More than £50 million was spent on training and development in 2003. The University for Lloyds TSB (UfLTSB) provided over 71,000 face-to-face training days, in excess of 26,000 places on residential training courses, and a Group-wide network of more than 2,000 multimedia training PCs giving local access to a range of learning materials supplementing internet and intranet sites. 2.4 million hits were received on the UfLTSB intranet site in 2003 compared with 1.8 million in 2002.
Lloyds TSB Group measures value internally by economic profit growth, an important measure of performance which signals where value is being created or destroyed. It has developed a framework to be able to measure economic capital requirements across all its businesses, taking into account market, credit, business and operational risk. Economic profit is measured by applying a charge for this economic equity to post-tax earnings. Using economic profit as the key performance measure enables the Group to understand which products, channels and customer segments are destroying value and which are creating the most value and to make better strategic choices as a result.
Internet banking. Internet banking provides online banking facilities for personal customers and enables them to conduct their financial affairs without the need to use the branch network. Some 2.4 million customers have registered to use Lloyds TSB Group’s internet banking services.
Card services. Lloyds TSB Group provides a range of card-based products and services, including credit and debit cards and card transaction processing services for retailers. Lloyds TSB Group is a member of both the VISA and MasterCard payment systems and had a 12.6 per cent share of outstanding card balances at 31 December 2003.
UK Wealth Management. Private Banking provides a range of tailor-made wealth management services and products to individuals from 39 offices throughout the UK. In addition to asset management, these include tax and estate planning, executor and trustee services, deposit taking and lending, insurance and personal equity plan and individual savings account (ISA) products. At 31 December 2003, client funds under management totalled some £11 billion.
Lloyds TSB Group’s businesses are subject to inherent risks concerning borrower credit quality as well as general UK and international economic conditions. Development of adverse conditions in the UK or in other major economies could cause profitability to decline.
3 The net interest margin represents the interest spread together with the contribution of interest-free liabilities. It is calculated by expressing net interest income as a percentage of average interest-earning assets.
Economic profit fell by £293 million or 26 per cent from £1,123 million in 2001 to £830 million in 2002. Profit attributable to shareholders fell by £443 million (20 per cent) to £1,790 million; however the notional charge on average equity was £150 million lower, as a result of a 14 per cent fall in average equity to £10,672 million from £12,338 million in 2001.
Total income increased by £126 million, or 3 per cent, to £3,727 million. Net interest income increased by £200 million, or 7 per cent, to £2,890 million. Growth in lending and deposit balances added £247 million to net interest income, which was only partly offset by a reduction of £47 million caused by a 7 basis points fall in the overall margin. Since 31 December 2001, personal loans and credit card lending increased by 15 per cent and 27 per cent
The net interest margin fell by 7 basis points, reducing net interest income by £47 million. The margin on retail lending products was 3 basis points lower than in 2001, with an improved personal loan margin being offset by reduced margins on personal overdrafts and credit card lending. The deposit margin was 13 basis points lower as the full impact of interest rate reductions in the second half of 2001 has not been reflected in the rate of interest paid on some savings products and the benefit of interest-free and low interest current accounts has been reduced.
The economic assumptions have been revised at 31 December 2003 as follows: Risk-adjusted discount rate (net of tax) 7.60 7.35 8.50 Return on equities (gross of tax) 7.45 7.10 8.00 Return on fixed interest securities (gross of tax) 4.85 4.50 5.25
New business income increased by £59 million, or 15 per cent, to £457 million. Weighted sales of life and pensions products increased by 1 per cent as sales volumes were affected by weak demand as consumer confidence in long-term savings products remained low. However there was a further change in the product mix towards higher margin regular premium protection policies with the emphasis upon sales of lower margin single premium life products being reduced. The new business margin, defined as new business contribution divided by weighted sales, improved to 21.6 per cent compared to 19.3 per cent in 2002. The increase in distribution costs was also higher than sales volumes. Costs were up £44 million, or 16 per cent, to £327 million partly reflecting
• Monitoring of scorecards. The Lloyds TSB Group uses statistically-based decisioning techniques (primarily credit scoring and performance scoring) for its principal consumer lending portfolios. Group Risk Management reviews and monitors new and material changes to scorecards.
In addition, in the US non-performing loans and advances are typically written off more quickly than in the UK. Consequently a UK bank may appear to have a higher level of non-performing loans and advances than a comparable US bank although the reported income is likely to be similar in both the US and the UK.
Market risk limits (trading). Limits to control market risk in respect of trading positions are recommended by the group asset and liability committee, subject to review by Group Risk Management, to the group executive committee and authorised in total by the board. A combination of position and sensitivity limits is used, depending on the nature of the business activity. The group asset and liability committee, through Group Treasury for trading centres, ensures appropriate delegation to businesses.
Product planning and development. Businesses have formal processes for reviewing the range of their product portfolios and subject all product development to rigorous assessment. The assessment includes seeking to ensure that the product meets clearly defined customer needs.
Accounting policies. The Lloyds TSB Group seeks to use appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates.
• Require the directors to prepare an annual report on the solvency position of the insurer. The valuation basis for assets is defined and there are limits on the extent to which certain categories of assets are allowable in determining the solvency position. The appointed actuary must calculate the value of long-term liabilities and details of his investigations are contained in the directors’ solvency report. In determining the value of long-term liabilities the appointed actuary must use a method and valuation basis permitted by the Handbook.
Lloyds TSB Group’s regulatory capital is divided into tiers defined by the European Community Banking Consolidation Directive as implemented in the UK by the FSA’s Interim Prudential Sourcebook for Banks. Tier 1 comprises mainly shareholders’ funds, tier 1 capital instruments and minority interests, after deducting goodwill and other intangible assets. Tier 2 comprises general loan loss provisions, and qualifying subordinated loan capital, with restrictions on the amount of general provisions and loan capital which may be included. The amount of qualifying tier 2 capital cannot exceed that of tier 1 capital. Total capital is reduced by deducting investments in subsidiaries and associates which are not consolidated for regulatory purposes and investments in the capital of other credit/financial institutions. In the case of Lloyds TSB Group, this means that the net assets of its life assurance and general insurance businesses are deducted from Lloyds TSB Group’s regulatory capital.
1 Investment securities are those intended for use on a continuing basis in the activities of Lloyds TSB Group and not for dealing purposes. Investment securities held by Lloyds TSB Group’s insurance businesses are not included.
Principal activities The company is a holding company and its subsidiaries provide a wide range of banking and financial services through branches and offices in the UK and overseas.
The fees of the non-executive directors are agreed by the board within a total amount determined by the shareholders. They may also receive fees, agreed by the board, for membership of board committees. The fees are designed to recognise the various responsibilities of a non-executive director’s role and to attract independent and experienced individuals. The fees are neither performance related nor pensionable. Non-executive directors who serve on the boards of principal subsidiary companies of the Group may also receive additional fees.
These payments relate to cash bonuses based on Group performance and the attainment of pre-determined targets relating to profit before tax and economic profit. 75 per cent of the award was to be payable on achievement of profit before tax and economic profit relating to the Group’s stretching budget for 2003 and the remuneration committee set a higher target for the maximum award. Each executive director received an award equal to 41.8 per cent of salary.
Mr Pritchard has a deferred cash entitlement of £80,194 from his membership of the defined contribution section of the Group’s FURBS.
Profit attributable to shareholders 3,254 1,790 2,233 Currency translation differences on foreign currency net investments 118 (3) (86) Actuarial losses recognised in post-retirement benefit schemes (note 45) (6) (3,299) (2,873) Deferred tax thereon (note 45) 2 968 863
Included above: Unamortised discounts net of premiums on investment securities 2 5
Total domestic 131,114 118,057 International Latin America 557 1,591 New Zealand – 10,447
Adjustments on disposal of businesses (9) (8) (1) Charge for the year – 2 (2)
Disposal of businesses (273) (84) (189) Charge for the year – 51 (51)
The limited voting ordinary shares are held by the Lloyds TSB Foundations. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares.
Details of the Group’s joint ventures are provided in note 21. Information relating to transactions entered into between Group undertakings and the joint ventures and details of outstanding balances at 31 December 2003 are also shown in note 21.
Current service cost 269 244 212 Past service costs 51 49 117
Listed investment securities are valued at quoted mid-market prices. Unlisted securities and equity shares are valued based on discounted cash flows, market prices of similar securities and other appropriate valuation techniques.
UK GAAP does not require a value to be placed upon the customer relationships in acquisitions.
Commissions and fees 2,328 2,171 2,147 Realised gains from sales of investments 89 163 183 Foreign exchange trading income 193 149 133 Securities and other trading gains (losses) 1,021 (2,370) (2,307)
Notes to the UK/US GAAP reconciliation a Goodwill and customer related intangible assets
The additional minimum pension liability arising on these plans of £4,836 million (2002: £4,867 million) has been recognised in accumulated other comprehensive income, net of the related intangible asset of £231 million (2002: £221 million) and deferred taxes of £1,381 million (2002: £1,369 million).
Weighted Weighted Weighted Weighted average average average average exercise remaining exercise remaining price life Number of price life Number of Exercise price range (pence) (years) options (pence) (years) options
Scottish Widows has a significant with-profits pensions business. This business is subject to UK corporation tax on the basis of a notional return determined by the UK taxation authorities. To the extent that the actual return from the business is less than the notional return, tax losses accumulate which may be carried forward and offset against excess returns in future years. The value of these losses at 31 December 2003 was £1,140 million (2002: £1,170 million). Excess returns do not occur regularly and are only likely to be triggered in the future if interest rates increase significantly or there is significant volatility in the markets or the actuarial valuation basis alters significantly. Given the current low interest rate environment and in view of the fact that the actuarial valuation basis is currently considered unlikely to alter significantly, in the opinion of management it is more likely than not that these losses will not be realised and therefore a full valuation allowance has been established against this balance.
Value of long-term assurance business acquired ii 2,094 – 2,094 2,282 – 2,282 Separate account assets viii 22,494 – 22,494 18,945 – 18,945
Under US GAAP the costs incurred by the Group in the acquisition of new and renewal life insurance business are capitalised. These consist of the acquisition costs, principally commissions, marketing and advertising and the administration costs associated with the processing and policy issuance, typically underwriting, together these are capitalised as an asset and amortised in relation to the profit margin of the policies acquired.
Shareholders’ equity (US GAAP) 11,892 10,190 d Reconciliation of the movements in shareholders’ equity under US GAAP 2003 2002 2001 £m £m £m
Issue of shares 45 77 194 Movements in relation to own shares (6) 5 1 Share compensation schemes 113 44 46 Revaluation of shares in group undertakings 1,694 (3,317) (383)
Lloyds TSB Asset Finance England 100%* Consumer credit, leasing and 25 Gresham Street Division Limited related services London EC2V 7HN
Enforceability of civil liabilities Lloyds TSB Group plc is a public limited company incorporated under the laws of Scotland. Most of Lloyds TSB Group plc's directors and executive officers and certain of the experts named herein are residents of the United Kingdom. A substantial portion of the assets of Lloyds TSB Group plc, and a substantial portion of the assets of such persons, are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them judgements of US courts, including judgements predicated upon the civil liability provisions of the federal securities laws of the United States. Furthermore, Lloyds TSB Group plc has been advised by its English solicitors that there is doubt as to the enforceability in the United Kingdom, in original actions or in actions for enforcement of judgements of US courts, of civil liabilities, including those predicated solely upon the federal securities laws of the United States.