Contents 2 Chairman’s statement 4 Group chief executive’s review 7 Our work in the community 8 The businesses of Lloyds TSB
UK Retail Banking and Mortgages 1,172 1,205 Insurance and Investments 1,231 1,421 Wholesale Markets 626 852 International Banking 379 357 Central group items 96 185
Our governing objective is to maximise shareholder value over time To meet our governing objective we aim: •To be a leader in our chosen markets
In order to provide a clearer representation of the underlying performance, the results of the Group’s life and pensions business include investment earnings calculated using longerterm investment rates of return and annual management charges based on unsmoothed fund values. The difference between the normalised investment earnings and the actual return (‘the investment variance’) together with the impact of changes in the economic assumptions used in the embedded value calculation have been separately analysed and a reconciliation to the Group’s profit before tax is given on this page.
Total income adjusted for investment variance, acquisitions and other specified items (see page 31), increased by 2 per cent to £9,484 million.
Maarten van den Bergh the housing market and consumer spending to fall during 2003 although overall economic growth for the year is expected to be slightly higher than the 1.7 per cent growth experienced in 2002.
We have these in abundance. Our market leading general insurance business has continued to prosper and delivered very strong profitable growth, with pre-tax profits increasing by 16 per cent, compared with 2001.
The Group’s strategy of maximising shareholder value over time can only be sustainably achieved by putting our customers at the heart of everything we do. Lloyds TSB’s multi-channel banking infrastructure, including internet and telephony services, means that the Group can provide its customers with significant options in terms of both convenience and choice. The knowledge and expertise of our staff ensures that the
The Group continues to strengthen its market position in many of its key product
The Foundations also run a ‘Matched Giving Scheme’ for Lloyds TSB Group staff which matches money raised and time given to registered charities. In 2003 the Foundations have set aside £1.25 million to encourage staff to support local groups. We support national charities through our
The main businesses and activities of the Group during 2002 are described below: UK Retail Banking and Mortgages UK Retail Banking and Mortgages provides a full range of banking and financial services to some 15 million customers. With more than 2,200 branches of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester (C&G), the Group provides comprehensive geographic coverage in England, Scotland and Wales.
• Telephone Banking. Telephone Banking continues to grow and the Group provides one of the largest telephony services in Europe. At the end of 2002 3.2 million customers had registered to use the services of PhoneBank and the automated voice response service PhoneBank Express.
• Scottish Widows Investment Partnership manages funds for the Group’s retail life, pensions and investment products. Clients also include corporate pension schemes, local authorities and other institutions in the UK and overseas. At the end of 2002 funds under management totalled some £70 billion.
• Treasury is a leading participant in the Sterling money market. It is active in currency money markets, foreign exchange markets and also in certain derivatives markets to meet the needs of customers, and as part of the Group’s trading activities, including liquidity management.
• New Zealand. The National Bank of New Zealand is the country’s second largest bank and provides a full range of banking services through some 160 outlets.
UITF 33 was issued in February 2002 and is effective for accounting periods ending on or after 23 March 2002. Following its implementation the Group has reclassified €750 million (£482 million) of Perpetual Capital Securities as undated loan capital and the related cost is included within interest expense. Previously these securities were included within minority interests in the balance sheet and the cost was treated as a minority interest deduction.
The amounts included in the Group’s profit and loss account in 2002 are reflected in other finance income and administrative expenses, and are summarised below.
Expected return on scheme assets 817 844 Interest cost of scheme liabilities (652) (537)
At 31 December 2002 a net pension deficit of £2,077 million was included in the Group’s balance sheet, based upon actuarial valuations carried out at that date. This reflects a fall in the value of the schemes’ assets caused by the significant reduction in equity market values. The valuations were prepared in accordance with the requirements of the accounting standard which seek to place a market value on the schemes’ assets and liabilities at a point in time. As a result, these valuations are not indicative of the long-term funding position of the schemes which is assessed in the light of triennial formal actuarial valuations of the schemes. The last formal actuarial valuation of the Group’s principal schemes was performed at 30 June 2002 and, whilst these valuations have yet to be finalised, they disclosed that the schemes remained satisfactorily funded although it is probable that it will be necessary to recommence employer’s cash contributions shortly. These cash contributions, which are likely to be in the order of £150 million in 2003 and £300 million in 2004, do not affect the Group’s profit and loss account as normal pension costs are already, under FRS 17, included within the Group’s operating expenses.
(see page 31). Customer lending and deposits continue to grow well with further growth in market share being achieved in a number of our core markets. Customer lending grew by 9 per cent to £134.5 billion and customer deposits increased by 7 per cent to £116.3 billion. The Group net interest margin was 3.20 per cent, compared with 3.40 per cent in 2001. This reduction was more than compensated for by increased volumes, resulting in an increase of 5 per cent in net interest income.
In the Mortgages business, gross new lending increased by 36 per cent to a record £19.0 billion, compared with £14.0 billion a year ago. Net new lending was £5.9 billion, compared with £3.9 billion in 2001, resulting in a market share of net new lending of 7.5 per cent. The Group’s current mortgage pipeline is at record levels and its market share of net new lending in the second half of 2002, at 8.8 per cent, was considerably better than in the first half of the year. Net new lending in the second half of 2002 was £3.9 billion compared with £2.0 billion in the first half of the year.
Profit before tax, excluding changes in economic assumptions and investment variance, from Insurance and Investments decreased by £190 million, or 13 per cent, to £1,231 million, partly as a result of a £135 million increase in provisions for redress to past purchasers of endowment and pension products to £205 million, and a reduction of £55 million in benefits from experience variances and assumption changes, largely reflecting the implementation of revised actuarial mortality assumptions. Overall weighted sales in the Group’s life, pensions and unit trust businesses were £767.6 million compared to £754.7 million last year, an increase of 2 per cent. This increase in weighted sales reflected a 7 per cent increase in weighted sales from life and pensions, partly offset by a 13 per cent reduction in weighted sales from unit trusts, largely caused by the continuing stockmarket volatility which has significantly reduced customer demand for equity-based ISA products. In the second half of 2002, weighted sales of £394.9 million were 10 per cent higher than the £358.9 million in the second half of 2001, and 6 per cent higher than the £372.7 million in the first half of 2002. Weighted sales from independent financial advisors rose by 25 per cent. There was further strong profit growth from the Group’s general insurance operations. A 19 per cent growth in the combined premium income from underwriting and commissions from insurance broking led to an increase in profit before tax of £103 million, or 16 per cent, to £754 million.
Consumer Finance, performed well, notwithstanding difficult local economic circumstances, and increased pre-tax profits on a local currency basis by 14 per cent. After the impact of adverse exchange rate movements, which were partly hedged, Losango made a pre-tax profit of £40 million, compared with £43 million in 2001.
International Banking provisions decreased to £162 million from £183 million, as a result of lower specific provisions in Losango, our consumer finance business in Brazil, largely reflecting exchange rate movements. The Group’s charge for bad and doubtful debts, expressed as a percentage of average lending, was 0.77 per cent compared to 0.62 per cent in 2001. At the end of the year provisions for bad and doubtful debts for the
Since the October presidential election in Brazil the economic situation has somewhat stabilised. The Group reduced its total exposure to Brazil, net of provisions, to £1.9 billion during 2002, from £3.3 billion at the end of 2001, largely from not replacing maturing Government bonds.
Profit before tax from UK Retail Banking and Mortgages decreased by £33 million to £1,172 million, compared with £1,205 million in 2001.
Total income increased by £179 million, or 4 per cent, to £4,416 million. Excluding the 2001 profits from the sale and leaseback of premises, total income grew by 6 per cent. Net interest income increased by £238 million, or 8 per cent, to £3,340 million. Personal loans and credit card lending increased by 15 per cent and 27 per cent respectively and, within Retail Banking, balances on current accounts and savings and investment accounts grew by 10 per cent. Mortgage balances outstanding increased by 10 per cent to £62.5 billion.
Charge as a percentage of average lending* Personal loans/overdrafts 3.73 3.88 Credit cards 3.52 3.60 Business Banking 1.22 1.05 * excluding the impact of the non-recurrence of provision releases totalling £72 million in 2001
We continue to offer a comprehensive multichannel distribution service to our customers. In addition to our network of over 2,000 branches, lloydstsb.com, our internet banking system, continues to grow and remains one of the most visited financial websites in Europe. Over 450,000 product sales were achieved via the internet in 2002, more than four times the number achieved in 2001. Our telephone banking operation, comprising
Premier Service, which has been successfully piloted in 2002, and the extension of our existing Personal Choice programme. Results from both of these programmes have already shown improved business flows and enhanced customer loyalty as we seek to meet a greater share of our customers’ financial needs, supported by the application of our advanced customer relationship management tools.
received a 5-star award from the Association of Independent Financial Advisors, an achievement unequalled by any UK financial services provider.
Life, pensions and unit trusts – Scottish Widows 573 585 – Abbey Life (98) 175
Profit before tax* 1,231 1,421 * excluding changes in economic assumptions and investment variance
Total sales from the Group’s life, pensions and unit trust businesses were £4,456.3 million, compared with £4,423.5 million in 2001, an increase of 1 per cent. Overall weighted sales were £767.6 million compared to £754.7 million last year, an increase of 2 per cent. This increase in weighted sales reflected a 7 per cent increase in weighted sales from life and pensions, partly offset by a 13 per cent reduction in weighted sales from unit trusts and equity-based ISAs, largely caused by the continuing volatility in global stockmarkets throughout 2002. In the second half of 2002, weighted sales of £394.9 million were 10 per cent higher than the £358.9 million in the second half of 2001, and 6 per cent higher than the £372.7 million in the first half of 2002.
A major programme to convert our unit trust range of some 80 funds into a range of Open Ended Investment Companies (OEICs) has now been completed and the resulting simpler range of mutual funds means that the Group is well positioned to take advantage of the likely changes in the market place, in particular the proposals outlined in the recently published Sandler report.
Weighted sales (regular + 1⁄10 single) Life and pensions 595.2 556.1 Unit trusts 172.4 198.6
Weighted sales by distribution channel: Branch network 350.6 376.2 Independent financial advisors 348.5 279.8
Group funds under management Scottish Widows Investment Partnership 70 78 UK Wealth Management 10 11
Profit before tax from general insurance operations, excluding investment variance, rose by £103 million, or 16 per cent, to a record £754 million, mainly as a result of continued strong revenue growth from creditor and home insurance. With over 9 million general insurance policies in force, we estimate that the Group has market leadership positions in the distribution of home and creditor insurance.
The Financial Services Authority has announced the abolition of the polarisation regime and the Group has been positioning itself to achieve competitive advantage in the new depolarised world. The Lloyds TSB Group has extensive interests in both the manufacture and distribution of long-term savings products. With Scottish Widows continuing to be the best recognised brand in the medium to long-term savings market and the actions already taken to improve choice by offering a range of externally managed funds alongside those offered by Scottish Widows Investment
Partnership, the Group remains well placed to prosper in a depolarised world. In particular, Scottish Widows’ unique multi-manager partnership with Frank Russell has been well received both in the IFA market and by our own customers.
(banking, treasury, large value lease finance, long-term agricultural finance, share registration, venture capital, and other related services for major UK and multinational companies, banks and financial institutions, and medium-sized UK businesses; and Lloyds TSB Asset Finance)
The charge for provisions for bad and doubtful debts in Wholesale Markets increased by £156 million. The charge relating to the Group’s corporate lending portfolio increased by £145 million largely as a result of provisions against the Group’s loans and advances to certain large US corporate customers, which totalled some £100 million, and an increase in the provisions charge against the corporate lending portfolio, reflecting weak equity markets and the slowdown in economic activity in the UK. Amounts written off fixed asset investments increased by £42 million, as a result of a £21 million write-down relating to operating irregularities on one specific securitisation issue, and portfolio growth related write-downs in the
Our Treasury operations had another good year, however, primarily as a result of less favourable trading conditions, pre-tax profits decreased by 16 per cent to £196 million, compared with a record £233 million in 2001. The Group’s risk-based activity in the derivatives markets continues to remain largely focused on straight cash based products in support of our customers’ transactions.
Holdings and Abbey National Vehicle Finance, both previously wholly owned subsidiaries of Abbey National plc, for a provisional cash consideration of £47 million. The premium on acquisition was £86 million. The businesses have been combined with Lloyds TSB autolease to create the leader in the UK contract hire and fleet management markets. In December 2002, the Group also acquired the Dutton-Forshaw Group, one of the leading motor dealer groups in the UK with 38 franchised dealerships representing 14 manufacturers, for a cash consideration of £49 million. Our CarSelect and Cars4Staff initiatives continue to expand rapidly through a range of channels, supplying new and used cars to
Trading surplus 541 508 Provisions for bad and doubtful debts 162 183 Amounts written off fixed asset investments – 7
Efficiency ratio 51.7% 53.6% Total assets (year-end) £21.8bn £21.4bn Total risk-weighted assets (year-end) £14.3bn £13.2bn
Net interest income decreased by £4 million to £745 million as volume growth in New Zealand and Brazil was offset by the impact of adverse exchange rate movements. Other income increased by £29 million, or 8 per cent, to £374 million, as a result of profits on the sale and leaseback of premises totalling £32 million. Operating expenses reduced by £8 million as increased local currency costs in New Zealand, which supported higher business volumes, and in Argentina, were more than offset by favourable exchange rate movements. Provisions for bad and doubtful debts were £21 million lower, as a result of lower specific provisions in Losango, our consumer finance business in Brazil, largely reflecting exchange rate movements.
Pre-tax profits from The National Bank of New Zealand increased by 32 per cent to £218 million as a result of asset growth across all business sectors, growth in the number of personal customers and higher levels of retail deposits and residential mortgages. Our consumer finance business in Brazil, Losango Consumer Finance, performed well, notwithstanding difficult local economic circumstances, and increased pre-tax profits on a local currency basis by 14 per cent. After the impact of adverse exchange rate movements, which were partly hedged, Losango made a pre-tax profit of £40 million, compared with £43 million in 2001.
Since the October presidential election in Brazil the economic situation has somewhat stabilised. The Group reduced its total exposure to Brazil, net of provisions, to £1.9 billion during 2002 (December 2001: £3.3 billion), largely from not replacing maturing Government bonds. Economic activity in Brazil has remained reasonably robust, and we believe this relative strength in the local economy, in conjunction with the significant
In October 2001, the Group sold its Brazilian fund management and private banking business, including its subsidiary Lloyds TSB Asset
Management S.A., to Banco Itaú S.A., resulting in a profit on sale of £39 million.
Earnings on surplus capital and the emerging markets debt investment portfolio largely reflect earnings on capital held at the Group centre, less the funding cost of Scottish Widows, and profits from the Group’s investment portfolio of, largely, emerging markets debt securities. During the year the Group accelerated its disposal programme for these investments as a result of concerns over credit and liquidity risks, particularly in Latin
America. Given the higher level of disposals the Group has decided to mark the portfolio to market in 2002 and in future reporting periods. This change had no profit impact in 2002. The Group does not expect to achieve similar levels of emerging markets debt portfolio contributions, which in 2002 totalled £103 million, in 2003 and beyond.
Net interest margin % 3.28 3.47 International: Net interest income £m 746 720 Average interest-earning assets £m 26,916 23,701 Gross yield on interest-earning assets % 8.63 10.19
Net interest income from international operations increased by £26 million, or 4 per cent, to £746 million. This represents 14 per cent of total group net interest income. Strong volume growth, particularly in New Zealand, was offset by the adverse effect of exchange rate movements.
Fees and commissions payable (645) (602) Dealing profits (before expenses): Foreign exchange trading income 173 158 Securities and other gains 15 75
Goodwill amortisation was £20 million higher. The efficiency ratio, excluding changes in economic assumptions and investment variance, was 50.3 per cent, compared to 49.0 per cent in 2001.
Universal Banking Service, anti-money laundering financial crimes programmes, and preparation for the forthcoming introduction of the Basel 2 capital accord.
Specific: At the end of December 2002 provisions for bad and doubtful debts totalled £1,767 million. This represented 1.3 per cent of total lending
(December 2001: 1.2 per cent). Non-performing lending increased to £1,414 million from £1,222 million in December 2001, largely reflecting higher levels of non-performing lending in the Group’s corporate portfolio, and general portfolio growth throughout the Group. At the end of the year, total provisions represented over 120 per cent of non-performing loans (December 2001: 120 per cent).
During 2002, total capital for regulatory purposes increased by £2,261 million to £11,748 million. Tier 1 capital increased by £1,082 million, mainly from the issue of new tier 1 capital instruments. The total amount of embedded value earnings contained within the Group’s tier 1 capital is now some £2.2 billion. Tier 2 capital increased by £1,015 million and supervisory deductions decreased by £164 million, as a result of a decrease in the Group’s embedded value to £6,228 million, from £6,366 million in December 2001.
Free asset ratio The free asset ratio is a common measure of financial strength in the UK for long-term insurance businesses. It is the ratio of assets less liabilities
Consequently, in order to provide a clearer representation of the underlying performance, the results of the life and pensions business are separately analysed to include investment earnings calculated using longer-term investment rates of return, and annual management charges based on unsmoothed fund values. This investment variance represents the difference between the actual investment return in the year on investments backing shareholder funds and the expected return based upon the economic assumptions made at the beginning of the year, and the effect of these fluctuations on the value of in-force business. The effects of other changes in economic circumstances beyond the control of management are also reflected in the investment variance.
Lloyds TSB General Insurance also holds investments to support its underwriting business; these are carried at market value and gains and losses included within dealing profits. Consistent with the approach adopted for the life and pensions business, an operating profit for the general insurance business is calculated including investment earnings normalised using the same long-term rates of return.
Income and expenses reconciliations To facilitate comparison of results, certain key financial information and commentaries have been considered excluding changes in economic assumptions, investment variance, pension and endowment provisions, the impact of investment returns of the Group’s pension scheme assets, operating lease depreciation, and the impact of acquisitions. Reconciliations are detailed below.
Expenses, excluding operating lease depreciation and the impact of acquisitions 4,580 4,579 Netting of operating lease depreciation 230 197 Acquisitions 105 –
The Group’s policy for managing Governance, People and Organisation risk is set out in the Group Policy Manual, which is approved by the Group
– Develop and maintain a strong risk management and control culture across all businesses.
The Group sets high standards for the conduct of its business and values its reputation. Responsibility for establishing an effective organisational structure is vested in Group and business unit management. Sound internal risk management practices are promoted through business unit directors who are responsible for identifying, measuring, monitoring and controlling the risks within their specific areas of accountability.
The Group seeks to ensure that its employees act with integrity and seek to deliver high levels of customer service. It promotes a working environment free from discrimination, harassment, bullying or victimisation of any kind. Employees are encouraged and expected to alert management to suspected misconduct, fraud or other serious malpractice.
The Group seeks to: – Ensure that all employees understand their role, the purpose of the role and where it fits into the wider team and organisational context.
The risk arising from the adoption of the Group’s agreed strategy and its implementation at corporate or business unit level.
A rigorous annual strategic planning process is conducted at Group and business unit level and includes a quantitative and qualitative assessment of the risks in the Group plan.
Executive Committee and the Board on the progress of the Group’s key strategies and plans.
The risk of loss arising from counterparty default subsequent to the provision of credit facilities (both on- and off-balance sheet).
A number of tools, including Group-level credit policy where appropriate, are used to control the Group’s exposure to undue levels of credit risk: Counterparty Limits – exposure to individual counterparties, groups of counterparties or customer risk segments 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 and term of the risk. Regular reports on significant credit exposures are provided to the Group
Bank Exposures – an in-house proprietary rating system is used to approve bank facilities, which are sanctioned on a Group-wide basis.
– Monitoring of scorecards. The Group utilises 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.
– Monitoring and controlling residual value risk exposure. The Group’s appetite for such exposure is communicated to the business by a series of time referenced Sector Caps, ensuring an acceptable distribution of future risk.
– Specialist units established within Group businesses to provide, for example: intensive management and control; security perfection, maintenance and retention; expertise in documentation for lending and associated products; sector-specific expertise; and legal services applicable to the particular market place and product range offered by the business unit.
The risk of loss arising from unexpected changes in financial prices, including interest rates, exchange rates, bond, equity and commodity prices.
Measurement Techniques – a variety of techniques are used to quantify the market risk arising from the Group’s banking and trading activities.
These reflect the nature of the business activity, and include simple interest rate gapping, open exchange positions, sensitivity analysis and Value at Risk (VaR). Stress testing and scenario analysis are also used in certain portfolios, and at Group level, to simulate extreme conditions to supplement these core measures.
Retail Portfolios – limits to control interest rate risk within the Group’s UK retail portfolios are set out in the policy for Group Balance Sheet
Particular attention is paid to the liquidity of the markets and products in which the Group trades to ensure that there are no undue concentrations of activity and risk.
General insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements which are broadly spread over different reinsurers. Detailed modeling, including that of the Probable Maximum Loss under various catastrophe scenarios, supports the choice of reinsurance arrangements. Appropriate reinsurance arrangements also apply within the life and pensions businesses.
– Communication and provision of general guidance on operational risk related issues, including regulatory changes and developments in the measurement and management of operational risk, to promote best practice throughout the Group.
For the Group to achieve its strategic aims of leadership in chosen markets and being first choice for customers, product life cycles must be effectively managed and new products developed to meet customer needs.
Business units are responsible for maintaining a range of products which meets the needs of customers and the business strategy; managing and controlling product risks; and compliance with applicable regulations.
New Product Approval – the Group defines a New Product as a new or amended product that introduces a significantly different risk profile at
The Group and its regulated subsidiary banks have been allocated an Individual Capital Ratio by the FSA, and the Board has agreed a formal buffer to be maintained in addition to the Individual Capital Ratio. Actual or prospective breaches of the formal buffer must be notified to the FSA, together with proposed remedial action; no such notifications have been made during 2002. Informally, a further buffer is maintained. In addition, the
Board has agreed a maximum limit for the proportion of debt instruments in the capital base. Risk-weighted assets are monitored by business unit, while capital is controlled centrally.
The risk of financial loss or reputational damage arising from inappropriate or poor customer treatment.
– Changes that significantly impact customers or staff are managed as part of an overall Group Change Plan managed by the Change
The Group has a dedicated Environmental Risk unit which is responsible for the development of environmental policies and procedures, and provides practical advice and guidance on environmental issues to business units. Significant progress has been made in developing the Group’s environmental management system, and this is detailed in the environmental report forming part of ‘the community and our business’.
Five year financial summary £ million £ million £ million £ million £ million
Deposits by banks and customers and debt securities in issue 172,032 157,846 136,623 123,668 119,389
Market price (year-end) 446p 746p 708p 774p 855p Net assets per share 141p 184p 213p 212p 170p
Performance measures Post-tax return on average shareholders’ equity 16.7% 18.1% 21.1% 23.9% 23.5% Post-tax return on average assets* 0.93% 1.28% 1.68% 1.63% 1.48% Post-tax return on average risk-weighted assets* 1.61% 2.26% 3.07% 2.94% 2.62%
Alan E Moore CBE*§ Deputy Chairman (leaving on 16 April 2003) Joined Lloyds Bank International in 1980. Held a number of senior and general management appointments in that company and in Lloyds Bank before becoming a director of Lloyds Bank in 1989 and deputy chief executive and treasurer in 1994. Following the merger with TSB Group in 1995, became deputy group chief executive of Lloyds TSB Group and then deputy chairman in 1998. Joined Glyn Mills & Co in 1953, holding senior appointments there until his secondment, as director general, to the Bahrain Monetary Agency from 1974 to 1979. Aged 66.
Ewan Brown CBE FRSE✠** Chairman of Lloyds TSB Scotland A director since 1999. A nonexecutive director of Lloyds TSB Scotland since 1997. Executive director of Noble Grossart since 1971. Chairman of Transport Initiatives Edinburgh. A non-executive director of John Wood Group and Stagecoach Holdings. Aged 60.
DeAnne S Julius CBE✠† Joined the board in 2001. Held a number of senior appointments in the UK and USA with the World Bank, Royal Dutch/Shell Group and British Airways, before membership of the Bank of England Monetary Policy Committee from 1997 to 2001. Chaired HM Treasury’s banking services consumer codes review group. A non-executive director of the Bank of England, BP, Serco Group and Roche Holdings SA. Aged 53.
The Earl of Selborne KBE FRS✠§ A director since 1995, having been a director of Lloyds Bank since 1994. Managing director of The Blackmoor Estate, his family business. Chancellor of Southampton University since 1996. President of the Royal Geographical Society from
Chairman and chief executive officer of Zona Financiera from 2000 to 2001. Aged 51.
Philip R Hampton Group Finance Director Joined the board in 2002. Previously, finance director of BT Group from 2000 to 2002, BG Group from 1996 to 2000 and British Steel from 1990 to 1996. Before that, he worked for Coopers & Lybrand from 1975 to 1980 and Lazard Brothers from 1981 to 1990. A non-executive director of RMC Group. Aged 49.
Results and dividends The consolidated profit and loss account on page 58 shows a profit attributable to shareholders for the year ended 31 December 2002 of £1,781 million.
An interim dividend of 10.7p per ordinary share was paid on 9 October 2002 and a final dividend of 23.5p per ordinary share will be paid on 7 May 2003. These dividends will absorb £1,908 million.
Directors Biographical details of directors are shown on pages 44 and 45. Particulars of their emoluments and interests in shares in the company are given on pages 48 to 54.
Mr Urquhart left the board at the annual general meeting in 2002. Mr Atkinson, Mr Butler, Miss Forbes and Mr Moore will leave the board at the annual general meeting in 2003.
Mr Gemmell became a director on 17 April 2002 and was elected at the annual general meeting on that day.
Donations The profit and loss account includes a charge for charitable donations totalling £33,403,000 (2001: £36,747,000), including £33,336,667 (2001: £36,376,667) under deeds of covenant to the four Lloyds TSB Foundations, which will be paid during 2003. No donations were made to political parties.
The fees of the non-executive directors are agreed by the board within a total amount determined by the shareholders. They are designed to recognise the significant responsibilities of directors and to attract individuals with the necessary experience and ability to make an important contribution to the Group’s affairs. The fees, which are neither performance related nor pensionable, are comparable with those paid by other companies.
Reward package The current package for executive directors comprises the following elements: Basic salary
Current salaries for the chairman, deputy chairman and executive directors, following the most recent salary review in December 2002 are: aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa
Performance conditions are set when the grant of options is made and the options cannot normally be exercised unless the conditions have been met. To meet the performance conditions, the company’s ranking, based on total shareholder return (calculated by reference to both dividends and growth in share price) over the relevant (three year) period, within the comparator group, must be at least ninth. Hoare Govett independently provides the information on total shareholder return and the company’s ranking and the auditors are also involved before the remuneration committee confirms whether the conditions have been met.
In 2002, options were granted to executive directors and senior executives within the scheme limits. These limits relate to the number of shares under option and the price payable on exercise. The maximum limit for the grant of options to an executive director in any one year is equal to one and a half times annual basic salary multiplied by a performance multiplier of 3.5 (although in exceptional circumstances, for example on the recruitment of a new executive, that could be increased to four times annual basic salary multiplied by 3.5).
The following table illustrates the percentage of the grant which would be exercisable depending on the ranking within the comparator group.
At the end of 2002 Lloyds TSB Group was ranked: 6th after two years of the performance period for options granted in 2001; and 11th after one year of the performance period for options granted in 2002.
Any awards made to executive directors in 2003 will be subject to the same scheme limits and performance conditions as outlined above.
Ranking position within % of option which may comparator group be exercised aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa 10 or below Nil – options not exercisable aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa
The current constituents of the comparator group are: Abbey National ABN Amro Alliance and Leicester
The executive directors, the chairman and the deputy chairman may participate in the Group’s ‘sharesave’ scheme and
As required by recent legislation regarding the directors’ remuneration report, this graph illustrates the performance of Lloyds TSB Group plc measured by total shareholder return (share price growth plus dividends paid) against a ‘broad equity market index’ over the past five years. As Lloyds TSB Group plc has been a constituent of the FTSE 100 index throughout this five-year period, that index is considered to be the most appropriate benchmark.
A G Kane (service agreement dated 9 February 2000) 375 14 18 11 418 548 Sir Tom McKillop 45 45 45
Column (d) is the equivalent transfer value, but calculated as at 31 December 2001 on the assumption that the director left service at that date. Mr Hampton joined the Group on 1 June 2002 and previous years’ figures are not shown.
Members of the Group’s pension schemes have the option to pay additional voluntary contributions: neither the contributions nor the resulting benefits are included in the above table.
At Weighted Exercise 1January average price of 2002 Exercised/ exercise share options Market (or date of Granted lapsed At price at granted, price Amount of gain on exercise***
appointment during the during the 31December 31December exercised at date of 2002 2001 Options to acquire shares: if later) year year 2002 2002 or lapsed exercise £000 £000
*** This is the difference between the market price of the shares on the day on which the share option was exercised and the price paid for the shares, and includes the value of shares issued to compensate directors for the special dividend mentioned above.
Share retention plan Mr Daniels is the only participant in the share retention plan, which was adopted in 2001 as part of the remuneration package considered necessary to attract him from the USA to the UK. An option was granted to him under the plan on 2 November 2001 to acquire 216,763 ordinary shares in the Company (with a value of £1.5 million at the date of grant) for a total price of £1.
Scottish Widows loan capital At the end of the year, Mr Ross had an interest in £28,394 of Scottish Widows Group Limited floating rate unsecured loan notes 2008 (2001: £43,194).
Compliance with the code The directors believe that the Company complies with the provisions of the code and that it has complied throughout the year with the provisions where the requirements are of a continuing nature.
Directors’ responsibilities The directors are required by the Companies Act 1985 to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the year and of the profit or loss for the year. Following discussions with the auditors, the directors consider that in preparing the financial statements on pages 58 to 92, the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider applicable have been followed.
The audit committee reviews the objectivity and independence of the auditors and monitors any non-audit work undertaken by them. Steps have also been taken to ensure that the auditors do not perform any management consultancy work for the Group. However, in certain circumstances, PricewaterhouseCoopers LLP undertake work which is not specifically related to the statutory or regulatory audits, but only where there is clear evidence that their experience with the Group would be key and valuable and in these cases any significant engagement is subject to approval by the audit committee.
To the members of Lloyds TSB Group plc We have audited the financial statements which comprise the consolidated profit and loss account, the consolidated balance sheet, the Company balance sheet, the consolidated cash flow statement, the statement of total recognised gains and losses and the related notes which have been prepared under the accounting policies set out on pages 64 to 67. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the directors’ remuneration report under the headings reward package, directors’ emoluments, directors’ pensions and directors’ interests (‘the auditable part’).
for the year ended 31 December 2002 2002 2001* Note £ million £ million
Provisions for liabilities and charges: Other provisions for liabilities and charges 38 361 292
Returns on investments and servicing of finance: Dividends paid to equity minority interests (18) (17)
FRS 17 requires the assets of post-retirement defined benefit schemes to be included on the balance sheet together with the related liability to make benefit payments. The profit and loss account includes a charge in respect of the cost of accruing benefits for active employees, benefit improvements and the cost of severances borne by the schemes; the expected return on the schemes’ assets is included within other finance income net of a charge in respect of the unwinding of the discount applied to the schemes’ liabilities. It also includes a charge in respect of post-retirement healthcare obligations. Under Statement of Standard Accounting Practice 24 the profit and loss account included a charge in respect of the cost of accruing benefits for active employees offset by a credit representing the amortisation of the surplus in the Group’s defined benefit pension schemes; a pension prepayment was included in the Group’s balance sheet, together with a provision in respect of post-retirement healthcare obligations. A prior year adjustment has been made increasing shareholders’ funds by £1,876 million to reflect the revised policy.
(iv) In December 2001, the Association of British Insurers (ABI) published detailed guidance for the preparation of figures using the achieved profits method of accounting which are published as supplementary financial information accompanying the accounts of most listed insurance companies. The ABI guidance recommends the use of unsmoothed fund values to calculate the value of in-force business. To improve the comparability of the results of the Group’s insurance operations with the supplementary financial information published by listed insurers the Group has changed the basis of its embedded value calculations to use unsmoothed fund values; previously the effect of investment fluctuations had been amortised to the profit and loss account over a two year period. A prior year adjustment has been made reducing shareholders’ funds by £53 million, to reflect the revised policy.
Impact on retirement Adjustment to attributable benefit Adjustment to shareholders’ profit for schemes for shareholders’
The consolidated accounts are prepared under the historical cost convention as modified by the revaluation of debt securities and equity shares held for dealing purposes (see g) and assets held in the long-term assurance business (see o), in compliance with Section 255A, Schedule 9 and other requirements of the Companies Act 1985 except as described below (see c), in accordance with applicable accounting standards, pronouncements of the Urgent Issues Task Force and with the Statements of Recommended Practice issued by the British Bankers’ Association and the Finance & Leasing Association. The Group’s methodology for calculating embedded value follows the guidance published by the Association of British Insurers for the preparation of figures using the achieved profits method of accounting except that tangible assets attributable to the shareholder are valued at market value. The guidance would require those assets backing capital requirements to be discounted to reflect the cost of encumbered capital, but such a treatment would be inconsistent with the treatment of capital supporting the Group’s banking operations. If this treatment had been followed income from long-term assurance business before tax in 2002 would have been slightly improved. Conversely, embedded value would have been some 8 per cent lower given the size of the shareholder capital required to be retained within Scottish Widows under the terms of the demutualisation.
The Scottish Widows goodwill is not being amortised through the profit and loss account; however, it is subjected to annual impairment reviews in accordance with Financial Reporting Standard 11. Impairment of the goodwill is evaluated by comparing the present value of the expected future cash flows, excluding financing and tax, (the ‘value-in-use’) to the carrying value of the underlying net assets and goodwill. If the net assets and goodwill were to exceed the value-in-use, an impairment would be deemed to have occurred and the resulting write-down in the goodwill would be charged to the profit and loss account immediately.
Fees and commissions receivable from customers to reimburse the Group for costs incurred are taken to income when due. Fees and commissions relating to the ongoing provision of a service or risk borne for a customer are taken to income in proportion to the service provided or risk borne in each accounting period. Fees and commissions charged in lieu of interest are taken to income on a level yield basis over the period of the loan. Other fees and commissions receivable are accounted for as they fall due.
In those cases where the operation of the customer’s account has ceased and it has been transferred to a specialist recovery department, the 1 Accounting policies (continued)
The Group operates a number of defined benefit pension and postretirement healthcare schemes, and a number of employees are members of defined contribution pension schemes.
The Group accounts for its interest in long-term assurance business using the embedded value basis of accounting, in common with other UK banks with insurance subsidiaries. The value of the shareholder’s interest in the long-term assurance business (‘the embedded value’) included in the Group’s balance sheet is an actuarially determined estimate of the economic value of the Group’s life assurance subsidiaries, excluding any value which may be attributed to future new business. The embedded value is comprised of the net tangible assets of the life assurance subsidiaries, including any surplus retained within the long-term business funds, which could be transferred to shareholder, and the present value of the in-force business. The value of the in-force business is calculated by projecting the future surpluses and other net cash flows attributable to the shareholder arising from business written by the balance sheet date, using appropriate economic and actuarial assumptions, and discounting the result at a rate which reflects the shareholder’s overall risk premium attributable to this business.
Notes to the accounts 2 Segmental analysis Profit on ordinary activities before tax 2002 2001*
Class of business: UK Retail Banking and Mortgages 1,172 1,205 Insurance and Investments Operating profit 1,231 1,421 Changes in economic assumptions 55 – Investment variance (952) (859)
Life and pensions 474 719 Unit trusts 1 41 General insurance 754 651 Asset management 2 10
The operating profit for the life and pensions business shown above reconciles to the income from long-term assurance business shown in the profit and loss account as follows: 2002 2001* £m £m
Other finance income 165 – 165 Fees and commissions receivable 2,773 280 3,053 Dealing profits (before expenses) 125 63 188 Income from long-term assurance business (314) 11 (303) General insurance premium income 486 – 486 Other operating income 552 211 763
†Net assets represent shareholders’ funds plus equity minority interests. Disclosure of information on net assets is an accounting standard requirement (SSAP25); it is not appropriate to relate it directly to the segmental profits above because the business is not managed by the allocation of net assets to business units.
Details of directors’ emoluments, pensions and interests are given on pages 51 to 54.
Statutory audit 4.8 4.0 Other audit fees including regulatory reporting 2.6 5.5 Due diligence 0.8 5.7 Internal control reviews 0.3 0.2
Profit on ordinary activities before tax is stated after taking account of: 2002 2001*
Income from: Aggregate amounts receivable, including capital repayments, in respect of assets leased to customers and banks under: Finance leases and hire purchase contracts 3,290 3,250 Operating leases 440 329
UK corporation tax Current tax on profits for the year 784 769 Adjustments in respect of prior years 12 (14)
The charge for tax on the profit for the year is based on a UK corporation tax rate of 30 per cent (2001: 30 per cent).
Tax charge thereon at UK corporation tax rate of 30% 782 948 Factors affecting charge: Goodwill amortisation 9 8 Overseas tax rate differences 24 12 Non-allowable and non-taxable items (28) 8 Gains exempted or covered by capital losses (23) (39) Tax deductible coupons on non-equity minority interests (12) (12) Payments to employee trust (20) (60) Capital allowances in excess of depreciation 7 (48) Other timing differences 99 4 Life companies rate differences 44 21 Other items (14) (12)
The current tax charge includes a credit of £46 million (2001: charge of £11 million) in respect of notional tax on the shareholder’s interest in the movement in value of the long-term assurance business. Since this derives from the use of a combination of tax rates it can give rise to a higher or lower charge compared to an expected 30 per cent rate, depending upon the reported investment returns.
Factors that may affect the future deferred tax charge are dealt with in Note 37.
Included above: Unamortised discounts net of premiums on investment securities 5 6 8 Tax on profit on ordinary activities (continued)
Total loans and advances to customers 136,297 124,471 Provisions for bad and doubtful debts (1,766) (1,466) Interest held in suspense (57) (70)
Provisions for bad and doubtful debts (1,766) (1,466) Interest held in suspense (57) (70)
At 31 December 2002 CARS 4 held £24 million (2001: £124 million) of receivables, matched by non-returnable finance of the same amount.
Transport, distribution and hotels 4,696 4,440 Property companies 4,008 2,907 Financial, business and other services 8,352 8,736 Personal: mortgages 62,467 56,578
Investment securities: Other public sector securities 1 1 – – Bank and building society
Investment securities: Other securities: 15 Provisions for bad and doubtful debts and non-performing lending (continued)
Investment securities: Other securities: Movements in investment securities comprise: Cost Provisions Total £m £m £m
In the year ended 31 December 2002 £31 million (2001: £27 million) of fees payable to iPSL have been included in the Group’s administrative expenses and £6 million (2001: £6 million) of charges to iPSL have been included in the Group’s income. The Group has also prepaid £6 million (2001: £8 million) of fees in respect of 2003 and this amount is included in prepayments and accrued income.
In the year ended 31 December 2002 £25 million (2001: £1 million) of interest receivable from Goldfish Bank Limited and £12 million (2001: £22 million) of charges to Goldfish Bank Limited in respect of administrative costs have been included in the Group’s income. At 31 December 2002 Goldfish Bank Limited owed £430 million (2001: £611 million) to the Group, which is included in loans and advances to banks. In addition, at 31 December 2002, the Group had made facilities available for Goldfish Bank Limited to borrow a further £420 million (2001: £239 million); these facilities are included in undrawn commitments (note 45).
Included in the gross assets disclosed on the balance sheet is an investment of £8 million (2001: £5 million) in associated undertakings.
The principal group undertakings, all of which have prepared accounts to 31 December and whose results are included in the consolidated accounts of Lloyds TSB Group plc, are: Percentage of equity share Country of capital registration / and voting incorporation rights held Nature of business
Lloyds TSB Commercial England †100% Credit factoring Finance Limited Lloyds TSB Leasing Limited England †100% Financial leasing Lloyds TSB Private Banking England †100% Private banking Limited The Agricultural Mortgage England †100% Long-term agricultural Corporation PLC finance The National Bank of New Zealand †100% Banking and financial New Zealand Limited services Lloyds TSB Bank (Jersey) Jersey †100% Banking and financial Limited services Lloyds TSB Scotland plc Scotland †100% Banking and financial services Lloyds TSB General England †100% General insurance Insurance Limited Scottish Widows Investment England †100% Investment Partnership Group Limited management Abbey Life Assurance England †100% Life assurance Company Limited Lloyds TSB Insurance England †100% Insurance broking Services Limited Lloyds TSB Life Assurance England †100% Life assurance and Company Limited other financial services Lloyds TSB Asset Finance England †100% Consumer credit, leasing Division Limited and related services Black Horse Limited England †100% Consumer credit, leasing and related services Scottish Widows plc Scotland †100% Life assurance Scottish Widows Annuities Scotland †100% Life assurance Limited
Balance sheet Assets Loans and advances to customers – – 329 – Tangible fixed assets 1,307 911 – – Other assets and prepayments 25 45 4 –
Liabilities Deposits by banks 1,245 923 – – Debt securities in issue – – 73 – Other liabilities and accruals 77 29 2 –
Cost: Exchange and other adjustments (1) (7) (3) Adjustments on acquisition 31 2 351
The Group has also established the Lloyds TSB Qualifying Employee Share Ownership Trust (‘the QUEST’) for the purpose of providing shares on the exercise of options under certain of the Group’s Save As You Earn (SAYE) share option schemes. During 2002, Lloyds TSB Group plc contributed £66 million to the QUEST, and the trustees subscribed for 18 million shares in the Company for a consideration of £136 million. During 2001, Lloyds TSB Group plc contributed £200 million and the trustees subscribed for 47 million shares for a consideration of £316 million. At 31 December 2002, 2 million shares were held by the QUEST with a book value of £5 million (2001: 2 million shares with a book value of £8 million) reflecting the exercise price of the options the shares are expected to be used to satisfy. Under the terms of the QUEST’s trust deed, the trustees have waived all but a nominal dividend on the shares they hold. The difference between the amount contributed by the Company and the movement in the book value of the shares and cash held by the QUEST has been charged to profit and loss account reserves.
The embedded value included in the consolidated balance sheet comprises: 2002 2001* £m £m
At 1 January – restated 6,366 6,496 Exchange and other adjustments (14) (35) Loss after tax (257) (40) Capital injection 140 100 *restated (see note 1)
Accrual of interest on the provision 17 20 Charge for the year 40 70 Compensation paid (223) (238) Guarantees* – (1)
Having considered a range of possible outcomes, the Group currently expects that the most likely outcome is that the balance in the Additional Account available for this purpose will be sufficient to meet the cost of the enhanced benefits payable to the guaranteed annuity option policyholders, as well as other contingencies. The cost of enhanced benefits, currently estimated to be approximately £1.1 billion (2001: £1.4 billion) on a net present value basis, will be paid out over many years as policies mature. In the event that the amount in the Additional Account proves, over time, to be insufficient, the shortfall will be met by the Group. At this time, no provision is considered necessary for such risk.
• Current tax legislation and rates have been assumed to continue unaltered, except where future changes have been announced. The UK corporation tax rate used for grossing up was 30 per cent (2001: 30 per cent). The normalised investment earnings have been grossed up at a composite longer term tax rate of 17 per cent (2001: 17 per cent).
Fixed interest securities 14,779 12,642 Stocks, shares and unit trusts 24,143 27,018 Investment properties 3,623 3,722 Other properties 121 121 Mortgages and loans 53 102
Technical provisions for linked liabilities 20,996 21,098 Fund for future appropriations 12 75 Other liabilities 890 876 *restated (see note 1)
Realised losses on investments (1,790) (1,031) Unrealised losses on investments (4,445) (4,423) Other charges (3) (8) Tax attributable to long-term business 200 280 Transfer from the fund for future appropriations 63 1,365
Balance on the technical account – long-term business (350) 139 Tax credit attributable to balance on the technical account – long-term business (190) (103) Income in shareholder fund 35 38 Expenses in shareholder fund (1) –
Income from long-term assurance business after tax reconciles to the loss calculated on a modified statutory solvency basis as follows: £m £m
Other differences: – movement in deferred acquisition costs 45 (79) – tax adjustment 55 150
Liabilities Shareholder’s funds 3,929 4,123 Fund for future appropriations 12 75 Long-term business provision† 23,217 24,129 Technical provision for linked liabilities† 20,996 21,098 Other creditors 1,115 1,087
The value of long-term business attributable to the shareholder on an embedded value basis reconciles to the net assets of the Group’s life and pensions subsidiaries calculated on a modified statutory solvency basis as follows: £m £m
Liabilities: denominated in sterling 142,641 132,915 : denominated in other currencies 64,777 56,489 *restated (see note 1)
Repayable on demand 8,500 6,634 Other deposits by banks with agreed maturity dates or periods of notice by residual maturity repayable: 3 months or less 14,692 14,227 1 year or less but over 3 months 1,634 2,529 5 years or less but over 1 year 487 751 £m £m
Balances arising from derivatives used for trading purposes (note 46a) 4,462 2,288 Balances arising from derivatives used for hedging purposes 611 475 Current tax 528 598
Settlement balances 49 542 Other liabilities 1,328 1,464 36 Accruals and deferred income 2002 2001 £m £m
The deferred tax balance at 31 December 2002 does not include any amounts in respect of the Group’s post-retirement benefit liability which is shown on the balance sheet after deduction of a deferred tax asset of £854 million (2001: a net post-retirement benefit asset of £281 million after deduction of a deferred tax liability of £152 million) (note 44).
Series 1 (US$750 million) 466 516 – – Series 2 (US$500 million) 311 344 – – Series 3 (US$600 million) 373 412 – –
113⁄4% Perpetual Subordinated Bonds 100 100 – – 6.625% Perpetual Capital Securities (€750 million) b 482 451 – – 6.90% Perpetual Capital Securities callable 2007 (US$1,000 million) c, k 610 – – – 55⁄8% Undated Subordinated Step-up Notes callable 2009 (€1,250 million) h 807 757 – – Undated Step-up Floating Rate Notes callable 2009 (€150 million) a 97 91 – – 65⁄8% Undated Subordinated Step-up Notes callable 2010 f 406 406 – – 6.35% Step-up Perpetual Capital Securities callable 2013 (€500 million) d, h, k 322 – – – 5.57% Undated Subordinated Step-up Coupon Notes callable 2015 (¥20 billion) i 104 105 – – 61⁄2% Undated Subordinated Step-up Notes callable 2019 f 267 266 – – 8% Undated Subordinated Step-up Notes callable 2023 f 199 199 – – 61⁄2% Undated Subordinated Step-up Notes callable 2029 f 455 455 – – 6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 f, k 497 – 497 –
Dated loan capital: Eurocurrency Zero Coupon Bonds 2003 (¥3 billion) e 14 15 14 15 Subordinated Fixed Rate Bonds 2003 (NZ$151 million) g 48 43 – – Subordinated Floating Rate Notes 2004 a 10 15 – –
Subordinated Step-up Floating Rate Notes 2009 callable 2004 (US$500 million) a 310 343 – – Subordinated Fixed Rate Bonds 2010 (NZ$100 million) g 33 29 – –
These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. **In certain circumstances, these notes and bonds would acquire the characteristics of preference share capital.
†These securities constitute limited partnership interests in Lloyds TSB Capital 2 L.P., a Jersey limited partnership in which Lloyds TSB (General Partner) Limited, a wholly owned subsidiary, is the general partner. Noncumulative income distributions accrue at a fixed rate of 7.834 per cent per annum up to 7 February 2015; thereafter they will accrue at a rate of 3.50 per cent above a rate based on the yield of specified UK government stock.
•These securities constitute interests in European Financial Institution Investments Partnership, an English law general partnership in which the principal partner is Langbourn Holdings Limited, a wholly owned subsidiary of the Group. The minority interests are entitled to 90 per cent of the partnership’s profits. In the event of a winding-up, at least 90 per cent of the capital of the partnership would be returned to Langbourn Holdings Limited.
Ordinary ordinary shares of shares of 25p each 25p each Total £m £m £m
Included within other finance income is an interest cost of £4 million (2001: £3 million) in respect of these defined benefit post-retirement healthcare schemes.
The assets of the Group’s defined benefit schemes and the expected rates of return are summarised as follows: Expected Expected long-term long-term
Percentage of scheme liabilities at balance sheet date 2.0% 0.7% Total amount recognised in the statement of total recognised gains and losses
(Deficit) surplus at end of year (2,931) 433 45 Contingent liabilities and commitments a Contingent liabilities and commitments 2002 2001 arising out of banking transactions £m £m
One such matter relates to the sale of life assurance products related to the repayment of residential mortgages. Falling investment returns have led to increased concern that the value of some of these policies will be less than the amount required to repay the mortgage. Certain customers have complained that this risk was not properly explained to them at the time of sale. Following a review of past sales made by Abbey Life a provision of £165 million has been made for the estimated cost of redress (note 30e).
Concerns have also been expressed over the appropriateness of certain sales of stockmarket related savings products. In this regard the Group is carrying out, in conjunction with the regulator, an investigation into the sales of the Extra Income & Growth Plan. This investigation is expected to be completed during 2003 when the Group will be in a position to estimate the financial effect.
Interest rate contracts: Interest rate swaps 286,617 4,085 4,535 Forward rate agreements 54,171 78 84 Options purchased 8,887 73 – Options written 3,993 – 58 Futures 35,112 – –
Net replacement cost represents the total positive fair value of all derivative contracts at the balance sheet date, after allowing for the offset of all negative fair values where the Group has a legal right of set-off with the counterparty concerned.
Liabilities: Minority interests and shareholders’ funds – – – – – 8,855 (152) 8,703 Internal funding of trading business (7,973) (198) (1,545) (5,148) (880) – 15,744 –
The disclosures in this note cover all on-balance sheet financial instruments; fair values of all derivative instruments are disclosed in note 46a.
Of the net losses of £226 million at 31 December 2002, £38 million of net losses are expected to be recognised in the year ending 31 December 2003 and £188 million of net losses in later years.
The combined balance sheet of First National Vehicle Holdings and Abbey National Vehicle Finance at 18 April 2002 was as follows: Book value Fair Fair at 18 April value value at 2002 adjustments acquisition £m £m £m
An initial cash payment of £47 million has been made, however following the preparation of the completion accounts it is believed that this should be subject to a downward adjustment of £5 million. Accordingly a receivable of this amount has been recognised in the Group’s balance sheet. The fair value adjustments principally reflect adjustments to the carrying value of operating lease assets and related taxation. Negotiations regarding the completion of this acquisition are still ongoing and, whilst no further significant adjustments to consideration or fair value adjustments are expected, in accordance with the requirements of paragraph 27 of Financial Reporting Standard 6, it is noted that the fair value of the net assets of the acquired businesses and the goodwill arising shown above are provisional.
Net cash inflow (outflow) before adjustments for the effect of foreign exchange movements 1,766 (100) Effect of foreign exchange movements 4 (38)
At 1 January – – Cash inflow from financing 167 – Retained profit 1 –
Effect of foreign exchange movements (5) (13) Cash inflow from financing 2,065 611 Capital repayments (4) (20) Adjustments on acquisition 2 –
Cash consideration paid (see f) 103 1 Payments to former members of Scottish Widows Fund and Life Assurance Society acquired during 2000 14 179
Net cash outflow 117 180 f Acquisition of group undertakings 2002 2001 £m £m
Substantial shareholdings At the date of this report notification had been received that Legal & General Investment Management Limited has an interest in 3% of the nominal value of the issued share capital. No other notification has been received that anyone has an interest in 3% or more of the nominal value of the issued share capital.
American Depositary Receipts (ADRs) Lloyds TSB shares are traded in the USA through an NYSE-listed sponsored ADR facility, with The Bank of New York as the depositary. The ADRs are traded on the New York Stock Exchange under the symbol LYG. The CUSIP number is 539439109 and the ratio of ADRs to ordinary shares is 1:4. For details please contact The Bank of New York, Investor Relations, PO Box 11258, Church Street Station, New York, NY 10286-