBP67 million have been downgraded.
At 31 December 2007 the client receivables portfolio included GBP115 million of
US sub-prime mortgage exposure.
Scottish Widows has no exposure to US sub-prime ABS either directly or
indirectly through CDOs. The Group holds GBP25 million of short-dated SIV
commercial paper through Scottish Widows.
Strong capital management disciplines
Capital efficiency continued to improve throughout the Group, resulting in an
increase in post-tax return on average shareholders' equity to 25.2 per cent,
and in the post-tax return on average risk-weighted assets to 1.76 per cent,
from 1.72 per cent. In our life assurance and investment businesses, the
post-tax return on embedded value, on a European Embedded Value (EEV) basis,
increased to 9.9 per cent, from 9.3 per cent.
Page 10 of 58
At the end of December 2007, the total capital ratio on a Basel I basis was 11.0
per cent and the tier 1 ratio was 8.1 per cent. During the year, risk-weighted
assets increased by 10 per cent to GBP172.0 billion, reflecting growth in our
mortgage and Corporate Markets businesses. Going forward, we expect high
single-digit or low double-digit annual growth in risk-weighted assets,
reflecting increased opportunities to continue to grow our customer lending.
The Group has successfully managed the transition to Basel II and the Group's
opening capital ratios on a Basel II basis were 11.0 per cent for total capital
and 9.5 per cent for tier 1 capital (page 43, note 11).
Scottish Widows remains strongly capitalised and, at the end of December 2007,
the working capital ratio of the Scottish Widows Long Term Fund was an estimated
19.2 per cent (page 49, note 19). During 2007, further capital repatriation
totalling GBP1.9 billion was made to the Group, bringing the total capital
repatriation since the beginning of 2005 to over GBP3.6 billion. On 5 December
2007 Standard & Poor's announced that it had re-affirmed its Scottish Widows
'AA-' debt rating and placed it on positive outlook.
Maintaining a strong liquidity and funding position
Throughout the recent marketwide liquidity turbulence, Lloyds TSB has maintained
a strong liquidity position for both the Group's funding requirements, which are
supported by our strong and stable retail and corporate deposit base, and those
of its sponsored conduit, Cancara. Retail and corporate deposit inflows have
been strong and the Group continues to benefit from its strong credit ratings
and diversity of funding sources. This has resulted in the Group continuing to
fund well over the last few months. In January 2008, Moody's announced that it
had re-affirmed its 'Aaa' long-term debt rating for Lloyds TSB Bank plc.
Significant reduction in the Group pension schemes' deficit
The Group's defined benefit pension schemes' gross deficit at 31 December 2007
improved by GBP1,416 million to GBP683 million, comprising net recognised
liabilities of GBP2,033 million partly offset by unrecognised actuarial gains of
GBP1,350 million (page 42, note 10). This improvement reflects an increase in
the real discount rate used to value the schemes' liabilities and Group
contributions to the schemes, which exceeded the cost of accruing benefits.
Substantial profit on sale of non-core businesses
During 2007 the Group sold a number of non-core businesses realising profits on
the disposal totalling GBP657 million (page 47, note 16). This has further
strengthened the Group's capital ratios and improved capital flexibility.
In May 2007, Lloyds TSB Group agreed the sale of the business and assets of
Lloyds TSB Registrars to Advent International, subject to completion and other
adjustments. The transaction was completed on 30 September 2007, following
regulatory approval, and the Group has reported a profit before tax on the sale
of this business of GBP407 million (tax: nil).
In July 2007, the Group announced an agreement to sell Abbey Life Assurance
Company Limited (Abbey Life) to Deutsche Bank AG. This transaction was also
completed at the end of September 2007 and the Group has reported a profit
before tax on the sale of this business of GBP272 million (tax: nil). In
addition, a pre-sale dividend of GBP175 million was paid to Group in June 2007.
Page 11 of 58
Taxation charge
The Group's tax charge for 2007 was GBP679 million, which was an effective rate
of 17.0 per cent (2006: 31.6 per cent). The effective tax rate is below the
standard UK corporation tax rate as a result of the gains on disposals being
either exempt from tax or covered by capital losses arising in earlier years, a
deferred income tax credit following the reduction in the corporation tax rate
announced in the 2007 Finance Act, and credits arising on policyholder
interests. Under IFRS, the income statement includes a corresponding charge for
policyholder interests within the Group's profit before tax. Excluding these
items the Group's effective rate of tax was 28.3 per cent (page 56, note 23).
The 2007 Finance Act reduction in corporation tax rate from 30 per cent to 28
per cent resulted in a one-off impairment charge of GBP28 million before tax
(GBP20 million after tax), relating to a reduction in future rental income
within the Group's leasing business. In addition, the Group's deferred tax
liabilities at 31 December 2007 were reduced, resulting in a credit to the
Group's tax charge of GBP110 million. The net impact of these items has been to
increase earnings attributable to shareholders by GBP90 million during the year.
Delivering accelerated earnings momentum, whilst improving profitability and
returns
2007 has been a challenging year for all banks, however Lloyds TSB's high
quality, more conservative business model has withstood the difficulties of
global financial markets turbulence. Strong earnings momentum has continued in
the UK retail banking and insurance businesses, and our relationship focused
Corporate and Commercial businesses have also continued to perform well. These
strong performances have resulted in a good level of income growth which,
combined with excellent cost control, has resulted in strong underlying profit
momentum. The Group has also continued to maintain satisfactory asset quality.
Encouragingly, this performance has not come at the expense of returns, as the
Group has continued to improve both its return on equity and return on
risk-weighted assets. As a result, the Group is well placed to maintain the
recent momentum established throughout the business, and we expect to continue
to perform well in 2008.
Helen A Weir
Group Finance Director
Page 12 of 58
SUMMARISED SEGMENTAL ANALYSIS
2007 Wholesale Group
UK Insurance and Central excluding
Retail and International group insurance Insurance
Banking Investments** Banking items gross up gross up** Group
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,783 68 2,518 (738) 5,631 461 6,092
Other income 1,797 1,900 1,773 362 5,832 6,804 12,636
Total income 5,580 1,968 4,291 (376) 11,463 7,265 18,728
Insurance claims - (302) - - (302) (7,220) (7,522)
Total income, net of 5,580 1,666 4,291 (376) 11,161 45 11,206
insurance claims
Operating expenses (2,548) (636) (2,282) (6) (5,472) (19) (5,491)
Trading surplus 3,032 1,030 2,009 (382) 5,689 26 5,715
(deficit)
Impairment (1,224) - (572) - (1,796) - (1,796)
Profit (loss) before 1,808 1,030 1,437 (382) 3,893 26 3,919
tax*
Volatility
- Insurance - (267) - - (267) - (267)
- Policyholder - - - - - (233) (233)
interests
Profit on sale of businesses - 272 385 - 657 - 657
Settlement of overdraft claims (76) - - - (76) - (76)
Profit (loss) before 1,732 1,035 1,822 (382) 4,207 (207) 4,000
tax
2006
Net interest income 3,642 56 2,177 (593) 5,282 78 5,360
Other income 1,621 1,740 2,035 201 5,597 8,306 13,903
Total income 5,263 1,796 4,212 (392) 10,879 8,384 19,263
Insurance claims - (200) - - (200) (8,369) (8,569)
Total income, net of 5,263 1,596 4,212 (392) 10,679 15 10,694
insurance claims
Operating expenses (2,476) (646) (2,264) (51) (5,437) 8 (5,429)
Trading surplus 2,787 950 1,948 (443) 5,242 23 5,265
(deficit)
Impairment (1,238) - (308) (9) (1,555) - (1,555)
Profit (loss) before tax* 1,549 950 1,640 (452) 3,687 23 3,710
Volatility
- Insurance - 84 - - 84 - 84
- Policyholder - - - - - 326 326
interests
Pension schemes related credit - - - 128 128 - 128
Profit (loss) before 1,549 1,034 1,640 (324) 3,899 349 4,248
tax
*Excluding volatility, profit on sale of businesses, the settlement of overdraft
claims in 2007 and the pension schemes related credit in 2006.
**The Group's income statement includes income and expenditure which are
attributable to the policyholders of the Group's long-term assurance funds.
These items have no impact upon the profit attributable to equity shareholders.
In order to provide a clearer representation of the underlying trends within
the Insurance and Investments segment, these items are shown within a separate
column in the segmental analysis above.
Page 13 of 58
DIVISIONAL PERFORMANCE
UK RETAIL BANKING
2007 2006 Change
GBPm GBPm %
Net interest income 3,783 3,642 4
Other income 1,797 1,621 11
Total income 5,580 5,263 6
Operating expenses (2,548) (2,476) (3)
Trading surplus 3,032 2,787 9
Impairment (1,224) (1,238) 1
Profit before tax, excluding settlement of overdraft claims 1,808 1,549 17
Settlement of overdraft claims (76) -
Profit before tax 1,732 1,549 12
Cost:income ratio* 45.7% 47.0%
Post-tax return on average risk-weighted assets* 2.13% 1.76%
Total assets GBP115.0bn GBP108.4bn 6
Risk-weighted assets GBP61.7bn GBP59.1bn 4
Customer deposits GBP82.1bn GBP75.7bn 8
*Excluding settlement of overdraft claims.
Key highlights
- Excellent profit performance. Profit before tax increased by 17 per
cent to GBP1,808 million, excluding the settlement of overdraft claims.
- Strong income momentum, up 6 per cent, supported by overall sales
growth of 17 per cent.
- Excellent progress in growing the current account customer
franchise, with over 1 million new current accounts opened, an increase of 17
per cent. New Added Value Accounts increased by 79 per cent. Lloyds TSB is now
the UK market leader in new current account customer recruitment.
- Strong growth in savings deposits resulted in an 11 per cent
increase in savings balances, with 15 per cent growth in bank savings.
- Stabilisation in net interest margin, with net interest margin in
the second half of 2007 1 basis point higher than in the first half of 2007.
- Continued good cost management, with a clear focus on investing to
improve service quality and processing efficiency. Excluding the impact of the
settlement of overdraft claims, operating expenses increased by 3 per cent and
there was a substantial improvement in the cost:income ratio to 45.7 per cent.
- The quality of new lending continues to be strong. Arrears levels
have continued to improve and the impairment charge in 2007 was lower than in
2006. Whilst the economic outlook for 2008 is uncertain, we do not expect to
experience a significant change in the retail impairment charge in the first
half of 2008, compared to the first half of 2007.
- Improved return on risk-weighted assets, reflecting the impact of
double-digit profit growth exceeding the increase in risk-weighted assets.
Page 14 of 58
UK RETAIL BANKING (continued)
During 2007, UK Retail Banking continued to make substantial progress in each of
its key strategic priorities: growing income from its existing customer base;
expanding its customer franchise; and improving productivity and efficiency. In
each of these areas, a key focus has been on improving sales of recurring income
products, such as current accounts and savings products which, combined with
higher lending related income, has supported the accelerating rate of revenue
growth.
Profit before tax from UK Retail Banking increased by GBP183 million, or 12 per
cent, to GBP1,732 million, reflecting strong levels of franchise growth,
excellent cost management and a slightly reduced impairment charge. Excluding
the settlement of overdraft claims, profit before tax increased by 17 per cent
to GBP1,808 million. Total income increased by GBP317 million, or 6 per cent,
supported by higher income from current accounts, savings and personal lending.
The adverse mix effect of strong growth in finer margin mortgages and flat wider
margin unsecured personal lending led to an overall reduction in the division's
net interest margin. Product margins on a year-on-year basis fell slightly
reflecting competitive pressures in the mortgage business in the first half of
2007 which more than offset an increase in retail savings margins. Towards the
end of the year, new business margins in the mortgage business started to
improve and this supported a stabilisation in the UK Retail Banking net interest
margin in the second half of the year, compared to the first half.
Operating expenses remained well controlled, increasing by 3 per cent, excluding
the settlement of overdraft claims. Significant improvements have been made in
the rationalisation of back office operations to improve efficiency and we
continue to increase the proportion of front office to back office staff in the
branch network.
Growing income from the customer base
The Retail Bank has continued to make excellent progress, with further strong
growth in product sales and continued good revenue growth. We continue to
deliver a very strong performance in the growing savings and investment market,
especially in bank savings where we have recently benefited from a significantly
improved rate of deposit growth.
Overall sales increased by 17 per cent, with improvements over a broad range of
products, especially current accounts, credit cards and bank savings products.
Sales volumes were particularly strong in the branch network with an increase of
24 per cent. This continued strong sales growth has been driven from high
levels of product innovation over the last twelve months with the successful
launch of a number of enhanced savings products, an improved range of added
value current accounts and the introduction of the innovative Lloyds TSB Duo
Airmiles credit card offer. Customer deposits have increased strongly, by 8 per
cent over the last twelve months, with particularly strong progress in growing
our bank savings and wealth management deposit balances, with increases of 15
per cent and 12 per cent respectively.
31 December 31 December
2007 2006 Change
Current account and savings balances GBPm GBPm %
Bank savings 41,976 36,417 15
C&G deposits 14,861 14,621 2
Wealth management 4,939 4,402 12
UK Retail Banking savings 61,776 55,440 11
Current accounts 20,305 20,221 -
Total customer deposits 82,081 75,661 8
Page 15 of 58
UK RETAIL BANKING (continued)
The Group has delivered good levels of mortgage growth, focusing on prime
mortgage business and seeking to maintain economic returns. However, as we have
previously indicated, our market share of net new mortgage lending in the second
half of the year was below our outstanding stock position, reflecting our
continued focus on writing value-creating business. The Group continues to
focus on those segments of the mortgage market where value can be created while
adopting a conservative approach to credit risk. As a result of our focus on
managing for value and the recent marketwide increase in interest spreads, new
business net interest margins have strengthened. Recent levels of mortgage
allocations have been stronger and we expect this to translate into robust
balance growth as we move into 2008.
Gross new mortgage lending for the Group totalled GBP29.4 billion (2006: GBP27.6
billion). Mortgage balances outstanding increased by 7 per cent to GBP102.7
billion and net new lending totalled GBP6.7 billion, resulting in a market share
of net new lending of approximately 6.2 per cent.
We have maintained our market leadership position in personal loans, despite
tightened credit criteria and a slowdown in consumer demand. Unsecured consumer
credit balances were broadly flat with personal loan balances outstanding at 31
December 2007 marginally higher at GBP11.2 billion, and credit card balances
slightly lower at GBP6.6 billion.
Expanding the customer franchise
In addition to the strong growth in product sales from existing customers, the
Group has continued to make progress in expanding its customer franchise.
Current account recruitment increased by 17 per cent, compared with last year,
supported by the range of added value current accounts, in particular the Silver
Account focusing on foreign nationals. During 2007, the Group opened more than
1 million new current accounts.
Wealth Management continues to make good progress with its expansion plans, and
over 260 advisers have now been trained on an enhanced wealth management offer
comprising private banking, open architecture portfolio management, retirement
planning, insurance and estate planning services. As a result, new Investment
Portfolio cases increased by 42 per cent and overall wealth management clients
increased by 11 per cent. Total new assets under management increased by 42 per
cent and wealth management banking deposits grew by 12 per cent.
In June 2007, the Group launched the Lloyds TSB Airmiles Duo account, a new,
innovative and exclusive credit card that offers a 'two in one' easy to manage
account, with one PIN, one statement and two cards, an American Express and a
MasterCard on which customers can earn Airmiles. The demand for this new
product has been extremely strong, and over 700,000 cards have been issued to a
generally more transactional, high quality, customer segment. As a result,
Lloyds TSB was the UK market leader in new credit card issuance during 2007, and
now has the largest and fastest growing loyalty credit card programme in the UK.
Page 16 of 58
UK RETAIL BANKING (continued)
Improving productivity and efficiency
We have continued to make significant progress in reducing levels of
administration and processing work carried out in branches and, as a result, we
have increased the number of dedicated customer facing branch network staff by
some 4,000 over the last 2 years. Over the same period, branch network staff
time spent on back office administration work has reduced from approximately 35
per cent to around 5 per cent. This has enabled us to increase our focus on
meeting our customers' needs and has supported the substantially improved branch
network sales productivity and service efforts. These improvements have led to
the retail banking cost:income ratio, excluding the impact of the settlement of
overdraft claims, improving to 45.7 per cent, from 47.0 per cent last year.
In Telephone Banking we have continued to invest in our market leading speech
recognition technology which has supported significant growth in the number of
customers using our automated service. This, combined with further improvements
in the efficiency of our contact centre operations, has led to all customer
service calls now being answered from UK based centres.
Impairment levels slightly decreased
Impairment losses on loans and advances decreased by GBP14 million, or 1 per
cent, to GBP1,224 million, largely reflecting a reduction in the level of
customer insolvencies and the quality of new lending. In addition, collections
procedures continue to improve, a particularly important competitive advantage
in a slowing consumer environment, and we achieved better than assumed
recoveries. The impairment charge as a percentage of average lending improved to
1.10 per cent, compared to 1.18 per cent last year. Over 99 per cent of new
personal loans and 89 per cent of new credit cards sold during 2007 were to
existing customers, where the Group has a better understanding of an individual
customer's total financial position. The level of arrears in the personal loan
and credit card portfolios reduced during 2007, whilst overdraft arrears
remained stable.
Mortgage credit quality remains excellent with the impairment charge remaining
at a low level of GBP18 million, or 2 basis points of average mortgage lending.
Arrears in the mortgage business have also fallen. In Cheltenham & Gloucester,
the average indexed loan-to-value ratio on the mortgage portfolio was 43 per
cent, and the average loan-to-value ratio for new mortgages and further advances
written during 2007 was 63 per cent. At 31 December 2007, only 1.7 per cent of
balances had an indexed loan-to-value ratio in excess of 95 per cent. We
extensively stress-test our lending to changes in macroeconomic conditions and
we remain very confident in the quality of our mortgage portfolio.
Page 17 of 58
INSURANCE AND INVESTMENTS
Excluding volatility and profit on disposal of businesses 2007 2006 Change
GBPm GBPm %
Net interest income 68 56 21
Other income 1,900 1,740 9
Total income 1,968 1,796 10
Insurance claims (302) (200) (51)
Total income, net of insurance claims 1,666 1,596 4
Operating expenses (636) (646) 2
Insurance grossing adjustment (page 13) 26 23 13
Profit before tax 1,056 973 9
Profit before tax analysis
Life, pensions and OEICs
New business profit - life and pensions 163 171 (5)
New business loss - OEICs (22) (24) 8
Existing business 551 384 43
Expected return on shareholders' net assets 192 134 43
Impact of surplus capital repatriation - 36
884 701 26
General insurance 128 243 (47)
Scottish Widows Investment Partnership 44 29 52
Profit before tax 1,056 973 9
Present value of new business premiums (PVNBP) 10,424 9,740 7
PVNBP new business margin (EEV basis) 3.1% 3.6%
Post-tax return on embedded value (EEV basis, page 50, note 20) 9.9% 9.3%
Key highlights
- Strong profit performance. Profit before tax increased by 9 per
cent to GBP1,056 million. Adjusting for the impact of surplus capital
repatriation, profit before tax increased by 13 per cent.
- Good income growth and excellent cost control. Income, net of
insurance claims and adjusting for the impact of surplus capital repatriation,
increased by 7 per cent. Operating expenses decreased by 2 per cent.
- Good sales performance. 7 per cent increase in Scottish Widows'
present value of new business premiums. Strong progress in increasing
bancassurance sales, up 20 per cent. Good performance in the sale of protection
products, corporate pensions and retirement income products.
- Improved returns. On an EEV basis, the post-tax return on embedded
value increased to 9.9 per cent. New business margin was robust at 3.1 per
cent.
- Robust capital position. Scottish Widows continues to deliver
improving capital efficiency and self-financing growth, and a further GBP1.9
billion of capital was repatriated to the Group during 2007.
- Increased weather related claims of GBP113 million, largely relating
to the severe flooding in the UK in June and July, contributed to a 47 per cent
reduction in profit before tax in General Insurance.
- Excellent performance in Scottish Widows Investment Partnership.
Profit before tax increased by 52 per cent reflecting higher margins and
improved mix of external business.
Page 18 of 58
INSURANCE AND INVESTMENTS (continued)
Scottish Widows life, pensions and OEICs
Profit before tax increased by GBP183 million, or 26 per cent, to GBP884
million. The effect of surplus capital repatriation to the Group has been to
reduce investment earnings by a total of GBP36 million in 2007. Adjusting 2006
for this, profit before tax increased by 33 per cent.
Life and pensions new business profit, on an IFRS basis and excluding
volatility, reduced by 5 per cent to GBP163 million reflecting a change in the
mix of investment products sold through the branch network towards non-embedded
value accounted products. Total existing business profit grew by 43 per cent to
GBP551 million, partly reflecting increased profits from the growing OEIC
portfolio, improved cost management and a reduction in adverse assumption
changes compared to 2006. The expected return on shareholders' net assets
increased by 43 per cent to GBP192 million as a result of a higher volume of
free assets, driven by strong equity markets and the impact of regulatory
changes in 2006, and a higher expected rate of return.
During 2007, Scottish Widows has continued to make strong progress in each of
its key business priorities: to maximise bancassurance success; to profitably
grow IFA sales; to improve service and operational efficiency; and to optimise
capital management.
Maximising bancassurance success
In 2007, the value of Scottish Widows' bancassurance new business premiums
increased by 20 per cent, building on the success of the simplified product
range for distribution through the Lloyds TSB branch network, Commercial Banking
and Wealth Management channels. Sales of protection products were particularly
strong. A new branch network creditor insurance and protection product, which
replaced an externally provided creditor product, has led to the significant
increase in protection sales during 2007. In addition, Scottish Widows launched
a new protection product, 'Protection for Life' towards the end of 2006, which
has performed very well. We have continued to deliver good sales of OEICs
following the more than doubling of sales in 2006.
Profitably growing IFA sales
Sales through the IFA distribution channel increased by 2 per cent, following
record A-day related sales levels in 2006. Scottish Widows has continued to
focus on the more profitable business areas within the IFA market. Sales of
savings and investment products were lower as we chose not to compete in areas
which deliver unsatisfactory returns, although this was partly offset by good
growth in OEIC sales. Corporate pensions volumes remained strong following
excellent growth last year and our managed fund business also showed good
improvement.
Page 19 of 58
INSURANCE AND INVESTMENTS (continued)
Present value of new business premiums (PVNBP) 2007 2006 Change
GBPm GBPm %
Life and pensions:
Protection 960 232 314
Savings and investments 913 1,300 (30)
Individual pensions 2,073 2,219 (7)
Corporate and other pensions 2,141 1,961 9
Retirement income 1,044 960 9
Managed fund business 486 348 40
Life and pensions 7,617 7,020 9
OEICs 2,807 2,720 3
Life, pensions and OEICs 10,424 9,740 7
Single premium business 8,375 7,321 14
Regular premium business 2,049 2,419 (15)
Life, pensions and OEICs 10,424 9,740 7
Bancassurance 4,096 3,421 20
Independent financial advisers 5,817 5,706 2
Direct 511 613 (17)
Life, pensions and OEICs 10,424 9,740 7
Improving service and operational efficiency
The business has made continued improvements in service and operational
efficiencies, and the benefits can be seen in a reduction of expenses by 2 per
cent compared to prior year, notwithstanding the introduction of a number of new
products. In addition, customer satisfaction is at its highest ever level.
Scottish Widows received a number of awards for service quality and product
innovation, including 'Best Individual Pensions Provider' at the Financial
Adviser awards whilst maintaining its top quartile position for lowest servicing
and acquisition costs per policy.
Optimising capital management
Scottish Widows has maintained its strong focus on improving capital management.
During 2007 Scottish Widows continued to deliver a more capital efficient
product profile and improved internal rates of return. The post-tax return on
embedded value, on an EEV basis, increased to 9.9 per cent, from 9.3 per cent
last year. During 2007, GBP1.9 billion of capital was repatriated to the Group,
giving a total capital repatriation of over GBP3.6 billion since the beginning
of 2005.
Page 20 of 58
INSURANCE AND INVESTMENTS (continued)
Results on a European Embedded Value (EEV) basis
Lloyds TSB continues to report under IFRS, however, in line with industry best
practice, the Group provides supplementary financial reporting for Scottish
Widows on an EEV basis. The Group believes that EEV represents the most
appropriate measure of long-term value creation in life assurance and investment
businesses.
2007 2006
Life, Life, Change
pensions pensions
and OEICs and OEICs
GBPm GBPm %
New business profit 326 346 (6)
Existing business
- Expected return 337 403
- Experience variances 78 69
- Assumption changes (45) (133)
370 339 9
Expected return on shareholders' net assets 207 131 58
Profit before tax, adjusted for capital repatriation* 903 816 11
Impact of surplus capital repatriation to Group - 36
Profit before tax* 903 852 6
New business margin (PVNBP) 3.1% 3.6%
Embedded value (year end) GBP5,365m GBP6,413m
Post-tax return on embedded value* 9.9% 9.3%
*Excluding volatility and other items (page 36, note 2).
Adjusting for the impact of capital repatriation, EEV profit before tax from the
Group's life, pensions and OEICs business increased by 11 per cent to GBP903
million.
New business profit fell by GBP20 million, or 6 per cent, to GBP326 million,
largely reflecting the impact of a higher risk-free discount rate and changes in
other economic assumptions applied to new business. This was however offset by a
corresponding credit to the expected return on shareholders' net assets.
Existing business profit increased by 9 per cent. Expected return decreased by
16 per cent to GBP337 million, primarily reflecting a lower shareholder benefit
this year from the reduction in the value of realistic balance sheet liabilities
and the impact of regulatory changes in 2006. Positive experience variances
were driven by higher annuity profits from Abbey Life. Overall lapse experience
was broadly in line with the Group's expectations, as higher lapse experience in
the life and pensions business was broadly offset by a favourable experience in
OEICs. Assumption changes primarily reflect changes to the longer term lapse
assumptions for both life and pensions business and OEICs. The expected return
on shareholders' net assets increased by GBP76 million, as a result of a higher
volume of free assets, driven by strong equity markets and the impact of
regulatory changes in 2006, and a higher expected rate of return.
Page 21 of 58
INSURANCE AND INVESTMENTS (continued)
Results on a European Embedded Value (EEV) basis
Overall the post-tax return on embedded value increased to 9.9 per cent from 9.3
per cent. Scottish Widows maintained a strong new business margin of 3.1 per
cent. Individual new business product margins remained broadly stable. The
overall new business margin fell by 50 basis points however, as a result of an
adverse impact from a higher risk-free discount rate and changes in other
economic assumptions applied to new business and the shift in product mix
resulting from the insourcing of a new branch network creditor insurance and
protection product. This product generates a lower new business margin, but
delivers good levels of value for the Group.
Page 22 of 58
INSURANCE AND INVESTMENTS (continued)
Scottish Widows Investment Partnership
Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased by
52 per cent to GBP44 million, reflecting increased profitability resulting from
higher margins and an improved mix of external business, a key strategic
priority for SWIP. Over the last 12 months, SWIP's assets under management
decreased by GBP4.1 billion to GBP97.6 billion, reflecting the decision by the
Trustees of the Lloyds TSB pension schemes to move GBP5.7 billion into external
passive management. As a result, institutional funds under management reduced
by GBP5.0 billion. The net movement in retail funds, net of expenses and
commissions, was an increase of GBP2.9 billion.
Movements in funds under management
The following table highlights the movement in retail and institutional funds
under management.
2007 2006
GBPbn GBPbn
Opening funds under management 105.7 97.5
Movement in Retail Funds
Premiums 11.7 11.7
Claims (4.8) (3.6)
Surrenders (6.4) (5.4)
Net inflow of business 0.5 2.7
Investment return, expenses and commission 2.4 6.0
Net movement 2.9 8.7
Movement in Institutional Funds
Lloyds TSB pension schemes (5.7) -
Other institutional funds (0.6) (1.3)
Investment return, expenses and commission 1.3 1.5
Net movement (5.0) 0.2
Proceeds from sale of Abbey Life 1.0 -
Dividends and surplus capital repatriation (1.9) (0.7)
Closing funds under management 102.7 105.7
Managed by SWIP 97.6 101.7
Managed by third parties 5.1 4.0
Closing funds under management 102.7 105.7
Including assets under management within our UK Wealth Management and
International Private Banking businesses, Groupwide funds under management
decreased by 3 per cent to GBP122.8 billion.
Page 23 of 58
INSURANCE AND INVESTMENTS (continued)
General insurance
2007 2006 Change
GBPm GBPm %
Commission receivable 648 629 3
Commission payable (692) (664) (4)
Underwriting income (net of reinsurance) 591 600 (2)
Other income 37 35 6
Net operating income 584 600 (3)
Claims paid on insurance contracts (net of reinsurance) (302) (200) (51)
Operating income, net of claims 282 400 (30)
Operating expenses (154) (157) 2
Profit before tax 128 243 (47)
Claims ratio 49% 32%
Combined ratio 93% 80%
Profit before tax from our general insurance operations decreased by GBP115
million, to GBP128 million, largely as a result of a GBP113 million increase in
weather related claims, primarily reflecting severe flooding in the UK in June
and July. Net operating income decreased by 3 per cent whilst costs were
reduced by 2 per cent.
Net operating income decreased by GBP16 million, or 3 per cent, as growth in
home and loan protection income was more than offset by lower motor insurance
income, increased reinsurance costs and the run-off from the legacy health
portfolio. Our continued focus on improving operational efficiency and improving
the effectiveness of our marketing spend has resulted in a GBP3 million, or 2
per cent, reduction in operating costs, whilst also continuing to improve
processing efficiency.
Overall sales performance has been good with an 8 per cent increase in new
business gross written premiums (GWP). Home insurance sales through the branch
network continue to perform well with 14 per cent growth in new business GWP.
We have, however, scaled back our participation in the distribution of home
insurance through direct channels, as a result of the increasingly competitive
pricing in that area of the market. During the year we continued to invest in
product development, with loan protection and home insurance products both
securing industry leading external quality ratings.
Income, net of claims, was GBP118 million lower, largely as a result of the
increased extreme weather related claims, following a benign period in 2006. As
a result, overall claims increased by GBP102 million, and key underwriting
ratios were significantly affected with an increase in the claims ratio to 49
per cent, and an increase in the combined ratio to 93 per cent. Adjusting for
the extreme weather related claims, the claims ratio improved, reflecting both a
favourable claims experience in our home insurance underwriting and the impact
of recent investment in improving the efficiency of our claims processing.
The business continues to invest in the development of its Corporate Partnership
distribution arrangements and the performance of the Pearl business acquired in
2006 has exceeded our initial expectations.
Page 24 of 58
WHOLESALE AND INTERNATIONAL BANKING
Excluding profit on disposal of businesses 2007 2006 Change
GBPm GBPm %
Net interest income 2,518 2,177 16
Other income 1,773 2,035 (13)
Total income 4,291 4,212 2
Operating expenses (2,282) (2,264) (1)
Trading surplus 2,009 1,948 3
Impairment (572) (308) (86)
Profit before tax 1,437 1,640 (12)
Cost:income ratio 53.2% 53.8%
Cost:income ratio, excluding market dislocation 50.9% 53.8%
Post-tax return on average risk-weighted assets 1.13% 1.38%
Total assets GBP163.3bn GBP147.8bn 10
Risk-weighted assets GBP105.1bn GBP91.8bn 14
Customer deposits GBP72.3bn GBP61.2bn 18
Profit before tax by business unit
Corporate Markets
- Before impact of market dislocation 1,132 1,030 10
- Impact of market dislocation (280) -
852 1,030 (17)
Commercial Banking 451 398 13
Asset Finance 60 113 (47)
International Banking and other businesses 74 99 (25)
1,437 1,640 (12)
Key highlights
- Overall profits impacted by turbulence in global financial markets.
Whilst the division has limited exposure to assets affected by current capital
market uncertainties, the impact of recent market dislocation has been to reduce
profit before tax in 2007 by GBP280 million.
- Continued relationship banking momentum. Excluding the impact of
market dislocation, profit before tax increased by 5 per cent.
- Further good progress in expanding our Corporate Markets business,
with an 18 per cent increase in Corporate Markets income supporting a 10 per
cent increase in profit before tax, excluding the impact of market dislocation.
Cross-selling income in Corporate Markets increased by 35 per cent.
- Continued strong franchise growth in Commercial Banking, with an 8
per cent growth in income and a 13 per cent growth in profit before tax. Lloyds
TSB has retained its leading position as the bank of choice for start-up
businesses.
- Continued tight credit control in Asset Finance, and a slowdown in
demand in the consumer lending portfolio, led to a 47 per cent reduction in
profit before tax.
- Strong risk management and good asset quality, despite a rise of
GBP264 million in impairment losses, largely as a result of the GBP92 million
impact of market dislocation, a GBP28 million provision reflecting the impact of
the 2007
Finance Act on the division's leasing business, and a lower level of corporate
releases and recoveries during the year.
Page 25 of 58
WHOLESALE AND INTERNATIONAL BANKING (continued)
In Wholesale and International Banking, the Group has continued to make
significant progress in its strategy to develop the Group's strong corporate and
small to medium business customer franchises and, in doing so, become the best
UK mid-market focused wholesale bank. The division has continued to make
substantial progress in its relationship banking businesses. In Commercial
Banking, strong growth in business volumes, further customer franchise
improvements and good progress in improving operational efficiency have resulted
in continued strong profit growth. In Corporate Markets, further good progress
has been made in developing our relationship banking franchise supported by a
strong cross-selling performance.
Overall, the division's profit before tax decreased by 12 per cent, to GBP1,437
million, reflecting the GBP280 million reduction in profits as a result of
market dislocation. Excluding this impact, profit before tax increased by 5 per
cent, with a continued strong performance in our relationship banking
businesses. This has generated overall income growth of 6 per cent, driven by
strong Corporate Markets and Commercial Banking income growth of 18 per cent and
8 per cent respectively. This exceeded cost growth of 1 per cent, leading to a
reduction in the cost:income ratio to 50.9 per cent, from 53.8 per cent last
year. Trading surplus, excluding the impact of market dislocation, increased by
GBP249 million, or 13 per cent, to GBP2,197 million.
The charge for impairment losses on loans and advances increased by GBP264
million to GBP572 million, largely as a result of the GBP92 million impact of
market dislocation, a one-off GBP28 million impairment charge reflecting a
reduction in rental income from operating lease activities following the
corporation tax rate change included in the 2007 Finance Act, a lower level of
releases and recoveries during the year and the impact of recent strong growth
in the corporate lending portfolio. Overall corporate and SME asset quality
remains good although we continue to expect some normalisation in the impairment
charge over the next few years. We do believe, however, that we remain
relatively well positioned as a result of our prudent credit management policy.
Page 26 of 58
WHOLESALE AND INTERNATIONAL BANKING (continued)
Corporate Markets
2007 2006 Change
GBPm GBPm %
Net interest income 1,104 806 37
Other income
- Before market dislocation 808 821 (2)
- Market dislocation (188) -
620 821 (24)
Total income 1,724 1,627 6
Operating expenses (632) (615) (3)
Trading surplus 1,092 1,012 8
Impairment
- Before market dislocation (148) 18
- Market dislocation (92) -
(240) 18
Profit before tax 852 1,030 (17)
In Corporate Markets, profit before tax fell by 17 per cent, however, excluding
the impact of market dislocation and the 2007 Finance Act, profit before tax
increased by 13 per cent. On this basis, income increased by 18 per cent,
supported by continued high levels of cross-selling income, up 35 per cent,
strong growth in corporate lending and a higher level of income from venture
capital investments. The strong growth in lending was supported by an increase
of GBP4.7 billion in Group lending to property companies, to GBP17.6 billion.
Two-thirds of this lending portfolio is commercial property lending supporting
our existing customer franchise and reflects a well-spread nationwide portfolio.
We adopt conservative credit criteria and the indexed loan-to-value of the
portfolio is approximately 62 per cent. One third of the portfolio is
residential lending, over half of which is to local authority backed public
housing.
Operating expenses increased by 3 per cent to GBP632 million, reflecting further
investment in people to support ongoing business growth. The trading surplus,
excluding market dislocation, increased by 26 per cent. The impairment charge
of GBP240 million includes GBP92 million from the impact of market dislocation and
the GBP28 million one-off charge relating to the impact of the 2007 Finance Act on
the division's leasing business. Excluding these items, the underlying increase
in the impairment charge reflects lower levels of releases and recoveries,
recent strong growth in corporate customer lending and impairments relating to
two special situations.
Page 27 of 58
WHOLESALE AND INTERNATIONAL BANKING (continued)
Commercial Banking
2007 2006 Change
GBPm GBPm %
Net interest income 890 821 8
Other income 429 397 8
Total income 1,319 1,218 8
Operating expenses (769) (727) (6)
Trading surplus 550 491 12
Impairment (99) (93) (6)
Profit before tax 451 398 13
Profit before tax in Commercial Banking grew by GBP53 million, or 13 per cent,
reflecting strong growth in business volumes, further improvements in growing
the Commercial Banking customer franchise and progress in improving operational
efficiency. Income increased by 8 per cent to GBP1,319 million, reflecting strong
growth in lending and deposit balances, whilst costs were 6 per cent higher, as
a result of increased investment to improve the operating platform. Commercial
Banking continued to develop and grow its customer franchise strongly, with
customer recruitment of 120,000 during 2007, reflecting its market-leading
position in the start-up market with a market share of 21 per cent. We also
made good progress in continuing to attract customers 'switching' from other
financial services providers. Lloyds TSB Commercial Finance has continued to
improve its strong market position, with a market share of approximately 20 per
cent, measured by client numbers. Asset quality in the Commercial Banking
portfolios remains good with impairment charges as a percentage of average
lending reducing by 7 basis points to 0.60 per cent, partly reflecting our move
to increase levels of secured lending.
Asset Finance
2007 2006 Change
GBPm GBPm %
Net interest income 299 331 (10)
Other income 472 529 (11)
Total income 771 860 (10)
Operating expenses (483) (508) 5
Trading surplus 288 352 (18)
Impairment (228) (239) 5
Profit before tax 60 113 (47)
Profit before tax in Asset Finance decreased by 47 per cent to GBP60 million,
largely reflecting continued tight credit criteria and a slowdown in demand in
the consumer lending portfolio which has led to a reduction in the level of new
business underwritten. As a result, income decreased by GBP89 million, or 10 per
cent. Costs were 5 per cent lower and the impairment charge decreased by GBP11
million to GBP228 million, reflecting the recent tightening of credit criteria,
improved collections procedures and lower balances outstanding, which offset an
increase in arrears. Conditions in the Motor Finance business remain
challenging. New business volumes have reduced, reflecting the marketwide
slowdown in consumer demand, and we have sought to avoid the structural
contraction in interest margins. In Personal Finance, new business volumes have
risen modestly in a fiercely competitive market. Our Contract Hire business,
Autolease, has performed well by continuing to leverage its strong market
position and efficient operation.
Page 28 of 58
CONSOLIDATED INCOME STATEMENT - STATUTORY
2007 2006
GBPm GBPm
Interest and similar income 16,874 14,108
Interest and similar expense (10,775) (8,779)
Net interest income 6,099 5,329
Fee and commission income 3,224 3,116
Fee and commission expense (600) (638)
Net fee and commission income 2,624 2,478
Net trading income 3,123 6,341
Insurance premium income 5,430 4,719
Other operating income 952 806
Other income 12,129 14,344
Total income 18,228 19,673
Insurance claims (7,522) (8,569)
Total income, net of insurance claims 10,706 11,104
Operating expenses (5,567) (5,301)
Trading surplus 5,139 5,803
Impairment (1,796) (1,555)
Profit on sale of businesses 657 -
Profit before tax 4,000 4,248
Taxation (679) (1,341)
Profit for the year 3,321 2,907
Profit attributable to minority interests 32 104
Profit attributable to equity shareholders 3,289 2,803
Profit for the year 3,321 2,907
Basic earnings per share 58.3p 49.9p
Diluted earnings per share 57.9p 49.5p
Dividend per share for the year* 35.9p 34.2p
Dividend for the year* GBP2,026m GBP1,928m
*The total dividend for the year represents the interim dividend paid in October
2007 and the final dividend which will be paid and accounted for in May 2008.
Page 29 of 58
CONSOLIDATED BALANCE SHEET - STATUTORY
31 December 31 December
2007 2006
Assets GBPm GBPm
Cash and balances at central banks 4,330 1,898
Items in course of collection from banks 1,242 1,431
Trading and other financial assets at fair value through profit or loss 57,911 67,695
Derivative financial instruments 8,659 5,565
Loans and advances to banks 34,845 40,638
Loans and advances to customers 209,814 188,285
Available-for-sale financial assets 20,196 19,178
Investment property 3,722 4,739
Goodwill 2,358 2,377
Value of in-force business 2,218 2,723
Other intangible assets 149 138
Tangible fixed assets 2,839 4,252
Other assets 5,063 4,679
Total assets 353,346 343,598
Equity and liabilities
Deposits from banks 39,091 36,394
Customer accounts 156,555 139,342
Items in course of transmission to banks 668 781
Trading and other liabilities at fair value through profit or loss 3,206 1,184
Derivative financial instruments 7,582 5,763
Debt securities in issue 51,572 54,118
Liabilities arising from insurance contracts and
participating investment contracts 38,063 41,445
Liabilities arising from non-participating
investment contracts 18,197 24,370
Unallocated surplus within insurance businesses 554 683
Other liabilities 9,690 10,985
Retirement benefit obligations 2,144 2,462
Current tax liabilities 484 817
Deferred tax liabilities 948 1,416
Other provisions 209 259
Subordinated liabilities 11,958 12,072
Total liabilities 340,921 332,091
Equity
Share capital 1,432 1,429
Share premium account 1,298 1,266
Other reserves (60) 336
Retained profits 9,471 8,124
Shareholders' equity 12,141 11,155
Minority interests 284 352
Total equity 12,425 11,507
Total equity and liabilities 353,346 343,598
Page 30 of 58
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - STATUTORY
Attributable to equity shareholders
Share capital Other Retained Minority
and premium reserves profits interests Total
GBPm GBPm GBPm GBPm GBPm
Balance at 1 January 2006 2,590 395 7,210 435 10,630
Movements in available-for-sale
financial assets, net of tax:
- change in fair value - (10) - - (10)
- transferred to income statement in - (21) - - (21)
respect of disposals
Movement in cash flow hedges, net of - 1 - - 1
tax
Currency translation differences - (29) - (4) (33)
Net income recognised directly in - (59) - (4) (63)
equity
Profit for the year - - 2,803 104 2,907
Total recognised income for the year - (59) 2,803 100 2,844
Dividends - - (1,919) (32) (1,951)
Purchase/sale of treasury shares - - (35) - (35)
Employee share option schemes:
- value of employee services - - 65 - 65
- proceeds from shares issued 105 - - - 105
Repayment of capital to minority - - - (151) (151)
shareholders
Balance at 31 December 2006 2,695 336 8,124 352 11,507
Movements in available-for-sale
financial assets, net of tax:
- change in fair value - (436) - - (436)
- transferred to income statement in - (5) - - (5)
respect of disposals
- transferred to income statement in - 49 - - 49
respect of impairment
- disposal of businesses - (6) - - (6)
Movement in cash flow hedges, net of - (15) - - (15)
tax
Currency translation differences - 17 _ - (1) 16
Net income recognised directly in - (396) - (1) (397)
equity
Profit for the year - - 3,289 32 3,321
Total recognised income for the year - (396) 3,289 31 2,924
Dividends - - (1,957) (19) (1,976)
Purchase/sale of treasury shares - - (1) - (1)
Employee share option schemes:
- value of employee services - - 16 - 16
- proceeds from shares issued 35 - - - 35
Repayment of capital to minority - - - (80) (80)
shareholders
Balance at 31 December 2007 2,730 (60) 9,471 284 12,425
Page 31 of 58
CONDENSED CONSOLIDATED CASH FLOW STATEMENT - STATUTORY
2007 2006
GBPm GBPm
Profit before tax 4,000 4,248
Adjustments for:
Change in operating assets (16,982) (31,995)
Change in operating liabilities 21,541 33,069
Non-cash and other items 2,784 1,555
Tax paid (859) (798)
Net cash provided by operating activities 10,484 6,079
Cash flows from investing activities
Purchase of available-for-sale financial assets (21,667) (23,448)
Proceeds from sale and maturity of available-for-sale financial assets 19,468 18,106
Purchase of fixed assets (1,334) (1,724)
Proceeds from sale of fixed assets 982 1,257
Acquisition of businesses, net of cash acquired (8) (20)
Disposal of businesses, net of cash disposed 1,476 936
Net cash used in investing activities (1,083) (4,893)
Cash flows from financing activities
Dividends paid to equity shareholders (1,957) (1,919)
Dividends paid to minority interests (19) (32)
Interest paid on subordinated liabilities (709) (713)
Proceeds from issue of subordinated liabilities - 1,116
Proceeds from issue of ordinary shares 35 105
Repayment of subordinated liabilities (300) (759)
Repayment of capital to minority shareholders (80) (151)
Net cash used in financing activities (3,030) (2,353)
Effects of exchange rate changes on cash and cash equivalents 82 (148)
Change in cash and cash equivalents 6,453 (1,315)
Cash and cash equivalents at beginning of year 25,438 26,753
Cash and cash equivalents at end of year 31,891 25,438
Cash and cash equivalents comprise cash and balances at central banks (excluding
mandatory deposits) and amounts due from banks with a maturity of less than
three months.
Page 32 of 58
CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited)
Lloyds TSB Group is a leading UK-based financial services group, providing a
wide range of banking and financial services in the UK and in certain locations
overseas. The Group's activities are organised into three segments: UK Retail
Banking, Insurance and Investments and Wholesale and International Banking.
Central group items includes the funding cost of certain acquisitions less
earnings on capital, central costs and accruals for payment to the Lloyds TSB
Foundations.
Services provided by UK Retail Banking encompass the provision of banking and
other financial services to personal customers, private banking and mortgages.
Insurance and Investments offers life assurance, pensions and savings products,
general insurance and asset management services. Wholesale and International
Banking provides banking and related services for major UK and multinational
companies, banks and financial institutions, and small and medium-sized UK
businesses. It also provides asset finance to personal and corporate customers,
manages the Group's activities in financial markets and provides banking and
financial services overseas.
Year ended UK General Life, Insurance Wholesale Central
31 December 2007 Retail insurance pensions and and group
Banking and asset Investments International items*
management Banking Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar income* 8,018 23 1,040 1,063 9,834 (2,041) 16,874
Interest and similar (4,235) - (527) (527) (7,316) 1,303 (10,775)
expense*
Net interest income 3,783 23 513 536 2,518 (738) 6,099
Other income (net of fee 1,797 554 7,643 8,197 1,773 362 12,129
and commission expense)
Total income 5,580 577 8,156 8,733 4,291 (376) 18,228
Insurance claims - (302) (7,220) (7,522) - - (7,522)
Total income, net of 5,580 275 936 1,211 4,291 (376) 10,706
insurance claims
Operating expenses (2,624) (154) (501) (655) (2,282) (6) (5,567)
Trading surplus (deficit) 2,956 121 435 556 2,009 (382) 5,139
Impairment (1,224) - - - (572) - (1,796)
Profit on sale of - - 272 272 385 - 657
businesses
Profit (loss) before tax 1,732 121 707 828 1,822 (382) 4,000
External revenue 9,132 1,235 8,854 10,089 10,082 300 29,603
Inter-segment revenue* 1,012 49 181 230 1,559 (2,801) -
Segment revenue 10,144 1,284 9,035 10,319 11,641 (2,501) 29,603
*Central group items on this and the following page includes inter-segment
consolidation adjustments within interest and similar income and within interest
and similar expense as follows: interest and similar income GBP(3,138) million
(2006: GBP(3,241) million); interest and similar expense GBP3,138 million (2006:
GBP3,241 million). There is no impact on net interest income. Similarly, Central
group items includes inter-segment revenue adjustments of GBP(4,103) million
(2006: GBP(4,102) million).
Page 33 of 58
CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited)
Year ended UK General Life, Insurance Wholesale Central
31 December 2006 Retail Insurance pensions and and group
Banking and asset Investments International items*
management Banking Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar income* 6,913 24 820 844 8,598 (2,247) 14,108
Interest and similar (3,271) - (741) (741) (6,421) 1,654 (8,779)
expense*
Net interest income 3,642 24 79 103 2,177 (593) 5,329
Other income (net of fee
and commission expense) 1,621 594 9,893 10,487 2,035 201 14,344
Total income 5,263 618 9,972 10,590 4,212 (392) 19,673
Insurance claims - (200) (8,369) (8,569) - - (8,569)
Total income, net of 5,263 418 1,603 2,021 4,212 (392) 11,104
insurance claims
Operating expenses (2,476) (157) (481) (638) (2,264) 77 (5,301)
Trading surplus (deficit) 2,787 261 1,122 1,383 1,948 (315) 5,803
Impairment (1,238) - - - (308) (9) (1,555)
Profit (loss) before tax 1,549 261 1,122 1,383 1,640 (324) 4,248
External revenue 8,136 1,249 10,888 12,137 8,659 158 29,090
Inter-segment revenue* 698 19 199 218 2,276 (3,192) -
Segment revenue 8,834 1,268 11,087 12,355 10,935 (3,034) 29,090
Page 34 of 58
NOTES
Page
1 Accounting policies, presentation and estimates 36
2 Volatility 36
3 Mortgage lending 38
4 Group net interest income 39
5 Other income 40
6 General insurance income 40
7 Operating expenses 41
8 Number of employees (full-time equivalent) 41
9 Impairment losses by division 42
10 Retirement benefit obligations 42
11 Capital ratios 43
12 Total assets by division 44
13 Balance sheet information 44
14 Loans and advances to customers 45
15 Credit market positions in Corporate Markets 46
16 Profit on sale of businesses 47
17 Economic profit 48
18 Earnings per share 48
19 Scottish Widows - realistic balance sheet information 49
20 European Embedded Value reporting - results for the year ended 31 December 2007 50
21 Scottish Widows - weighted sales (Annual Premium Equivalent) 55
22 Legal and regulatory matters 55
23 Taxation 56
24 Dividend 57
25 Other information 57
Page 35 of 58
1. Accounting policies, presentation and estimates
The 2007 results have been prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union (EU). The
accounting policies adopted in the preparation of these results are unchanged
from those disclosed in the Group's consolidated financial statements as at and
for the year ended 31 December 2006 ('2006 Annual Report and Accounts') copies
of which can be found on the Group's website at
www.investorrelations.lloydstsb.com/ir/company_reports_page.asp or are available
upon request from the Company Secretary's Department, Lloyds TSB Group plc, 25
Gresham Street, London EC2V 7HN.
The following pronouncements relevant to the Group are applicable for the year
ended 31 December 2007:
Pronouncement Nature of change Effective date
IFRS 7 Financial Instruments: Consolidates financial instruments Annual periods beginning on or after
disclosures into a single standard and 1 January 2007
Disclosures requires more detailed qualitative and
quantitative disclosures about exposure
to risks arising from financial
instruments.
Amendment to IAS 1 Presentation Introduces additional disclosures of Annual periods beginning on or after
of Financial Statements - Capital the objectives, policies and processes 1 January 2007
Disclosures for managing capital, quantitative data
about what the entity regards as
capital, and compliance with capital
requirements.
The relevant disclosures are included in the Group's consolidated financial
statements for the year ended 31 December 2007.
2. Volatility
Banking volatility
Since the introduction of IFRS in 2005, in order to provide a clearer view of
the underlying performance of the business, the Group has separately disclosed
within Central group items the effects of marking-to-market derivatives held for
risk management purposes. This amount, net of the effect of the Group's IAS 39
compliant hedge accounting relationships, was previously disclosed as banking
volatility.
The use of fair values in financial reporting is now more widespread and there
is a better understanding of their effects; consequently, in line with evolving
best practice, the Group no longer considers it appropriate to disclose banking
volatility separately. Divisions will continue to transfer, through the Group's
internal transfer pricing arrangements, to Group Corporate Treasury (included in
Central group items) the movements in the market value of hedging derivatives
where the impact is not locally managed.
Page 36 of 58
2. Volatility (continued)
Insurance volatility
The Group's insurance businesses have liability products that are supported by
substantial holdings of investments, including equities, property and fixed
interest investments, all of which have a volatile fair value. The value of the
liabilities does not move exactly in line with changes in the fair value of the
investments, yet IFRS requires that the changes in both the value of the
liabilities and investments be reflected within the income statement. As these
investments are substantial and movements in their fair value can have a
significant impact on the profitability of the Insurance and Investments
division, management believes that it is appropriate to disclose the division's
results on the basis of an expected return in addition to the actual return.
The difference between the actual return on these investments and the expected
return based upon economic assumptions made at the beginning of the year is
included within insurance volatility.
Changes in market variables also affect the realistic valuation of the
guarantees and options embedded within products written in the Scottish Widows
With Profit Fund, the value of the in-force business and the value of
shareholders' funds. Fluctuations in these values caused by changes in market
variables, including market spreads reflecting credit risk premia, are also
included within insurance volatility. These market credit spreads represent the
gap between the yield on corporate bonds and the yield on government bonds, and
reflect the market's assessment of credit risk. Changes in the credit spreads
affect the value of the in-force business asset in respect of the annuity
portfolio.
The expected investment returns used to determine the normalised profit of the
business, which are based on prevailing market rates and published research into
historic investment return differentials, are set out below:
2008 2007 2006
% % %
Gilt yields (gross) 4.55 4.62 4.12
Equity returns (gross) 7.55 7.62 6.72
Dividend yield 3.00 3.00 3.00
Property return (gross) 7.55 7.62 6.72
Corporate bonds (gross) 5.15 5.22 4.72
During 2007, profit before tax included negative insurance volatility of GBP267
million, being a credit of GBP7 million to net interest income and a charge of
GBP274 million to other income (2006: positive volatility of GBP84 million, being a
credit of GBP2 million to net interest income and a credit of GBP82 million to other
income). The effect of widening credit risk spreads and falling gilt values
more than offset the favourable impact of a modest increase in equity values and
changes in market consistent assumptions. During 2006 increases in equity
values were partly offset by lower gilt values.
Policyholder interests volatility
As a result of the requirement under IFRS to consolidate the Group's life and
pensions businesses on a line-by-line basis, the Group's income statement
includes amounts attributable to policyholders which affect profit before tax;
the most significant of these items is policyholder tax.
Page 37 of 58
2. Volatility (continued)
Under IFRS, tax on policyholder investment returns is required to be included in
the Group's tax charge rather than being offset against the related income, as
it is in actual distributions made to policyholders. The impact is, therefore,
to either increase or decrease profit before tax with a corresponding change in
the tax charge. Other items classified within policyholder interests volatility
include the effects of investment vehicles which are only majority owned by the
long-term assurance funds. In the case of these vehicles, the Group's profit
for the year includes the minorities' share of the profits earned. As set out
below these amounts do not accrue to the equity holders, accordingly management
believes a clearer representation of the underlying performance of the Group's
life and pensions businesses is presented by excluding policyholder interests
volatility.
2007 2006
GBPm GBPm
Net interest income - (33)
Other income (233) 359
Profit before tax (233) 326
Taxation - policyholder 243 (222)
Minority interests (10) (104)
Profit attributable to equity shareholders - -
During 2007, profit before tax included negative policyholder interests
volatility of GBP233 million, being a charge to other income (2006: positive
volatility of GBP326 million, being a charge of GBP33 million to net interest income
and a credit of GBP359 million to other income). In 2007, substantial
policyholder tax losses have been generated as a result of a fall in property,
gilt and bond values. These losses reduce future policyholder tax liabilities
and have led to a policyholder tax credit during the year. Profits were
recognised in 2006 as a result of positive market movements combined with
realised gains in the holdings in property investment vehicles majority owned by
the long-term assurance funds.
3. Mortgage lending
2007 2006
Gross new mortgage lending GBP29.4bn GBP27.6bn
Market share of gross new mortgage lending 8.1% 8.0%
Redemptions GBP22.7bn GBP20.7bn
Market share of redemptions 8.9% 8.8%
Net new mortgage lending GBP6.7bn GBP6.9bn
Market share of net new mortgage lending 6.2% 6.3%
Mortgages outstanding (year end)* GBP102.0bn GBP95.3bn
Market share of mortgages outstanding 8.5% 8.8%
*Excluding the effect of IFRS related adjustments in order to conform with industry statistics.
In Cheltenham & Gloucester, the average indexed loan-to-value ratio on the
mortgage portfolio was 43 per cent (31 December 2006: 44 per cent), and the
average loan-to-value ratio for new mortgages and further advances written
during 2007 was 63 per cent (2006: 64 per cent). At 31 December 2007, only 1.7
per cent of balances had an indexed loan-to-value ratio in excess of 95 per
cent.
Page 38 of 58
4. Group net interest income
2007 2006
GBPm GBPm
Banking margin
Net interest income 5,167 4,914
Average interest-earning assets, excluding reverse repos 185,022 170,743
Net interest margin 2.79% 2.88%
Statutory basis
Net interest income 6,099 5,329
Average interest-earning assets, excluding reverse repos 248,233 226,990
Net interest margin 2.46% 2.35%
The Group's net interest income includes certain amounts attributable to
policyholders, in addition to the interest earnings on shareholders' funds held
in the Group's insurance businesses. In addition, the Group's net interest
margin is significantly affected by the accounting treatment of a number of
Products and Markets and other products, principally those where funding costs
are treated as an interest expense and related revenues are recognised within
other income. In order to enhance comparability in the Group's banking net
interest margin these items have been excluded in determining both net interest
income and average interest-earning assets.
A reconciliation of banking net interest income to Group net interest income
follows:
2007 2006
GBPm GBPm
Banking net interest income 5,167 4,914
Products and Markets, and other products 464 368
Volatility and insurance grossing adjustment 468 47
Group net interest income 6,099 5,329
Certain fees payable by the Group's asset finance business have been
reclassified from other income to interest income as part of the effective yield
of the related lending; there is no impact upon profit before tax. Comparative
figures have been restated accordingly.
Page 39 of 58
5. Other income
2007 2006
GBPm GBPm
Fee and commission income:
UK current account fees 693 652
Other UK fees and commissions 1,215 1,210
Insurance broking 648 629
Card services 536 493
International fees and commissions 132 132
3,224 3,116
Fee and commission expense (600) (638)
Net fee and commission income 2,624 2,478
Net trading income 3,570 5,981
Insurance premium income 5,430 4,719
Other operating income 1,012 725
Total other income* 12,636 13,903
Insurance claims (7,522) (8,569)
Total other income, net of insurance claims* 5,114 5,334
Volatility
- Insurance (274) 82
- Policyholder interests (233) 359
Total other income, net of insurance claims 4,607 5,775
*Excluding volatility. For statutory reporting purposes, volatility totalling GBP
(507) million in 2007 (2006: GBP441 million); is included in total other income;
comprising net trading income of GBP(447) million (2006: GBP360 million) and other
operating income of GBP(60) million (2006: GBP81 million).
Certain fees payable by the Group's asset finance business have been
reclassified from other income to interest income as part of the effective yield
of the related lending; there is no impact upon profit before tax. Comparative
figures have been restated accordingly.
6. General insurance income
2007 2006
GBPm GBPm
Premium income from underwriting
Creditor 164 180
Home 441 424
Health 9 13
Reinsurance premiums (23) (17)
591 600
Commissions from insurance broking
Creditor 394 377
Home 49 47
Health 12 13
Other 193 192
648 629
Page 40 of 58
7. Operating expenses
2007 2006
Administrative expenses: GBPm GBPm
Staff:
Salaries 2,127 2,117
National insurance 167 161
Pensions
- Before pension schemes related credit 238 293
- Pension schemes related credit - (128)
238 165
Other staff costs 372 298
2,904 2,741
Premises and equipment:
Rent and rates 304 310
Hire of equipment 16 15
Repairs and maintenance 154 165
Other 145 149
619 639
Other expenses:
Communications and external data processing 462 499
Advertising and promotion 192 184
Professional fees 279 231
Settlement of overdraft claims 76 -
Other 405 388
1,414 1,302
Administrative expenses 4,937 4,682
Depreciation and amortisation 630 619
Total operating expenses 5,567 5,301
Cost:income ratio - statutory basis* 52.0% 47.7%
Cost:income ratio - excluding volatility, the settlement of 49.0% 50.8%
overdraft claims and, in 2006, the pension schemes related credit
*Total operating expenses divided by total income, net of insurance claims.
8. Number of employees (full-time equivalent)
2007 2006
UK Retail Banking 29,943 30,204
Insurance and Investments 5,276 5,685
Wholesale and International Banking 15,997 19,210
Other, largely IT and Operations 10,111 10,400
61,327 65,499
Agency staff (full-time equivalent) (3,249) (2,869)
Total number of employees (full-time equivalent) 58,078 62,630
The total number of employees reduced by 4,552 to 58,078. Of this reduction
2,790 related to the impact of business disposals (Lloyds TSB Registrars 1,485,
Dutton-Forshaw 1,277 and Abbey Life 28).
Page 41 of 58
9. Impairment losses by division
2007 2006
GBPm GBPm
Impairment losses by division
UK Retail Banking
Personal loans/overdrafts 679 740
Credit cards 527 490
Mortgages 18 8
1,224 1,238
Wholesale and International Banking
Excluding market dislocation and 2007 Finance Act 447 313
Market dislocation 22 -
2007 Finance Act 28 -
497 313
Central group items - 9
Impairment losses on loans and advances 1,721 1,560
Other credit risk provisions 5 (5)
Impairment of available-for-sale financial assets 70 -
Total impairment charge 1,796 1,555
Charge as % of average lending:
Personal loans/overdrafts 5.32 5.85
Credit cards 7.96 6.99
Mortgages 0.02 0.01
UK Retail Banking 1.10 1.18
Wholesale and International Banking* 0.51 0.39
Total charge* 0.82 0.83
*Excluding impact of market dislocation and 2007 Finance Act.
10. Retirement benefit obligations
2007 2006
GBPm GBPm
Defined benefit pension schemes
Present value of scheme liabilities 16,795 17,378
Fair value of scheme assets (16,112) (15,279)
Net defined benefit scheme deficit 683 2,099
Unrecognised actuarial gains 1,350 263
Net recognised defined benefit scheme deficit 2,033 2,362
Other post-retirement benefit schemes 111 100
Net recognised liability 2,144 2,462
Deferred tax (600) (739)
Recognised liability after tax 1,544 1,723
The Group's defined benefit pension schemes' gross deficit at 31 December 2007
improved by GBP1,416 million to GBP683 million, comprising net recognised
liabilities of GBP2,033 million partly offset by unrecognised actuarial gains of
GBP1,350 million. This improvement largely reflects an increase in the real
discount rate used to value the schemes' liabilities and Group contributions to
the schemes, which exceeded the cost of accruing benefits.
Page 42 of 58
11. Capital ratios
Basel II Basel I Basel I
31 December 31 December 31 December
2007 2007 2006
GBPm GBPm GBPm
Tier 1
Share capital and reserves 12,663 12,141 11,155
Regulatory post-retirement benefit adjustments 704 704 1,041
Other items - - 39
Preference share capital 1,589 1,589 1,610
Innovative tier 1 capital instruments 1,474 1,474 1,372
Available-for-sale revaluation reserve and cash flow hedging 402 402 (12)
reserve
Goodwill (2,358) (2,358) (2,377)
Other deductions (929) - -
Total tier 1 capital 13,545 13,952 12,828
Tier 2
Undated loan capital 4,457 4,457 4,390
Dated loan capital 3,441 3,441 3,624
Collectively assessed provisions 12 2,150 1,951
Available-for-sale revaluation reserve in respect of equities 12 12 -
Other deductions (928) - -
Total tier 2 capital 6,994 10,060 9,965
20,539 24,012 22,793
Supervisory deductions
Life and pensions businesses (4,373) (4,373) (5,368)
Other deductions (491) (762) (790)
Total supervisory deductions (4,864) (5,135) (6,158)
Total capital 15,675 18,877 16,635
Risk-weighted assets GBPbn GBPbn GBPbn
Credit risk 127.2
Market risk 5.3
Operational risk 10.1
Total risk-weighted assets 142.6 172.0 156.0
Risk asset ratios
Tier 1 9.5% 8.1% 8.2%
Total capital 11.0% 11.0% 10.7%
Post-tax return on average risk-weighted assets 2.03% 1.89%
Post-tax return on average risk-weighted assets* 1.76% 1.72%
*Excluding volatility, profit on sale of businesses, settlement of overdraft
claims and, in 2006, pension schemes related credit.
Page 43 of 58
12. Total assets by division
31 December 31 December
2007 2006
GBPm GBPm
UK Retail Banking 115,012 108,381
Insurance and Investments 73,377 86,074
Wholesale and International Banking 163,294 147,836
Central group items 1,663 1,307
Total assets 353,346 343,598
13. Balance sheet information
31 December 31 December
2007 2006
GBPm GBPm
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 3,155 3,739
Interest bearing current accounts 42,858 40,906
Savings and investment accounts 70,003 64,380
Other customer deposits 24,671 19,134
Total sterling 140,687 128,159
Currency 15,868 11,183
Total deposits - customer accounts 156,555 139,342
Loans and advances to customers
Agriculture, forestry and fishing 3,226 2,905
Energy and water supply 2,102 2,024
Manufacturing 8,385 7,513
Construction 2,871 2,332
Transport, distribution and hotels 11,573 10,490
Postal and communications 946 831
Property companies 17,576 12,896
Financial, business and other services 29,707 22,999
Personal : mortgages 102,739 95,601
: other 22,988 23,025
Lease financing 4,686 4,802
Hire purchase 5,423 5,060
212,222 190,478
Allowance for impairment losses on loans and advances (2,408) (2,193)
Total loans and advances to customers 209,814 188,285
Total loans and advances to customers in our international businesses totalled
GBP6,291 million (31 December 2006: GBP5,589 million).
Page 44 of 58
14. Loans and advances to customers
Retail - Retail - Wholesale Total
Mortgages Other
31 December 2007 GBPm GBPm GBPm GBPm
Neither past due nor impaired 99,828 29,850 73,475 203,153
Past due but not impaired 2,153 966 639 3,758
Impaired - no provision required 415 100 293 808
- provision held 343 3,600 560 4,503
Gross 102,739 34,516 74,967 212,222
Allowance for impairment losses (37) (2,029) (342) (2,408)
Net 102,702 32,487 74,625 209,814
31 December 2006
Neither past due nor impaired 92,873 29,364 60,005 182,242
Past due but not impaired 1,943 1,005 374 3,322
Impaired - no provision required 658 92 158 908
- provision held 127 3,580 299 4,006
Gross 95,601 34,041 60,836 190,478
Allowance for impairment losses (42) (1,918) (233) (2,193)
Net 95,559 32,123 60,603 188,285
The analysis of lending between retail and wholesale has been prepared based
upon the type of exposure and not the business segment in which the exposure is
recorded. Included within retail are exposures to personal customers and small
businesses, whilst included within wholesale are exposures to corporate
customers and other large institutions.
Loans and advances to customers which are neither past due nor impaired
Retail - Retail - Wholesale Total
Mortgages Other
GBPm GBPm GBPm GBPm
31 December 2007
Good quality 99,407 18,157 46,240
Satisfactory quality 378 8,964 25,013
Lower quality 1 665 2,034
Below standard, but not impaired 42 2,064 188
Total 99,828 29,850 73,475 203,153
31 December 2006
Good quality 92,472 16,940 35,659
Satisfactory quality 359 9,667 21,797
Lower quality - 663 2,249
Below standard, but not impaired 42 2,094 300
Total 92,873 29,364 60,005 182,242
Page 45 of 58
14. Loans and advances to customers (continued)
The definitions of good quality, satisfactory quality, lower quality and below
standard but not impaired applying to retail and wholesale are not the same,
reflecting the different characteristics of these exposures and the way they are
managed internally, and consequently totals are not provided. Wholesale lending
has been classified using internal probability of default rating models mapped
so that they are comparable to external credit ratings. Good quality lending
comprises the lower assessed default probabilities, with other classifications
reflecting progressively higher default risk. Classifications of retail lending
incorporate expected recovery levels for mortgages, as well as probabilities of
default assessed using internal rating models. Good quality lending includes
the lower assessed default probabilities and all loans with low expected losses
in the event of default, with other categories reflecting progressively higher
risks and lower expected recoveries.
15. Credit market positions in Corporate Markets
Lloyds TSB's high quality business model means that the Group has relatively
limited exposure to assets affected by current capital markets uncertainties.
The following table shows credit market positions in Corporate Markets, on both
a gross and net basis.
Credit market positions - 31 December 2007 Net Gross
Exposure Exposure
GBPm GBPm
US sub-prime ABS-direct - -
ABS CDOs
- unhedged 130 130
- monoline hedged - 470
- major global bank cash collateralised - 1,861
Structured investment vehicles
- capital notes 78 78
- liquidity backup facilities 370 370
Trading portfolio
- ABS trading book 474 474
- secondary loan trading 665 863
- other assets* 3,895 3,895
*Primarily high quality senior bank and corporate assets; also includes GBP181
million of indirect exposure to US sub-prime mortgages and ABS CDOs. This super
senior exposure is protected by note subordination.
Page 46 of 58
15. Credit market positions in Corporate Markets (continued)
Available-for-sale assets 31 December
2007
GBPbn
Cancara 8.3
- US sub-prime - nil
- Alt-A - GBP619 million
- CMBS - GBP1,355 million (100% AAA/Aaa)
Student Loan ABS 3.2
- US Government guaranteed
Treasury assets 4.6
- Government bond and short-dated bank commercial paper
Other assets 4.1
- Major bank senior paper and high quality ABS
Total - Group 20.2
16. Profit on sale of businesses
During 2007, the Group disposed of its share registration business, Lloyds TSB
Registrars; Abbey Life, the UK life operation which was closed to new business
in 2000; and its medium-size car dealership, Dutton-Forshaw. In addition,
provision has been made for payments under an indemnity given in relation to a
business sold in an earlier year. A breakdown is provided below.
2007 2006
GBPm GBPm
Lloyds TSB Registrars 407 -
Abbey Life 272 -
Other (22) -
657 -
Page 47 of 58
17. Economic profit
2007 2006
GBPm GBPm
Statutory basis
Average shareholders' equity 11,681 10,531
Profit attributable to equity shareholders 3,289 2,803
Less: notional charge (1,051) (948)
Economic profit 2,238 1,855
Excluding volatility, profit on sale of businesses, settlement of overdraft claims
and, in 2006, pension schemes related credit
Average shareholders' equity 11,339 10,485
Profit attributable to equity shareholders 2,863 2,634
Less: notional charge (1,021) (944)
Economic profit 1,842 1,690
Economic profit represents the difference between the earnings on the equity
invested in a business and the cost of the equity. The notional charge has been
calculated by multiplying average shareholders' equity by the cost of equity
used by the Group of 9 per cent (2006: 9 per cent).
18. Earnings per share
2007 2006
Statutory basis
Basic
Profit attributable to equity shareholders GBP3,289m GBP2,803m
Weighted average number of ordinary shares in issue 5,637m 5,616m
Earnings per share 58.3p 49.9p
Fully diluted
Profit attributable to equity shareholders GBP3,289m GBP2,803m
Weighted average number of ordinary shares in issue 5,683m 5,667m
Earnings per share 57.9p 49.5p
Excluding volatility, profit on sale of businesses, settlement of overdraft claims
and, in 2006, pension schemes related credit
Profit attributable to equity shareholders GBP2,863m GBP2,634m
Weighted average number of ordinary shares in issue 5,637m 5,616m
Earnings per share 50.8p 46.9p
Page 48 of 58
19. Scottish Widows - realistic balance sheet information
Financial Services Authority (FSA) returns for large with-profits companies
include realistic balance sheet information. The information included in FSA
returns concentrates on the position of the With Profit Fund. However, under
the Scottish Widows demutualisation structure, which was court approved, the
fund is underpinned by certain assets outside the With Profit Fund and it is
more appropriate to consider the long-term fund position as a whole to measure
the realistic capital position of Scottish Widows. The estimated position at 31
December 2007, allowing for the proposed transfer of GBP300 million from the Long
Term Fund to the Shareholder Fund, is shown below, together with the actual
position at 31 December 2006.
31 December 2007 (estimated) With Profit Long Term
Fund Fund
GBPbn GBPbn
Available assets, including support arrangement assets 17.8 20.9
Realistic value of liabilities (16.8) (16.9)
Working capital for fund 1.0 4.0
Working capital ratio 5.4% 19.2%
31 December 2006 With Profit Long Term
Fund Fund
GBPbn GBPbn
Available assets, including support arrangement assets 19.4 22.3
Realistic value of liabilities (18.3) (18.3)
Working capital for fund 1.1 4.0
Working capital ratio 5.8% 17.9%
The Risk Capital Margin (RCM) is the capital buffer that the FSA requires to be
held to cover prescribed adverse shocks. At 31 December 2007, the RCM was
estimated to be GBP62 million for the With Profit Fund and GBP96 million for the
Long Term Fund (covered 15 times and 42 times respectively by the working
capital for the fund). At 31 December 2006, the RCM was GBP57 million for the
With Profit Fund and GBP84 million for the Long Term Fund (covered 20 times and 47
times respectively).
Page 49 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007
This section provides further details of the Scottish Widows EEV financial
information.
Composition of EEV balance sheet
2007 2006
GBPm GBPm
Value of in-force business (certainty 2,779 3,220
equivalent)
Value of financial options and guarantees (53) (56)
Cost of capital (178) (248)
Non-market risk (61) (75)
Total value of in-force business 2,487 2,841
Shareholders' net assets 2,878 3,572
Total EEV of covered business 5,365 6,413
Reconciliation of opening EEV balance sheet to closing EEV balance sheet on
covered business
Shareholders' Value of in-force
net assets business Total
GBPm GBPm GBPm
As at 1 January 2006 3,445 2,941 6,386
Total profit after tax 873 (100) 773
Dividends (746) - (746)
As at 31 December 2006 3,572 2,841 6,413
Total profit after tax 661 107 768
Profit on disposal of Abbey Life (EEV basis)
Sale proceeds 985 - 985
Assets disposed (474) (461) (935)
511 (461) 50
Dividends (1,866) - (1,866)
As at 31 December 2007 2,878 2,487 5,365
Analysis of shareholders' net assets on an EEV basis on covered business
Required Free Shareholders'
capital surplus net assets
GBPm GBPm GBPm
As at 1 January 2006 2,393 1,052 3,445
Total profit after tax (186) 1,059 873
Dividends - (746) (746)
As at 31 December 2006 2,207 1,365 3,572
Total (loss) profit after tax (238) 899 661
Disposal of Abbey Life (EEV basis) (232) 743 511
Dividends - (1,866) (1,866)
As at 31 December 2007 1,737 1,141 2,878
Page 50 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Summary income statement on an EEV basis
2007 2006
GBPm GBPm
New business profit 326 346
Existing business profit
- Expected return 337 403
- Experience variances 78 69
- Assumption changes (45) (133)
370 339
Expected return on shareholders' net assets 207 167
Profit before tax, excluding volatility and other items* 903 852
Volatility (271) 176
Other items* 58 76
Total profit before tax 690 1,104
Taxation (59) (331)
Impact of Corporation tax rate change 137 -
Total profit after tax, excluding profit on sale of Abbey Life 768 773
Profit on sale of Abbey Life (EEV basis) 50 -
Total profit after tax 818 773
*Other items represent amounts not considered attributable to the underlying
performance of the business.
Page 51 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Breakdown of income statement between life and pensions, and OEICs
2007 Life and pensions OEICS Total
GBPm GBPm GBPm
New business profit 270 56 326
Existing business
- Expected return 286 51 337
- Experience variances 35 43 78
- Assumption changes (105) 60 (45)
216 154 370
Expected return on shareholders' net assets 199 8 207
Profit before tax* 685 218 903
New business margin (PVNBP) 3.5% 2.0% 3.1%
Post-tax return on embedded value* 9.9%
2006 Life and pensions OEICS Total
GBPm GBPm GBPm
New business profit 287 59 346
Existing business
- Expected return 361 42 403
- Experience variances 35 34 69
- Assumption changes (129) (4) (133)
267 72 339
Expected return on shareholders' net assets 160 7 167
Profit before tax* 714 138 852
New business margin (PVNBP) 4.1% 2.2% 3.6%
Post-tax return on embedded value* 9.3%
*Excluding volatility and other items.
Page 52 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Economic assumptions
A bottom up approach is used to determine the economic assumptions for valuing
the business in order to determine a market consistent valuation.
The risk-free rate assumed in valuing in-force business is 10 basis points over
the 15 year gilt yield. In valuing financial options and guarantees the
risk-free rate is derived from gilt yields plus 10 basis points, in line with
Scottish Widows' FSA realistic balance sheet assumptions. The table below shows
the range of resulting yields and other key assumptions.
31 December 31 December
2007 2006
% %
Risk-free rate (value of in-force) 4.65 4.72
Risk-free rate (financial options and guarantees) 4.28 to 4.81 3.91 to 5.41
Retail price inflation 3.28 3.23
Expense inflation 4.18 4.13
Non-market risk
An allowance for non-market risk is made through the choice of best estimate
assumptions based upon experience, which generally will give the mean expected
financial outcome for shareholders and hence no further allowance for non-market
risk is required. However, in the case of operational risk and the With Profit
Fund these are asymmetric in the range of potential outcomes for which an
explicit allowance is made.
Non-economic assumptions
Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed
each year and are based on an analysis of past experience and on management's
view of future experience. These assumptions are intended to represent a best
estimate of future experience.
For OEIC business, the lapse assumption is based on recent experience which has
been collected over a period that has coincided with favourable investment
conditions. Management have used a best estimate of the long-term lapse
assumption which is higher than indicated by this experience. In management's
view, the approach and lapse assumption are both reasonable.
Page 53 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Sensitivity analysis
The table below shows the sensitivity of the EEV and the new business profit
before tax to movements in some of the key assumptions. The impact of a change
in the assumption has only been shown in one direction other than for risk free
rate. Where the impact has been shown only in one direction it can be assumed
to be reasonably symmetrical.
Impact on new
Impact business profit
on EEV before tax
GBPm GBPm
2007 EEV/new business profit before tax 5,365 326
(1a) 100 basis points reduction in risk-free rate 161 7
(1b) 100 basis points increase in risk-free rate (115) (7)
(2) 10 per cent reduction in market values of equity assets (178) n/a
(3) 10 per cent reduction in market values of property assets (32) n/a
(4) 10 per cent reduction in expenses 96 31
(5) 10 per cent reduction in lapses 88 19
(6) 5 per cent reduction in annuitant mortality (64) (5)
(7) 5 per cent reduction in mortality and morbidity (excluding annuitants) 22 3
(8) 100 basis points increase in equity and property returns nil nil
(9) 10 basis points increase in credit spreads (46) (6)
(1) In this sensitivity the impact takes into account the change in the value
of in-force business, financial options and guarantee costs, statutory reserves
and asset values.
(2) The reduction in market values is assumed to have no corresponding impact
on dividend yields.
(3) The reduction in market values is assumed to have no corresponding impact
on rental yields.
(4) This sensitivity shows the impact of reducing new business maintenance
expenses and investment expenses to 90 per cent of the expected rate.
(5) This sensitivity shows the impact of reducing lapse and surrender rates to
90 per cent of the expected rate.
(6) This sensitivity shows the impact on our annuity and deferred annuity
business of reducing mortality rates to 95 per cent of the expected rate.
(7) This sensitivity shows the impact of reducing mortality rates on
non-annuity business to 95 per cent of the expected rate.
(8) Under a market consistent valuation, changes in assumed equity and
property returns have no impact on the EEV.
(9) This sensitivity shows the impact of a 10 basis point increase in
corporate bond yields and the corresponding reduction in market values.
Government bond yields and the risk-free rate are assumed to be unchanged.
In sensitivities (4) to (7) assumptions have been flexed on the basis used to
calculate the value of in-force business and the realistic and the statutory
reserving bases. A change in risk discount rates is not relevant as the risk
discount rate is not an input to a market consistent valuation.
Page 54 of 58
21. Scottish Widows - weighted sales (Annual Premium Equivalent)
2007 2006
GBPm GBPm
Weighted sales (regular + 1/10 single)
Life and pensions:
Savings and investments 89 128
Protection 117 49
Individual pensions 273 270
Corporate and other pensions 352 322
Retirement income 101 98
Managed fund business 47 35
Life and pensions 979 902
OEICs 297 290
Life, pensions and OEICs 1,276 1,192
Bancassurance 458 403
Independent financial advisers 733 714
Direct 85 75
Life, pensions and OEICs 1,276 1,192
22. Legal and regulatory matters
During the ordinary course of business the Group is subject to threatened or
actual legal proceedings. All such material cases are periodically reassessed,
with the assistance of external professional advisers where appropriate, to
determine the likelihood of the Group incurring a liability. In those instances
where it is concluded that it is more likely than not that a payment will be
made, a provision is established to management's best estimate of the amount
required to settle the obligation at the relevant balance sheet date. In some
cases it will not be possible to form a view, either because the facts are
unclear or because further time is needed properly to assess the merits of the
case. No provisions are held against such cases; however the Group does not
currently expect the final outcome of these cases to have a material adverse
effect on its financial position.
In the UK and elsewhere, there is continuing political and regulatory scrutiny
of financial services. On 6 November 2007 the Competition Commission published
its emerging thinking into the Payments Protection Inquiry and is expected to
report by December 2008. The OFT is also carrying out a market study into
personal current account pricing alongside its investigation into certain
current account charges which are also subject to a legal test case (see below).
The OFT is also investigating interchange fees charged by some card networks in
parallel with the European Commission's own investigation into cross-border
interchange fees. At the same time regulators are considering the review of
retail distribution and UK financial stability and depositor protection
proposals. It is not presently possible to assess the cost or income impact of
these inquiries or any connected matters on the Group until the outcome is
known.
In addition, a number of EU directives, including the Unfair Commercial
Practices Directive and Payment Services Directive are currently being
implemented in the UK. The EU is also considering regulatory proposals for,
inter alia, a Consumer Credit, Mortgage Credit, Single European Payments Area,
Retail Financial Services Review and capital adequacy requirements for insurance
companies (Solvency II).
Page 55 of 58
22. Legal and regulatory matters (continued)
On 27 July 2007, following agreement between the UK Office of Fair Trading (OFT)
and a number of UK financial institutions, the OFT issued High Court legal
proceedings against those institutions, including Lloyds TSB Bank plc, to
determine the legal status and enforceability of certain of the charges applied
to their personal customers in relation to requests for unplanned overdrafts. A
preliminary issues hearing has now taken place and judgment is currently
awaited. It is likely that further hearings will be required and, if appeals
are pursued, the proceedings may take a number of years to conclude. Pending
resolution, the Financial Services Authority has agreed, subject to certain
conditions, that the handling of customer complaints on this issue can be
suspended until the proceedings are concluded unless in the light of prevailing
circumstances this would be inappropriate. The Group intends strongly to defend
its position. Accordingly, no provision in relation to the outcome of this
litigation has been made. Depending on the Court's determinations, a range of
outcomes is possible, some of which could have a significant financial impact on
the Group. The ultimate impact of the litigation on the Group can only be known
at its conclusion.
There has been increased scrutiny of the financial institutions sector,
especially in the US, with respect to combating money laundering and terrorist
financing and enforcing compliance with economic sanctions. The Office of
Foreign Assets Control (OFAC) administers US laws and regulations in relation to
US economic sanctions against designated foreign countries, nationals and others
and the Group has been conducting a review of its conduct with respect to
historic US dollar payments involving countries, persons or entities subject to
those sanctions. The Group has provided information relating to its review of
such historic payments to a number of authorities including OFAC, the US
Department of Justice and the New York County District Attorney's office which,
along with other authorities, have been reported to be conducting a broader
review of sanctions compliance by non-US financial institutions. The Group is
involved in ongoing discussions with these authorities with respect to agreeing
a resolution of their investigations. No provision has been made in respect of
this matter. The Group does not expect the final outcome to have a material
adverse effect on its financial position.
23. Taxation
The statutory effective tax rate in 2007 was 17.0 per cent, compared to 31.6 per
cent in 2006. Under IFRS the Group is required to include in income tax expense
the tax attributable to UK life insurance policyholder earnings and its
interests in Open-ended Investment Companies (OEICs). The effective rate of the
Group, excluding the gross policyholder and OEIC interests from profit before
tax and the tax charge and, in 2007, the profit on disposal of businesses from
profit before tax and the impact on the year end deferred tax position of the UK
corporation tax rate change (GBP110 million credit), was 28.3 per cent (2006:
28.0 per cent).
The 2007 Finance Act reduction in the corporation tax rate from 30 per cent to
28 per cent has resulted in a one-off impairment charge relating to a reduction
in future rental income within the Group's leasing business of GBP28 million, as
a result of the triggering of relevant tax variation clauses. In addition, the
Group's deferred tax liabilities have been remeasured resulting in a credit to
the Group's tax charge of GBP110 million. The net impact of these items has been
to increase shareholders' equity by GBP90 million. The future impact of the
reduction in capital allowances from 25 per cent to 20 per cent will not be
material for the Group.
Page 56 of 58
23. Taxation (continued)
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:
2007 2006
GBPm GBPm
Profit before tax 4,000 4,248
Tax charge thereon at UK corporation tax rate of 30% 1,200 1,274
Factors affecting charge:
Disallowed and non-taxable items 2 (8)
Overseas tax rate differences (4) (2)
Gains exempted or covered by capital losses (274) (78)
Policyholder interests (173) 123
Corporation tax rate change (110) -
Other items 38 32
Tax charge 679 1,341
24. Dividend
A final dividend for 2007 of 24.7p (2006: 23.5p), representing an increase of 5
per cent, will be paid on 7 May 2008. The total amount of this dividend is
GBP1,394 million.
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Key dates for the
payment of the dividend are:
Shares quoted ex-dividend 5 March 2008
Record date 7 March 2008
Final date for joining or leaving the dividend reinvestment plan 9 April 2008
Final dividend paid 7 May 2008
Annual general meeting 8 May 2008
25. Other information
The financial information included in this news release does not constitute
statutory accounts within the meaning of section 240 of the Companies Act 1985.
Statutory accounts for the year ended 31 December 2007 were approved by
directors on 21 February 2008 and will be delivered to the Registrar of
Companies following publication on 29 March 2008. 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 57 of 58
CONTACTS
For further information please contact:-
Michael Oliver
Director of Investor Relations
Lloyds TSB Group plc
020 7356 2167
Email: michael.oliver@ltsb-finance.co.uk
Mary Walsh
Director of Corporate Relations
Lloyds TSB Group plc
020 7356 2121
Email: mary.walsh@lloydstsb.co.uk
Kirsty Clay
Senior Manager, Media Relations
Lloyds TSB Group plc
020 7356 1517
Email: kirsty.clay@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.
A copy of the Group's corporate responsibility report may be obtained by writing
to Corporate Responsibility, Lloyds TSB Group plc, 25 Gresham Street, London
EC2V 7HN. This information together with the Group's code of business conduct
is also available on the Group's website.
Registered office: Lloyds TSB Group plc, Henry Duncan House, 120 George Street,
Edinburgh, EH2 4LH. Registered in Scotland no. 95000.
Page 58 of 58
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LLOYDS TSB GROUP plc
(Registrant)
By: M D Oliver
Name: M D Oliver
Title: Director of Investor Relations
Date: 22 February 2008