Total capital ratio 11.3 per cent, tier 1 capital ratio 9.5 per cent.
Record levels of new acquisition finance deals and commitments were achieved in 2003
We offer RouteMap, a unique business development programme, to our business customers
In order to provide a clearer representation of the underlying performance, the results of the Lloyds TSB Group’s life and pensions and general insurance businesses include investment earnings calculated using longer-term rates of return and, in the life and pensions business, annual management charges based on unsmoothed fund values. Management separately analyse the difference between these normalised earnings and the actual return (‘the investment variance’) together with the impact of changes in the economic assumptions used in the embedded value calculation.
The Lloyds TSB Group’s capital management policy is focused on optimising value for shareholders. There is a clear focus on delivering organic growth and expected capital retentions are sufficient to support planned levels of growth. However, we also wish to maintain the flexibility to make value enhancing ‘in market’ acquisitions such as the recent acquisition of the Goldfish credit card and personal loan businesses, asset finance businesses and Chartered Trust. At this stage, therefore, the board has decided not to implement a share buyback programme but will, of course, continue to keep all options for the utilisation of capital under review.
Our people are the key to our success. To support our objective to become a consistently high performance organisation, every one of our staff needs to know what they can do to be more successful. Our staff have played a very important role in the implementation of many positive changes during 2003, and I thank them for their continuing support. During 2003 we have made great strides in embedding, via a balanced scorecard approach to performance management, greater clarity and accountability for performance in each business and, in doing so, have devolved greater decision making and responsibility from the Group centre to our managers nearer to the customer.
In May 2003, we welcomed Wolfgang Berndt and Angela Knight to the board as non-executive directors. We are also pleased that Helen Weir will join us on 26 April 2004 as group finance director. Two executive directors, Mike Ross and Philip Hampton, left the board in September 2003 and January 2004 respectively. Lord Selborne, a non-executive director, will be leaving the board at the annual general meeting. We thank them all for their contribution to the Group.
The Group has over 9 million personal lines general insurance policies in force
Lloyds TSB Group’s headline results in 2003 showed a 66 per cent rise in profit before tax to £4,348 million, compared to £2,618 million in 2002. This increase does not appropriately reflect our performance, as it was, in large part, the result of the strategic repositioning of our business portfolio and the greater stability in global financial markets. Excluding the profit on the sale of businesses, investment variance and changes in economic assumptions, the Lloyds TSB Group’s profit before tax was down 4 per cent, or £126 million, to £3,380 million. On the same basis, profit before tax increased by 3 per cent in the second half of 2003, compared to the first half of the year, supported by improvements in each of the main business units.
In particular, the reduction of £131 million in the Lloyds TSB Group’s pension scheme related income, and the introduction of the Competition Commission’s remedies for small and medium-sized enterprises which reduced profit before tax by £174 million in 2003.
Whilst it is important to recognise that these are ongoing parts of the business, the year-on-year comparison excluding these factors shows earnings growth, with a modest income uplift and continued tight control over expenses. Growth in income was supported by good quality growth in customer lending and deposits which, excluding the impact of disposals, grew by 10 per cent and 6 per cent respectively. The rate of decline in the net interest margin has slowed, despite intense competition within the UK financial services market, as we improved the mix of assets. The Group net interest margin in 2003 was 3.04 per cent, compared with 3.20 per cent in 2002, and we continue to budget for further gradual product margin erosion.
Our key financial measures of performance are economic profit growth and return on economic equity. During 2003, the Lloyds TSB Group delivered an economic profit increase of 4 per cent and maintained a high post-tax return on equity, excluding disposal gains, investment variance and changes in economic assumptions at 27.4 per cent.
The Lloyds TSB Group’s principal focus is on growth from within the franchise. Our objective is to build valuable long-term relationships with customers in both the retail and corporate markets. We will, however, continue to review opportunities for ‘in-market’ purchases, such as the successful acquisition of Goldfish. The Lloyds TSB Group’s capital position has strengthened considerably during 2003, providing the capital flexibility to make value creating acquisitions to support this focus on organic growth.
In Retail Banking, current and savings account deposits increased by 10 per cent
Net new mortgage lending in 2003 was a record £8.3 billion
Even after absorbing the £174 million reduction in income as a result of the Competition Commission’s SME ruling and excluding the £865 million profit on sale of businesses, profit before tax in Wholesale and International Banking grew 5 per cent during 2003.
During 2003 we have made good progress both strategically and financially. We have brought a sharper focus on maintaining and building profitability and we are beginning to deliver growth in our substantial retail and corporate customer franchises. We remain confident of delivering further improved performance by the second half of 2004.
Our customers can access and manage their accounts online in real-time, 365 days a year
All the evidence shows that these policies and practices, more fully described in our corporate social responsibility report, The Community & our Business, are fundamental to creating employee motivation and performance, customer satisfaction and loyalty, community endorsement and appreciation, and supplier commitment. And all, of course, lead directly to long-term value creation for shareholders.
Strategy of Lloyds TSB Group The governing objective of Lloyds TSB Group is to maximise shareholder value over time. In an environment of increasing competition and empowered customers, Lloyds TSB Group believes that this shareholder value objective can best be achieved by: • focusing on markets where we can build and sustain competitive advantage,
• developing business strategies for those markets which are founded on being profitably different in the way we create customer value, and
Lloyds TSB Group continues to focus on building competitive advantage in its core markets by seeking opportunities to consolidate its position in businesses where it is already strong through a combination of organic growth and acquisitions and by divesting businesses in markets where it is not a leader and cannot aspire reasonably to leadership. The acquisition of Scottish Widows in March 2000 has greatly enhanced Lloyds TSB Group’s market position in the life assurance and investment markets. Whilst these markets have been hit by weak share prices in the recent past, in the longer term they are expected to exhibit strong demand growth driven by demographics and regulation. Within Asset Finance, Lloyds TSB Group has acquired Chartered Trust, First National Vehicle Holdings, Abbey National Vehicle Finance and the Dutton-Forshaw Group to enhance its leading positions in the UK point of sale motor finance and contract hire markets. Lloyds TSB Group has recently divested its businesses in New Zealand, Brazil and France which were markets in which Lloyds TSB Group did not expect to be able to build and sustain competitive advantage.
Telephone banking. Telephone banking continues to grow and Lloyds TSB Group provides one of the largest telephony services in Europe, in terms of customer numbers. At the end of 2003, some 4.1 million customers had registered to use the services of PhoneBank and the automated voice response service PhoneBank Express. Lloyds TSB Group’s telephone banking contact centres handled some 59 million calls during 2003.
Insurance and Investments offers life assurance, pensions and investment products, general insurance and fund management services. The operating profit, calculated as explained under ‘Operating and financial review and prospects – Line of business information – Summary’, of Insurance and Investments in
Other life and pensions products are generally written from the Non-Participating sub-fund. Examples include unit-linked policies, annuities, term assurances and health insurance (under which a predetermined amount of benefit is payable in the event of an insured event such as death). The benefits provided by such linked policies are wholly or partly determined by reference to a specific portfolio of assets known as unit-linked funds.
General Insurance. Lloyds TSB General Insurance provides general insurance through the retail branches of Lloyds TSB Bank and Cheltenham & Gloucester, and through a direct telephone operation and the internet. Lloyds TSB General Insurance is a market leader in the distribution of household insurance in the UK.
Management and resources Lloyds TSB Group recognises that it will create value for its shareholders if it creates value for its customers. Its constant aim is to meet the rapidly changing needs and expectations of its customers. Lloyds TSB Group believes that success depends upon service, consistency and commitment. Nothing is more important to Lloyds TSB Group’s business than maintaining the trust and confidence of its customers and Lloyds TSB Group aims, wherever possible, to maintain long-term relationships with its customers.
Competitive environment Lloyds TSB Group operates in a financial services world that is experiencing consolidation at national and, to a lesser extent, international levels. The last few years have seen the beginnings of pan-European consolidation and considerable consolidation within the US.
Lloyds TSB Group’s key markets are in the UK, in both the retail and corporate, commercial and business banking sectors, where the markets for basic financial and banking services are relatively mature. Retail banking markets have shown strong rates of growth in recent years, notably in consumer borrowing and mortgages, but the resultant high rates of consumer indebtedness are expected to restrain future growth. The markets for life and pensions and general insurance products are expected to show strong rates of growth in a number of key areas, although stock market weakness has depressed demand for some equity-based products in the recent past, and a considerable amount of uncertainty exists about the impact of regulatory change.
In addition to the challenging competitive environment, the UK financial services industry is characterised by recent government intervention and regulation. Lloyds TSB Group is currently facing over 120 potential legislative issues which may have an impact on its business, over half of which emanate from Europe as part of the Financial Services Action Plan or in the shape of EU social legislation. Many of the reviews instigated by the UK government into the financial services sector have been against a backdrop of increased consumerism, driven by support for open competition and a fair deal for the consumer.
As announced by the government in November 2003, the OFT is also reviewing the impact of the Financial Services and Markets Act 2000 on competition in UK financial services.
Other recent reviews into the financial services sector include: • The Sandler Review into the UK’s long-term retail savings industry which was commissioned to identify structural flaws in the financial services industry which might prevent customers from saving. The report’s core recommendation is the introduction of simple regulated products with capped charges, restrictions on investment profile and the ability to exit on reasonable terms.
Lloyds TSB Group has always supported the principle of competition and agrees with the importance of building consumer confidence in financial services. Lloyds TSB Group has concerns about the introduction of price controls, which would be a barrier to entry and believes that voluntary codes, rather than statutory regulation, are in the best interests of consumers and competition.
Operational risks are present in Lloyds TSB Group’s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, documentation, people and systems or from external events. Lloyds TSB Group’s businesses are dependent on their ability to process accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Lloyds TSB Group’s systems and processes are designed to ensure that the operational risks associated with its activities are appropriately controlled, but Lloyds TSB Group realises that any weakness in these systems could have a negative impact on its results of operations during the affected period. See ‘Operating and financial review and prospects – Operations risk’ and ‘Operating and financial review and prospects – Legal and regulatory risk’.
Lloyds TSB Group’s businesses are subject to substantial regulation, regulatory and governmental oversight. Any significant adverse regulatory developments or changes in government policy could have a negative impact on Lloyds TSB Group’s results of operations.
Lloyds TSB Group conducts its businesses subject to ongoing regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies, voluntary codes of practice and interpretations in the UK and the other markets where it operates. Future changes in regulation, fiscal or other policies are unpredictable and beyond the control of Lloyds TSB Group. For additional information, see ‘Operating and financial review and prospects – Supervision and regulation’.
The market for UK financial services and the other markets within which Lloyds TSB Group operates are highly competitive, and management expects such competition to intensify in response to consumer demand, technological changes, the impact of consolidation, regulatory actions and other factors, which could result in a reduction in profit margins. Lloyds TSB Group’s ability to generate an appropriate return for its shareholders depends significantly upon the competitive environment and management’s response to it. See ‘Description of business – Competitive environment’.
The results discussed below are not necessarily indicative of Lloyds TSB Group’s results in future periods. The following information contains certain forward looking statements. For a discussion of certain cautionary statements relating to forward looking statements, see ‘Forward looking statements’.
The following discussion is based on and should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report. For a discussion of the accounting policies used in the preparation of the financial statements, see ‘Accounting policies’ in note 1 to the financial statements. The financial statements are prepared in accordance with UK GAAP, which varies in certain significant respects from US GAAP. A discussion of such differences and a reconciliation of certain UK GAAP amounts to US GAAP is included in note 50 to the financial statements.
During 2003 the UK economy has showed signs of recovery; manufacturing output has been on a gentle upward trend resulting in an increase in business investment spending and the service sector has continued to grow steadily, however liabilities remain high relative to income. Low interest rates have reduced the burden of repayments resulting in a lower level of corporate failures, although problems have remained in specific sectors. Interest rates were increased towards the end of 2003 and the improving economic conditions may result in further increases in 2004, although this is expected to be gradual and therefore should not have a significant effect upon the number of companies failing. Consumer spending has continued to be the principal driver of the economy although spending trends have slowed as a result of weaker growth in disposable incomes and a levelling-off of improvements in the unemployment rate. Unsecured lending has remained at high levels and despite a slowdown in the housing market, mortgage lending has accelerated further as a result of an increase in equity withdrawal. The effect has been a further increase in levels of personal indebtedness which has resulted in higher numbers of personal bankruptcies; further increases in interest rates may cause this trend to continue.
Against this economic backdrop, within the UK banking businesses of the Lloyds TSB Group there has been continued growth in consumer lending and mortgage balances; lending to the corporate and commercial sectors has remained largely unchanged. The implementation of the Competition Commission’s remedies in respect of the Lloyds TSB Group’s SME business resulted in a reduction in the net interest margin although the effect on net interest income was more than offset by volume growth. There has been some deterioration in the arrears position within the personal lending portfolio which has been a contributory factor to a significant increase in the bad debt charge in this area of the business although there was a reduction in the charge against mortgages and corporate and commercial portfolios.
The Lloyds TSB Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases where the original sales processes are found to have been deficient. The ultimate cost is inherently uncertain and in determining the level of provisions required it is necessary for management to exercise significant judgment. The principal assumptions underlying the provisions relate to the number of cases requiring redress and the estimated average cost of redress per case; these will be affected by external factors beyond the control of management, such as regulatory actions and the performance of the financial markets. Therefore over time it is possible that adjustments will be necessary to the level of provisions held.
Lloyds TSB Group reviews the goodwill arising on the acquisition of subsidiary undertakings when events or changes in economic circumstances indicate that impairment may have taken place and at the end of the first full year after an acquisition. In addition, since the goodwill arising on the acquisition of Scottish Widows is considered to have an indefinite useful life, because of the strength of the brand and the position of the business as one of the leading providers of life, pensions, unit trust and fund management products, and is therefore not amortised, the Lloyds TSB Group is required under UK GAAP to perform an annual review to determine whether an impairment has occurred.
The impairment review is performed by projecting future cash flows, excluding finance and tax, based upon budgets and plans and making appropriate assumptions about rates of growth and discounting these using a rate approximating to the weighted average cost of capital after making adjustment for the risk inherent in the cash flows. If the present value of the projected cash flows were to be materially less than the carrying value of the underlying net assets and related goodwill an impairment would have occurred and a charge would be made to the profit and loss account. This calculation requires the exercise of significant judgement by management; if the estimates made prove to be incorrect or changes in Scottish Widows’ performance affect the amount and timing of future cash flows, the goodwill may become impaired in future periods.
The charge for bad and doubtful debts was 8 per cent lower at £950 million compared with £1,029 million in 2002. In UK Retail Banking and Mortgages the provisions charge increased by £98 million, or 20 per cent, to £594 million, mainly as a result of continued asset growth in the personal loan and credit card portfolios, however there was some deterioration in the arrears position and an increase in fraud related losses in the personal loan portfolio. In Wholesale and International Banking the provisions charge decreased by £171 million to £369 million. In Wholesale, provisions against the corporate lending portfolio decreased by £86 million as a small number of large provisions made in 2002 were not repeated. Within International Banking provisions fell by £93 million mainly as a result of lower provisions being required against the Lloyds TSB Group’s exposures in Argentina.
Amounts written off fixed asset investments decreased by £43 million to £44 million in 2003. The charge in 2002 included £30 million in respect of Argentine emerging market bonds which were disposed of in 2003, and there was a reduction in the charge within the wholesale businesses.
In 2001, a profit of £39 million arose on the sale of the Lloyds TSB Group’s Brazilian fund management and private banking businesses.
The net interest margin fell by 16 basis points to 3.04 per cent from 3.20 per cent in 2002, reducing net interest income by £259 million. The implementation of the Competition Commission’s SME report remedies caused a reduction in the Group net interest margin of 10 basis points costing £169 million. There was some margin erosion within the mortgages business and it was further reduced by both the continuing change in the composition of the lending portfolio towards finer margin products and the disposal of the high yielding emerging markets investments; there was also a lower contribution from interest-free liabilities, caused by lower average UK interest rates in 2003. Favourable exchange rate movements, principally in New Zealand, increased net interest income by £59 million.
Domestic net interest income increased by £131 million, or 3 per cent, to £4,556 million; this represents 87 per cent of consolidated net interest income. Average interest-earning assets increased by £11,798 million, or 9 per cent, to £146,700 million, adding £360 million to net interest income. Within UK Retail Banking and Mortgages, balances increased by £9,590 million largely as a result of growth in the consumer lending and mortgages portfolios, helped by the acquisition during the year of the credit card and personal loan portfolios of Goldfish Bank. In Wholesale balances increased by £1,558 million mainly due to growth in asset finance balances and the full year effect of structured finance transactions entered into during 2002.
Lloyds TSB Group net interest income increased by £249 million, or 5 per cent, to £5,171 million, representing 58 per cent of total income compared to 55 per cent in 2001. Average interest-earning assets increased by £16,873 million, or 12 per cent, to £161,818 million, adding £655 million to net interest income. Within UK Retail Banking and Mortgages, growth lead to increases of £2,256 million in average personal lending and credit card balances and £4,481 million in average mortgage balances. Within Wholesale and International Banking, average interest-earning assets increased by £10,347 million, reflecting growth in corporate and money market lending and increased levels of structured finance transactions. Overseas, growth in balances in New Zealand was partly offset by reductions in Latin America as exchange rates weakened and the Lloyds TSB Group’s exposures to Brazil and Argentina reduced.
Fees and commissions receivable increased by £46 million mainly as a result of good growth in UK current account fees and improved income from credit and debit card transactions, which has more than offset a reduction in insurance broking commissions. UK current account fee income rose by £44 million, reflecting increased fee income from added value current accounts due to both a growth in the number of accounts and higher monthly charges; returned cheque fees also increased as the number of returned items has risen.
Fees and commissions payable were £77 million higher compared to last year as a result of a £36 million increase in commissions paid to motor dealers by the asset finance operation, reflecting growth in the levels of new business, and higher costs relating to legal expenses and valuation fee incentives supporting the strong mortgage growth. Fees payable in respect of the credit and debit card business also increased, mainly reflecting volume growth and the cost of customer incentives, and there was also an increase in fees payable in connection with the Lloyds TSB Group’s added value accounts as volumes have increased.
Fees and commissions receivable increased by £131 million, or 4 per cent, to £3,053 million, mainly due to increases in income from insurance broking and card services. Insurance broking commission income increased by £119 million, with continued strong growth in creditor insurance products, reflecting the increased lending volumes in the branch network, and higher levels of retrospective commission income. Income from credit and debit card services increased by £82 million, mainly as a result of higher merchant service charges and fees. UK current account fee income rose by £6 million, reversing the downward trend experienced in recent years; a £37 million increase in fee income from added value current accounts more than offset a reduction in service charges following their partial withdrawal during 2001. This more than offset a reduction in other UK fees and commissions of £57 million, or 5 per cent, from £1,220 million to £1,163 million following a £59 million reduction in unit trust and asset management fees, as the continued fall in the level of stock markets during 2002 have reduced the level of funds under management and significantly reduced customer demand for equity-based products. There was also a fall in the level of recharges to Goldfish Bank, Lloyds TSB Group’s joint venture with Centrica plc, which were down £10 million, and a reduction of £6 million in income from the company registration business, as the exceptionally high levels of corporate transactions in 2001 were not repeated.
Income from long-term assurance business decreased by £264 million however, excluding the effect of changes in the economic assumptions used in the embedded value calculation, which in 2002 resulted in profits of £55 million, and the impact of a £135 million increase in provisions for redress to past purchasers of endowment and pension products, income was £184 million lower. Falling stock markets increased the losses from the investment portfolio supporting the long-term assurance funds by £36 million and reduced the capitalised value of annual management charges by a further £66 million. The expected return from existing business was £36 million lower, reflecting the lower value of in-force business at the start of the year as a result of the reduction in stock market levels during 2001. There was also a reduction of £55 million in benefits from experience variances and actuarial assumption changes, largely reflecting the implementation of revised actuarial mortality assumptions which resulted in a one-off cost of £57 million. Despite the difficult market conditions sales of life and pensions products grew, with an improved performance in the more profitable products. This resulted in a £9 million or 7 per cent increase in new business contribution.
Administrative expenses increased by £264 million to £4,476 million, largely reflecting the £200 million provision for customer redress. Staff costs were £71 million higher at £2,588 million. Salaries were £43 million, or 2 per cent, higher as the impact of the annual pay review and the acquisitions made during 2002 have more than offset the effect of an underlying reduction in staff numbers of 1,209 (full time equivalent); the cost of bonuses and other performance related payments remained broadly unchanged. National Insurance costs grew by £9 million reflecting the higher overall salary bill and the increase in employers’ contribution rates which took effect in April 2003. Pension costs increased by £35 million, or 11 per cent, reflecting a growth in the current service cost as interest rates have fallen and an increase in the level of cash contributions being made into defined contribution schemes in the UK. Other staff costs grew by £32 million because of increased use of agency and other contract staff to support a number of major IT development projects and a significant increase in training costs, particularly for staff working in the branch network. These factors have been partly offset by a £48 million reduction in severance and related costs following the completion of a number of major restructuring initiatives.
Other expenses increased by £192 million, largely as a result of the £200 million provision for customer redress and related costs in respect of past sales of mortgage endowment and long-term savings products, including the Extra Income & Growth Plan. Advertising expenditure increased by £25 million mainly reflecting promotional expenditure incurred in connection with the credit card and mortgage businesses and also wider use of television advertising during 2003; professional fees increased by £10 million due to greater use of external consultants on a number of major projects. This has been offset by a £43 million reduction in other expenses. There has been a reduction in the processing charges paid to iPSL, Lloyds TSB Group’s clearings joint venture, and reduced credit and debit card fraud losses.
Associated undertakings and joint ventures (7) 2 1 * Figures for 2002 and 2001 have been restated to reflect changes in accounting policy adopted in 2003; for further details see note 1 to the financial statements.
Economic profit In pursuit of our aim to maximise shareholder value over time, management has for the last eleven years used a system of value based management as a framework to identify and measure value creation. Management uses economic profit, a non-GAAP measure, as a measure of performance, and believes that it provides important information for investors, because it captures both growth in investment and return; profit before tax is the comparable GAAP measure used by management. Lloyds TSB Group defines economic profit as the earnings on the equity invested in the business less a notional charge for the cost of the equity invested in that business.
The table below summarises Lloyds TSB Group’s calculation of economic profit for the periods indicated.
Comparative figures have been restated to reflect a change in accounting policy following the issue of Urgent Issues Task Force Abstract 37 ‘Purchases and sales of own shares’ and Urgent Issues Task Force Abstract 38 ‘Accounting for ESOP trusts’, the reclassification of Business Banking earnings from UK Retail Banking and Mortgages to Wholesale and International Banking, and changes in internal transfer pricing arrangements. The Lloyds TSB Group has also changed its accounting policy relating to the deferral of certain expenses incurred in connection with the acquisition of new asset finance and unit trust business. These costs are now charged to the profit and loss account as incurred, rather than over the expected life of the related transactions. For further details of these changes in accounting policy see note 1 to the financial statements.
Total assets (year-end) £90,272m £79,629m £71,707m Total risk-weighted assets (year-end) £53,846m £48,313m £42,390m 2003 compared with 2002
Operating expenses were £197 million, or 9 per cent higher, at £2,409 million compared to £2,212 million in 2002 as a result of the £200 million provision for customer redress; if this is excluded operating expenses fell by £3 million. There was an increase in salary and pension costs, largely reflecting the effects of the annual pay review and falling interest rates on the cost of providing post-retirement benefits, and the increased cost of agency staff and other contractors which have been offset to an extent by lower severance and related costs following the completion of a number of major restructuring initiatives. Advertising expenditure also increased particularly in the credit card and mortgage businesses and there was wider use of TV advertising; however there was a reduction in the level of operational losses and lower clearings costs. The efficiency ratio was largely unchanged.
Lloyds TSB Group’s share of the results of its joint venture operations was a loss of £11 million, little changed from 2001.
Insurance broking income fell by £43 million reflecting lower levels of creditor insurance and an increased allowance for the clawback of commissions by the insurance underwriters due to the early settlement of loans. There was also a £27 million reduction in income from unit trust and asset management activities as a result of lower average fund values and the continued weakness of the long-term savings market. This has been partly offset by a £49 million increase in general insurance premiums as income from the sale of home contents insurance has improved, helped by the buoyant housing market.
Life, pensions and unit trusts: – Provisions for customer redress (100) (205) (70)
Pre-tax profit from Scottish Widows Investment Partnership (‘SWIP’) improved to £2 million reflecting an increase in new business and a lower level of investment expenditure.
The operating profit from life, pensions and unit trusts decreased by £286 million, or 37 per cent, from £763 million in 2001 to £477 million in 2002. Operating profit at Scottish Widows was £53 million lower at £590 million, compared to £643 million in 2001. Life and pensions new business income increased by £40 million, or 11 per cent, to £398 million, following a 7 per cent increase in weighted sales and a change in mix towards more profitable products. Investment earnings were £27 million lower, reflecting reduced asset values at the start of 2002, and life and pensions distribution costs rose £28 million, in line with sales. Unit trust profits were £36 million lower reflecting lower sales and reduced management income, both as a result of adverse stock market conditions.
The operating profit from the general insurance businesses increased by £102 million or 16 per cent, to £753 million from £651 million in 2001. Profit from the broking business was £118 million higher as a result of increases in commission income, particularly in respect of creditor products, and higher levels of retrospective commissions. However, there was a £16 million reduction in operating profits from the underwriting business as a result of an increase in weather related claims following floods and storms early in 2002 and increased distribution and administration expenses, as a result of higher transaction volumes.
SWIP achieved a break-even result, compared to a profit of £10 million in 2001, the reduction in profitability being driven primarily by lower stock market levels and significant investment in new infrastructure to support future business growth. At the end of 2002 SWIP had some £70 billion of funds under management compared to £78 billion at the end of 2001; the decline reflected the continued fall in stock market levels over 2002.
In 2003, there was a positive investment variance of £125 million (2002: negative £943 million, 2001: negative £860 million) reflecting the recovery in stock market values during 2003; the FTSE All-Share index increased by 17 per cent in 2003 compared with a 24 per cent fall in 2002. The benefit of improving stock markets was limited by the lower equities content in the long-term assurance funds and a reduction in the values of fixed interest investments.
Regular premium sales amounted to £337.9 million, or 56 per cent of total life and pensions weighted sales, compared to £286.3 million, or 48 per cent of the total in 2002, an increase of £51.6 million. Weighted sales of regular premium pension products increased by £24.0 million as improved sales through the IFA channel, reflecting both Scottish Widows’ marketing initiatives and investment in this channel, more than offset a reduction in sales through the branch network which have been affected by weak demand. Sales of regular premium life products increased by £27.6 million mainly as a result of higher sales of term assurance and savings products; sales of mortgage-related products providing life cover on repayment mortgages continued to improve, reflecting the buoyant housing market and the resulting strong growth in mortgage lending.
Sales of single premium products fell by £450.7 million, or 15 per cent, from £3,089.0 million in 2002 to £2,638.3 million in 2003. Single premium life product sales decreased by £685.1 million as a result of further reductions in sales of investment bonds due to low stock market values and adverse media comment and the closure of an investment trust in the first half of 2003 due to a lack of suitable quality investment opportunities. This was partly offset by strong growth in single premium pension business; sales rose by £218.9 million or 21 per cent as a result of the improved performance of stakeholder pension products. Sales of single premium annuity business increased by £15.5 million, or 3 per cent, following pricing changes in 2002.
Weighted sales of life, pensions and unit trust products were £733.4 million compared to £767.6 million in 2002. By distribution channel, sales through the branch network fell by £71.8 million, or 20 per cent, to £278.8 million mainly reflecting the significant reductions during 2003 in sales of single premium life and pensions products and unit trusts. Sales of regular premium products were broadly unchanged as initiatives within the branch network resulted in an increase in term assurance sales, which offset a fall in sales of pension products. Branch network sales during 2003 were affected by significant restructuring activity in the personal sector regulated sales force, to reflect lower levels of new business and improved cost efficiency, which has resulted in a reduction in its size of almost one third. Direct sales decreased by £6.3 million as a result of lower single premium product sales in difficult market conditions. However, sales through the IFA channel improved by £56.2 million, or 17 per cent, to £391.6 million with particularly strong growth in regular premium products reflecting the benefits of the investment made into this channel in 2002 and earlier. In the 2003 IFA Service Awards, Scottish Widows achieved a five-star rating in all categories.
Existing business profits fell by £60 million, or 41 per cent, to £85 million from £145 million in 2002. Within the expected return a reduction of £39 million reflecting a reduction in the value of in-force business and a lower discount rate was offset by lower restructuring costs in 2003. There was a reduction of £168 million in the benefits from changes in actuarial assumptions and experience variances. It is common practice for life assurance companies to regularly review the detailed assumptions that support the embedded value calculations having regard to recent experience. In 2003 there was a charge of £75 million in respect of actuarial assumption changes compared to a credit of £78 million in 2002, reflecting the capitalisation of pension scheme contributions, following their recommencement in 2003, within the Lloyds TSB Group’s embedded value calculations and benefits in 2002 from revisions to the assumed shareholder tax rate and the valuation of unmodelled products which have not been repeated. Experience variances were £15 million worse as a result of a deterioration in lapse and persistency rates. These factors have been partly offset by a £105 million reduction in the level of additional provisions required for redress payments to customers.
Regular premium sales, at £286.3 million, were £4.3 million, or 2 per cent, higher than 2001. Regular premium mortgage-related product sales, providing life cover on repayment mortgages, were £10.3 million higher as a result of the buoyant housing market in the UK and successful cross-selling to mortgage customers in the branch network. Sales of non-mortgage related life products were also higher reflecting strong sales of term assurance products following a number of sales initiatives in the branch network. These increases, however, were partly offset by a £20.1 million reduction in sales of regular premium pension products. Sales of the stakeholder pension product had been strong since the launch in April 2001, as the lower charges on this product continued to make it attractive; however this growth was more than offset by reduced sales of the older pension products, reflecting the less attractive charging structures and adverse stock market conditions.
Overall sales of unit trust products were £319.5 million lower. There was a large fall in sales of equity-based Individual Savings Accounts, as a result of the continuing volatility in global stock markets throughout 2002.
Weighted sales of life and pensions and unit trust products were £767.6 million compared to £754.7 million in 2001. By distribution channel, weighted sales through the branch network have fallen by 7 per cent, with decreases in sales of life and pension products, particularly investment bond products which had been affected by low stock market levels and adverse press comment, and lower unit trust sales as a result of the depressed market conditions. Weighted sales by independent financial advisors increased by 24 per cent as a result of the strong sales of single premium stakeholder pensions and annuities products. Direct sales were down 22 per cent, partly a result of market conditions; in particular volumes of pension and annuity product sales have fallen with customers preferring to purchase these products from independent financial advisors.
Unit trust profits in 2002, at £3 million, were down significantly from £44 million in 2001. During 2002, unit trust income, before distribution costs, reduced by 36 per cent compared to 2001. This reduction reflects a fall in income from initial charges, following a 13 per cent fall in weighted sales, and a £32 million decrease in annual management fee income, as global stock market conditions have reduced the value of the funds managed. Unit trust distribution costs have fallen in line with the reduced sales.
The operating profit of the underwriting business at £219 million was £21 million, or 11 per cent, higher than in 2002. Premium income increased by £49 million, or 10 per cent, to £535 million as a result of continued strong growth in income from the sale of home insurance products which rose by £60 million. An increase in average sums assured has more than offset a decline in sales volumes, particularly through the IFA channel, as commission rates became uncompetitive; sales volumes started to improve in the final quarter of 2003 as commissions payable were increased. Creditor insurance premiums were £3 million lower and reinsurance premiums increased by £7 million due to increased rates in the reinsurance market and higher underwritten premiums.
General insurance claims were £7 million higher at £236 million compared to £229 million in 2002. The claims ratio fell from 45.7 per cent to 42.4 per cent reflecting the beneficial effect of generally mild weather conditions although this did cause an increase in subsidence related claims in the second half of 2003.
The operating profit from general insurance was £753 million in 2002, up £102 million or 16 per cent from £651 million in 2001. This comprised a profit of £198 million from general insurance underwriting and £555 million from broking activities.
Lloyds TSB Group’s Wholesale and International Banking business comprises banking, treasury, large value lease finance, long-term agricultural finance, share registration, venture capital, factoring and invoice discounting, and other related services for major UK and multinational companies, banks and financial institutions, and small and medium-sized UK businesses, and other forms of asset finance. It also includes banking and financial services overseas; following the disposal of Lloyds TSB Group’s operations in New Zealand these activities are now in three main areas (the Americas, Europe and Offshore Banking).
Total assets (period-end) £101,555m £117,066m £107,034m Total risk-weighted assets (period-end) £63,065m £73,000m £64,464m 2003 compared to 2002
Total income decreased by £3 million to £4,043 million. Net interest income fell by £71 million to £2,387 million. Within the Wholesale businesses net interest income fell by £74 million reflecting the implementation of the Competition Commission’s SME report remedies: the provision of interest-bearing current accounts to small business customers has caused the margin to fall by 24 basis points, reducing net interest income by £169 million. There was also lower income from treasury activities as the interest rate cut in the early part of the year and flattening of the yield curve reduced market opportunities. This more than offset the effects of strong growth within the asset finance operations which resulted in an increase in net interest income of £99 million; average asset finance balances increased by £991 million, mainly due to the continued demand for consumer credit in the UK and the margin widened by 48 basis points. There was also an increase in income from structured finance transactions following the growth in balances during 2002. In International Banking there was a modest increase in net interest income of £3 million. There was a £44 million improvement in net interest income from New Zealand as volume growth and favourable exchange rate movements have more than offset the effect of some margin erosion. In other areas, however, net interest income has fallen as balances have been reduced, particularly in Latin America, as the Lloyds TSB Group has sought to reduce its exposure to these economies.
Other income increased by £68 million, or 4 per cent, to £1,656 million as a result of a £109 million increase within Wholesale. This principally reflects the inclusion of income from the sale of cars by the Dutton-Forshaw Group following its acquisition in December 2002, increasing income by £51 million, and gains of £34 million on the sale of a number of leases by Lloyds TSB Leasing where the tax attributes could be used by the purchasers. There have also been increases in the level of gains realised on the sale of venture capital investments and fees from corporate, asset finance and factoring activity; however, this has been partly offset by a £36 million increase in commissions paid to motor dealers by the asset finance operation, reflecting the growth in levels of new business, and lower income from company registration activities. In International Banking, other income fell by £41 million mainly as a result of a £28 million reduction in profits from the sale and leaseback of premises. There was also a reduction in fund management fees, partly due to the disposal of the business in France, and lower income from Argentina as the level of activity has been reduced, which has more than offset improvements in Brazil and New Zealand, principally from treasury operations.
The provisions charge fell by £171 million to £369 million. The charge within Wholesale fell by £78 million as the level of new provisions required against corporate customers reduced. In 2002 provisions totalling some £100 million were made against large US exposures which have not been repeated to the same extent during 2003. In the asset finance business the provisions charge was largely unchanged despite strong lending growth during 2003, as the high level of voluntary terminations experienced in 2002 were not repeated during 2003. Within International Banking the charge fell by £93 million mainly as a result of a reduction of £79 million in the new provisions required against the Lloyds TSB Group’s exposures in Argentina as the economic conditions in that country have started to stabilise. There has also been a reduction in the charge in other Latin American operations as specific cases requiring provisions in 2002 have not been repeated.
Accrual for payment to Lloyds TSB Foundations (31) (33) (36) Other finance income 34 165 307 Pension scheme benefit augmentations – – (82) Earnings on surplus capital and the emerging markets debt investment portfolio (50) (105) (39) Abbey National offer costs – – (16) Central costs and other unallocated items (18) (23) (47)
The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly disabled and disadvantaged, to play a fuller role in society. The Foundations receive 1 per cent of the Lloyds TSB Group’s pre-tax profit after adjusting for gains and losses on the disposal of businesses and pre-tax minority interests, averaged over three years, instead of the dividend on their shareholdings. In 2003, the Group accrued £31 million for payment to the Lloyds TSB Foundations, a reduction of £2 million compared to 2002. Although there has been a recovery in profitability during 2003 after making adjustment for disposal gains, there has been a continued fall in the three year rolling average further reducing the amount payable. See note 41 to the financial statements.
Other finance income represents income from the expected return on the Group’s pension fund assets after a charge for the unwinding of the discount on the pension fund liabilities. The significant reduction in income in 2003 reflects the combined impact of a reduction in the expected return on lower pension scheme assets as a result of the continuing weakness in global equity markets, and increased pension fund liabilities at the beginning of the year.
The reduction in the charge in respect of the payment to the Lloyds TSB Foundations in 2002 reflected the continued fall in Lloyds TSB Group profits during the year.
Earnings on surplus capital and the emerging markets debt investment portfolio were £66 million lower due to increased interest expense following issues of subordinated debt during 2002 and a reduction in the level of surplus capital because of dividend payments and increased investment in the business units. Benefits realised in 2001 of £30 million from changes in interest rate hedging arrangements were not repeated.
Future accounting developments In common with other listed companies governed by the law of an EU member state, for financial years beginning on or after 1 January 2005 the Lloyds TSB Group will be required to prepare its financial statements in accordance with international accounting standards adopted at the European level (endorsed IASs or IFRSs). This requirement will therefore first be effective for the Lloyds TSB Group’s 2005 financial statements. A significant amount of work has already been performed to prepare for the transition to international accounting standards. Detailed analyses have been performed within each of the Lloyds TSB Group’s principal businesses to identify those areas where changes to existing accounting practice will be required and plans developed to make amendments to the systems and processes to address the revised requirements.
The international accounting standards likely to have the most significant effect upon the financial statements of the Lloyds TSB Group are IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’. Implementation of these standards will result in changes to the way in which many of the transactions entered into by the Lloyds TSB Group are accounted for and presented in the balance sheet. In particular, these standards will require a much wider use of fair values within the financial statements which is likely to result in greater volatility in both earnings and shareholders’ equity. Neither IAS 32 nor IAS 39 have yet been endorsed by the European Commission and the International Accounting Standards Board (‘IASB’) is still considering possible amendments to the standards; therefore their eventual content and timing of implementation remains uncertain.
Goodwill and intangible assets. Under US GAAP, following the full implementation of SFAS No. 142 in 2002, goodwill is no longer amortised through the profit and loss account. Goodwill continues to be amortised under UK GAAP, however the charge in the Lloyds TSB Group’s profit and loss account is relatively small since the directors have decided that it is not appropriate to amortise the goodwill that arose on the acquisition of Scottish Widows in 2000. In 2001 and earlier years, prior to the full implementation of SFAS No. 142, the US GAAP amortisation charge was significantly higher than under UK GAAP, since US GAAP then required the amortisation of the Scottish Widows goodwill balance and of the goodwill arising, under US GAAP, from the business combination of Lloyds Bank Plc and TSB Group plc in 1995. Under UK GAAP the combination of Lloyds Bank Plc and TSB Group plc was accounted for as a merger with no goodwill arising.
Total interest-earning assets of trading book 17,622 666 3.78 15,518 602 3.88 12,252 544 4.44
Average Interest Average Interest Average Interest balance expense Cost balance expense Cost balance expense Cost
Liabilities and shareholders’ equity Deposits by banks: Liabilities to banks under sale and repurchase agreements: Customer accounts: Liabilities to customers under sale and repurchase agreements: Debt securities in issue: Subordinated liabilities: Total interest-bearing liabilities of banking book 165,613 4,894 2.96 150,203 5,378 3.58 133,068 6,442 4.84 Total interest-bearing liabilities of trading book 17,622 666 3.78 15,518 602 3.88 12,252 544 4.44
Interest-free liabilities Minority interests and shareholders’ funds: Non-interest bearing customer accounts: Other interest-free liabilities: Percentage of liabilities applicable to foreign activities (%) 12.9 14.2 14.1
Approximately 85 per cent of the value of the balances are calculated on a daily basis with balances held by Lloyds TSB Group’s leasing and asset finance businesses averaged on a monthly basis. Management believes that the interest rate trends are substantially the same as they would be if all balances were averaged on the same basis.
Total interest receivable and similar income (336) 827 (1,163) (757) 1,007 (1,764)
The changing regulatory environment faced by Lloyds TSB Group businesses, and developments in best practice, prompted the Lloyds TSB Group during 2003 to review its risk governance structures to deliver more effective risk management. The process of embedding these changes continues. In particular, the review focused on the role of key risk committees, executive accountabilities for risk and the mechanisms by which the board and management carry out their oversight and control responsibilities.
Divisional risk officers provide oversight of risk management activity within each of the Lloyds TSB Group’s operating divisions. Reporting directly to the group executive directors responsible for the divisions, their day-to-day contact with business management, business operations and risk initiatives, provides an effective risk oversight mechanism. They meet regularly with the chief risk director to enable best practice to be shared and to provide a comprehensive and current perspective on material risks facing the Lloyds TSB Group.
The Lloyds TSB Group provides risk training to improve staff risk awareness and develop the risk culture in line with its EWRM goals.
The EWRM model strengthens the Lloyds TSB Group’s ability to identify and assess risks; aggregate risks and define the corporate risk appetite; develop solutions for reducing or transferring risk, where appropriate; and exploit risks to gain competitive advantage, thereby increasing shareholder value.
The Lloyds TSB Group has adopted a risk language in which all risks are classified by one or more of the following 11 risk drivers: Sub-risks have been developed for these high level risks to further refine the identification and classification of risk to enable risk events to be accurately categorised to facilitate analysis of root causes.
It is the Lloyds TSB Group’s policy for the board and senior management at both Lloyds TSB Group and business level to receive relevant, reliable and timely management information in line with business objectives to seek to ensure that activities are appropriately controlled, key risks are identified and monitored, decisions are implemented and regulatory obligations are met.
The Lloyds TSB Group’s approach to people management is to employ skilled, committed staff, working as a team for the benefit of customers and shareholders, who are given the opportunity to fulfil their potential; employ the highest ethical standards of behaviour and best practice management principles; and recruit on the basis of ability and competence.
Significant company mergers and acquisitions require specific approval by the board. In addition to the standard due diligence conducted during a merger or acquisition, Group Risk Management conducts an independent risk assessment of the target company and its proposed integration into the Lloyds TSB Group.
Portfolio analysis. With Group Risk Management, businesses identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed in terms of credit risk exposure. This entails the production and analysis of regular portfolio monitoring reports for review by Group Risk Management.
A number of tools, including Group-level credit policy where appropriate, are used to control the Lloyds TSB Group’s exposure to undue levels of credit risk: • High-level credit policies designed to ensure a balanced and managed approach to the identification and mitigation of credit risk.
The following table analyses the coverage of the allowance for loan losses by category of loans.
The following discussion consists of an analysis of credit risk elements by categories which reflect US lending and accounting practices. These differ from those employed in the UK. In particular: Suspended interest and non-performing lending
Total accruing loans against which specific provisions have been made 1,222 1,283 1,340 1,814 1,998
As at 31 December 2002 the countries with cross border outstandings of between 0.75 per cent and 1 per cent of assets, amounting to £5,080 million in total were Japan, the Netherlands and Belgium. As at 31 December 2001, the countries with cross border outstandings of between 0.75 per cent and 1 per cent of assets, amounting to £3,504 million in total were Japan and the Netherlands.
Trading value at risk (VaR) – VaR can be calculated using a number of different methodologies and at different confidence intervals. Lloyds TSB Group utilises more than one methodology for comparative purposes, thus avoiding undue reliance on a single measure.
Structural interest rate risk. In Lloyds TSB Group’s retail portfolios, including mortgages, and in Lloyds TSB Group’s capital funds, arises from the different repricing characteristics of Lloyds TSB Group’s banking assets and liabilities and is managed by the Group Balance Sheet Management department under the direction of the group asset and liability committee.
Interest rate risk arises from the mismatch between interest rate insensitive liabilities and interest rate sensitive assets, and between the differing contractual periods for which interest rates are fixed on interest rate sensitive assets and liabilities. Group Balance Sheet Management manages this risk centrally by offsetting against each other any matching interest rate sensitive assets and liabilities; acquiring new financial assets and liabilities as matching hedges against net balances of mismatched interest rate sensitive banking liabilities and assets, respectively; and acquiring new financial assets with interest rates contractually fixed for a range of periods up to five years as hedges for net balances of interest rate insensitive liabilities.
Lloyds TSB Group’s non-trading exposure is summarised in the form of an interest rate repricing table, as set out in note 47b to the financial statements. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. However, the table does not take into account the effect of interest rate options used by Lloyds TSB Group to hedge its exposure.
The risk of loss arising from the inherent characteristics, management or distribution of products or services, or from failure to meet or exceed customer expectations and competitor offerings. For the Lloyds TSB Group to achieve its objective to maximise value for shareholders over time, product life cycles must be effectively managed and new products developed to meet customer needs.
New product approval. The Lloyds TSB Group defines a new product as a new or amended product that introduces a significantly different risk profile at Lloyds TSB Group or business level. In line with defined policy, businesses provide Group Risk Management with details of new products at an early stage of product or service development to ensure compliance with the Lloyds TSB Group’s risk appetite and strategy. Businesses are required to demonstrate that new products meet clearly defined customer needs and that the sales process mitigates the risks of unsuitable sales.
Each reporting entity within the Lloyds TSB Group has a finance function which is responsible for the production of financial, management and regulatory information. It is the responsibility of Group Finance to produce consolidated information for use internally and to meet external regulatory and statutory reporting requirements. Group Finance requires businesses and reporting entities to follow common processes and reporting standards.
Businesses or reporting entities have formal month-end and quarter-end procedures in place for preparation of management and financial accounts respectively, review and formally approve management accounts at a determined level of detail, ensuring consistency with financial accounts and prepare forecasts and detailed annual budgets that are subject to formal review and approval. They are further required to implement measures to monitor performance at local level to identify significant fluctuations or unusual activity.
Service improvements are monitored by customer satisfaction surveys. The results of the research are fed into the Lloyds TSB Group’s CARE Index, which measures ongoing performance against five principal objectives: customer understanding; accessibility; responsibility; expertise; and overall service quality improvement.
Trends across all the CARE Index categories are monitored and fed into a programme of continuous customer service improvement. Lloyds TSB Group also provides its staff with clear Financial Services Authority compliant guidelines and processes for dealing with customer complaints.
The risk of financial loss or reputational damage arising from failing to comply with the laws, regulations or codes applicable to the financial services industry.
Group Compliance. All compliance personnel also have a reporting line to Group Compliance, which sets compliance standards across the Lloyds TSB Group and provides independent reporting and assessment to the board and business directors.
The group compliance director has access to the chairman, group chief executive and members of senior management.
At 31 December 2003, Lloyds TSB Group also had £5,959 million of undated long-term debt outstanding; there were no finance lease obligations outstanding.
Within Lloyds TSB Group’s insurance and investments businesses, the principal sources of liquidity are premiums received from policyholders, charges levied upon policyholders, investment income and the proceeds from the sale and maturity of investments. The investment policies followed by Lloyds
The FSA is responsible for the authorisation and supervision of those firms which are engaged in investment business as defined in the FSMA. As part of the authorisation process, the FSA reviews applicants to ensure that they satisfy the necessary criteria including honesty, competence and financial soundness, to engage in regulated activity. Lloyds TSB Group’s investment businesses became authorised by the FSA through being ‘grandfathered’ as having been authorised under previous legislation to carry on investment business.
The draft code had been drawn up by a wide cross-section of market practitioners representing principals and brokers in the foreign exchange, money and bullion markets. The work was carried out by the Foreign Exchange Joint Standing Committee, the Wholesale Sterling Deposits Working Group (a sub-group of the Money Market Liaison Group) and the London Bullion Market Association, and was based on the LCC, while working in tandem with the FSA’s work on the IPC. These groups have considered the comments put forward during the consultation period and produced a revised version of the code. The groups will continue to monitor developments in market practice and review periodically how the code should be amended to reflect such changes.
The insurance companies within the Lloyds TSB Group also became authorised by the FSA through being ‘grandfathered’ as having been authorised under previous legislation. While the authorisation and supervision of insurance companies is subject to the same FSA regulatory approach as other investment companies, rules exist to: • Restrict the carrying out of insurance business in the UK to persons authorised by the FSA.
• Prevent an insurer, and its parent, from declaring a dividend when long-term business assets do not exceed long-term liabilities. Furthermore, surplus assets in the long-term fund can only be transferred out once the appointed actuary has completed an investigation.
The Consumer Credit Act 1974 regulates both brokerage and lending activities in the provision of personal secured and unsecured lending. The Data Protection Act 1998 regulates, among other things, the retention and use of data relating to individual customers. The Unfair Terms in Consumer Contracts Regulations 1994 came into force in July 1995. These Regulations together with the Unfair Contract Terms Act 1977 apply to certain contracts for goods and services entered into with customers. The main effect of the Regulations is that a contractual term covered by the Regulations which is ‘unfair’ will not be enforceable against a consumer. These Regulations apply, among other things, to mortgages and related products and services.
In December 2001 the UK government announced that the FSA would become responsible for regulating the sale and administration of general insurance (e.g. motor, property and liability insurance) and pure protection contracts (i.e. critical illness, income protection, term assurance and long-term care assurance). The government’s legislation, and the FSA’s rules subsequently made under it, will, when finalised, implement the Insurance Mediation Directive (‘IMD’) in the UK. The regulation of insurance intermediation will commence from 14 January 2005.
EU directives, which are required to be implemented in member states through national legislation, have a strong influence over the framework for supervision and regulation of banking and financial services in the UK. The banking directives aim to harmonise banking regulation and supervision throughout member states by setting out minimum standards in key areas such as capital adequacy and deposit and investor compensation schemes. The UK has now largely implemented these minimum requirements. The directives also require member states to give ‘mutual recognition’ to each other’s standards of regulation. Under the Second Banking Co-ordination directive the concept of mutual recognition has also been extended to create the ‘passport’ concept; this gives a bank which has been authorised in its ‘home’ state the freedom to establish branches in, and to provide cross-border services into, other member states without the need for additional local authorisation.
• Improvement in the stability of the financial system by reliable and timely disclosure of risk information.
It is not expected that the eventual framework will be implemented before 1 January 2007.
The review is now nearing completion and management does not expect any further material changes in the provisioning requirement. However, the cases that are still to be settled are generally large and complex and there is therefore a risk that the assumptions made in determining the provision may prove to be inaccurate.
Mortgage endowments were also sold to customers through the branch networks of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester; these policies were either underwritten by life assurance companies within the Lloyds TSB Group or by third parties. During 2003 there has been a significant increase in the level of complaints received from customers in respect of these sales and as a result a provision of some £65 million has been established to cover the estimated cost of remediation. The ultimate cost remains highly uncertain as it depends both upon the number of customers whose complaints are found to be justified and the actual payments made, which will depend upon individual circumstances. Consequently, there is a risk that further provisions in respect of this matter may be required in the future, although management is satisfied that current provisioning levels remain adequate.
The ultimate cost, and any impact upon the Lloyds TSB Group, will not be known for many years. However, Scottish Widows has been developing an actuarial model to assist in the management of the with-profits fund and to meet regulatory requirements. The model allows management to estimate the effects of different economic scenarios upon the financial position of the fund and consider the implications of different management actions. Preliminary output from this model indicates that the possible cost of providing benefits on policies containing features such as options and guarantees varies widely and, depending on the economic scenario encountered, could result in the Lloyds TSB Group incurring a liability. Based on the information available at present, having considered the range of possible outcomes, and after making allowance for the effect of proposed future management actions, the Lloyds TSB Group currently considers that no provision is necessary. However, the model is subject to ongoing development and the position will be kept under review.
Shareholders’ funds increased by £1,681 million, mainly due to retained profits, reflecting in part the profit arising on the disposal of The National Bank of New Zealand, and the favourable effect of exchange rate movements on the carrying value of the Lloyds TSB Group’s overseas branches and subsidiaries. Loan capital increased by £286 million following the issue of additional undated loan capital to support the expansion of the Lloyds TSB Group’s balance sheet which more than offset the effect of disposals.
Risk-weighted assets decreased to £117,732 million at 31 December 2003 following the disposal of the Lloyds TSB Group’s operations in New Zealand and Brazil and the post-tax return on average risk-weighted assets was 2.63 per cent.
The Lloyds TSB Group has a CSR steering committee chaired by the deputy group chief executive and comprising the senior executives of those businesses most directly affected by SEE issues. The committee meets quarterly to recommend strategy and direction. The board reviews overall CSR performance annually and individual issues are subject to board discussion throughout the year.
The board is confident that the systems in place to manage significant CSR risks are effective and provide adequate information to identify and assess the short and long-term risks arising from SEE matters. In 2003, CSR risks and opportunities have been assessed and the board is satisfied that CSR risks pose no material threat to the company.
Securities of the US treasury and US government agencies 1,624 1,626 1,740 1,736 1,148 1,147
Bank and building society certificates of deposit – – 340 340 234 234
Domestic Loans and advances to banks 11,940 1,430 301 13,671 Loans and advances to customers: – Financial, business and other services 5,102 3,041 1,509 9,652
Average Average Average Average Average. Average. balance rate balance rate balance. rate.
Foreign Certificates of deposit and other time deposits 7,420 642 161 569 8,792
Short-term borrowings are included within the balance sheet captions ‘Deposits by banks’, ‘Customer accounts’ and ‘Debt securities in issue’ and are not identified separately on the balance sheet. The short-term borrowings of Lloyds TSB Group consist of overdrafts from banks, securities sold under agreements to repurchase, certificates of deposit issued, commercial paper and promissory notes issued and other marketable paper. Securities sold under agreements to repurchase and certificates of deposit issued are the only significant short-term borrowings of Lloyds TSB Group.
The financial statements have been prepared in accordance with UK GAAP, which differs in certain significant respects from US GAAP. A discussion of such differences and a reconciliation of certain UK GAAP amounts to US GAAP is included in note 50 to the financial statements.
4 Translated into US dollars at the Noon Buying Rate on the date each payment is made except for the 2003 final dividend which has been translated at the Noon Buying Rate on 31 December 2003.
Post-tax return on average shareholders’ equity 29.3 14.8 12.0 14.8 15.5 Post-tax return on average assets 1.29 0.73 0.72 1.00 1.13 Average shareholders’ equity to average assets 4.4 4.8 5.8 6.6 7.2 1 For the purposes of this five year summary, income statement items in respect of discontinued operations have been aggregated with those of continuing operations. 2 Lloyds TSB Group does not have sufficient information to calculate US GAAP average balances on a monthly basis. Where applicable, these financial ratios have been based upon simple averages of the opening and closing balances.
Ewan Brown CBE FRSE✠** Chairman of Lloyds TSB Scotland A director since 1999. A nonexecutive director of Lloyds TSB Scotland since 1997. Joined Noble Grossart in 1969 and was an executive director of that company until December 2003. Chairman of Transport Initiatives Edinburgh. A nonexecutive director of John Wood Group, Noble Grossart and Stagecoach Holdings. Aged 61.
Christopher S Gibson-Smith✠† A director since 1999. Chairman of National Air Traffic Services and the London Stock Exchange. Joined BP in 1970, serving as managing director from 1997 to 2001, having held senior and general management appointments in the UK, USA, Canada and Europe. A non-executive director of The British Land Company.
Sir Tom McKillop▲‡ A director since 1999. Joined ICI in 1969 and held a number of senior and general management appointments before the demerger in 1993, when Zeneca was created. Chief executive of Zeneca Pharmaceuticals from 1994 to 1999 and chief executive of AstraZeneca from 1999. Pro-chancellor of Leicester University. Aged 60.
Michael E Fairey Deputy Group Chief Executive Joined TSB Group in 1991 and held a number of senior and general management appointments before being appointed to the board in 1997 and deputy group chief executive in 1998. Since January 2004 has also acted as group finance director. Joined Barclays Bank in 1967 and held a number of senior and general management appointments, including managing director of Barclays Direct Lending Services from 1990 to 1991. Aged 55.
Archie G Kane Group Executive Director, Insurance and Investments Joined TSB Commercial Holdings in 1986 and held a number of senior and general management appointments in Lloyds TSB Group before being appointed to the board in 2000, as group executive director, IT and Operations. Appointed group executive director, Insurance and Investments in October 2003. After some 10 years in the accountancy profession, joined General Telephone & Electronics Corporation in 1980, serving as finance director in the UK
His early career, between 1972 and 1980, was spent with National Australia Bank. Aged 48.
As the company owed no amounts to trade creditors at 31 December 2003, the number of days required to be shown in this report, to comply with the provisions of the Companies Act 1985, is nil. The equivalent figure for the Lloyds TSB Group in the UK is 20. This bears the same proportion to the number of days in the year as the aggregate of the amounts owed to trade creditors at 31 December 2003 bears to the aggregate of the amounts invoiced by suppliers during the year.
The roles of the chairman, the group chief executive and the board and its governance arrangements, including the schedule of matters specifically reserved to the board for decision, are reviewed annually. The matters reserved to the board for decision include the approval of the annual report and accounts and any other financial statements; the payment of dividends; the long-term objectives of the Group; the strategies necessary to achieve these objectives; the Group’s budgets and plans; significant capital expenditure items; significant investments and disposals; the basis of allocation of capital within the Group; the organisation structure of the Group; the arrangements for ensuring that the Group manages risks effectively; any significant change in accounting policies or practices; the appointment of the company’s main professional advisors; and the appointment of senior executives within the organisation and the related forward planning.
The audit committee met seven times in 2003, during which it received reports from, and held discussions with, management and the auditors. In discharging its duties, the committee has reviewed the auditors’ remuneration and their independence and objectivity and recommended their re-appointment at the annual general meeting. The committee also reviewed the financial statements published in the name of the board and the quality and acceptability of the related accounting policies, practices and financial reporting disclosures; the scope of the work of the group’s internal audit department, reports from that department and the adequacy of its resources; the effectiveness of the systems for risk management and compliance with financial services legislation and regulations; the results of the external audit and its cost effectiveness; reports from the external auditors on audit planning and their findings on accounting and internal control systems; and its own role and performance. The committee also had a meeting with the auditors, without executives present, and a meeting with the head of internal audit alone.
The group executive committee, comprising the group chief executive, the deputy group chief executive, the group executive directors, the chief risk director, the group human resources director and the director of group IT and operations, meets to assist the group chief executive in performing his duties. Specifically, the committee considers the development and implementation of strategy, operational plans, policies and budgets; the monitoring of operating and financial performance; the assessment and control of risk; the prioritisation and allocation of resources; and the monitoring of competitive forces in each area of operation. The committee, assisted by its sub-committees, the group business risk and group asset and liability committees, also supports the group chief executive in endeavouring to ensure the development, implementation and effectiveness of the Group’s risk management framework, the clear articulation of the Group’s risk policies and that the Group’s aggregate risk exposures and concentrations of risk are reviewed.
The remuneration committee, which comprises Sir Tom McKillop (chairman), Dr Berndt, Dr Gibson-Smith and Dr Julius, reviews the remuneration policy for the top management group, to ensure that members of the executive management are provided with appropriate incentives to encourage them to enhance the performance of the Group and that they are rewarded for their individual contribution to the success of the organisation. It is made aware of, and advises on, major changes to employee benefit schemes and it also agrees the policy for authorising claims for expenses from the group chief executive and the chairman. It has delegated powers for setting remuneration for the chairman, the deputy chairman, the group executive directors, the company secretary and any Group employee whose salary exceeds £300,000 per annum.
The attendance of directors at board meetings and at meetings of the audit, nomination and remuneration committees during 2003 was as follows: Audit Nomination Remuneration Board committee committee committee
Statement of 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 Lloyds TSB Group as at the end of the year and of the profit or loss for the year. The directors consider that in preparing the financial statements on pages 89 to 175, the company has used appropriate accounting polices, consistently applied and supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider applicable have been followed.
In addition, in 2003, Alithos Limited provided information for the testing of the total shareholder return (TSR) (calculated by reference to both dividends and growth in share price) performance conditions for the company’s executive share option schemes and PricewaterhouseCoopers LLP checked the results of the testing of the performance conditions and the annual incentive payments for executive directors against targets set.
The strategy for executive directors’ pay is, generally, for basic salaries to reflect the relevant market median; for benefits such as the use of a company car, medical insurance and pension to reflect market practice; and for total direct compensation (including annual and long-term incentives) to reward upper quartile performance with upper quartile remuneration. This strategy is consistent with the principle that performance should determine a significant proportion of the total remuneration. There are no plans to change this strategy.
Basic salaries are reviewed annually, usually in December, taking into account individual performance and market information (which is provided by TPFC) and then adjusted from 1 January of the following year. Details of salaries payable in 2004 are shown on page 80.
For 2004, the total bonus availability (bonus pool) will be based on Group performance with pre-determined targets relating to profit before tax and economic profit. An amount equal to 75 per cent of the executive directors’ bonus opportunity would be payable into the bonus pool on the achievement of a stretching budget for 2004; failure to achieve at least 90 per cent of this budget would result in no bonus payment. If there is a bonus pool, individual executive directors will be considered for awards from the bonus pool based on individual targets which will include profitability, franchise growth, risk, service and other specific goals that are relevant to improving overall business performance. The maximum opportunity for executive directors will be equal to 100 per cent of salary, with the exception of Mr Daniels, whose maximum opportunity for 2004 has been set at 125 per cent to increase the proportion of his pay which is performance linked and to reflect the competitive market position for total earning opportunity.
At the annual general meeting in May 2004, the shareholders will be asked to approve a new performance share plan, to operate as an element of the annual incentive scheme. Under the plan, executive directors will be required to defer 50 per cent of any bonus payable for 2004 into shares in the company, known as bonus shares. The bonus shares will be held on behalf of the executive for a period of three years before release.
Under the new plan executives will also be eligible for an award of free shares, to be known as performance shares, to match the bonus shares. The maximum match will be two performance shares for each bonus share, awarded at the end of the three year retention period. The number of performance shares actually awarded will depend on the company’s TSR performance measured over a three year period, compared with the TSR of the other companies in the comparator group listed below. The maximum of two performance shares for each bonus share will be awarded only if the company’s TSR performance places it first in the comparator group; one performance share will be awarded for each bonus share if the company is placed fifth; and one performance share for every two bonus shares if the company is placed eighth (median). Between first and fifth positions and fifth and eighth positions sliding scales will apply. If the TSR performance is below median no performance shares will be awarded. There will be no retest.
Ranking position within comparator group Per cent of option which may be exercised 10 or below Nil – options not exercisable
The performance condition for options granted from 2005 will be based on TSR over the relevant (three year) period measured against the same group of 14 UK financial services companies listed on page 78. The options will become exercisable in full if the company is placed fourth or above in the comparator group, and as to 30 per cent if the company is placed eighth (i.e. median). The options will lapse if the company is placed below eighth. A sliding scale will apply between fourth and eighth positions. There will be no retest.
The executive directors, the chairman and the deputy chairman are also eligible to participate in the Lloyds TSB Group ‘sharesave’ option scheme and the Lloyds TSB Group ’shareplan'. These are 'all-employee' share schemes and, therefore, performance conditions do not apply.
The remuneration committee encourages each executive director to build up a sizeable shareholding in the company over time and the new incentive arrangements will support this principle. It is expected that, in due course, each executive director will have a shareholding at least equal in value to his or her annual salary.
It is now the company’s policy (subject to existing contractual arrangements) that where compensation on early termination is due, it should be paid on a phased basis and that bonus payments should relate to the period of actual service, rather than the full notice period.
Rebased to 100 on 1 January 1999 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
‘Other benefits’ include the use of a company car, private medical insurance, life insurance cover, flexible benefit payments, cash paid for the balance due above the £3,000 limit for free shares under the Lloyds TSB Group’s all employee share incentive plan (see page 83), allowances for relocation and professional advice for Mr Targett, housing, education and financial advice allowance for Mr Daniels and an additional payment in respect of the contribution to the separate fund relating to Mr Fairey’s pension. The separate fund, which was mentioned in previous annual reports, was established to cover pension obligations of those who joined the Group after 1 June 1989 and who are subject to the Inland Revenue earnings cap relating to pensions, introduced by the Finance Act 1989.
The amount in ‘other benefits’ for Mr Ross includes legal and career counselling allowances and payments in 2003 to which he was contractually entitled when his employment was terminated on 30 September 2003. As part of his termination arrangements he is also entitled to a bonus reflecting what he would have received during his notice period. The remainder of his termination payments will be settled in 2004 and will be reported in the 2004 report and accounts.
For Mr Atkinson, the figure in ‘other benefits’ represents the amount to which he was contractually entitled when his employment was terminated on 31 May 2002, reflecting what he would have received during his notice period in respect of a flexible benefits cash payment, cash paid instead of shares under shareplan, medical insurance and the use of a company car for the period 1 January to 31 May 2003. The payment under ‘performance related pay’ is the 2003 bonus for the period to 31 May 2003.
Column (d) is the equivalent transfer value, but calculated as at 31 December 2002 on the assumption that the director left service at that date.
Column (e) is the increase in pension built up during the year, recognising (i) the accrual rate for the additional service based on the pensionable salary in force at the year end, and (ii) where appropriate the effect of pay changes in 'real' (inflation adjusted) terms on the pension already earned at the start of the year.
Directors’ interests The interests, all beneficial, of those who were directors at 31 December 2003 in shares in Lloyds TSB Group were: At 1 January 2003 (or later date of At 31 December At 5 March†
§ These share options lapsed when Mr Hampton left the board on 12 January 2004.
The market price for a share in the company at 1 January 2003 and 31 December 2003 was 446p and 448p, respectively. The range of prices between 1January 2003 and 31 December 2003 was 295.75p to 483p.
The option will lapse if Mr Targett ceases to be an employee, or gives notice of resignation, before the normal exercise date, except in the circumstances described above.
The number and/or nominal amount of shares may be adjusted by the board on certain variations in the share capital of Lloyds TSB Group plc.
Opinion In our opinion: • the financial statements give a true and fair view of the state of affairs of the company and the Group as at 31December 2003 and of the profit and cash flows of the Group for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and
Amounts written off fixed asset investments 5 44 – 44 87 60
Prepayments and accrued income 29 1,918 2,287 Long-term assurance business attributable to the shareholder 30 6,481 6,213
M A van den Bergh J E Daniels M E Fairey Chairman Group Chief Executive Deputy Group Chief Executive 90 LLOYDS TSB GROUP
There was no material difference between the results as reported and the results that would have been reported on an unmodified historical cost basis. Accordingly, no note of historical cost profits and losses has been included.
Reconciliation of movements in consolidated shareholders’ funds for the year ended 31 December 2003 2003 2002* 2001* £ million £ million £ million
for the year ended 31 December 2003 £ million £ million £ million
(ii) It has been the Group’s policy to defer certain expenses incurred in connection with the acquisition of new asset finance and unit trust business and charge these costs to the profit and loss account over the expected life of the related transactions. Following a review of the Group’s accounting policies this treatment is no longer considered to be the most appropriate and these costs will now be charged to the profit and loss account as incurred.
Goodwill arising on all other acquisitions after 1 January 1998 is amortised on a straight line basis over its estimated useful economic life, which does not exceed 20 years.
Specific provisions relate to identified risk advances and are raised when the Group considers that recovery of the whole of the outstanding balance is in serious doubt. The amount of the provision is equivalent to the amount necessary to reduce the carrying value of the advance to its expected ultimate net realisable value.
Full actuarial valuations of the Group’s main defined benefit schemes are carried out every three years with interim reviews in the intervening years; these valuations are updated to 31 December each year by qualified independent actuaries, or in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows. For the purposes of these annual updates, scheme assets are included at market value and scheme liabilities are measured on an actuarial basis using the projected unit method; these liabilities are discounted at the current rate of return on an AA corporate bond of equivalent currency and term. The post-retirement benefit surplus or deficit is included on the Group’s balance sheet, net of the related amount of deferred tax. Surpluses are included only to the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes. The current service cost and any past service costs are included in the profit and loss account within operating expenses and the expected return on the schemes’ assets, net of the impact of the unwinding of the discount on scheme liabilities, is included within other finance income. Actuarial gains and losses, including differences between the expected and actual return on scheme assets, are recognised, net of the related deferred tax, in the statement of total recognised gains and losses.
A number of the Group’s subsidiary undertakings are engaged in writing long-term assurance business, including the provision of life assurance, pensions, annuities and permanent health insurance contracts. In common with other life assurance companies in the UK, these companies are structured into one or more long-term business funds, depending upon the nature of the products being written, and a shareholder’s fund. All premiums received, investment returns, claims and expenses, and changes in liabilities to policyholders are accounted for within the related long-term business fund. Any surplus, which is determined annually by the Appointed Actuary after taking account of these items, may either be distributed between the shareholder and the policyholders according to a predetermined formula or retained within the long-term business fund. The shareholder will also levy investment management and administration charges upon the long-term business fund.
Life, UK Retail pensions, Wholesale Banking unit trusts Insurance and and General and asset and International Central Continuing Discontinued††† Mortgages insurance management Investments Banking group items operations operations Total
The average number of persons on a headcount basis employed by the Group during the year was as follows: The above staff numbers exclude 5,202 (2002: 5,870; 2001: 5,450) staff employed in the long-term assurance business. Costs of £194 million (2002: £209 million; 2001: £168 million) in relation to those staff are reflected in the valuation of the long-term assurance business.
– Due diligence services 0.7 0.8 5.7 – Management consultancy – 0.1 3.5
The auditors’ remuneration for the holding company was £51,500 (2002: £50,000; 2001: £50,000).
The fees paid to the auditors for tax advisory work relate to the preparation and review of the tax returns of a number of the Group’s overseas operations, advice on a number of issues relating to the acquisition of Scottish Widows, the implementation of internal tax restructuring advice principally within Scottish Widows and a review of the Group's VAT procedures.
General insurance claims 229 – 229 Provisions for bad and doubtful debts: Amounts written off fixed asset investments 87 – 87
Interest receivable: – Interest receivable and similar income arising from debt securities 503 27 530 – Other interest receivable and similar income 9,251 1,583 10,834
General insurance claims 174 – 174 Provisions for bad and doubtful debts: Amounts written off fixed asset investments 60 – 60
Profit on ordinary activities before tax is stated after taking account of: Income from: Aggregate amounts receivable, including capital repayments, in respect of assets leased to customers and banks under: – Finance leases and hire purchase contracts 3,495 3,290 3,250
Factors that may affect the future deferred tax charge are dealt with in note 37.
The profit attributable to shareholders includes a profit of £1,880 million (2002: £1,912 million; 2001: £1,893 million) dealt with in the accounts of the parent company for which no profit and loss account is shown as permitted by Section 230 of the Companies Act 1985.
13 Treasury bills and other eligible bills 2003 2003 2002 2002 Balance sheet Valuation Balance sheet Valuation £m £m £m £m
Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. It is expected that tax of £2 million (2002: £1 million) would be recoverable if the investment securities were sold at their year end valuation.
Repayable on demand 3,768 4,313 Other loans and advances by residual maturity repayable: – 3 months or less 7,637 8,512 – 1 year or less but over 3 months 2,329 2,624 – 5 years or less but over 1 year 1,496 1,700
Loans and advances by residual maturity repayable: – 3 months or less 23,284 23,989 – 1 year or less but over 3 months 9,458 10,357 – 5 years or less but over 1 year 31,384 30,637
Loans and advances to customers: Domestic Agriculture, forestry and fishing 2,025 2,076
Due within 1 year 5,045 6,412 Due 1 year and over 23,624 22,902
Transfers from other securities 1,873 – – 1,873 Securities sold or matured (11,389) (5) (29) (11,365) Adjustments on disposal of businesses (100) – – (100) Charge for the year – – 42 (42) Amortisation of premiums and discounts – 48 – 48
Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. It is expected that tax of £3 million (2002: £4 million) would be payable if the investment securities were sold at their year end valuation.
The difference between the cost of other securities and market value, where the market value is higher than the cost, is not disclosed as its determination is not practicable.
During 2003 the Group contributed a further £12 million of capital to Goldfish Holdings Limited.
Shares in banks 10,752 9,093 Shares in other group undertakings 1 (2)
Profit and loss account Interest receivable – – – 82 12 –
Cash flow statement Net cash inflow (outflow) from operating activities 132 422 391 1,173 (250) –
24 Intangible fixed assets Cost Amortisation Net book value £m £m £m
25 Tangible fixed assets Operating Premises Equipment lease assets £m £m £m
Cost: Exchange and other adjustments 4 13 (61) Adjustments on acquisition and disposal (52) (120) (1)
Investment earnings. This represents the expected investment return on both the net tangible assets and the value of the shareholder’s interest in the long-term business account, based upon the economic assumptions made at the beginning of the year.
New business income 477 413 374 Life and pensions distribution costs (327) (277) (247) New business contribution 150 136 127 Existing business: – Assumption changes and other items (75) 78 95 – Customer remediation provisions (see d) (100) (205) (70)
Accrual of interest on the provision 2 17 20 Charge for the year 44 40 70
For the purposes of consolidating the long-term assurance policyholder assets and liabilities into the Group’s balance sheet a deduction has been made of £122 million (2002: £122 million) for own shares held within the with-profit funds.
Assets held to cover linked liabilities 25,023 20,996 Other assets 2,018 1,718
Notes to the accounts 32 Deposits by banks 2003 2002 £m £m
The deferred tax balance at 31 December 2003 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 £916 million (2002: £854 million) (note 45).
The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases where the original sales processes are found to have been deficient. During the year the Group has provided a further £200 million in this respect, of which £65 million relates to past sales of mortgage endowment policies and £135 million to long-term savings products.
c) In certain circumstances the interest payments on these securities can be deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB Group plc can declare or pay a dividend until payments are resumed. Any deferred payments will be made good on redemption of the securities. 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 22 November 2007.
h) In the event that these Notes are not redeemed at the callable date, the coupon will be reset to a fixed margin over the then 5 year Yen swap rate.
j) Issued during 2003 primarily to finance the general business of the Group.
Both of the above issues were made under the limited subordinated guarantee of Lloyds TSB Bank plc. In certain circumstances these preferred securities will be mandatorily exchanged for preference shares in Lloyds TSB Group plc. Lloyds TSB Group plc has entered into an agreement whereby dividends may only be paid on its ordinary shares if sufficient distributable profits are available for distributions due in the financial year on these preferred securities.
Authorised: Sterling £m £m £m 6,911 million Ordinary shares of 25p each 1,728 1,728 1,728 79 million Limited voting ordinary shares of 25p each 20 20 20 175 million Preference shares of 25p each 44 44 44
Exchange and other adjustments 118 (3) (86) Actuarial losses recognised in post-retirement benefit schemes (note 45) (4) (2,331) (2,010) Movements in relation to own shares (note 43) (2) (70) (195) Goodwill written back on sale of businesses 181 – – Profit (loss) for the year 1,343 (118) 361
The cumulative amount of premiums on acquisitions written off against Group reserves during previous years amounts to £2,090 million (2002: £2,271 million; 2001: £2,271 million) of which £1,662 million (2002: £1,823 million; 2001: £1,817 million) was within the last 10 years.
The accumulated foreign exchange translation adjustment as at 31 December 2003 reduced Group reserves by £144 million (2002: £262 million; 2001: £259 million).
Own shares – the Company 22 26 33 Lloyds TSB Group interest in shares held by the long-term assurance funds† 17 17 17
Own shares – the Group 39 43 50 * Lloyds TSB Group plc sponsors the Lloyds TSB Group Employee Share Ownership Trust, a discretionary trust for the benefit of employees and former employees of the Lloyds TSB Group. The Company has lent £21 million to the trustees, interest free, to enable them to purchase Lloyds TSB Group plc ordinary shares, which are used to satisfy options granted by the Company or to meet commitments arising under other employee share schemes. Under the terms of the trust, the trustees have waived all but a nominal dividend on the shares they hold. At 31 December 2003, 2 million shares were held by the trustees with a cost of £12 million and a market value of £7 million (2002: 2 million shares with a cost of £13 million and a market value of £7 million; 2001: 2 million shares with a cost of £15 million and a market value of £15 million).
In 2001 the Group established the Lloyds TSB Group Shareplan (‘Shareplan’) for the purpose of providing an enhanced remuneration package for employees. The shares are used to provide free shares awarded to employees for no consideration, as a percentage of salaries by reference to the profits of the Group; together with partnership shares which are acquired by employees via monthly contributions; and matching shares, which are additional shares awarded for no consideration to employees acquiring partnership shares. Shareplan became active during 2003. At 31 December 2003, 2 million shares were held (but not allocated to individual employees) by the Shareplan trustees at their cost to the Group of £9 million. The trustees have waived all but a nominal dividend on the shares they hold.
The charge to the Company’s profit and loss account reserves represents the loss on transactions in own shares of £10 million less the net reduction in the cost of own shares of £4 million.
The Group enters into certain transactions with its long-term assurance businesses, which cannot be eliminated in the consolidated accounts because of the basis of accounting used for the Group’s long-term assurance businesses. After taking into account legally enforceable netting agreements, at 31 December 2003 Group entities owed £1,995 million (2002: £1,372 million) and were owed £136 million (2002: £145 million); these amounts are included in customer accounts and loans and advances to customers respectively. Furthermore Scottish Widows plc has provided £30 million of subordinated loan capital to Scottish Widows Bank plc, which is included in other liabilities. In addition, fees of £107 million (2002: £76 million; 2001: £62 million) were received, and fees of £71 million (2002: £35 million; 2001: £28 million) were paid, in respect of asset management and other services.
Certain administrative properties used by Scottish Widows are owned by the long-term assurance funds. During 2003 Scottish Widows paid rent to the long-term assurance funds amounting to £5 million (2002: £5 million; 2001: £4 million). In addition, at 31 December 2003, the long-term assurance funds owned 31 million ordinary shares in the Company (2002: 31 million shares).
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 2003, the Group’s pension funds had call deposits with Lloyds TSB Bank plc amounting to £16 million (2002: £89 million).
Defined contribution schemes 33 25 18 Defined benefit schemes 320 293 329
The majority of the Group’s employees are members of the defined benefit sections of Lloyds TSB Group Pension Schemes No’s 1 and 2. During the years ended 31 December 2001 and 2002, the Group made no contributions to these schemes. During 2003, no contributions have been made to the Lloyds TSB Group Pension Scheme No. 2; however the Group has recommenced contributions to the Lloyds TSB Group Pension Scheme No. 1 at a rate of 31.7 per cent of pensionable salary, with effect from 1 July 2003. Since the defined benefit sections of these schemes are now closed to new members and the age profile of the active members is increasing, under the projected unit method, the current service cost will increase as the members of the schemes approach retirement.
The principal assumptions used in the scheme valuations were as follows: 31December 31 December 31 December.
The amounts recognised in the statement of total recognised gains and losses comprise: £m £m £m.
Deficit in the schemes (3,055) (2,931) Related deferred tax asset 916 854
Past service costs (51) (49) Actuarial loss (6) (3,299) Adjustment on disposal of business 34 –
Guarantees include those given on behalf of a customer to stand behind the current obligations of the customer and to carry out those obligations should the customer fail to do so.
Information about the Group’s use of financial instruments and management of the associated risks is given on pages 53 to 55.
Equity derivatives are also used by the Group as part of its equity based retail product activity to eliminate the Group’s exposure to fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities in the form of published indices on or before a specified future date.
Interest rate contracts: Interest rate swaps 236,956 3,346 4,006 Forward rate agreements 54,213 29 29 Options purchased 10,475 145 – Options written 5,265 – 162 Futures 38,626 – –
The fair values presented in the following table are at a specific date and may be significantly different from the amounts which will be actually be paid or received on the maturity or settlement date. In many cases, the estimated fair values could not be realised immediately and accordingly do not represent the value of these financial instruments to the Group as a going concern.
The fair value of deposits repayable on demand is considered to be equal to their carrying value. The fair value for all other deposits and customer accounts was estimated using discounted cash flows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.
Assets: – Treasury bills and other eligible bills 530 530 1,879 1,878 – Loans and advances to banks and customers 2,032 2,032 149,971 151,526 – Debt securities and equity shares 17,620 17,620 11,900 11,932 Liabilities: – Deposits by banks and customers 2,927 2,927 138,850 138,428 – Debt securities in issue 1,122 1,122 29,133 29,005 – Subordinated liabilities – – 10,168 11,156
Fair values are determined by reference to quoted market prices or, where no market price is available, using internal models which discount expected future cash flows at prevailing interest rates.
The Group’s main overseas operations are in the Americas and Europe (and, in 2002, in New Zealand). Details of the Group’s structural foreign currency exposures are as follows: Functional currency of Group operations £m £m
US dollar 255 363 Swiss franc 104 100 Other non-sterling 200 323
Details of value at risk in the Group’s global trading activities are given on page 53.
During the year ended 31 December 2002, the Group’s asset finance operations completed the acquisitions of First National Vehicle Holdings and Abbey National Vehicle Finance, both previously wholly owned subsidiaries of Abbey National plc operating in the UK contract hire and fleet management market, and the business of the Dutton-Forshaw Group, a motor dealer; a number of fair value adjustments were made in respect of these acquisitions. In addition the Group’s retail operations acquired the business of Accucard, a credit card technology development and marketing company. Premiums on acquisition totalling £103 million were capitalised and are being written off to the profit and loss account over their estimated useful lives. Initial cash payments totalling £103 million were made in 2002; during 2003 a refund of £5 million has been received in respect of First National Vehicle Holdings and Abbey National Vehicle Finance, following agreement of the completion accounts, and a further payment of £1 million has been made in respect of the Accucard business (with the final payment of £1 million being due in 2004).
b Analysis of cash as shown in the balance sheet 2003 2002 2001 £m £m £m
Cash and balances with central banks 1,195 1,140 1,240 Loans and advances to banks repayable on demand 3,768 4,313 2,443
Exchange and other adjustments 23 18 (6) Cash inflow from financing – 167 – Minority share of profit after tax 47 43 40 Payments to minority shareholders (81) (43) (40)
g Disposal of group undertakings and businesses 2003 2002 2001 £m £m £m
Cash consideration received 2,434 – 40 Cash disposed of (52) – –
For defined benefit schemes, pension costs in the profit and loss account reflect the cost of accruing benefits for active employees, benefit improvements and the cost of severances borne by the schemes; the expected return on scheme assets, net of a charge in respect of the unwinding of the discount applied to scheme liabilities, is included in the profit and loss account as other finance income. Actuarial gains and losses, including differences between the expected and actual return on scheme assets, are recognised as they arise, net of deferred tax, in the statement of total recognised gains and losses. Scheme assets are assessed at fair value and scheme liabilities are measured on an actuarial basis using the projected unit method and are discounted at the current rate of return on a high quality corporate bond of equivalent currency and term. The overall surplus or deficit is included on the balance sheet, net of the related deferred tax.
The Group accounts for share compensation schemes based on their estimated fair values at the date of the grant in accordance with SFAS No. 123 ‘Accounting for Stock Based Compensation’.
Finance lease income is recognised in proportion to the funds invested in the lease using a method that results in a constant rate of return on the net cash investment, which takes into account tax payments and receipts.
Entities that fall within the definition of quasi-subsidiaries as set out in FRS5 have been consolidated. A quasi-subsidiary is defined as an entity which, although it does not fulfil the definition of a subsidiary, is directly or indirectly controlled by Lloyds TSB Group.
A specific provision is made to cover the estimated loss as soon as the recovery of an outstanding loan is considered doubtful. General provisions are raised to cover losses incurred but not yet identified as of the balance sheet date.
SFAS No. 114 ‘Accounting by Creditors for Impairment of a Loan’ requires the overall credit risk provision to be determined based upon the present value of expected future cash flows, discounted at the loan’s effective interest rate or, as a practical expedient, on the loan’s observable market value, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous consumer loans that are collectively valued for impairment are outside the scope of SFAS No. 114, as are debt securities and leases. General provisions are made against such loans when losses have been incurred but not yet identified as of the balance sheet date.
Under SFAS No. 109 ‘Accounting for Income Taxes’, deferred tax assets and liabilities are recorded for all temporary differences. A valuation allowance is recorded against a deferred tax asset where it is more likely than not that some portion of the deferred tax asset will not be realised. Deferred tax is provided on enacted tax rates. SFAS No. 109 requires provisions to be raised on the portion of unremitted foreign earnings that are not considered to be permanently reinvested in the foreign subsidiary.
Own shares held are deducted from equity. Own shares that are held by the Group’s long-term assurance funds are recognised to the extent of the shareholder’s interest, which is 10 per cent.
SFAS No. 115 ‘Accounting for Certain Investments in Debt and Equity Securities’ requires that debt securities which are ‘available-for-sale’ (where there is the absence of either the intent or the ability to hold them to maturity) and equity shares with a readily determinable market value should be recorded at fair value with unrealised gains and losses reflected in shareholders’ equity. All debt securities held as available-for-sale are subject to assessment for other than temporary impairment in accordance with SFAS No. 115 and, for asset backed securities, in accordance with the Emerging Issues Task Force (EITF) Abstract No. 99-20 ‘Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitised Financial Assets’.
The assets, liabilities and results of the Group’s overseas operations are translated into sterling at the rate of exchange prevailing at the balance sheet date, as permitted under UK GAAP.
SFAS 149 – Amendment of Statement 133 on Derivative Instruments and Hedging Activities
SFAS No. 149 was issued in April 2003. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective prospectively for contracts entered into or modified after 30 June 2003 and prospectively for hedging relationships designated after 30 June 2003. Adoption of this statement has not had a material impact on Lloyds TSB Group’s US GAAP financial statements.
SFAS 132 – Employers’ Disclosures about Pensions and Other Retirement Benefits (revised 2003)
In December 2003 the FASB issued a revision to SFAS No. 132 which requires enhanced disclosures about the Lloyds TSB Group’s defined benefit pension plans. The revised standard became effective immediately for UK-based plans and will become effective for the Lloyds TSB Group’s US GAAP financial statements for 2004 for overseas based plans. Adoption of this statement has not had, and is not expected to have, a material impact on Lloyds TSB Group’s US GAAP financial statements.
In November 2003 the EITF reached a consensus on certain additional disclosure requirements in connection with holding losses on investment securities. The disclosures now required are set out on page 167 of the financial statements.
The net present value of the profits inherent in the policies of the long-term assurance fund is not recognised. An adjustment is made for the amortisation of acquisition costs and fees.
The following tables summarise the adjustments to net income and shareholders’ equity which would arise from the application of US GAAP: Reconciliation of net income 2003 2002* 2001* Note £m £m £m
Shareholders’ equity under US GAAP 11,892 10,164 * restated (see note 1)
New share capital subscribed 45 139 379 Movement in own shares (31) 35 (189) Share compensation schemes 113 44 46 Minimum pension liability 53 (3,277) – Change in the fair value of available-for-sale securities – insurance activities 8 15 (46) Change in the fair value of available-for-sale securities – banking activities 54 (147) (165) Exchange and other differences 163 – (98)
** Significant items affecting the Group’s effective tax rate under US GAAP include the fact that tax is levied on UK life assurance and pension businesses under specialised rules not based on the profit and loss account. In addition, under US GAAP a tax provision is required for unrealised gains that are attributable to the policyholders. The amount provided will vary depending upon the fluctuations of the stock market and this movement can result in significant changes in the effective rate of tax.
Shareholders’ equity: – Common stock 1,418 1,416 – Additional paid-in capital 5,003 4,848 – Retained earnings 8,929 7,634 – Treasury stock (193) (191) – Accumulated other comprehensive income (3,265) (3,543) Total shareholders’ equity 11,892 10,164
The Group’s UK GAAP cash flow statement on page 94 is prepared under the provisions of FRS 1 (Revised). This is similar in many respects to SFAS No. 95 ‘Statement of Cash Flows’, as amended by SFAS No. 104 ‘Statement of Cash Flows – Net Reporting of Certain Cash Receipts and Cash Payments and Classification of Cash Flows from Hedging Transactions’. Two principal differences arise between the standards with regard to the definition of cash and the classification of items within the cash flow statement.
Differences between UK and US GAAP with regard to classification of items within the cash flow statement are summarised below: Cash flow Classification under FRS 1 (Revised) Classification under SFAS No. 95
Notes to the accounts 50 Differences between UK GAAP and US GAAP (continued)
Change in accounting principle – – – – (10) (10) Charge for the year (51) 51 – (59) 59 –
Net income and earnings per share amounts for the years ended 31 December 2003, 2002 and 2001, adjusted to exclude the amortisation expenses related to goodwill assets which are no longer amortised, are as follows: Net income (£m) Basic earnings per share (pence) Diluted earnings per share (pence)
Add back goodwill amortisation – – 248 – – 4.5 – – 4.5
As discussed in note 6, Lloyds TSB Group disposed of its interest in the National Bank of New Zealand, its operations in France and certain of its interests in Brazil during 2003.
The difference between the profit on disposal under UK GAAP and that recorded under US GAAP is analysed as follows: £m
The measurement of the US GAAP pension cost is undertaken in accordance with the requirements of SFAS No. 87 and SFAS No. 109. The disclosures reflect the amendments arising from SFAS No. 132 ‘Employers’ Disclosures about Pensions and Other Postretirement Benefits’ (revised 2003).
For the reconciliations below, the Group has applied SFAS No. 87 to the Lloyds TSB Group Pension Schemes No’s 1 and 2 with effect from 31December 1997 as it was not feasible to apply it as of January 1989, the date specified in the standard. The Scottish Widows pension scheme has been included from 3 March 2000, the date of acquisition.
Funded status (3,166) (3,088) Unrecognised net actuarial loss 5,454 5,529 Unrecognised prior service cost 233 221 Unrecognised transition asset – (107)
Accrued benefit cost (2,315) (2,312) Intangible asset recognised 231 221 Accumulated other comprehensive income 4,605 4,646
Information for pension plans with an accumulated benefit obligation in excess of plan assets is presented in aggregate below: £m £m
The financial assumptions used to determine net cost for the year ended 31December 2003, 2002 and 2001 are as follows: Expected return on assets 6.60 6.60 6.60 Expected rate of salary increases 3.83 4.04 3.53 Rate of pension increases 2.30 2.50 2.50
The overall expected return on assets assumption has been determined with the aim of reflecting the average rate of growth expected on the funds invested. In deriving this return the aim is to use a stable, realistic long-term rate of return. In any year, it is considered whether the rate of return is reasonable having regard to the weighted average of the expected returns from each of the main asset classes adjusted to allow for any difference between the levels of the fair value and market related value of assets.
Employers’ contributions were £138 million during 2003 (2002: £37 million). Employers’ contributions are expected to be approximately £375 million during 2004.
In accordance with SFAS No. 123 the Group accounts for share compensation schemes based on their estimated fair value at the date of grant. The following disclosures only reflect options granted from 1 January 1995 onwards. In the initial phase-in period, the amounts will not be representative of the effect on reported net income for future years. The SFAS No. 123 charge for the fair value of share options issued since 1 January 1996 is: £m £m £m
The effect of the performance conditions on the value of the executive share options has been determined by assuming that the earnings per share condition will be satisfied at all times and by using a stochastic projection model to determine the effect of the market-based condition. The compensation cost accrued in the US GAAP financial statements has therefore been based on a best estimate of the number of options that are likely to vest. To the extent that actual forfeitures are different from the estimate, the calculation of the compensation cost will be revised as appropriate.
In 2001, the Group adopted the Lloyds TSB Group plc Share Retention Plan. Options granted under this scheme are not subject to any performance conditions. The option granted in 2001 was made specifically to facilitate the recruitment of Mr Daniels, has a total exercise price of £1, and will be exercisable in the six month period beginning 31 December 2004.
In March 2003, the Group adopted the Lloyds TSB Group plc Share Plan 2003. Options granted under this scheme are not subject to any performance conditions. The option granted in 2003 was made specifically to facilitate the recruitment of Mr Targett, has a total exercise price of £1, and will be exercisable in the six month period beginning 31 December 2005.
Eligible employees may enter into contracts through the Save-As-You-Earn (SAYE) scheme to save up to £250 per month and, at the expiry of a fixed term of three or five years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discount, which is currently 20 per cent of the market price at the date the options were granted. Grants in periods up to 31 December 2001 also had options exercising after seven years.
The fair value calculations are based on the following assumptions: Executive SAYE
Weighted Number of average shares as Weighted option to which Number Number average Number of price at options were of options of options exercise options at 31 December exercisable at lapsed exercised price 2002 31 December (pence) 31 December during year during year (pence)
Diluted earnings per share measures the effect that existing share options would have on the basic earnings per share if they were to be exercised, by increasing the number of ordinary shares, although any options that are anti-dilutive are excluded from this calculation. An option is considered anti-dilutive when the value of the exercise price exceeds the market price. Under US GAAP certain incentive plan shares, for which the trustees have waived all dividend and voting rights, have also been included in the calculation of diluted earnings per share.
The application of EITF 02-3 ‘Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities’, which does not allow the recognition of an unrealised gain or loss at the inception of a derivative contract unless the models used to value these contracts use market observable inputs, has not had an impact on Lloyds TSB Group’s US GAAP financial statements. The fair value of these contracts is calculated using quoted prices in an active market or prices where the fair value is determined using a valuation technique that incorporates observable market data.
Under SFAS No. 115 all debt securities and equity shares are classified and disclosed as either held-to-maturity, available-for-sale or trading. Those classified as held-to-maturity are measured at amortised cost. Available-for-sale securities are measured at fair value with unrealised gains and losses excluded from the income statement and reported net of tax and minority interests as a separate component of other comprehensive income. Trading securities are measured at fair value with unrealised gains and losses included in the income statement. Debt securities and equity shares categorised as available-forsale under US GAAP give rise to an adjustment to accumulated other comprehensive income as detailed on page 153.
Of which: Due Due Due between between within 1 and 5 5 and 10 Due over No fixed 1 year years years 10 years maturity Total £m £m £m £m £m £m
The Group has the following tax losses available to be carried forward and offset against the future taxable profits of certain subsidiaries. The majority of the losses may be carried forward indefinitely.
The following tables reconcile the UK GAAP tax charge and deferred tax liability to the US GAAP tax charge and deferred tax liability as disclosed on pages £m £m £m.
UK GAAP Deferred tax liability 1,376 1,313 Deferred tax – UK pension asset (916) (854) Deferred tax – US GAAP 39 60 Deferred tax - US GAAP reconciling items 1,231 1,151 Other items* (286) (248)
The nature of the activities of VIEs in which Lloyds TSB Group has a significant variable interest include: Financing vehicles
The following table represents the carrying amounts of classification of consolidated assets that are collateral for those VIE operations that are (1) already consolidated under UK and US GAAP which would continue to be consolidated under US GAAP and (2) those VIEs created after 1 February 2003 which fall to be consolidated under FIN 46-R: Currently VIEs created after consolidated VIEs 1 February 2003 Total
The total assets and maximum exposure to loss at 31 December 2003 for those VIEs created before 1 February 2003 where Lloyds TSB Group believes it is the primary beneficiary and which have not been consolidated under UK or US GAAP are analysed in the table below. Lloyds TSB Group anticipates it would have to consolidate these entities in its US GAAP financial statements from 1 January 2004. For the purposes of these disclosures, maximum exposure to loss is considered to be the total assets, equivalent to Lloyds TSB Group’s interest. Lloyds TSB Group does not believe that losses arising from its involvement in these entities will be material.
The following tables summarise the adjustments to the profit and loss account and balance sheet which would arise from the application of US GAAP to the Group’s insurance businesses.
Long-term assurance business attributable to the shareholder ii (6,481) – (6,481) (6,213) – (6,213) Long-term assurance assets attributable to policyholders iii (50,078) – (50,078) (45,218) – (45,218) Cash and due from banks 3,587 – 3,587 2,117 – 2,117 Trading account assets iv 24,212 – 24,212 24,664 – 24,664
Indebtedness of related parties 2,200 – 2,200 1,588 – 1,588 Long-term assurance liabilities to policyholders iii 50,078 – 50,078 45,218 – 45,218 Debt securities in issue (256) – (256) (154) – (154)
Separate account liabilities viii (22,494) – (22,494) (18,945) – (18,945) Indebtedness to related parties (322) – (322) (333) – (333)
Under UK GAAP applicable to banking groups, in order to reflect the different nature of the shareholder’s and policyholders’ interests in the long-term assurance business these are shown separately as one-line items in the Group’s balance sheet. The value of the long-term assurance business attributable to the shareholder comprises the net assets of the life assurance companies and the value of the in-force business. The assets attributable to policyholders mainly comprise the investments held in the long-term assurance funds either on behalf of policyholders, or which have not yet been allocated to either the policyholders or the shareholder. Liabilities to policyholders mainly comprise policyholder benefit provisions.
Under UK GAAP applicable to banking groups, future policyholder benefit provisions included in the Group’s balance sheet are calculated using net premium methods for conventional with-profits life insurance and other protection-type policies and are based on fund value for unitised with-profits insurance policies and investment-type policies. Net premiums are calculated using assumptions for interest, mortality, morbidity and expenses. These assumptions are determined as prudent best estimates at the date of valuation.
Under US GAAP, for unitised with-profits insurance and other investment-type policies, the liability is represented by the policyholder’s account balance before any applicable surrender charges. Policyholder benefit liabilities for conventional with-profits life insurance and other protection-type insurance policies are developed using the net level premiums method. Assumptions for interest, mortality, morbidity, withdrawals and expenses were prepared using best estimates at date of policy issue (or date of company acquisition by the Group, if later) plus a provision for adverse deviation based on Group experience. Interest assumptions range from 4 per cent to 7 per cent.
Under UK GAAP, segregated accounts are established for policyholder business for which policyholder benefits are wholly or partly determined by reference to specific investments or to an investment-related index. This is referred to as linked business. Linked business can either be unit-linked, property-linked or index-linked. In the case of the unit-linked and property-linked business the policyholders bear the investment risk. The Group bears the investment risk relating to the index-linked business.
Under US GAAP only those assets where the policyholder bears the investment risk are reported as separate account assets and liabilities.
51 Parent company disclosures a Company profit and loss account 2003 2002 2001 £m £m £m
Shareholders’ equity at 31 December 11,892 10,190 13,421 * restated (see note 1)
The table below sets out the interim and final dividends which were declared in respect of the ordinary shares for fiscal years 1999 through 2003. The sterling amounts have been converted into US dollars at the Noon Buying Rate in effect on each payment date, except for the 2003 final dividend which has been translated at the Noon Buying Rate on 31 December 2003.
Interim dividend Interim dividend Final dividend Final dividend per share per share per share per share
Price per share (in pence) Price per share (in pence) High Low
Annual prices: Quarterly prices: Fourth quarter 32.55 27.07 Third quarter 31.16 26.43 Second quarter 32.35 20.98 First quarter 29.79 19.65
Documents on display The documents concerning us which are referred to herein may be inspected at the SEC. You may read and copy any document filed or furnished by us at the SEC's public reference rooms in Washington D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the reference rooms. The SEC also maintains a website at www.sec.gov which contains, in electronic form, each of the reports and other information that we have filed electronically with the SEC.
Subject to the provisions set out in the next paragraph in relation to temporary non-residents, US holders will not normally be liable for UK tax on chargeable gains unless they carry on a trade, profession or vocation in the UK through a branch or agency and the ordinary shares or ADSs are or have been used or held by or for the purposes of the branch or agency, in which case such US holder might, depending on individual circumstances, be liable to UK tax on chargeable gains on any disposition of ordinary shares or ADSs. A US holder who is only temporarily not resident in the UK may, under anti-avoidance legislation, still be liable for UK tax on chargeable gains realised, subject to any available exemption, relief and/or foreign tax credit.
A US holder is entitled under the terms of the Old Treaty, in principle, to receive a payment from the UK Inland Revenue in respect of a dividend from the Lloyds TSB Group in an amount equal to the tax credit (the ‘Tax Credit Amount’) to which a UK resident individual is generally entitled in respect of the dividend. This is an amount equal to one-ninth of the dividend received. However, that entitlement is subject to a deduction withheld under the Old Treaty. The amount of such deduction will equal the Tax Credit Amount, i.e. one-ninth of the dividend. Therefore, a US holder will not be able to claim any payment from the UK Inland Revenue in respect of a dividend from Lloyds TSB Group.
Where Lloyds TSB Group issue ordinary shares or a holder of ordinary shares transfers such shares to the custodian or nominee for the depositary to facilitate the issue of ADSs to him representing the ordinary shares or to a person providing clearance services (or their nominee or agent), a liability to UK stamp duty or SDRT at the rate of 1.5 per cent (rounded up to the next multiple of £5 in the case of the stamp duty) of either the issue price or, in the case of transfer, the listed price of the ordinary shares, calculated in sterling, will arise. Where a holder of ordinary shares transfers such shares to the custodian or nominee for the depositary or clearance service this charge will generally be payable by the person receiving the ADSs or transferring the ordinary shares into the clearance service.
In addition, the summary is based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement or any other related document will be performed in accordance with its terms. The US Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits for US holders of ADSs. Accordingly, the analysis of the creditability of UK taxes described below could be affected by future actions that may be taken by the US Treasury.
The summary is based upon tax laws of the US including the Internal Revenue Code of 1986, as amended to the date hereof (the ‘Code’), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, as well as upon the Old Treaty and the New Treaty, as appropriate, changes to any of which may affect the tax consequences described herein possibly with retroactive effect. Prospective purchasers of the ADSs or ordinary shares should consult their own tax advisors as to the US, UK or other tax consequences of the purchase, ownership and disposition of such securities in their particular circumstances, including the effect of any state or local tax laws.
As used herein, a ‘US holder’ is a beneficial owner of ADSs or shares, that is, for US federal income tax purposes: • a citizen or resident of the US; • a corporation or a partnership created or organised in or under the laws of the US or of any political subdivision thereof; • an estate the income of which is subject to US federal income taxation regardless of its source; or
For US federal income tax purposes, US holders of ADSs will be treated as the owners of the underlying ordinary shares.
The limitation of foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, any dividends paid by Lloyds TSB Group plc on ADSs or ordinary shares will generally constitute ‘passive income’ or, in the case of US financial service providers, may be ‘financial services income’.
Scottish Widows Investment England 100%* Investment management 10 Fleet Place Partnership Group Limited London EC4M 7RH
Related party transactions At 31 December 2003, those who were directors of Lloyds TSB Group plc on that day beneficially owned the following ordinary shares, not including options: Title of class Identity of person or group Amount owned Per cent of class
Ordinary shares, nominal value 25 pence each Directors (16 persons) 450,832 0.01
Overdraft A line of credit, contractually repayable on demand unless a fixed-term has been agreed, established through a customer's current account.
With-profits sub-fund See ‘Description of business – Business and activities – Insurance and Investments – Life assurance, pensions and investments’.
A postal dealing service is available through Lloyds TSB Registrars. The current rate for both purchases and sales is 0.75%, no minimum. For full details please contact Lloyds TSB Registrars.
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 10286-1258.
Individual Savings Accounts (ISAs) The company provides a facility for investing in Lloyds TSB shares through an ISA. For details please contact Lloyds TSB Private Banking ISAs, Freepost, PO Box 249, Haywards Heath, West Sussex RH16 3ZU.
The community and our business Information about the Group’s role in the community and copies of the Group’s code of business conduct and its environmental report may be obtained by writing to ‘Corporate Responsibility’, Lloyds TSB Group plc, 25 Gresham Street, London EC2V 7HN. This information is also available on the Group’s website.
Financial calendar 2004 8 March Results for 2003 announced 17 March Ex-dividend date for 2003 final dividend 19 March Record date for final dividend 7 April Final date for joining or leaving the dividend reinvestment plan for the final dividend 5 May Final dividend paid 21 May Annual general meeting in Glasgow 30 July Results for half-year to 30 June 2004 announced 11 August Ex-dividend date for 2004 interim dividend 13 August Record date for interim dividend 8 September Final date for joining or leaving the dividend reinvestment plan for the interim dividend 6 October Interim dividend paid