In my first year as Chairman of Lloyds TSB I am pleased to be able to report that the Group has performed well, particularly against the weakening economic backdrop in the UK and other global economies and the impact on our business of lower stockmarkets.
Dennis Holt left at the end of August, and Lawrence Urquhart will retire from the board and as chairman of Scottish Widows at the annual general meeting. We greatly appreciate the contribution they have made to the Group.
At the end of 2001 funds under management totalled some £78 billion.
(the life, pensions and unit trust businesses of Scottish Widows and Abbey Life; general insurance underwriting and broking; and Scottish Widows Investment Partnership)
Investment earnings 247 212 Life and pensions distribution costs (247) (225)
Operating expenses reduced by £26 million. Increased costs of £13 million in New Zealand and £12 million in Brazil, which supported higher business volumes, were more than offset by a £46 million benefit from exchange rate movements.
The net interest margin decreased by 10 basis points, reflecting the higher funding cost of Scottish Widows, which caused a reduction of 7 basis points, and a reduction in the contribution of interest-free liabilities. The net interest margin on personal lending products fell by 5 basis points and the mortgage margin was broadly unchanged.
exceptional restructuring costs As part of our drive to maximise shareholder value, we are committed to achieving first quartile total shareholder return performance in comparison with a peer group of 16 national and international financial services groups. We have made good progress in this respect over the last 12 months but more needs to be done to ensure that our bottom line earnings continue to grow as robustly as possible to help achieve this goal. It is also essential that we improve our flexibility to ensure that the Group remains in a very strong position to combat any potential slowdown in the economy, and to position itself for a finer margin operating environment.
Expected annualised benefits Initial efficiency programme (cumulative) – 75 145 320 410
There was a net general provisions charge of £11 million as the £55 million charge relating to the ongoing economic difficulties in Argentina was partly offset by a release of £32 million in the general provision relating to the Group’s mortgage portfolio.
Group’s embedded value earnings. In addition, the movement in the embedded value in the balance sheet includes experience variances related to movements in the market value of the funds. Consequently, in order to provide a clearer representation of the underlying performance, the results of the life and pensions business are analysed between an operating profit, including investment earnings calculated using longer-term investment rates of return, and a profit before tax, separately identifying the short-term fluctuations in investment returns.
• Establishment and maintenance of the Group’s Large Exposures Policy. Exposure to individual counterparties or groups of counterparties is controlled through a tiered hierarchy of delegated sanctioning authorities. Approval requirements for each decision are based on the transaction amount, the customer’s aggregate facilities, credit risk ratings and the nature of the risk. Regular reports on significant credit exposures are provided to the Group Executive Committee and Board.
financial review representative sample of accounts in the portfolio to assess the quality of the loan book and other exposures.
Credit risk also arises from the use of derivatives. Note 47a) on pages 80 and 81 shows the total notional principal amount of interest rate, exchange rate and equity contracts outstanding at 31 December 2001. The notional principal amount does not, however, represent the Group’s real exposure to credit risk, which is limited to the current cost of replacing contracts with a positive value to the Group, should the counterparty default. This replacement cost is also shown in note 47a).
Lawrence M Urquhart* (retiring at the annual general meeting on 17 April 2002) Chairman of Scottish Widows Joined the board in 2000. Chairman of BAA and a non-executive director of Imerys SA. Joined Burmah Castrol in 1977 and held a number of senior and general management appointments in that company, including chief executive from 1985 to 1993 and chairman from 1990 to 1998. Former chairman of English China Clays. Aged 66.
The authority for the Company to purchase, in the market, up to 558 million of its shares, representing some 10 per cent of the issued ordinary share capital, expires at the annual general meeting. It was not used during the year and shareholders will be asked to give a similar authority at the annual general meeting. Details are contained in the accompanying notice of meeting.
At Weighted 1 January average Exercise 2001 exercise price of Market (or date of Granted Exercised At price at share options price Amount of gain on exercise**
Auditing Standards issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority.
Profit for the year attributable to shareholders 10 2,500 2,706 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Net assets 10,760 9,734aafffffffffffffffffffffffffff aafffffffffffffffffffffffffff Capital and reserves Called-up share capital 42 1,411 1,396 Share premium account 43 959 595
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 3,550 3,860afffffffffffffffffffffffffff afffffffffffffffffffffffffff Operating profit from Insurance and Investments is further analysed as follows: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
§ Subordinated Fixed Rate Bonds 2006 – 22 – – † Subordinated Floating Rate Notes 2006 – 100 – 100
Profit and loss reserve including net pension asset 7,811afffffffffffffffffffffffffff 46 Contingent liabilities and commitments a Contingent liabilities and commitments 2001 2000 arising out of banking transactions £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 388,780 4,236 4,677afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Equity contracts 4,580 428 255afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Effect of netting (3,843) (3,843)
The maturity of the notional principal amounts and net replacement cost of both trading and non-trading instruments entered into with third parties was: Under 1 to 5 Over 5 1 year years years Total aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Net assets disposed of: Sundry net assets 1 2 Goodwill written back on disposal – 93 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff