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UK Retail Financial Services profit up £99 million, or 3 per cent, to £3,189 million.
Operating profit up 6 per cent to £4,462 million from £4,195 million.
Profit attributable to shareholders increased by 8 per cent to £3,188 million.
On a proforma weighted sales basis, new business premiums in the life and pensions business increased by 31 per cent.
The Group has improved market share in many key product areas.
For the world as a whole, 2001 was particularly challenging. The tragic events of September 11 further enhanced the recessionary tendencies that were clearly becoming visible in many OECD economies, after a prolonged period of continued economic growth. Concerted and significant action by Governments and monetary authorities has, however, provided confidence that signs of an economic rebound should become visible in the second half of 2002.
bank sector index. We have increased the dividend by 10 per cent.
Taking share price appreciation and dividend income together, the total return to shareholders was 10.1 per cent.
in service... customer focus During 2001 we sold more products to more people than ever before.
first choice for our customers We have made good progress in many areas by focusing on improving our service to customers. During 2001 we completed the implementation of a new online real-time personal banking system which has cost us £250 million over the last three years. Over the next 12-18 months we will complete the process of moving all correspondence and telephone calls out of branches to specialist service centres thus enabling staff in branches to do what they do best – to serve customers face-to-face. We have set ourselves a goal of raising customer service to record levels by the end of 2002, partly by increasing the number of customer facing staff, and to be demonstrably better than our major competitors by the end of 2003.
We recruited a record number of new customers during the year, our cross-selling rates are better than any of our peers and the level of customer attrition remains well below the industry average. We have continued to improve our product range and in 2001 the number of customers who chose to pay for their added value current accounts increased to over 3 million. Our successful segmentation strategies have been developed more fully in our retail, business banking and middle market corporate businesses. We have increased the average number of products our customers hold with us to 2.4 products per customer against an industry average today of some 1.9.
We have made good progress with our three strategic aims and we have also made progress with our three world class aspirations where we are seen as being world class in many aspects of customer relationship management; managing and leading our people; and managing change. The exciting thing about the future is the very real opportunity to excel even more in all these areas as we continue to grow our business.
So, how did our actions flow through into the figures for 2001?
performance The Group’s performance over the last few years can only be described as a modern day success story. Business as usual profit has broadly doubled over the last five years. We have one of the highest returns on equity in the world.
We are the only major shareholder owned bank in the world with a ‘triple A’ rating from Moody’s.
Learning also continues in the workplace and investing in our employees is equally important. The University for Lloyds TSB embodies our commitment to career-long learning and continuous development and we have shared our expertise through sponsorship of the Goodison Group which is recommending priorities to the government in the field of lifelong learning.
• Telephone Banking. Telephone Banking continues to grow and the Group provides one of the largest telephony services in
Debtor Management service providing legal support to help customers recover debts and Prospect Finder providing customers with a tailored list of potential customers for their business. Lloyds TSB is the leading bank for new business start-ups with around one in five opening accounts with the
• UK Wealth Management. Private Banking provides a range of tailor-made wealth management services and products to individuals from 40 offices throughout the UK. In addition to asset management, these include tax and estate planning, executor and trustee services, deposit taking and lending, insurance, and personal equity plan and ISA
Clients also include corporate pension schemes, local authorities and other institutions in the UK and overseas.
• The Americas. The Group has operated in The Americas for over 130 years and has offices in Brazil, Argentina,
• New Zealand. The National Bank of New Zealand is the country’s second largest bank and provides a full range of banking services through some 159 outlets.
were, like the original debt, previously included in loans and advances, at their written down value at date of exchange as adjusted for any subsequent movements in bad debt provisions. This treatment is no longer considered to be the most appropriate and the uncollateralised bonds have been reclassified as debt securities where they are carried at an amount based on the market value at the date of the original exchange as adjusted for the amortisation of the discount on acquisition. A prior year adjustment, increasing reserves by £248 million, has been made to reflect the revised policy.
The effect of this change on the profit and loss account for 2001 has been to increase other operating income by £77 million, increase the charge for bad and doubtful debts by £84 million, increase amounts written off fixed asset investments by £38 million, and to reduce profit before tax by £45 million. Loans and advances have been reduced by £294 million, debt securities have increased by £657 million and shareholders’ funds have increased by £254 million. 2000 comparatives have been restated; other operating income increased by £58 million, amounts written off fixed asset investments increased by £18 million and the charge for bad and doubtful debts increased by £66 million. Profit before tax has been reduced, therefore, by £26 million.
Management S.A. (page 32), and the impact of a provision for redress to past purchasers of pension policies (‘pension provision’). During 2000 changes in the economic assumptions applied to our long-term assurance business
(page 33) and a one-off charge relating to stakeholder pensions (page 33) were also significant. To facilitate comparisons of the results, certain financial information and commentaries have been presented on a ‘business as usual operating profit’ basis, which excludes the effect of these exceptional items.
Group filed with the US Securities and Exchange Commission for a discussion of such factors.
Our bancassurance strategy continues to deliver positive results. Profit before tax, on a business as usual basis, from
Pre-tax profit from UK Retail Banking fell by £143 million, or 18 per cent, to £633 million. This reduction in profitability reflects the substantial investments that have been made to support future growth including the introduction of improved products and services. In addition, during 2001 the Group invested heavily in improving customer service in the branch network and in the implementation of a number of customer relationship management initiatives which supported the 14 per cent product sales growth during the year. These investments will help to increase cross sales and improve customer loyalty in recognition that the retail banking business is a key recruitment vehicle for the sale of all our extensive range of bancassurance products, much of the profitability of which is reflected in other divisions.
Wholesale Markets pre-tax profit increased by £191 million, or 26 per cent, to £937 million as all businesses performed strongly. In addition to the impact of the acquisition of Chartered Trust there was strong customer lending growth in Corporate and Commercial Banking, and good contributions from Corporate and Commercial Banking,
Excluding the general provision in respect of Argentina, provisions overseas increased to £122 million from £115 million. The Group’s charge for bad and doubtful debts, expressed as a percentage of average lending and excluding the general provision relating to Argentina, was 0.57 per cent compared to 0.50 per cent in 2000. At the end of the year provisions for bad and doubtful debts for the Group totalled £1,468 million, representing over 120 per cent of non-performing loans (2000: 113 per cent) and, notwithstanding the general slowdown in global economic growth, the level of non-performing loans decreased slightly to £1,222 million, compared with £1,259 million in
One of the key elements of our strategy has been our investment in Customer Relationship Management (CRM). Our
Trading surplus 2,013 1,995 Provisions for bad and doubtful debts 415 332 Income from associated undertakings and joint ventures (10) 2 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Group operates. This extensive repositioning has included substantial investment in infrastructure, improved products, a revised fee structure and higher staff numbers in customer facing sales and support areas. This has clearly had a short-term impact on profitability but we are confident that the business is now better positioned for sustainable future profit growth.
ATM charges. All of these product and service enhancements have substantially improved the Group’s customer proposition and have been a key factor in the delivery of a 14 per cent increase in retail banking product sales during 2001.
Group’s added value current accounts continued with Lloyds TSB maintaining its market leadership in this area with over 3 million customers now using these accounts. In addition the Group has substantially enhanced its broader product range with new and innovative savings products and a wider range of more competitive personal loan and credit card services. In many cases these are supported by internet technology extending product distribution and improving operating efficiency.
During the year, Business Banking rolled-out an innovative new customer needs based proposition, to make it easier for people to start up in business and to reduce the number of businesses ceasing to trade within their first few years.
The Group continues to be one of the most efficient mortgage providers in the UK. C&G continues to benefit from mortgage sales distribution through the Lloyds TSB branch network, the IFA market and from the strength of the C&G
Life, pensions and unit trusts: Scottish Widows 715 629 Abbey Life 199 169 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Scottish Widows has now been fully integrated into the Group, sales and profitability are improving, and we are confident that the various financial targets we set on completion of the acquisition will be achieved, good progress already having been made. Operating profit from Insurance and Investments increased by 12 per cent to £1,601 million from £1,425 million in 2000.
Operating profit from general insurance operations, comprising underwriting and broking, rose by £81 million, or 14 per cent, to a record £668 million, mainly as a result of continued strong revenue growth from creditor and home insurance. With over 8 million general insurance policies in force, we believe the Group has market leadership in home, creditor and travel insurance.
External unit trust sales: Total external unit trust sales 1,400.5 1,990.0 2,043.4
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 428 399afffffffffffffffffffffffffff afffffffffffffffffffffffffff Commissions from insurance broking: aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 528 398afffffffffffffffffffffffffff afffffffffffffffffffffffffff Operating profit 668 587
Chartered Trust in September 2000 had a significant impact on the figures within Wholesale Markets. In 2001
Group constantly reviews all of its lending portfolios and remains satisfied that its prudent lending approach will continue to ensure that the Group’s lending book is well positioned for any economic slowdown. There was an £18 million reduction in the charge against the consumer finance portfolio of Lloyds UDT due to improved credit control procedures.
Following the acquisition of Chartered Trust, the Group has now combined the activities of Lloyds UDT and Chartered
Trust to create Lloyds TSB Asset Finance. This has consolidated the Group’s position as market leader in the independent provision of motor finance. Lloyds TSB is also one of the leading contract hire providers in the UK and through our motor direct operation we are now successfully beginning to sell new and used cars to our 16 million retail customers. Trading conditions have been in line with our expectations at the time of acquisition, market share is increasing and we are on track to achieve our financial projections and anticipated cost synergies.
International Banking pre-tax profit was £33 million, or 7 per cent, lower at £444 million compared with 2000, as a result of a £100 million reduction in pre-tax profit caused by the recent economic difficulties in Argentina. Pre-tax profit from International Banking represented 10 per cent of Group pre-tax profit of which 4 per cent related to our
Some two-thirds of the local balance sheet relates to retail and business customer lending and mortgages, with cash and liquidity, and lending to banks representing the majority of the residual balance sheet. In addition, the Group has offshore loans of some £150 million to subsidiaries of major multinational companies with Argentine operations, and some £100 million of Argentine Government bonds within the Emerging Markets Debt portfolio.
The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly disabled and disadvantaged people, to play a fuller role in society. The Foundations receive 1 per cent of the Group’s pre-tax profit, averaged over 3 years, instead of the dividend on their shareholdings. In 2002 they will receive £36 million (2001: £34 million) to distribute to charities, making them in aggregate the largest independent grant giving body in the UK.
Earnings on surplus capital, central costs and other unallocated items, was £12 million better than in 2000. A full year’s funding cost of Scottish Widows, compared to 10 months in 2000, was offset by the gradual build up of surplus capital and some £30 million of benefits to Group capital from changes in the Group’s interest rate hedging arrangements.
Net interest margin % 3.48 3.58 International: Net interest income £m 720 631 Average interest-earning assets £m 23,701 20,448 Gross yield on interest-earning assets % 10.19 10.40
Fees and commissions receivable: UK current account fees 573 629 Other UK fees and commissions 1,220 1,171 Insurance broking 528 398 Card services 332 304 International fees and commissions 269 266
Premises and equipment: Rent and rates 261 247 Hire of equipment 18 26 Repairs and maintenance 110 115
Depreciation increased by £147 million. An increase of £95 million in the charge in respect of operating lease assets, of which £82 million is due to the acquisition of Chartered Trust, was partly offset by a £23 million reduction in the depreciation charge on certain ship leases. Goodwill amortisation increased by £17 million due to the amortisation of the goodwill arising on the acquisition of Chartered Trust.
The management of day-to-day operating costs continues to have a strong emphasis in the Group, whilst at the same time we are investing heavily in many key future growth areas of our business. Our investments in e-commerce, wealth management, and customer relationship management and segmentation programmes will improve the quality of our sales and service and improve our revenue growth prospects in 2002 and beyond. During 2001, this incremental new revenue investment totalled £235 million. In 2002 and beyond we expect the level of this new revenue investment to reduce.
In 2004 and beyond no further ‘below the line’ exceptional restructuring costs are anticipated as a result of this efficiency programme. The further expenditure of approximately £170 million, which will now be incurred in 2002 beyond that previously advised, will be covered by additional cost benefits estimated at £155 million by the end of 2002, resulting in a payback of just over one year for these further costs.
Further initiatives – – 170 40 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
financial review capital ratios 31 December 31 December 2001 2000* £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Post-tax return on average risk-weighted assets – statutory basis 2.53% 3.10% – business as usual basis 3.20% 3.38%
Abbey National offer costs These relate to costs incurred in connection with the proposed acquisition of Abbey National plc prior to the announcement by the Secretary of State for Trade and Industry that Lloyds TSB would not be permitted to proceed with an offer.
shareholder returns Dividends of £1,872 million (an increase of 10 per cent per share) are covered 1.3 times by earnings. Profit of £628 million will be retained in the business. Total shareholders’ funds grew by £736 million, or 7 per cent, to £10,760 million (191p per share) from £10,024 million (180p per share) at the end of 2000.
Since the merger between Lloyds Bank and TSB six years ago, the Group’s share price has risen by 115 per cent. An investment of £1,000 in Lloyds TSB shares on 1 January 1996, with dividends reinvested in each year, was worth £2,763 at the end of 2001, a compound annual growth rate of over 18 per cent. On the same basis, an investment of £1,000 in the FTSE All-Share index would be worth £1,662.
economic profit In pursuit of our aim to maximise shareholder value, we use a system of value based management as a framework to identify and measure value in order to help us make better business decisions. Accounting profit is of limited use as a measure of value creation and performance as it ignores the cost of the equity capital that has to be invested to generate the profit. We choose economic profit as a measure of performance because it captures both growth in investment and return. Economic profit represents the difference between the earnings on the equity invested in a business and the cost of the equity. Our calculation of economic profit uses average equity for the year and is based on a cost of equity of 9 per cent (2000: 9 per cent).
The longer-term rates of return for the period are consistent with those used by the Group in the calculation of the embedded value at the beginning of the period, which were 8.00 per cent for equities and 5.25 per cent for gilts.
These are based upon a long-term view of economic activity and are therefore not adjusted for market movements which are considered to be short term. This approach is considered the most appropriate given the long-term nature of the portfolio of products and achieves consistency in reporting from one period to the next.
stakeholder pensions Stakeholder pensions were introduced from 6 April 2001, with charges on these new products being limited by
Insurance and investment businesses provide general insurance and market savings and investment products both within and outside the banking customer bases. Fund management services are also provided although, whilst involving external clients, this activity is currently dominated by the management of internal group funds.
Responsibility for the implementation of risk policy and for ensuring that there is an effective top level control framework is delegated to the Director of Group Risk Management, who reports to the Group Chief Executive and has access to the Chairman and members of senior management. The Audit Committee and the Board in turn receive regular reports on risk issues prepared by Group Risk Management. The Director of Group Risk Management is also responsible for the provision of independent oversight of management actions which impact upon the risk profile of the Group.
This risk governance structure is illustrated in the following organogram: The Director of Group Risk Management implements the policies established by the Board through four principal departments: Group Risk, Group Audit, Group Compliance and Sanctioning & Sovereign Risk. Group Risk’s responsibilities include credit risk, market risk, operational risk, insurance risk and environmental risk; the department also sets risk policy, develops risk methodology and undertakes risk evaluation and reporting. Group Risk
At an operating level, the Group promotes sound internal risk management practices through the directors of its separate business units, who have primary responsibility for measuring, monitoring and controlling the range of portfolio and operating risks within their specific area of accountability. The directors and management of the business units, as the primary risk managers, are responsible for establishing proper control frameworks within their businesses to ensure that the Group’s activities are conducted effectively but prudently, and within the parameters defined by Group Risk Management. They are responsible for ensuring that the risks within their business are identified, assessed, controlled and monitored, and that the controls and procedures implemented comply with Group policies and standards, which are extensively documented in rule books and procedures manuals.
• Control of bank exposures. In-house proprietary rating systems are used to approve bank facilities on a Group basis.
• Portfolio analysis. In conjunction with Group Risk, Group 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.
• Communication and provision of general guidance on all credit-related risk issues, including regulatory changes and environmental risk policy, to promote consistent and best practice throughout the Group.
Day-to-day credit management and asset quality within each business unit is the primary responsibility of the business unit directors. Each business unit has in place established credit processes involving credit policies, procedures and lending guidelines. Authority to delegate lending discretions within operating divisions rests with officers holding divisional lending delegated authority. All material authorities are advised to Group Risk.
Market risk is the risk of losses being incurred as a result of adverse movements in interest or exchange rates or other market variables. It is managed by a variety of different techniques, and strictly controlled within aggregate limits authorised by the Board. The Group’s banking activities expose it to the risk of adverse movements in interest rates or exchange rates, with little or no exposure to equity or commodity risks.
Limits to control trading positions and interest rate risk within the wholesale banking book are set by Group Risk up to a total authorised by the Board. A combination of risk measurement techniques are used, including position limits and sensitivity limits. These are supplemented by a range of Value at Risk (VaR) techniques in use in individual businesses, where suitable methodologies have been developed in consultation with Group Risk to meet the specific requirements of each centre. At Group level, global positions are incorporated into a central VaR model, taking into account natural offset positions between different trading centres, and stress tests are carried out to simulate extreme conditions.
Group Risk issues the limits to the international business units on interest rate gaps or, where more appropriate, VaR.
Structural interest rate risk in the Group’s retail portfolios, including mortgages, and in the Group’s capital funds, arises from the different repricing characteristics of the Group’s banking assets and liabilities and is managed by the
The surplus in the life businesses exists to provide liquidity and solvency capital. With profits business, in particular, involves guaranteed benefits that create an indirect market risk to the Group. Accordingly, in extreme investment market conditions, the associated surplus could be called upon to support with profits benefits.
The Group’s structural position at 31 December 2001 is set out on page 83 in note 47d). The position implies that a hypothetical increase of 10 per cent in the value of sterling against all other currencies would lead to a £172 million reduction in reserves. There would be no material impact upon the Group’s risk asset ratio.
Group Risk Management’s responsibilities in respect of operational risk are as follows: Policy & Methodology: • Formulation of high-level operational risk policies designed to ensure a comprehensive and consistent approach to the identification and management of operational risk. These policies provide a standard framework within which
The Financial Services Authority sets down minimum requirements for solvency and reserving for all classes of insurance, which are carefully monitored by the relevant business units within the Group. The retained risk level is carefully controlled and monitored, with close attention being paid to the analysis of underwriting experience, product design, policy wordings, adequacy of reserves, solvency management and regulatory requirements.
The Group’s business is regulated overall by the Financial Services Authority (FSA), and additionally by local regulators in offshore and overseas jurisdictions. Each Group business has a nominated individual with ‘Compliance
Lloyds TSB Group adopts a responsible attitude to social, environmental and ethical (SEE) issues, and publishes a separate annual information pack on its role in the community, its code of business conduct and its environmental performance: ‘the community and our business’ (see page 85 for details).
Profit on ordinary activities before tax 3,550 3,860 3,656 3,053 2,790aaddfff aaddfff aaddfff aaddfff aaddfff Profit on ordinary activities after tax 2,579 2,755 2,545 2,159 2,044aaddfff aaddfff aaddfff aaddfff aaddfff Profit for the year attributable to shareholders 2,500 2,706 2,539 2,146 2,030aaddfff aaddfff aaddfff aaddfff aaddfff Economic profit 1,543 1,839 1,777 1,424 1,441aaddfff aaddfff aaddfff aaddfff aaddfff
J Eric Daniels Group Executive Director, UK Retail Banking Joined the board in 2001. Served with Citibank from 1975 and held a number of senior and general management appointments in the USA, South America and Europe before becoming chief operating officer of Citibank Consumer Bank in 1998. Following the Citibank/Travelers merger in 1998, he was chairman and chief executive officer of Travelers Life and Annuity until 2000. Chairman and chief executive officer of Zona Financiera from 2000 to 2001. Aged 50.
Sheila M Forbes† A director of TSB Group since 1994. Chairs the board of governors of Thames Valley University and is a civil service commissioner. Head of personnel for Unigate from 1980 to 1988 and personnel director for Storehouse from 1988 to 1992. Director of human resources at Reed Elsevier (UK) from 1992 to 1996. Aged 55.
The Company is a holding company and its subsidiaries provide a wide range of banking and financial services through branches and offices in the UK and overseas.
Mr Gemmell will join the board on 17 April 2002. Under the articles of association these new directors offer themselves for election at the annual general meeting.
No director had a material interest at any time during the year in any contract of significance with the Company or its subsidiaries.
The Group is committed to employment policies which follow best practice, based on equal opportunities for all employees irrespective of sex, race, national origin, religion, colour, disability, sexual orientation, age or marital status.
The profit and loss account includes a charge for charitable donations totalling £36,747,000 (2000: £34,790,000), including £36,376,667 (2000: £34,483,333) under deeds of covenant to the four Lloyds TSB Foundations, which will be paid during 2002. No donations were made to political parties.
As the Company owed no amounts to trade creditors at 31 December 2001, the number of days required to be shown in this report, to comply with the provisions of the Companies
Account is taken of information, from internal and independent sources, on the remuneration for comparable positions in a wide range of FTSE 100 companies. The strategy for executive pay is, generally, for basic salaries to reflect the relevant market median, and total direct compensation (basic salary, annual incentives and the value of long-term incentives) to be at the upper quartile of the market place, provided that performance justifies the amount.
The government recently announced that it intended to legislate to require companies to provide shareholders with more detailed information on directors’ remuneration and to put an annual resolution to shareholders on the directors’ remuneration report.
Each year, with the help of external management consultants, the total remuneration package is reviewed, and in 2001 Hay
In April 2000, shareholders approved the introduction of a medium-term incentive plan, which gives executive directors serving at that time the opportunity of an award, deferred until after the end of 2002 and which is subject to two performance targets, based on the efficiency ratio and return on equity. For the group chief executive the maximum award will be equal to 50 per cent of aggregate basic salary for the years 2000-2002 and for other executive directors, the maximum award will be equal to 25 per cent of aggregate basic salary for these three years.
For the year 2001, the Group’s efficiency ratio was 49.0 per cent and return on equity was 23.5 per cent.
The Group is committed to the governing objective of maximising shareholder value over time. The board believes that the executive share option schemes for senior executives, approved by the shareholders at the annual general meeting in 1997 and amended at the annual general meeting in 2001, provide an effective method of giving executives the incentive to achieve that objective.
USA, as part of the remuneration package considered necessary to attract him to the UK. He is the only participant in the plan and he became eligible to participate in it when he joined the company on 1 November 2001. On 2 November 2001, an option was granted to him under the plan to acquire 216,763 ordinary shares in the company (with a value of £1.5 million at the date of grant) for a total price of £1. No further options may be granted to him under the plan.
Mr Atkinson, Mr Ellwood, Mr Fairey, Mr Kane and Mr Pritchard each has a service agreement which the company may terminate by giving one year’s notice. In connection with the arrangements for the transfer of the business of Scottish Widows to the Group in March 2000, Mr Ross’s service agreement provided for two years’ notice for the first two years. After March 2002, the notice period will decrease by one month for each month of service. In March 2003, therefore, Mr Ross’s agreement will provide for one year’s notice. To facilitate
Salaries/fees benefits payments sharing Total 2000 aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff
service agreements and a departing director’s duty to mitigate loss. The committee reviewed the wording of the executive directors’ agreements and felt that as the notice period did not exceed one year, with the exception of Mr Ross and Mr Daniels as mentioned above, there was no need to provide explicitly for compensation payments on early termination.
Pension benefits earned 31 December (excluding 31 December by the directors: 2001 inflation) 2001 aaaaaaasfff aaaaaaasfff aaaaaaasfff
The pension provisions in Mr Pritchard’s service agreement have been changed, with effect from 1 January 2000, to defined benefit arrangements. He therefore waived entitlement to the £63,045 allocation to the defined contribution section of the separate fund mentioned in last year’s annual report.
The directors’ interests, all beneficial, in shares in Lloyds TSB Group were: At At 1 January 1 January
* These directors will receive additional Lloyds TSB Group shares on exercising share options held on 28 December 1995. These shares will compensate them for the special dividend of 68.3p per share which was paid to former TSB Group shareholders in 1996 following the merger with Lloyds Bank, but which was not paid to optionholders. In that regard Mr Fairey received 13,511 additional shares when he exercised the 138,556 share options shown above. Following that exercise, Mr Fairey no longer held any share options to which these arrangements apply.
** This is the difference between the market price of the shares on the day on which the share option was exercised and the price paid for the shares, and includes the value of shares issued to compensate directors for the special dividend mentioned above.
None of the other directors at 31 December 2001 had options to acquire shares in the Company or its subsidiaries.
The board considers that good governance is central to achieving the Group’s governing objective of maximising shareholder value. That has been uppermost in directors’ minds when applying the governance principles contained in the code annexed to the UK listing authority’s listing rules.
Information about directors’ remuneration is given in the directors’ remuneration report on pages 46 to 51 and details of how the board reviews financial and operational controls and risk management generally are shown on page 53 and in the financial review on pages 10 to 39.
Group Compliance. The audit committee also receives reports from the Company’s auditors, PricewaterhouseCoopers, (which include details of significant internal control matters that they have identified) and has a discussion with the auditors at least once a year without executives present, to ensure that there are no unresolved issues of concern.
We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the United Kingdom Companies Act 1985.
We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises only the directors’ report, the chairman’s statement, the financial review and the corporate governance statement.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.
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 31 December 2001 and of the profit and cash flows of the
Trading surplus 4,502 4,572 General insurance claims 174 142 Provisions for bad and doubtful debts 16
Intangible fixed assets 23 2,566 2,599 Tangible fixed assets 24 3,365 3,037
Other contingent liabilities 1,931 1,541 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff 7,963 5,147aafffffffffffffffffffffffffff aafffffffffffffffffffffffffff Commitments: Commitments arising out of sale and option to resell transactions – 3
Short-term borrowings 35 – 1 Amounts owed to group undertakings 1,760 1,811 Other creditors 62 62 Dividend payable 1,306 1,172
Total assets less current liabilities 11,173 10,246 Creditors Amounts falling due after more than one year
Profit attributable to shareholders 2,500 2,706 Currency translation differences on foreign currency net investments (86) (11) aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Acquisitions and disposals: Additions to interests in joint ventures (44) – Acquisition of group undertakings (note 49e) (180) (5,110) Disposal of group undertakings and businesses (note 49g) 40 83
Net cash outflow before financing (885) (70) Financing: Issue of subordinated liabilities (loan capital) 286 952 Issue of capital securities by subsidiary undertakings 456 509 Issue of ordinary share capital net of £185 million
Shares in group undertakings are stated in the balance sheet of the Company at its share of net tangible assets, with the exception of the life assurance group undertakings which are stated on the basis described in o. Attributable goodwill is included, where this has not been written off directly to reserves.
In those cases where the Group is the lessee, operating lease costs are charged to the profit and loss account in equal annual instalments over the life of the lease.
A number of the Group’s subsidiary undertakings are engaged in writing longterm 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.
The Group accounts for its interest in long-term assurance business using the embedded value basis of accounting. The value of the shareholder’s interest in the long-term assurance business (‘the embedded value’) included in the Group’s balance sheet is an actuarially determined estimate of the economic value of the Group’s life assurance subsidiaries, excluding any value which may be attributed to future new business. The embedded value is comprised of the net tangible assets of the life assurance subsidiaries, including any surplus retained within the long-term business funds, which could be transferred to the shareholder, and the present value of the in-force business. The value of the in-force business is calculated by projecting the future surpluses and other net cash flows attributable to the shareholder arising from business written by the balance sheet date, using appropriate economic and actuarial assumptions, and discounting the result at a rate which reflects the shareholder’s overall risk premium.
The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred and only credited to the profit and loss account when earned. Where the Group acts as intermediary, commission income is included in the profit and loss account at the time that the underwriter accepts the risk of providing insurance cover to the customer.
Class of business: UK Retail Banking and Mortgages Profit before exceptional restructuring costs 1,588 1,665 Exceptional restructuring costs (150) (99)
UK Retail Financial Services 2,271 2,785 Wholesale Markets and International Banking Profit before exceptional restructuring costs 1,381 1,223 Exceptional restructuring costs (17) (30)
Central group items (124) (118) Profit on sale of businesses 39 –
InterDomestic national Total 2000 2000* 2000* £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Salaries and profit sharing 1,953 1,862 Social security costs 140 131 Other pension costs (note 45) (108) (105)
5 Exceptional restructuring costs In February 2000 the Group announced an efficiency initiative aimed at reducing its overall cost base, which continued during 2001. The initiative focuses on improving the Group’s infrastructure, consolidation of large scale processing operations and support functions and streamlining of the branch network, combined with the expansion of lower cost delivery channels, all of which contributes towards an enhancement in organisational efficiency and customer service. Costs of £167 million (2000: £108 million) were incurred in connection with this programme, mainly comprising severance, software writeoff and consultancy costs.
Following the acquisition of Scottish Widows in 2000, the Group has been progressively integrating its businesses with its existing insurance and investment activities and rationalising the processes. During 2001, costs of £50 million (2000: £59 million) were incurred, principally relating to the integration and centralisation of back office support functions, the streamlining and automation of client service processes and the redefinition of the sales process.
Debt securities 58 27 Equity shares 2 5 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 60 32afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
Charges: Rental of premises 203 193 Hire of equipment 18 26 Interest on subordinated liabilities (loan capital) 493 490 *restated (see note 1)
The profit attributable to shareholders includes a profit of £1,893 million (2000: £1,699 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.
pence pence per share per share £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 33.7 30.6 1,872 1,683afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 12 Earnings per share 2001 2000* aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Profit attributable to shareholders† £2,500m £2,706m Weighted average number of ordinary shares in issue during the year†† 5,533m 5,487m Dilutive effect of options outstanding 50m 58m Diluted weighted average number of ordinary shares in issue during the year 5,583m 5,545m Earnings per share 45.2p 49.3p Diluted earnings per share 44.8p44.8p 48.8p *restated (see note 1)
Other eligible bills – 47 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,412 1,709afffffffffffffffffffffffffff afffffffffffffffffffffffffff Included above: Unamortised discounts net of premiums on investment securities 6 2afffffffffffffffffffffffffff afffffffffffffffffffffffffff Movements in investment Premiums securities comprise: and
At 31 December 2001 2,777 5 2,782afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes.
14 Loans and advances to banks 2001 2000* £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Lending to customers 111,541 102,648 Hire purchase debtors 5,345 5,172 Equipment leased to customers 7,585 8,122 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Loans and advances to customers 1,466 1,420 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,468 1,426afffffffffffffffffffffffffff afffffffffffffffffffffffffff
Loans and advances to customers Domestic: Agriculture, forestry and fishing 2,074 2,026
Investment securities: Other public sector securities – – 1 1 Bank and building society aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Other securities: aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 13,236 13,236 8,210 8,210afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
Securities sold or matured (13,987) (84) (4) (14,067) Charge for the year – – 58 (58) Amortisation of premiums and discounts – 62 – 62 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
At 31 December 2001 50 12 38afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes.
At 31 December 2001 afffffffffffffffffffffffffff The Group’s principal investments are in two joint ventures: Group interest Nature of business aaaaaaaaaaaffffffffffffffffffffffffffaffffffffffffffffffffffffff aaaaaaaaaaaffffffffffffffffffffffffffaffffffffffffffffffffffffff iPSL 19.5% of issued Cheque processing ordinary share capital
Amounts advanced – 100 Repayment of loans – (100) Revaluation 808 –
Cost: Exchange and other adjustments (14) (22) 8 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff
The Group’s residual value exposure in respect of operating lease assets, all of which are expected to be disposed of at the end of the lease terms, was as follows: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Foreign exchange and interest rate contracts (note 47a) 2,090 2,688 Balances arising from derivatives used for hedging purposes 931 431 Settlement balances 570 121 Other assets 877 758 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,468 3,998afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
The value of the shareholder’s interest in the long-term assurance business (‘the embedded value’) is comprised of the net tangible assets of the life assurance subsidiaries, including any surplus retained in the long-term business funds, which could be transferred to shareholders, and the present value of the in-force business. The value of the in-force business is calculated by projecting future surpluses and other net cash flows attributable to the shareholder arising from business written by the balance sheet date and discounting the result at a rate which reflects the shareholder’s overall risk premium.
Contribution from existing business: this comprises the following elements: • The expected return arising from the unwinding of the discount applied to the expected cash flows at the beginning of the year; • Experience variances caused by the differences between the actual experience during the year and the expected experience; and
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.
Included within other items are: Short-term fluctuations in investment returns: this represents (a) the difference between the actual investment return in the year on investments backing shareholder funds and the expected return based upon the economic assumptions made at the beginning of the year: this is recognised immediately; and (b) the effect of these fluctuations on the value of in-force business which is recognised using smoothed fund values.
Movements in the provision over the last two years have been as follows: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Accrual of interest on the provision 20 26 Charge for the year 70 100 Compensation paid (238) (173)
By the end of 2000, the Group had gained further experience as to the number and size of claims likely to require compensation, in particular those affected by the revised guidelines issued towards the end of 1999 dealing with the way in which compensation should be calculated for those customers who had opted out of the State Earnings Related Pension Scheme. After taking this into account, the cost of redress was forecast to increase by £100 million and a provision of this amount was made.
The long-term assurance assets attributable to policyholders comprise: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 46,389 51,085afffffffffffffffffffffffffff afffffffffffffffffffffffffff Investments shown above comprise: Fixed interest securities 12,642 14,512 Stocks, shares and unit trusts 27,018 31,885 Investment properties 3,722 3,098 Other properties 121 10 Mortgages and loans 102 117 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 47,910 52,683afffffffffffffffffffffffffff afffffffffffffffffffffffffff The liabilities to policyholders comprise: Technical provisions: Long-term business provision (net of reinsurance) 24,151 23,514 Claims outstanding (net of reinsurance) 211 172
Other debt securities by residual maturity repayable: 3 months or less 17,070 8,574 1 year or less but over 3 months 4,931 6,476 5 years or less but over 1 year 104 241 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 24,420 17,899afffffffffffffffffffffffffff afffffffffffffffffffffffffff 35 Short-term borrowings
The short-term borrowings of the Company in 2000 comprised floating rate unsecured loan notes which were repaid during 2001. These notes were not subordinated and bore interest at rates set periodically in advance based on London Interbank rates.
Settlement balances 542 232 Other liabilities 1,464 1,148 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 6,673 6,600afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
At 31 December 2001 34 204 75 69 19 401afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Pension obligations A description of the Group’s pension arrangements is provided in note 45a).
■ 55⁄8% Undated Subordinated Step-up Notes callable 2009 (€1,250 million) 757 774 † Undated Step-up Floating Rate Notes callable 2009 (€150 million) 91 94 ¶ 65⁄8% Undated Subordinated Step-up Notes callable 2010 406 405 ✜ 5.57% Undated Subordinated Step-up Coupon Notes callable 2015 (¥20 billion) 105 117 ¶ 61⁄2% Undated Subordinated Step-up Notes callable 2019 266 266 ¶ 8% Undated Subordinated Step-up Notes callable 2023 199 199
† Subordinated Floating Rate Notes 2010 (US$400 million) 274 267 – –
Company on a subordinated basis. ¶ At the callable date the coupon on these Notes will be reset by reference to the applicable five year benchmark gilt rate. § These bonds bear interest, to be reset 5 years before redemption date, at a fixed margin over New Zealand Government stocks. ■ In the event that these Notes are not redeemed at the callable date, the coupon will be reset to a floating rate. ✜ 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. ❖ Exchangeable at the election of the Group for further subordinated floating rate notes.
✣ A further £257 million was issued during 2001 primarily to finance the general business of the Group. ✠ Issued during 2001 primarily to finance the general business of the Group.
Preference shares of US25 cents each 40 40afffffffffffffffffffffffffff afffffffffffffffffffffffffff Euro €m €m
At 31 December 2001, options to acquire 123 million Lloyds TSB Group ordinary shares of 25p each were outstanding under the executive share option schemes, the share retention plan, and the staff sharesave share option schemes exercisable up to 2011. These include the option, described on page 47, to acquire 216,763 shares under the share retention plan: otherwise the options are exercisable at prices ranging from 124p to 888p per share.
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 2001 Group entities owed £1,186 million (2000: £1,251 million) and were owed £299 million (2000: £289 million); these amounts are included in customer accounts and loans and advances to customers respectively. In addition, fees of £62 million (2000: £68 million) were received, and fees of £28 million (2000: £29 million) were paid, in respect of asset management services.
Pension arrangements for most of the staff in the UK and the majority of those overseas are operated through defined benefit schemes funded by Group companies. The principal schemes in operation are Lloyds TSB Group Pension Schemes No’s 1 and 2. The defined benefit sections of these schemes are now closed to new members. Pension arrangements for staff joining Lloyds TSB Group Pension Scheme No. 1 after 1 January 1996 and Lloyds TSB Group Pension Scheme No. 2 after 1 January 1998 are through money purchase elements of these schemes. Arrangements for pensions of certain staff employed overseas who are not included in funded schemes are made in accordance with local regulations and custom.
notes to the accounts b Post-retirement healthcare costs in the consolidated accounts
Rate of inflation 2.50 Rate of salary increases 4.04 Rate of increase for pensions in payment and deferred pensions 2.50 Discount rate 6.00
Net pension asset 356afffffffffffffffffffffffffff If these amounts had been recognised in the financial statements, the Group’s net assets and profit and loss account reserve at 31 December 2001 would have been as follows: £m aaaaaffffffffffffffffffffffffff
After an extensive review of its existing practices carried out in the light of the judgement of the House of Lords in the guaranteed annuities case Equitable Life vs Hyman, it was announced that Scottish Widows was revising the way it calculates benefits for guaranteed annuity policies with effect from 1 February 2002. As a result of this change, the terminal bonuses for guaranteed annuity option policies will be increased.
The eventual cost of providing the enhanced benefits is dependent upon a number of factors, including in particular: • The proportion of policyholders with a guaranteed annuity option policy who choose to exercise their options; • The effect of future interest rate and mortality trends on the cost of annuities; and
47 Derivatives and other financial instruments Information about the Group’s use of financial instruments and management of the associated risks is given on pages 33 to 39 in the financial review.
Options purchased 3,825 11 – Options written 3,492 – 9 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 109,949 1,269 1,199afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Interest rate contracts: Interest rate swaps 286,617 4,085 4,535 Forward rate agreements 54,171 78 84 Options purchased 8,887 73 – Options written 3,993 – 58 Futures 35,112 – –
The aggregate carrying value of non-trading derivatives with a positive fair value was an asset of £18 million (2000: an asset of £23 million) and with a negative fair value was an asset of £1 million (2000: a liability of £1 million).
Total assets 91,080 8,581 10,626 30,587 11,586 16,384 21,306 190,150afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Liabilities: Minority interests and shareholders’ funds – – – – – 11,655 102 11,757 Internal funding of trading business (3,736) (741) (1,171) (6,051) (1,384) – 13,083 –
Total assets 85,466 5,927 7,058 32,001 7,503 15,461 14,612 168,028afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Liabilities: Minority interests and shareholders’ funds – – – – – 10,556 20 10,576 Internal funding of trading business 148 (982) (264) (6,188) (374) – 7,660 –
Debt securities and equity shares 8,416 8,416 6,436 6,916 Liabilities: Deposits by banks and customers 1,201 1,201 117,523 117,369 Debt securities in issue 956 956 16,943 16,982 Subordinated liabilities – – 7,510 7,692 *restated (see note 1)
Fair values are determined by reference to quoted market prices or, where no market price is available, using internal models which discount expected future cashflows at prevailing interest rates.
Information about the management of market risk in the Group’s trading activities is given on pages 36 and 37 in the financial review.
Of the net losses of £578 million at 31 December 2001, £342 million of net losses are expected to be recognised in the year ending 31 December 2002 and £236 million of net losses in later years.
At 1 January 515 – Effect of foreign exchange movements (11) 6 Cash inflow from financing 456 509 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Payments pending settlement – 401 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 10 6,588afffffffffffffffffffffffffff afffffffffffffffffffffffffff g Disposal of group undertakings and businesses 2001 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
In addition there were other items affecting the Group’s 2001 results when compared to 2000. During 2001 there were exceptional restructuring costs in support of the Group’s extensive efficiency programme (page 28), acquisition costs relating to the proposed acquisition of Abbey National (page 31), a profit on the sale of Lloyds TSB Asset Management S.A.
(page 32), and the impact of a provision for redress to past purchasers of pension policies (‘pension provisions’). During 2000 changes in the economic assumptions applied to our long-term assurance business (page 33) and a one-off charge relating to stakeholder pensions (page 33) were also significant. To facilitate comparisons of the results, certain financial information and commentaries have been presented on a ‘business as usual operating profit’ basis, which excludes the effect of these exceptional items.
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 Public Affairs, Lloyds TSB Group plc, 71 Lombard Street, London EC3P 3BS. This information is also available on the Group’s website (see below).