Share dealing facilities The Company provides a low cost, execution only, postal dealing service for the purchase and sale of Lloyds TSB shares through Lloyds TSB Registrars. The current rate of commission for purchases is 0.75%, minimum £10, and for sales is 0.75%, no minimum. For full details please contact Lloyds TSB Registrars. Telephone 0870 6060302.
other significant achievements during the year include: During 2001, the Group sold more products to more people than in any previous year.
Customer lending grew by 7 per cent to £123 billion and customer deposits increased by 7 per cent to £109 billion.
Total capital ratio 9.2 per cent, tier 1 capital ratio 8.4 per cent.
In the UK, the combination of lower interest rates and continued increases in consumer spending, aided by a further rise in house prices, has underpinned the domestic economy. While there is some concern about the viability of continued consumer spending, a recovery in other world economies should help to keep growth in the UK economy at acceptable, albeit lower, levels in 2002.
our results The Group’s results for 2001 were satisfactory with business as usual operating profit up by 6 per cent to £4,462 million, in part building on the
Our vision for Lloyds TSB remains constant – to create value for our customers. In creating such value for our customers we are able to create, and maximise, value for our shareholders.
First, we need to be a leader in our chosen markets; second, we need to be first choice for our customers by understanding and meeting their needs better than any of our competitors and, third, we need to drive down our dayto -day costs to improve our efficiency and to enable us to continue to invest for future growth. In addition, as we operate increasingly in a global market place, we need to be world class in three vital areas: in customer relationship management, in the way we manage and lead our people, and in the way we manage change which is now an endemic and permanent part of business life.
products. products We have continued to improve our product range to one that is more innovative and attractive than it has ever been. We are the clear market leader in fee based added value accounts. During 2001, we recruited a record number of new current account customers and levels of customer attrition remain low, and well below the industry average.
We announced at the end of January how Scottish Widows will in future deal with guaranteed annuity rate policies following the Equitable Life vs Hyman judgement. When we acquired Scottish Widows in March 2000, an Additional Account was set up within the With Profits Fund. This Account had a value, at 31 December 2001, of approximately £1.7 billion and is available to meet any additional costs of providing guaranteed benefits on transferred policies, including guaranteed annuity option policies. We expect that the Additional Account will be sufficient to meet this cost, as well as other contingencies. This action, which helps to protect both policyholders and shareholders, continues to demonstrate the prudence and strength of the Group.
And, of course, many of our staff invest their own time in the community – sitting on committees, helping actively or raising money. In 2002, the Foundations will make £1.2 million available to match funds raised, and time given, by staff to charities through the Matched Giving Scheme.
In 2001, Lloyds TSB won two Department of Trade and Industry sponsored Business in the Community awards for our role in developing the Portsmouth Area Regeneration Trust. This groundbreaking model of a community-based financial institution tackles the effects of financial exclusion and provides disadvantaged people with the first step into mainstream financial services. The initiative is so successful that it is now being replicated across the country in both urban and rural locations.
groups, whose businesses provide a comprehensive range of banking and financial services in the UK and overseas. At the end of 2001 total group assets were £237 billion and there were over 81,000 employees. Market capitalisation was £41.5 billion.
UK Retail Financial Services encompasses three of the main businesses – UK Retail Banking, Mortgages, and Insurance and Investments – and provides a full range of banking and financial services to 16 million customers.
Europe. At the end of 2001 2.5 million customers had registered to use the services of PhoneBank and the automated voice response service PhoneBank Express.
• Internet Banking. Internet Banking provides online banking facilities for personal and business customers and enables them to conduct their financial affairs without using the branch network. Over 1.8 million customers have registered to use the Group’s internet banking services.
• Business Banking. Small businesses are served by dedicated business managers based in 448 locations throughout the UK. Customers have access to a wide range of tailored business services ranging from traditional banking products through factoring, insurance and investments to non-financial solutions to their business problems such as
UK and multinational companies, financial institutions and, through a network of dedicated offices, to medium-sized businesses in the UK. The Agricultural Mortgage Corporation provides long-term finance for the agricultural sector.
Belgium, Dubai and in the USA. It provides a full range of retail banking, private banking and financial services to overseas residents and islanders, together with deposit services offshore for UK residents.
UK Retail Financial Services, which encompasses UK Retail Banking, Mortgages, and Insurance and Investments, increased by £99 million, or 3 per cent, to £3,189 million from £3,090 million in 2000. The trading surplus increased by 6 per cent to £3,788 million.
The Group continues to see the benefits from the acquisition of Scottish Widows in 2000 with a 6 per cent growth in proforma weighted sales in life, pensions and unit trusts to £754.7 million. This 6 per cent growth reflected a 31 per cent increase in weighted sales from life and pensions, offset by a 31 per cent reduction in weighted sales from unit trusts, caused by the downturn in the market during the second half of 2001. Operating profit from our life and pensions business increased by £116 million, or 15 per cent, to £914 million. Operating profit from general insurance operations, comprising underwriting and broking, rose by £81 million, or 14 per cent, to a record £668 million, mainly as a result of continued strong sales growth in all major product lines.
International Banking pre-tax profit was £33 million lower at £444 million compared with 2000, as a result of a £100 million reduction in pre-tax profit caused by the recent economic difficulties in Argentina. Profits from New Zealand in local currency terms increased by 17 per cent, but after the effect of exchange rate movements profits from The
The total Group charge for bad and doubtful debts, excluding the general provision in respect of Argentina, was 28 per cent higher at £692 million, compared with £541 million in 2000. The domestic charge increased to £570 million from £426 million, partly as a result of the Chartered Trust acquisition, but also as a result of a £30 million provision made against the Group’s loans and advances to one specific corporate customer, which total some £70 million. In addition, during 2000 UK Retail Banking had a one-off benefit of £42 million following the full centralisation of its arrears processing.
December 2000. Our high quality lending portfolio remains heavily influenced by our mortgage business and, throughout our business, we continue to be well positioned for any economic slowdown.
Banking, Mortgages, and Insurance and Investments, increased by £99 million, or 3 per cent, to £3,189 million from £3,090 million in 2000. The trading surplus increased by 6 per cent to £3,788 million.
We continue to follow a strategy of differentiation through segmentation and we have developed our retail strategy around four principal customer segments. We are now beginning to tailor our products and services to meet the specific needs of these segments and we have improved our product range to be more innovative and attractive than it has ever been.
UK Retail Banking has the responsibility for managing the core relationship with our current account customers and, therefore, acts as the principal gateway for the cross-sale of our full range of bancassurance products and services.
As such it contributes significantly to the profitability of other businesses, particularly in our life and pensions, and general insurance businesses.
During 2001, these improved products and services have brought about the planned reduction in margins on certain personal loan products, together with reductions in fee income in areas such as unauthorised borrowing fees and
LloydsTSB.com, our internet banking system, continues to grow rapidly and now has 1.8 million registered customers. It is consistently one of the most visited financial websites in Europe. In addition to being able to conduct banking transactions over the internet, our customers can purchase products and services at a time more convenient to them.
Our small business internet portal, success4business.com, designed to deliver business and financial solutions to our customers’ ongoing needs, now has over 77,000 registered users. Customer deposit balances have increased by 5 per cent and this has been accompanied by high levels of sales of insurance, mortgages and investment products, helped increasingly by a close working relationship with Scottish Widows and Cheltenham & Gloucester.
A relatively stable arrears position and the beneficial effect of house price increases have meant that bad debt provisions remained at low levels, resulting in a release of £32 million of the Group’s mortgage general provision.
Consequently new provisions were more than offset by releases and recoveries resulting in a net provisions credit of £24 million for the year, compared with a net credit of £13 million in 2000. The quality of our mortgage lending continues to be very satisfactory and we remain well positioned for any slowdown in economic growth.
Operating profit from Insurance 1,582 1,385 Scottish Widows Investment Partnership 19 40 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Total operating profit 1,601 1,425afffffffffffffffffffffffffff afffffffffffffffffffffffffff Short-term fluctuations in investment returns (page 32) (648) (94) Changes in economic assumptions (page 33) – 127 Pension provisions/stakeholder pension related charge (page 33) (70) (180)
Operating profit from our life, pensions and unit trusts businesses increased by £116 million, or 15 per cent, to £914 million. The market for medium and long-term investments was adversely affected in the second half of the year, as a consequence of the events of September 11 and the general decline in global stockmarkets. However, over the last 12 months the growth in the sales of Scottish Widows’ life and pensions products has exceeded overall market growth, and we are confident of further progress in 2002 and beyond.
The overall 6 per cent growth in weighted sales reflected a 31 per cent increase in weighted sales from life and pensions, offset by a 31 per cent reduction in weighted sales from unit trusts, largely caused by the downturn in the market during the second half of 2001.
The 31 per cent growth in weighted sales from life and pensions, from £423.6 million in 2000 to £556.1 million in 2001, resulted in an increase in market share well ahead of our expectations.
Scottish Widows is also well placed to take advantage of the opportunities in the stakeholder pensions market. During 2001, Scottish Widows became the nominated stakeholder pensions provider for a number of associations and employers which gives access to more than 46,000 employers, an estimated market share of 16 per cent. Over 20,000 employers have already designated Scottish Widows as their stakeholder pensions provider, resulting in 837,000 employees being offered stakeholder pensions. In 2001, weighted sales of stakeholder pension products totalled £76 million, an estimated 15 per cent market share. The business remains relatively immature but, with the growing size of our portfolio, we expect stakeholder pensions to make a good contribution to ongoing profits.
The principal focus of Scottish Widows Investment Partnership (SWIP) is the delivery of consistent superior investment performance. During 2001 Scottish Widows Investment Management and Hill Samuel Asset Management were fully integrated into SWIP. A complete overhaul of the management structure has also been undertaken, together with a fundamental review of investment philosophy, processes and systems. Pre-tax profits from SWIP for the year were £19 million compared with £40 million in 2000, the reduction in profitability partly being driven by lower stockmarket levels. At the end of the year SWIP had £78 billion of funds under management, out of Groupwide funds under management totalling £109 billion. Having created a top class investment management team, SWIP is already demonstrating a strong turnaround in performance and we are confident that, following all the changes made during 2001, overall fund management performance will continue to improve in 2002 and beyond.
New business 362 297 Existing business – expected return 374 334 – experience variances 37 36 – assumption changes and other items 95 96
New business income increased by 22 per cent and existing business profits rose 9 per cent, partly as a result of the inclusion of Scottish Widows for the full year, compared with only 10 months in 2000. During the year the life and pensions new business margin, defined as new business income less distribution costs divided by weighted sales, increased to 20.7 per cent, from 18.5 per cent in 2000. The improvement largely arising from cost efficiencies driven by process enhancements, together with an improved product mix.
It is standard practice for life companies to regularly review the underlying assumptions that support the embedded value calculations, taking into account the latest experience in respect of customer lapse rates, expense inflation, investment mix, mortality rates and other similar items. It is our normal practice to undertake a full review in December each year, which has historically led to some profit and loss account benefit. In 2000 the review, together with some tax-related adjustments, resulted in a benefit of £96 million. In 2001 this review, together with the planned harmonisation of actuarial models between Scottish Widows and other Group life companies, resulted in a benefit of £95 million, on combined policyholders’ funds of over £46 billion.
With Profits Fund against the consequences of a future fall in interest rates.
Total new business premium income Regular premiums: Life – mortgage related 24.7 23.6 24.9
Our general insurance operations, comprising both underwriting and broking activities, had a record year and operating profits rose by £81 million, or 14 per cent, to £668 million.
As a leading distributor of general insurance products, Lloyds TSB now has over 8 million policies in force and we believe the Group has UK market leadership in home, creditor and travel insurance.
Trading surplus 1,107 854 Provisions for bad and doubtful debts 155 94 Amounts written off fixed asset investments 15 14 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Excluding the impact of Chartered Trust, net interest income increased by £109 million resulting primarily from positive interest rate management and asset growth. Other income increased by £115 million, excluding the impact of Chartered Trust. This increase largely resulted from increased operating lease rentals of £54 million from Lloyds
TSB Leasing and Lloyds UDT. There was also a £26 million increase from higher fees from large corporate activity, factoring and following the completion of a number of high quality structured finance transactions. Excluding
Lloyds TSB Development Capital had another good year expanding its regional representation in the UK, achieving record levels of venture capital investment and a high level of realisations of venture capital gains, which contributed to pre-tax profits of £37 million.
Profit on sale of Lloyds TSB Asset Management S.A. 39 –
The Emerging Markets Debt portfolio contributed £111 million compared with a contribution of £78 million in 2000. Following the implementation of Financial Reporting Standard 18 (page 61, note 1) certain holdings of uncollateralised bonds have been reclassified as debt securities. Based on secondary market prices, the surplus of market value over the restated net book value of the Emerging Markets Debt investment portfolio was some £200 million (December 2000 restated: £400 million).
Accrual for payment to Lloyds TSB Foundations (36) (34) Earnings on surplus capital, central costs and other unallocated items (72) (84)
Group net interest income increased by £357 million, or 8 per cent, to £4,944 million, despite a reduction of £52 million caused by a 4 basis point reduction in the underlying net interest margin. Average interest-earning assets increased by 11 per cent to £145 billion. There was further growth in mortgages and other customer lending in the
UK. The overall net interest margin decreased to 3.41 per cent, a reduction of 9 basis points. The impact of the funding cost of Scottish Widows represented 5 basis points of this 9 basis point reduction, with the residual 4 basis point decrease in the margin reflecting the increasingly competitive operating environment and a lower contribution from interest-free liabilities, caused by the lower interest rate environment.
Average interest-earning assets increased by 10 per cent to £121 billion. Personal lending and mortgage balances grew by £6 billion and wholesale balances increased by £5 billion largely reflecting growth in the corporate and commercial businesses, and the impact of the acquisition of Chartered Trust.
Fees and commissions receivable increased by 6 per cent to £2,922 million, largely reflecting strong growth in income from insurance broking. Other UK fees and commissions increased by £49 million, or 4 per cent, from £1,171 million to £1,220 million mainly due to the inclusion in 2001 of fees earned by Chartered Trust. Unit trust and asset management fees decreased by £20 million as a result of the substantial fall in the level of stockmarket activity in the second half of the year. In addition there was also a £26 million increase in fees from large corporate and factoring activity reflecting increased transaction volumes. These factors more than offset the effect of the withdrawal of ATM fees and lower transaction volumes within the stockbroking business.
London Treasury, and higher foreign exchange income from The National Bank of New Zealand.
Chartered Trust, from £151 million in 2000 to £329 million in 2001. Other significant contributions to other operating income are the realisation of venture capital gains within Lloyds TSB Development Capital of £57 million, earnings on the sale and restructuring of Emerging Markets Debt investments of £109 million, and £57 million profit on the sale and leaseback of premises.
Administrative expenses Staff: Salaries and profit sharing 1,754 1,626 National insurance 140 131
Total operating expenses 4,091 3,764afffffffffffffffffffffffffff afffffffffffffffffffffffffff Efficiency ratio 42.9% 43.4% Exceptional restructuring costs 217 188 Abbey National offer costs 16 –
Total operating expenses, on a business as usual basis, increased by £327 million, or 9 per cent compared with 2000. On a like-for-like basis, excluding increased costs following the acquisitions of Scottish Widows and Chartered
Administrative expenses increased by £163 million, or 5 per cent, to £3,541 million. Staff costs increased by £97 million, or 5 per cent, reflecting the impact of the acquisition of Chartered Trust, higher staff numbers and incremental investment in revenue growth businesses.
Staff eligible to participate in the staff profit sharing scheme will receive 9 per cent of basic salary (2000: 10 per cent).
At the end of December 2001 provisions for bad and doubtful debts totalled £1,468 million. This represented 1.2 per cent of total lending. Non-performing lending decreased to £1,222 million from £1,259 million in December 2000.
tax The effective rate of tax was 27.4 per cent (2000: 28.6 per cent). The lower effective rate of tax, compared with the standard tax rate of 30 per cent, is largely due to tax relief on payments to the QUEST to satisfy Save As You Earn options, and gains on disposals of investments and properties sheltered by capital losses.
Total risk-weighted assets 108.8 94.0afffffffffffffffffffffffffff afffffffffffffffffffffffffff Risk asset ratios: total capital 9.2% 9.4%
At the end of December 2001 the risk asset ratios were 9.2 per cent for total capital and 8.4 per cent for tier 1 capital.
During 2001 the FTSE All-Share index fell by 15 per cent and this created adverse short-term fluctuations in investment returns totalling £648 million. These adverse short-term fluctuations should not represent a permanent impairment to the value of the Group’s reserves which fluctuate as stockmarket values fluctuate.
Government to a maximum of one per cent per annum. In order not to disadvantage existing pensions customers, charges were reduced on our existing book. This had the effect of reducing future cash flows in the Group’s embedded value calculation and a one-off charge of £80 million was therefore made to the profit and loss account in 2000.
financial instruments The Group’s activities can be divided into three broad categories: banking and mortgages, insurance and investments, and trading activities.
Within its banking activities, the Group has a number of treasury operations that are responsible for utilising surplus funds and meeting funding shortfalls by entering into transactions in the money markets. Portfolios of debt securities and treasury bills are held to provide a source of liquidity; it is the Group’s intention to hold these investments until maturity although in certain circumstances they may be disposed of before then where, for example, the need to hold the investment no longer applies. Any profits or losses arising from a sale of this kind are recognised immediately.
However, interest rate and exchange rate positions are taken out using derivatives (forward foreign exchange contracts, interest rate swaps and forward rate agreements) and on-balance sheet instruments (mainly debt securities). The objective of these positions is to earn a profit from favourable movements in market rates. Accordingly, these transactions are reflected in the accounts at their fair value and gains and losses shown in the profit and loss account as dealing profits.
The Group Risk Committee, established during 2001, is responsible to the Group Executive Committee for the protection of shareholder value through the assessment and control of the high level risks assumed by the Group, and ensuring that the requisite culture, practices and systems are in place across the Group to meet internal and external obligations. The Group Risk Committee also reviews the allocation and deployment of capital at risk, taking into account the Group’s risk appetite.
Group Risk Management’s responsibilities in respect of credit risk include the following: • Formulation of high level credit policies designed to ensure a balanced and managed approach to the identification and mitigation of credit risk. These policies provide a standard framework within which Group businesses structure their individual policies and rules. Group Risk reviews, approves and monitors credit policy documents established for individual businesses.
Specialist units are established within Group business units to provide intensive management and control in order to maximise recoveries of doubtful debts.
Regular independent audits of credit processes are undertaken by Group Audit. Such audits include consideration of the completeness and adequacy of credit manuals and lending guidelines, together with an in-depth analysis of a
Individual accounts are reviewed to ensure that the facility grade is appropriate, that credit procedures have been properly followed and that, where an account is non-performing, provisions raised are adequate.
To reduce credit risk the Group uses a variety of credit enhancement techiques such as netting and collateralisation, where security is provided against the exposure.
Credit derivatives are a method of transferring credit risk from one counterparty to another and of increasing exposure to selected counterparties. Credit derivatives include credit swaps, credit spread options and credit linked notes.
financial review the chairmanship of the Group Finance Director; other members include the Director of Group Risk Management and the managing directors of the Group’s principal business units. The Group’s Board-approved policy is to optimise the stability of future net interest income, which is achieved by entering into hedging transactions using interest rate swaps and other financial instruments.
The simulation models used by GBSM include assumptions about the relationships between customer behaviour and the level of interest rates; the anticipated level of future business is also taken into account. The accuracy of these assumptions will impact the efficiency of hedging transactions. The assumptions are regularly updated and the projected exposure is actively managed in accordance with Lloyds TSB Group’s Asset and Liability Committee policy.
The Group’s non-trading exposure is summarised in the form of an interest rate repricing table, as set out on page 82.
Derivatives are used to meet customers’ financial needs, as part of the Group’s trading activities and to reduce its own exposure to fluctuations in interest and exchange rates. The principal derivatives used by the Group are interest rate contracts (including interest rate swaps, forward rate agreements and options) and exchange rate contracts (including forward foreign exchange contracts, currency swaps and options). 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.
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
Financial Services Authority’s Sterling Stock Liquidity policy in the UK, with similar liquidity policies in place across all trading centres worldwide. Compliance is monitored by regular liquidity returns to Group Risk.
• Development of a standard methodology to ensure consistency in the identification, assessment and management of operational risk. This methodology is being implemented by business units throughout the Group.
A major cause of operational losses is fraud involving credit and debit cards. In common with the rest of the financial services industry, Lloyds TSB is investing in technology to combat this problem.
financial review mitigated by reinsurance arrangements which are broadly spread over different reinsurers. Appropriate reinsurance arrangements also apply within the life and pensions businesses.
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’.
Following the recent publication by the Association of British Insurers of guidelines on the disclosure of information on SEE issues in company annual reports, the Group is reviewing its SEE policies and disclosures.
Profit and loss account aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Statutory profit before tax 3,550 3,860 3,656 3,053 2,790aaddfff aaddfff aaddfff aaddfff aaddfff
Total assets 236,539 219,113 177,050 168,634 158,803aaddfff aaddfff aaddfff aaddfff aaddfff
Minority interests (equity and non-equity) 997 552 33 42 40 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Long-term assurance liabilities to policyholders 46,389 51,085 26,542 23,692 20,046 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Total liabilities 236,539 219,113 177,050 168,634 158,803aaddfff aaddfff aaddfff aaddfff aaddfff
Alan E Moore CBE*§ Deputy Chairman 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 65.
M Kent Atkinson Group Finance Director Joined Bank of London & South America in 1964, which became a Lloyds Bank subsidiary in 1971, and held a number of senior and general management appointments, including positions in Latin America and the Middle East, before being appointed to the board in 1997. A non-executive director of Coca-Cola HBC SA. Aged 56.
independent non-executive directors * Member of the audit committee ** Chairman of the audit committee † Member of the remuneration committee ‡ Chairman of the remuneration committee § Member of the nomination committee ◆ Chairman of the nomination committee ▲ Senior independent director
A director of TSB Group since 1993. Joined Unilever in 1970 and following a number of senior and general management appointments was appointed an executive director of Unilever in 1992. Aged 55.
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 and Serco Group. Aged 52.
The consolidated profit and loss account on page 55 shows a profit attributable to shareholders for the year ended 31 December 2001 of £2,500 million.
An interim dividend of 10.2p per ordinary share was paid on 10 October 2001 and a final dividend of 23.5p per ordinary share will be paid on 1 May 2002. These dividends will absorb £1,872 million.
Biographical details of directors are shown on pages 42 and 43.
Selborne retire by rotation at the annual general meeting and offer themselves for re-election.
Schemes offering share options or the acquisition of shares are available for most staff, to encourage their financial involvement in the Group.
Industry published a consultative document on the subject at the end of December 2001, inviting comments by the middle of March 2002.
In 2001 the package for executive directors comprised the following elements: Basic salary
The remuneration committee reviewed the attainment of targets and agreed the incentive payments.
The option is designed to encourage him to remain with the company and, accordingly, it will normally become exercisable only if he remains an employee, and has not given notice of resignation, on 31 December 2004, or if he ceases to be an employee before that date in certain circumstances described in his service agreement, in which case it will be exercisable for six months and then lapse. Briefly, these include the following: • If he were to be entitled to terminate his service agreement without notice by reason of his employer’s conduct.
The option may also be exercisable on a takeover or reconstruction of the company.
The option will lapse if Mr Daniels dies or ceases to be an employee, or gives notice of resignation, before 31 December 2004, except in the circumstances described above.
The benefits conferred by the option are not pensionable and the option is not transferable.
Any change to Mr Daniels’ rights in the event of a variation of share capital which would be to his advantage could not generally be made without shareholder approval.
directors’ remuneration directors’ pensions (a) Additional pension (c) earned (excluding (b) Accrued inflation) during Increase in pension the year ended transfer value entitlement at
Column (b) is the additional capital value of column (a) which would arise if the pension were to be transferred to another pension scheme on the director’s leaving the company, based on factors supplied by the actuary of the relevant Group pension scheme in accordance with actuarial guidance note GN11, less (where paid) the director’s contributions. Column (c) is the aggregate pension entitlement based on pensionable service with the company to 31 December 2001 but payable at normal retirement age.
appointment during the during the 31 December 31 December granted or at date of 2001 2000 Options to acquire shares: if later) year year 2001 2001 exercised exercise £000 £000 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
P B Ellwood* Exercisable 321,340 321,340 358p Not exercisable 311,224 441,725 696p 130,501 655p M E Fairey* Exercisable 224,556 54,000 510p
M D Ross Exercisable – – Not exercisable 268,941 440,549 615p 30,152 655p 141,456 733p
The market price for a share in the Company at 31 December 2001 was 746p. The range of prices between 1 January 2001 and 31 December 2001 was 590p to 772p.
The following comments are, therefore, included to comply with these rules.
The information on pages 42 and 43 shows that the Company is led and controlled by a board comprising executive and nonexecutive directors with wide experience. The appointment of directors is considered by the board and, following the provisions in the articles of association, they must retire by rotation, and may stand for re-election by the shareholders, at least every three years.
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.
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 55 to 84, 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 board of directors is responsible for the Group’s system of internal control, which is designed to ensure effective and efficient operations, internal control, including financial reporting, and compliance with laws and regulations. It should be noted, however, that such a system is designed to manage, rather than eliminate the risk of failure to achieve business objectives. In establishing and reviewing the system of internal control the directors have regard to the materiality of relevant risks, the likelihood of a loss being incurred and the costs of control. It follows, therefore, that the system of internal control can only provide reasonable but not absolute assurance against the risk of material loss.
The directors and senior management of the Group are committed to maintaining a control-conscious culture across all areas of operation. This is communicated to all employees by way of procedures manuals and regular management briefings.
Key business risks are identified, and these are controlled by means of procedures such as physical controls, credit, trading and other authorisation limits and segregation of duties. There are well established budgeting and forecasting procedures in place and reports are presented regularly to the board detailing the results of each principal business unit, variances against budget and prior year, and other performance data. Internal controls contain procedures which assist the board in identifying new and emerging risks.
The effectiveness of the internal control system is reviewed regularly by the board and the audit committee, which also receives reports of reviews undertaken around the Group by the
We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions is not disclosed.
Prepayments and accrued income 29 3,190 2,965 Long-term assurance business attributable to the aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Accruals and deferred income 37 3,563 4,174 Provisions for liabilities and charges: Other provisions for liabilities and charges 39 401 442
Other commitments 53,342 42,586 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff 53,342 42,589aafffffffffffffffffffffffffff aafffffffffffffffffffffffffff * restated (see note 1)
Shares in group undertakings 22 11,960 11,152 Loans to group undertakings 22 759 759
statement of total recognised gains and losses for the year ended 31 December 2001 2001 2000* £ million £ million aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Retained profit 628 1,023 Currency translation differences on foreign currency net investments (86) (11) Issue of shares 194 74 Goodwill written back on sale and closure of businesses – 109 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Net increase in shareholders’ funds 736 1,195 Shareholders’ funds at beginning of year 10,024 8,581 Prior year adjustment (note 1) – 248 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Shareholders’ funds at end of year 10,760 10,024aafffffffffffffffffffffffffff aafffffffffffffffffffffffffff * restated (see note 1)
Total taxation (829) (864) Capital expenditure and financial investment: Additions to fixed asset investments (47,049) (23,564) Disposals of fixed asset investments 40,530 24,850 Additions to tangible fixed assets (1,157) (1,006) Disposals of tangible fixed assets 285 78 Capital injection to life fund (100) –
Net cash outflow from acquisitions and disposals (184) (5,027) Equity dividends paid (1,738) (1,522)
(Decrease) increase in cash (note 49c) (100) 1,406aafffffffffffffffffffffffffff aafffffffffffffffffffffffffff * restated (see note 1)
The effect of this change on the profit and loss account for the year ended 31 December 2001 has been to increase other operating income by £77 million (2000: £58 million), increase the charge for bad and doubtful debts by £84 million (2000: £66 million), increase amounts written off fixed asset investments by £38 million (2000: £18 million) and to reduce profit before tax by £45 million (2000: £26 million). Loans and advances have been reduced by £294 million (2000: £312 million), debt securities have increased by £657 million (2000: £723 million) and shareholders’ funds have increased by £254 million (2000: £287 million). In addition, certain sundry assets and liabilities have been reclassified. 2000 comparative figures have been restated.
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 and 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.
Debt securities and equity shares held for dealing purposes are included at market value.
Premises and equipment held for letting to customers under operating leases are depreciated over the life of the lease to give a constant rate of return on the net investment, taking into account anticipated residual values. Anticipated residual values are reviewed regularly and any impairments identified are charged to the profit and loss account.
working lives. The unfunded liability is included as a provision in the balance sheet.
Derivatives are used in the Group’s trading activities to meet the financial needs of customers, for proprietary purposes and to manage risk in the Group’s trading portfolios. Such instruments include exchange rate forwards and futures, currency swaps and options together with interest rate swaps, forward rate agreements, interest rate options and futures. These derivatives are carried at fair value and all changes in fair value are reported within dealing profits in the profit and loss account. Fair values are normally determined by reference to quoted market prices; internal models are used to determine fair value in instances where no market price is available. The unrealised gains and losses on trading derivatives are included within other assets and other liabilities respectively. These items are reported gross except in instances where the Group has entered into legally binding netting agreements, where the Group has a right to insist on net settlement that would survive the insolvency of the counterparty; in these cases the positive and negative fair values of trading derivatives with the relevant counterparties are offset within the balance sheet totals.
Insurance and Investments Operating profit 1,601 1,425 Short-term fluctuations in investment returns (648) (94) Changes in economic assumptions – 127 Exceptional restructuring costs (50) (59) Pension provisions (70) (100) Stakeholder pension related charge – (80)
Life and pensions 868 750 Unit trusts 46 48 General insurance 668 587 Asset management 19 40 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,601 1,425afffffffffffffffffffffffffff afffffffffffffffffffffffffff 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: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Total gross income 12,831 2,639 15,470afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Profit on ordinary activities before tax 3,427 433 3,860afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff
Class of business: UK Retail Banking and aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffff
3 Dealing profits (before expenses) 2001 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Foreign exchange trading income 158 141 Securities and other gains 75 57 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 233 198afffffffffffffffffffffffffff afffffffffffffffffffffffffff Dealing profits include the profits and losses arising both on the purchase and sale of trading instruments and from the year-end revaluation to market value, together with the interest income earned from these instruments and the related funding cost.
Audit and similar services 17 11 Consultancy and advisory services 4 25 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Total fees 21 36afffffffffffffffffffffffffff afffffffffffffffffffffffffff The auditors’ remuneration for the holding company was £50,000 (2000: £50,000).
The increase in due diligence and other audit-related work in 2001 comprises principally work in relation to the Group’s listing on the New York Stock Exchange and in connection with the bid for Abbey National.
It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties, where their expertise and experience with the Group are important, principally relating to tax advice and due diligence reporting on acquisitions, or where they are selected on a competitive basis.
7 Profit before tax on sale of businesses On 3 October 2001 the Group announced the sale of its Brazilian fund management and private banking business, including its subsidiary, Lloyds TSB Asset Management S.A. This resulted in a profit on sale of £39 million (tax: £11 million).
Income from: Aggregate amounts receivable in respect of assets leased to customers and banks under: Finance leases and hire purchase contracts 3,250 3,295 Operating leases 329 151
Foreign tax Current tax on profits for the year 179 137 Adjustments in respect of prior years (17) (5)
Current tax charge 897 1,004 Deferred tax 73 100 Associated undertakings and joint ventures 1 1 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 971 1,105afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
The charge for tax on the profit for the year is based on a UK corporation tax rate of 30 per cent (2000: 30 per cent).
Balance Balance sheet Valuation sheet Valuation £m £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 15,224 15,290afffffffffffffffffffffffffff afffffffffffffffffffffffffff Repayable on demand 2,443 2,794 Other loans and advances by residual maturity repayable: 3 months or less 8,995 10,352 1 year or less but over 3 months 2,698 1,365 5 years or less but over 1 year 708 478
Provisions for bad and doubtful debts (1,466) (1,420) Interest held in suspense (70) (90)
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 122,935 114,432afffffffffffffffffffffffffff afffffffffffffffffffffffffff Of which repayable on demand or at short notice 7,804 9,342afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
Securitisations Certain instalment credit receivables have been securitised and are subject to non-returnable financing arrangements. In accordance with Financial Reporting Standard 5, these items have been shown under the linked presentation method.
At 31 December 1,099 369 1,069 357afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,468 1,426afffffffffffffffffffffffffff afffffffffffffffffffffffffff
Total domestic 108,038 101,565 International: Latin America 2,347 2,222 New Zealand 8,435 7,368 Rest of the world 5,651 4,787
**Figures exclude provisions and interest held in suspense relating to loans and advances to banks.
Other securities: Other public sector securities 151 151 131 131 Bank and building society aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 24,225 24,439 14,605 15,024afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Due within 1 year 6,745 5,405 Due 1 year and over 17,480 9,200 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 24,225 14,605afffffffffffffffffffffffffff afffffffffffffffffffffffffff Unamortised discounts net of premiums on investment securities 622 904afffffffffffffffffffffffffff afffffffffffffffffffffffffff
Prior year adjustment (note 1) 404 319 – 723 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
At 31 December 2001 10,553 519 83 10,989afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 68 LLOYDS TSB GROUP
notes to the accounts 16 Provisions for bad and doubtful debts and non-performing lending (continued)
Treasury bills and other eligible bills 1,036 546 Debt securities 4,498 3,543 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 5,534 4,089afffffffffffffffffffffffffff afffffffffffffffffffffffffff These investments have been sold to third parties but, since the Group is committed to reacquire them at a future date and at a predetermined price, they are shown in the balance sheet.
In the year ended 31 December 2001 £1 million of interest receivable from Goldfish Bank Limited and £22 million of charges to Goldfish Bank Limited in respect of administrative costs have been included in the Group’s income. At 31 December 2001 Goldfish Bank Limited owed £611 million to the Group, which is included in loans and advances to banks.
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 aaaaaaaffffffffff aaaaaaff aaaaaaaaaaaaaaaffff
Depreciation: Exchange and other adjustments (4) (10) – Charge for the year 61 253 197 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff
Amounts payable in: 1 year or less 3 20 5 years or less but over 1 year – 3 aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff 3 23afffffffffffffffffffffffffff afffffffffffffffffffffffffff 26 Capital commitments
Lloyds TSB Group plc also sponsored the TSB Group Employee Trust, a further discretionary trust for the benefit of employees and former employees of the Lloyds TSB Group. The shares in this trust were exhausted during 2001; at 31 December 2000, 0.1 million shares were held by the trustees with a book value of £0.2 million and a market value of £0.5 million. The trust currently holds no assets and full provision has been made against the outstanding amount of the Company’s loan to the trust.
The Group has also established the Lloyds TSB Qualifying Employee Share Ownership Trust (‘the QUEST’) for the purpose of delivering shares on the exercise of options under certain of the Group’s Save As You Earn (SAYE) share option schemes. During 2001, Lloyds TSB Group plc contributed £200 million to the QUEST, and the trustees subscribed for 47 million shares in the Company for a consideration of £316 million. During 2000, Lloyds TSB Group plc contributed £122 million and the trustees subscribed for 30 million shares for a consideration of £193 million. At 31 December 2001, 2 million shares were held by the QUEST with a book value of £8 million (2000: 1 million shares with a book value of £4 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 book value of the shares held by the QUEST at 31 December 2001 has been charged to profit and loss account reserves.
In addition, a further 0.5 million ordinary shares were held by Lloyds TSB Group Holdings (Jersey) Limited at 31 December 2001 (2000: 0.8 million shares). These shares, on which the dividend entitlement has been waived, were gifted to the Group some years ago at nil cost and are used to satisfy outstanding options or to meet commitments arising under other employee share schemes.
Exchange and other adjustments (35) (92) Profit after tax 115 441 Capital injection 100 –
Exceptional items: this includes any other items which, by virtue of their size or incidence, are considered not to form part of the ongoing operating profit.
Income from long-term assurance business is set out below: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
New business contribution 374 305 Contribution from existing business – expected return 359 311 – experience variances 37 36 – changes in assumptions and other items 95 96 Investment earnings 247 212 Distribution costs (247) (225)
Income from long-term assurance business after tax 115 441afffffffffffffffffffffffffff afffffffffffffffffffffffffff Income before tax from long-term assurance business can also be analysed as follows: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Income net of claims and technical provisions 636 937 Pension provisions (70) (100) Operating expenses (557) (471) Tax charged to technical account (62) (191)
Income from long-term assurance business before tax 193 615afffffffffffffffffffffffffff afffffffffffffffffffffffffff d Pension provisions
Risk-adjusted discount rate (net of tax) 8.50 Return on equities (gross of tax) 8.00 Return on fixed interest securities (gross of tax) 5.25 Expenses inflation 3.00
• Future bonus rates on with-profits business are set at levels which would fully utilise the assets supporting the with-profits business. The proportion of profits derived from with-profits business allocated to the shareholder has been assumed to continue at the current rate of one-ninth of the cost of the bonus.
Technical provisions for linked liabilities 21,083 24,413 Fund for future appropriations 95 1,667 Other liabilities 849 1,319 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 46,389 51,085afffffffffffffffffffffffffff afffffffffffffffffffffffffff
LLOYDS TSB GROUP 73 notes to the accounts 30 Long-term assurance business (continued)
34 Debt securities in issue 2001 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Bonds and medium-term notes by residual maturity repayable: 1 year or less 589 538 2 years or less but over 1 year 178 169 5 years or less but over 2 years 405 472 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Foreign exchange and interest rate contracts (note 47a) 2,288 2,346 Balances arising from derivatives used for hedging purposes 475 1,071 Current tax 598 631
Interest payable 1,310 1,670 Other creditors and accruals 2,253 2,504 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 3,563 4,174afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
Short-term timing differences (89) (59) Pensions prepayment 268 230 Emerging Markets Debt securities (70) (74) Accelerated depreciation allowances 1,610 1,586 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,719 1,683afffffffffffffffffffffffffff afffffffffffffffffffffffffff £m aaaaaffffffffffffffffffffffffff
At 1 January 2001 – as previously reported 1,559 Prior year adjustment (note 1) 124 aaaaaffffffffffffffffffffffffff
Post-retirement healthcare A description of the Group’s post-retirement healthcare obligations is provided in note 45b).
Vacant leasehold property Whenever the Group ceases to occupy a property, or commits itself to doing so, it is the Group’s policy to raise a provision to cover any anticipated shortfall when comparing the recoverable amount of its interest in the property to the future rental and other payments that the Group is obligated to make over the remaining term of the lease. These provisions are made by reference to a prudent estimate of expected sub-let income and the possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on an annual basis and will normally run off over the remaining life of the leases concerned, currently averaging six years; where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
§ Subordinated Fixed Rate Bonds 2007 (NZ$150 million) 43 44 – – 51⁄4% Subordinated Notes 2008 (DM750 million) 234 240 – –
† Subordinated Step-up Floating Rate Notes 2009 callable 2004 (US$500 million) 343 334 – – Subordinated Fixed Rate Bonds 2010 (NZ$100 million) 29 30 – –
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 960 515afffffffffffffffffffffffffff afffffffffffffffffffffffffff *These securities constitute limited partnership interests in Lloyds TSB Capital 1 L.P., a Jersey limited partnership in which Lloyds TSB (General Partner) Limited, a wholly owned subsidiary, is the general partner. Non-cumulative income distributions accrue at a fixed rate of 7.375 per cent per annum up to 7 February 2012; thereafter they will accrue at a rate of 2.33 per cent above EURIBOR, to be set annually.
§These securities were issued during 2001, by Lloyds TSB Bank plc, primarily to finance the general business of the Group. Interest payments accrue at the rate of 6.625 per cent per annum; in certain circumstances these payments can be deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB Group plc can declare or pay a dividend until any deferred payments have been made. In the event of a winding up of Lloyds TSB Bank plc, these securities will acquire the characteristics of preference shares. The securities can be redeemed at par at the option of Lloyds TSB Bank plc on or after 42 Called-up share capital 2001 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
At 31 December 2001 1,391 20 1,411afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 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.
At 31 December 2001 959 959afffffffffffffffffffffffffff afffffffffffffffffffffffffff Revaluation reserve: Increase in net tangible assets of subsidiary undertakings 808 aaaaaffffffffffffffffffffffffff
Exchange and other adjustments (86) – Shares issued to the QUEST (note 27) (185) (182) Retained profit 628 21 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Group entities provide a number of banking and other services to the Group’s pension funds, which are conducted on similar terms to third party transactions. At 31 December 2001, the Group’s pension funds had call deposits with Lloyds TSB Bank plc amounting to £572 million (2000: £344 million).
45 Pensions and other post-retirement benefits a Pension costs in the consolidated accounts
Full actuarial valuations of Lloyds TSB Group Pension Schemes No’s 1 and 2 are carried out every three years with interim reviews in the intervening years. At 30 June 1999, the date of the latest full actuarial valuations, the principal actuarial assumptions adopted were that, over the long term, the annual real rate of return on new investments would be 3 per cent higher than the annual increase in pensionable remuneration, 4 per cent higher than the annual increase in present and future pensions in payment, and 3 per cent higher than the annual increase in dividends receivable. The market value of the assets of the schemes at this date was £11,748 million. The actuarial value of the assets represented 125 per cent of the accrued liabilities allowing for future increases in pensions and pensionable remuneration. For funding purposes, the surpluses in the two schemes are being eliminated by means of a contribution holiday.
Pension asset related to Lloyds TSB Group Pension Schemes No’s 1 and 2 894 768 Pension obligation relating to certain overseas schemes (34) (34) Deferred tax (268) (230)
The principal assumptions used in these updated valuations were as follows: % aaaaaffffffffffffffffffffffffff
The assets of the Group’s defined benefit schemes and the expected rates of returns are summarised as follows: Expected long-term rate of Fair value return at 31 at 31 December December £m % pa aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
The following amounts at 31 December 2001 were measured in accordance with the requirements of FRS 17: £m aaaaaffffffffffffffffffffffffff
Net assets including net pension asset 10,524afffffffffffffffffffffffffff Profit and loss reserve excluding net pension asset 7,455 Net pension asset 356 aaaaaffffffffffffffffffffffffff
Commitments arising out of sale and option to resell transactions – 3 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 53,342 42,589afffffffffffffffffffffffffff afffffffffffffffffffffffffff 45 Pension and other post-retirement benefits (continued)
Under the terms of the transfer of the Scottish Widows’ business, a separate memorandum account was created within the With Profits Fund called the Additional Account. This Account had a value at 31 December 2001 of approximately £1.7 billion, and is available to meet any additional costs of providing guaranteed benefits on transferred policies, including guaranteed annuity option policies. The assets allocated to the Additional Account include certain hedge assets, to provide protection to the With Profits Fund against the consequences of a future fall in interest rates.
Exchange rate contracts: Interest rate contracts: Equity contracts: Total: Exchange rate contracts: Interest rate contracts: Equity contracts: Total: The notional principal amount does not represent the Group’s real exposure to credit risk, which is limited to the current cost of replacing contracts at current market rates should the counterparties default.
Exchange rate contracts: Spot, forwards and futures 146 3 1 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 216 12 2afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Interest rate contracts: Interest rate swaps 2,919 164 68 Forward rate agreements 62 – –
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,600 96 35afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Effect of netting – –
Total liabilities 126,196 7,433 2,003 (1,070) 7,133 27,149 21,306 190,150afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
As at 31 December 2000* £m £m £m £m £m £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Assets: Treasury bills and other eligible bills 534 40 46 9 1 – 1,079 1,709 Loans and advances to banks 13,034 1,184 392 112 191 185 192 15,290 Loans and advances to customers 69,150 4,206 6,109 30,673 5,542 (1,378) 130 114,432 Debt securities and equity shares 2,497 475 464 1,202 1,747 51 8,416 14,852 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Total liabilities 112,601 8,522 3,620 (1,935) 4,833 25,775 14,612 168,028afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
The disclosures in this note cover all on-balance sheet financial instruments; fair values of all derivative instruments are disclosed in note 47a).
Fair values have not been calculated for sundry debtors and creditors in the trading book.
The net losses arising in 2000 and earlier years and recognised in 2001 amounted to £88 million. Net losses of £403 million arose in 2001 but were not recognised in the year.
LLOYDS TSB GROUP 83 notes to the accounts 47 Derivatives and other financial instruments (continued)
Net increase in loans and advances (9,340) (6,350) Net increase in investments other than investment securities (5,664) (355) Net increase in other assets (327) (124) Net increase (decrease) in deposits by banks 7,689 (2,794) Net increase in customer accounts 7,525 7,469 Net increase in debt securities in issue 6,557 4,738 Net increase in other liabilities 109 185 Net increase in items in course of collection/transmission (17) (126) Other non-cash movements 1 176 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
At 31 December 960 515affffffffffffffffffffffff afffffffffffffffffffffffffff Subordinated liabilities and finance leases £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Effect of foreign exchange movements (8) 120 Cash inflow from financing 155 897 Capital repayments (20) (4) Adjustments on acquisition – 23 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Cash consideration paid (see f) 1 5,110 Payments to former members of Scottish Widows Fund and Life Assurance Society acquired during 2000 179 –
In accordance with generally accepted accounting practice amongst listed insurance companies in the UK, the results of the Group’s life and pensions business have been separately analysed between an operating profit, which includes investment earnings calculated using longer-term investment rates of return, and a profit before tax, separately identifying the short-term fluctuations in investment returns (page 32).
UK Retail Financial Services 3,189 3,090 Wholesale Markets 937 746 International Banking 444 477 Central group items (108) (118)
Business as usual operating profit 4,462 4,195 Short-term fluctuations in investment returns (648) (94) Exceptional restructuring costs (217) (188) Abbey National offer costs (16) – Profit on sale of Lloyds TSB Asset Management S.A. 39 –
Pension provisions (70) (100) Changes in economic assumptions – 127 Stakeholder pension related charge – (80)
Statutory profit before tax 3,550 3,860asfffffffs asfffffffs profit before tax by main businesses presentation of results 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
Substantial shareholdings No notification has been received that anyone has an interest in 3% or more of the nominal value of the issued share capital.
Share price information In addition to information published in the financial pages of the press, the latest price of Lloyds TSB shares on the London Stock Exchange can be obtained by telephoning 0906 8771515. These telephone calls are charged at 60p per minute, including VAT.
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 102861258. Telephone (1) 888 BNY ADRS (US toll free), international callers (1) 610 312 5315. Email Shareowner–svcs@bankofny.com
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