All the departing directors leave with our warm thanks for their contribution to the Group over many years.
All these factors augur well for future sustainable growth. However, we have also had to absorb a number of significant hits to our profit and loss account. During the year we have experienced a reduction in profit of £952 million as a result of the adverse investment variance following the 24 per cent fall in the FT All Share Index during 2002. We have increased the Group’s general provision by £50 million in respect of our business in Argentina and significantly increased our provisions in respect of certain US corporate customers as a result of their accounting and other irregularities. In addition, we have absorbed provisions totalling £205 million for redress to past purchasers of pensions and Abbey Life endowment and long-term savings products, much of which relates to policies written in the late 1980s and early 1990s. The Group has also experienced a reduction of £59 million in unit trust and asset management fees, largely as a result of stockmarket falls, a cost of £57 million to reflect the implementation of revised mortality assumptions in the Group’s life businesses, and a £142 million reduction in income as a result of lower other finance income, following the adoption of Financial Reporting Standard 17. The overall impact of these issues meant that the Group’s statutory pre-tax profits fell to £2,607 million from £3,161 million in 2001, and earnings per share fell by 21 per cent to 32.0p. Our post-tax return on equity was 16.7 per cent. Excluding changes in economic assumptions and investment variance, our post-tax return on equity was 23.0 per cent.
One of our main projects this year has been the development of the Wessex Reinvestment Trust (WRT) which will deliver loan services to develop enterprise and facilitate access to affordable housing and workspace. This is the first entirely rural community finance initiative which seeks to provide a springboard for rural regeneration in Devon, Dorset and Somerset.
* cashpoint is a registered trade mark of Lloyds TSB Bank plc
• Asset Finance through the Lloyds TSB Commercial Finance, Alex Lawrie and autolease brands is a market leader in invoice discounting, factoring and contract hire. The Black Horse branded point of sale finance operation has leading positions in the motor, motorbike and caravan markets. Specialist personal lending, store credit, small/medium ticket leasing and the recently acquired Dutton-Forshaw motor dealership complete this group of businesses.
FRS 19 was issued in December 2000 and is effective for accounting periods ending on or after 23 January 2002. Following its implementation, the Group makes full provision for deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. Previously provision was only made where it was considered that there was a reasonable probability that a liability or asset would crystallise in the foreseeable future. An adjustment has been made increasing shareholders’
FRS 17 replaces SSAP 24 and UITF 6 as the accounting standard dealing with post-retirement benefits. The Group has decided to implement the requirements of FRS 17 in 2002 to coincide with the triennial full actuarial valuations of the Group’s pension schemes and because of the significant impact that implementation has on the Group’s reported results.
The total capital ratio was 9.6 per cent and the tier 1 capital ratio was 7.8 per cent. Balance sheet assets increased by £17 billion, or 7 per cent, to £253 billion from £236 billion at the end of 2001. Loans and advances to customers increased by £11.5 billion, or 9 per cent. Risk-weighted assets increased by 13 per cent to £122 billion, from £108 billion at the end of 2001. At the end of December 2002, the Scottish Widows free asset ratio was an estimated 10.0 per cent, compared to 11.5 per cent at the end of 2001.
Mortgages Investments Markets Banking group items Total Year ended 31 December 2002 £m £m £m £m £m £m
New business sales of 2.8 million products were 6 per cent higher than last year with home, creditor and motor business all growing strongly, particularly through direct channels (direct mail, telephone, affinity and internet) where sales grew by 11 per cent. Overall income from creditor insurance increased by 23 per cent, reflecting higher personal sector loan and credit card volumes and an improved personal lending penetration rate. Home insurance income increased by 22 per cent, with sales volumes increasing by 7 per cent to 1.2 million policies.
Lloyds TSB Leasing maintained its position as the largest ‘big ticket’ leasing company in the UK and continued to develop its position as an established provider of operating leases within its chosen market sectors. Pre-tax profits were £60 million compared to £67 million in 2001. At the end of the year, Lloyds TSB Registrars’ registration market share of FTSE 100 companies was 57 per cent, and its market leadership in employee share administration services continued to strengthen, having achieved market leadership in the new Share Incentive Plan market. Lower transactional activity, however, led to a reduction in pre-tax profit to £48 million, from £54 million in 2001.
Lloyds TSB Development Capital achieved record levels of venture capital investment, however, in a difficult market for disposals, realisations of venture capital gains were £35 million lower than in 2001. During the year, Lloyds TSB Development Capital was named Private Equity House of the Year for 2001.
This focus on cost control will be continued notwithstanding further significant investment throughout the business in 2003, to support increased business volumes, further improvements in productivity, and increases in investment in mandatory projects. These include projects such as the
The Group’s governing objective is to maximise value for its shareholders by: – Being first choice for its customers.
The Group’s banking activities expose it to the risk of adverse movements in interest rates or exchange rates, with little or no exposure to equity or commodity risk. The Group’s insurance activities also expose it to market risk (see ‘Insurance Risk’ below).
Non-trading Portfolios – interest rate risk within the Group’s non-trading exposure is summarised in the form of an interest rate repricing table, as set out on page 89. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. However, the table does not take into account the effect of interest rate options used by the Group to hedge its exposure.
Management up to a total authorised by the Board. A combination of position and sensitivity limits is used, depending on the nature of the business activity.
Equity derivatives are used by the Group to match equivalent liabilities arising from some of its retail products. Derivatives may also be used for efficient portfolio management purposes in client funds where such activity is in accordance with Group approved policy and the customer mandate.
Profit for the year attributable to shareholders 1,781 2,229 2,654 2,439 2,073
Archie G Kane Group Executive Director, IT and Operations Joined TSB Commercial Holdings in 1986 and held a number of senior and general management appointments in the Group before being appointed to the board in 2000. After some 10 years in the accountancy profession, joined General Telephone & Electronics Corporation in 1980, serving as finance director in the UK from 1983 to 1985. Chairman of the council of the Association for Payment Clearing Services. Aged 50.
The board has audit, nomination and remuneration committees which comply with the provisions of the code.
Going concern The directors are satisfied that the Company and the Group have adequate resources to continue to operate for the foreseeable future and are financially sound. For this reason, they continue to adopt the going concern basis in preparing the accounts.
General provisions are raised to cover latent bad and doubtful debts which are present in any portfolio of advances but have not been specifically identified. The Group holds general provisions against each of its principal lending portfolios, which are calculated after having regard to a number of factors; in particular, the level of watchlist or potential problem debt, the observed propensity for such debt to deteriorate and become impaired and prior period loss rates. The level of general provision held is reviewed on a regular basis to ensure that it remains appropriate in the context of the perceived risk inherent in the related portfolio and the prevailing economic climate.
Charges: Rental of premises 220 203 Hire of equipment 18 18 Interest on subordinated liabilities (loan capital) 537 515 *restated (see note 1)
Total income 31 Operating expenses 38 Provisions for bad and doubtful debts 1