Total capital ratio 9.6 per cent, tier 1 capital ratio 7.8 per cent.
Our strategic aims The Group remains totally committed to maximising shareholder value over time and our business units continue to be focused on the Group’s three strategic aims: to be a leader in our chosen markets, to be first choice for our customers and to drive down day-to-day operational costs to enable us to further invest in our business franchise. This is a strategy that is being well implemented and delivered, and ensures that the Group continues to seek the optimum balance between short-term profit growth and investment in the future of the business, to create sustainable long-term value for all our stakeholders.
Alan Moore, Deputy Chairman, will also be leaving the Board at the annual general meeting after 23 years of valuable service, including 14 as a member of the Board, and will be replaced by David Pritchard, who will retire as an executive director. Steve Targett will join the Board on 10 March 2003, and succeed David as Group Executive Director, Wholesale and International Banking, following the annual general meeting.
Market leadership in home insurance With over 9 million policies in force, Lloyds TSB Insurance is one of the largest distributors of personal lines general insurance in the UK, with market leadership in the distribution of home and creditor insurance.
The trading environment of 2002 has been a substantial challenge for both the financial services industry and, within it, Lloyds TSB. In order to prosper in such a challenging environment it remains essential that the Lloyds TSB Group has in place a clearly defined strategy. To this end we remain committed to maximising shareholder value over time through leveraging world class leadership and management of our people to achieve our three strategic aims. We have made progress in a number of areas.
In our wholesale markets and international banking businesses good growth has continued to be achieved in a number of our specialist businesses, although this growth has been offset by a significant increase in the level of corporate bad and doubtful debt provisions.
Business has an important role to play in neighbourhood renewal which is why we work with community based organisations to foster economic and social regeneration. Our programme focuses on creating access to finance in disadvantaged communities, providing backing for small business and encouraging entrepreneurship among young people.
Foundations have received over £200 million to distribute to local charities.
• Current accounts, savings and investment accounts, and consumer lending. The retail branches of Lloyds TSB Bank offer a broad range of branded products and C&G provides retail investments through its branch network and a postal investment centre.
• 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 products. At the end of 2002, client funds under management totalled some £10 billion.
• Cheltenham & Gloucester is the Group’s specialist residential mortgage provider, selling its mortgages through branches of C&G and Lloyds TSB Bank in England and Wales, as well as through the telephone, internet and postal service, C&G TeleDirect. The Group is the third largest residential market lender in the UK, with a market share of 9.3 per cent, loans outstanding at the end of 2002 of £62.5 billion and over 980,000 borrowers.
Insurance and Investments • Scottish Widows is the Group’s specialist provider of life assurance, pensions and investment products, which are distributed through the Lloyds TSB branch network, through independent financial advisors and directly to the consumer via the telephone, internet, and face-to-face.
equity at 31 December 2001 by £40 million to reflect the revised policy.
Net interest income (31) – – – (31) Other finance income – – 165 – 165 Other income – – – (104) (104)
Net interest income 4,944 (22) – – – 4,922 Other finance income – – – 307 – 307
Consequential adjustments have been made to the balance sheet to reflect these changes in accounting policy.
Forward looking statements This document contains forward looking statements with respect to the business, strategy and plans of the Lloyds TSB Group, its current goals and expectations relating to its future financial condition and performance. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Lloyds TSB Group’s actual future results may differ materially from the results expressed or implied in these forward looking statements as a result of a variety of factors, including UK domestic and global economic and business conditions, risks concerning borrower credit quality, market related risks such as interest rate risk and exchange rate
TSB Group filed with the US Securities and Exchange Commission for a discussion of such factors.
Shareholders’ equity decreased by £2,384 million to £7,972 million following a reduction of £2,331 million in the value of the Group’s pension schemes, largely caused by the significant reduction in equity market values. These pension scheme related movements are ignored for regulatory capital purposes and, excluding these market movements, shareholders’ equity decreased by £53 million. The post-tax return on average shareholders’ equity was 16.7 per cent, compared to 18.1 per cent in 2001. Excluding changes in economic assumptions and investment variance, post-tax return on average shareholders’ equity was 23.0 per cent. Economic profit decreased by 27 per cent to £821 million. The posttax return on average assets was 0.93 per cent, and the post-tax return on average risk-weighted assets was 1.61 per cent.
The Group’s market share of net new lending in the fourth quarter of 2002 was 10.0 per cent.
The total Group charge for bad and doubtful debts was 38 per cent higher at £1,029 million, compared with £747 million in 2001. In UK Retail
In common with a number of companies in the life assurance industry, the Group has been carrying out a review of the past sales of certain endowment based and long-term savings products. As a result the Group has made a provision of £165 million to cover its liability for redress to policyholders in respect of past sales made, primarily in the late 1980s and early 1990s, by the Abbey Life salesforce prior to its disposal by the Group in February 2000. The adequacy of the provision for redress to past purchasers of pension policies has been reviewed as lower stockmarket levels have increased the expected remaining cost of redress. The Group has made a final provision for this purpose of £40 million. The Group is also carrying out, in conjunction with the regulator, an investigation into the appropriateness of sales of a stockmarket related investment product, the Extra Income &
Total assets* 207,418 189,404 * excluding long-term assurance assets attributable to policyholders
Trading surplus 1,746 1,630 Provisions for bad and doubtful debts 563 415 Income from joint ventures (11) (10)
Total assets (year-end) £85.9bn £78.0bn Total risk-weighted assets (year-end) £54.2bn £48.3bn
Other income decreased by £59 million to £1,076 million. There was an improvement in income earned from credit and debit cards, and increased income from added value current accounts, but this was offset by a higher level of fees and commissions payable and a reduction of £57 million in profits from the sale and leaseback of premises, as the Group’s strategy of converting much of its branch portfolio from freehold tenure to leasehold is almost complete.
Gross new mortgage lending £19.0bn £14.0bn Market share of gross new mortgage lending 8.7% 8.7% Net new mortgage lending £5.9bn £3.9bn Market share of net new mortgage lending 7.5% 7.2% Mortgages outstanding (year-end) £62.5bn £56.6bn Market share of mortgages outstanding 9.3% 9.5%
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 brand. In addition C&G TeleDirect, its internet and telephone operation, continued to perform strongly. Business levels sourced from intermediaries remain strong and, for the eighth consecutive year, C&G
Total new business premium income Regular premiums: Life – mortgage related 35.0 24.7 – non-mortgage related 32.7 19.9
The principal focus of Scottish Widows Investment Partnership (SWIP) is the delivery of consistently superior investment performance. Pre-tax profits from SWIP for the year were £2 million compared with £10 million in 2001, the reduction in profitability being driven primarily by lower stockmarket levels and significant investment in new infrastructure to support future business growth. At the end of the year SWIP had £70 billion of funds under management, out of Groupwide funds under management totalling £98 billion. Overall fund management performance in 2002 showed a significant improvement. SWIP’s largest UK equity fund, the UK Growth Fund, has achieved a top quartile performance within its sector over six and twelve months. This improvement in performance is also reflected in each of SWIP’s mainstream, actively managed, UK equity funds which have all achieved top quartile performance, over a twelve month period, within their sector. In addition, SWIP now has a total of 14 funds rated A and above by Standard and Poor’s. A number of new products have been launched during the year, most notably the SWIP Global Liquidity
New business income increased by 11 per cent supported by a 7 per cent growth in weighted sales from life and pensions products, and an improved performance in the more profitable life products. The life and pensions new business margin, defined as new business income less distribution costs divided by weighted sales, increased to 19.3 per cent, from 18.5 per cent in 2001. The improvement largely arose from an improved product mix, particularly higher margin protection and regular premium life products. The new business margin improved in all distribution channels.
Commissions from insurance broking: Profit before tax* 754 651 * excluding investment variance
(40 per cent) largely as a result of increased property claims which reflected a 26 per cent growth in the home underwritten portfolio, and higher weather and flood related insurance claims.
UK market leader in the distribution of home and creditor insurance.
Wholesale Markets pre-tax profit decreased by £226 million, or 27 per cent, to £626 million. The acquisitions during the year of First National
Net interest income increased by £62 million resulting primarily from asset growth. Other income increased by £112 million, as an increase in operating lease rentals of £111 million, largely as a result of the asset finance acquisitions, and a higher level of insurance commission and corporate banking fees, were offset by a reduction in the realisations of venture capital gains, after record gains in 2001. Operating expenses increased by £202 million of which £102 million reflected the asset finance acquisitions, and a further £33 million reflected an increase in operating lease depreciation.
Group staff, customers, and employees of our corporate customers. Over 5,000 cars were supplied during 2002.
The Group’s offshore banking operations increased their pre-tax profit by £3 million to £123 million. In Europe Private Banking, pre-tax profits were £24 million, compared to £20 million in 2001.
International Monetary Fund support package which the newly elected president and incoming government have indicated they will support, should alleviate current concerns about the Brazilian economy. The economic situation in Argentina continues to be difficult and the outlook is likely to remain uncertain at least until after the new Argentine government takes office during 2003. In 2002 the Group increased its general provision relating to its exposure to Argentina by £50 million. The Group’s total exposure to Argentina at the end of the year was reduced to some £190 million net of provisions and charges, compared to £610 million at the end of 2001. The Group has now provided for some 50 per cent of its total exposure to Argentina.
Accrual for payment to Lloyds TSB Foundations (33) (36) Other finance income 165 307 Pension scheme benefit augmentations – (82) Earnings on surplus capital and the emerging markets debt investment portfolio 2 63 Abbey National offer costs – (16) Central costs and other unallocated items (38) (51)
Other finance income represents income from the expected return on the Group’s pension fund assets less the charge for unwinding the discount on the pension fund liabilities. The significant reduction in income in 2002 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 caused by the expected greater lifespan of pension scheme members.
Domestic net interest income increased by £223 million, or 5 per cent, to £4,425 million, notwithstanding a reduction of £226 million caused by a 19 basis point reduction in the net interest margin. This represents 86 per cent of total group net interest income. Average interest-earning assets increased by £13.7 billion, or 11 per cent to £134.9 billion. Average personal lending and mortgage balances grew by £6.7 billion and wholesale balances increased by £7.2 billion. The net interest margin decreased by 19 basis points reflecting a reduction in the contribution of interest-free liabilities and the continuing shift in the mix of average interest-earning assets towards high quality, but finer margin, corporate and wholesale lending. In UK Retail Banking and Mortgages there was a 4 basis point decrease in the net interest margin as continued gradual erosion of the mortgage margin was partly offset by a shift in the mix of retail business growth towards personal lending and credit cards. In Wholesale
Fees and commissions receivable: UK current account fees 579 573 Other UK fees and commissions 1,163 1,220 Insurance broking 647 528 Card services 414 332 International fees and commissions 250 269
Fees and commissions receivable increased by 4 per cent to £3,053 million, largely reflecting strong growth in income from insurance broking and card services. Other UK fees and commissions decreased by £57 million, or 5 per cent, from £1,220 million to £1,163 million as a result of a £59 million reduction in unit trust and asset management fees, which reflected the impact of the continued fall in the level of stockmarkets during 2002. There was also a £20 million increase in fees from large corporate and factoring activity reflecting increased transaction volumes.
Other operating income increased by £55 million to £763 million. Increases of £25 million in earnings on the sale and restructuring of emerging markets debt investments and £111 million in operating lease rentals, largely as a result of the acquisition of First National Vehicle Holdings and
Capital and a reduction of £25 million in profits on the sale and leaseback of premises.
Administrative expenses Staff: Salaries and profit sharing 1,758 1,776 National insurance 134 140
Premises and equipment: Rent and rates 280 261 Hire of equipment 18 18 Repairs and maintenance 131 115
The Group remains committed to strict cost control and, largely as a result of the continuing efficiency initiatives, we expect that the Group’s operating expenses in 2003, excluding the impact of acquisitions and operating lease depreciation, will grow by no more than the rate of inflation.
Excluding the impact of acquisitions, staff numbers decreased by 4,191. This is significantly in excess of the targeted net reduction of 3,000 staff.
Within UK Retail Banking staff numbers decreased by 3,513 as increases from planned improvements to customer service and a substantial increase in our branch sales activities have been more than offset by reductions of staff numbers in back office operations as part of the Group’s efficiency programme. In Wholesale Markets staff numbers increased by 2,151 as a result of the asset finance acquisitions, but reduced by 114 on an underlying basis. In International Banking staff numbers decreased by 466.
Insurance and Investments 6,170 6,316 Wholesale Markets 11,385 9,234 International Banking 11,788 12,254
Total number of employees (full-time equivalent) 79,537 81,400 * although the costs of distributing mortgages and insurance through the Lloyds TSB network are allocated to the mortgage and insurance businesses, the number of employees involved in these activities in the network is included under UK Retail Banking
Non-performing loans increased to £1,414 million compared with £1,222 million in December 2001, largely reflecting higher levels of nonperforming lending in the Group’s corporate portfolio and general portfolio growth throughout the Group. In UK Retail Banking and Mortgages the overall arrears position remained stable. An improved position in personal lending and mortgages was offset by a slight deterioration in the credit card portfolio, largely reflecting the slowdown in economic growth in the UK. Non-performing lending represented 1.0 per cent of total lending, compared with 1.0 per cent in December 2001. Our lending portfolio remains heavily influenced by our high quality, relatively low risk, mortgage business and, as a result, we remain relatively well positioned to withstand any continued economic slowdown.
Risk-weighted assets increased by 13 per cent to £122.4 billion and the post-tax return on average risk-weighted assets decreased to 1.61 per cent.
Profit attributable to shareholders 1,781 2,229 Less: notional charge (960) (1,110)
Investment variance In accordance with generally accepted accounting practice in the UK, it is the Group’s accounting policy to carry the investments comprising the reserves held by its life companies at market value. The reserves held to support the with-profits business of Scottish Widows are substantial and changes in market values will result in significant volatility in the Group’s embedded value earnings, which is beyond the control of management.
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 per cent for equities and 5.25 per cent for gilts. Following changes in economic assumptions made at the end of 2002 the longer-term rates of return for 2003 have been revised to 7.10 per cent for equities and 4.50 per cent for gilts.
Income, excluding changes in economic assumptions, investment variance, pension and endowment provisions, the impact of investment returns on the Group’s pension scheme assets, operating lease depreciation and the impact of acquisitions 9,484 9,314 Changes in economic assumptions 55 – Investment variance (952) (859) Pension and endowment provisions (205) (70) Other finance income 165 307 Netting of operating lease depreciation 230 197 Acquisitions 101 –
Enterprise-wide risk management Lloyds TSB has adopted an enterprise-wide framework for the identification, assessment and management of risk, designed to meet its customers’
Strong risk governance The risk governance structure is designed to create a risk-aware culture in which the nature and size of risks are well understood, and business decisions strike a balance between risk and reward which is consistent with the Group’s risk appetite, whilst maximising shareholder value. The governance structure is based on the following elements: The Board is responsible for determining the long-term strategy of the business, the markets in which the Group will operate and the level of risk acceptable to the Group in each area of its business. As explained on page 55, it is assisted in this by the Chairman’s Committee and the Audit
Risk Committee. The salient elements of the policy are summarised below.
Investments) with a centralised IT and operational support function (Group IT and Operations). These units are run in a manner consistent with strategic direction from the Board, tight financial and operating controls and the prudent management of risk.
– Follow industry best practice on corporate governance, and conduct business with integrity, due skill, care and diligence.
– Manage and measure employees’ performance and contribution to collective goals.
– It has a joint responsibility with employees for their personal and career development to improve current performance and to enhance future prospects.
The risks arising from the adoption of the Group’s strategy at corporate and business unit level are managed by a number of processes.
Revenue and capital investment decisions require additional formal assessment and approval. Formal risk assessment is conducted as part of the financial approval process.
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 Group.
Cross-border Exposures – country limits are authorised and managed by a dedicated unit, using an in-house rating system, which takes into account economic and political factors.
Wholesale Banking – market risk in the wholesale banking books is managed in the UK by Lloyds TSB Treasury, and internationally by an authorised local treasury operation in each overseas centre. The levels of exposure within these books are controlled and monitored within approved limits, both locally and also centrally by Group Risk Management. Active management of the book is necessary to meet customer requirements and changing market circumstances.
Retail Portfolios and Capital Funds – market 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 GBSM, reporting to the ALCO. The simulation models used by GBSM include assumptions about the relationships between customer behaviour and the level of interest rates; the anticipated level of future business is also taken into account. The accuracy of these assumptions will impact the efficiency of hedging transactions. The assumptions are regularly updated and the projected exposure is actively managed in accordance with the policy.
Insurance risks are both retained and reinsured with external underwriters. 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.
– Implementation of a Group-wide standard methodology to ensure consistency in the identification, assessment and management of operational risk.
Product Planning and Development – business units have formal processes for reviewing the range of their product portfolios and subjecting all product development to rigorous assessment. They are also responsible for ensuring compliance with all relevant regulatory and legislative requirements.
Business units are required, prior to the publication of any sales material, to seek confirmation that it complies with the regulatory and legal requirements of the jurisdiction in which the product is offered and marketed. Terms and conditions (to include mandates, agreements and other documentation) are approved by legal advisers and reviewed periodically.
Where appropriate, technical advice/approval is sought from specialist functions, e.g. Tax, Legal and Compliance. Only products carrying the approval of Group Risk Management and the business units involved in their manufacture/delivery are offered to customers.
Liquidity Policy – a Group Liquidity Policy is in place which requires a common methodology for measuring liquidity across the Group. The methodology derives a liquidity ratio calculated by taking the sum of liquid assets, five-day wholesale inflows and back-up lines, and then dividing this by the sum of five-day wholesale outflows and a percentage of retail maturities and contingent claims drawable over the next five days.
Capital ratios are a key factor in the Group’s budgeting and planning processes, and updates of expected ratios are prepared regularly during the year. Capital raised takes account of expected growth and currency of risk assets, and also allows for the sensitivity of the Group’s capital to movements in equity markets.
– Implement measures to monitor performance at local level to identify significant fluctuations or unusual activity.
It is the responsibility of local line management to ensure that the Liquidity Policy is met, and the sources and maturities of assets and liabilities are continually managed and appropriately diversified to avoid any undue concentration as market conditions evolve. Compliance is monitored by regular liquidity returns to Group Risk Management.
The Group’s business is regulated overall by the FSA, and additionally by local regulators in offshore and overseas jurisdictions.
To deliver the Group’s strategic aims, change must be managed in an effective, risk-aware and appropriately controlled manner throughout the organisation. The Group’s Change Management Standards provide consistency of approach across the Group’s project portfolio. In particular, the following control processes are in place: – The Group’s approach to change management is regularly benchmarked against other organisations around the world.
Implementation Review Committee (CIRC). The CIRC ensures that the aggregate impact of the implementation of change on customers, staff and systems is understood, managed and controlled.
Profit on ordinary activities before tax 2,607 3,161 3,785 3,529 2,948
Profit on ordinary activities after tax 1,843 2,286 2,703 2,445 2,086
M Kent Atkinson (leaving on 16 April 2003) Joined Bank of London & South America in 1964, which became a Lloyds Bank subsidiary in 1971, and held a number of senior and general management appointments, including positions in Latin America and the Middle East, before being appointed to the board in 1997 as group finance director. Became a non-executive director of the group in June 2002. A non-executive director of Coca-Cola HBC SA, Marconi and Marconi Corporation. Aged 57.
Sheila M Forbes CBE✠† (leaving on 16 April 2003) 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. A non-executive director of OCS Group. Aged 56.
Gavin J N Gemmell CBE✠* Chairman of Scottish Widows Joined the board in 2002. A non-executive director of Scottish Widows since 1984. Retired as senior partner of Baillie Gifford in 2001, after 37 years with that firm. A non-executive director of Archangel Informal Investment. Chairman of the court of Heriot-Watt University. Aged 61.
Peter B Ellwood CBE Group Chief Executive (until 31 May 2003) Joined TSB Bank in 1989 as chief executive, retail banking. Appointed a director of TSB Group in 1990 and became group chief executive in 1992. Following the merger with Lloyds Bank in 1995, became deputy group chief executive of Lloyds TSB Group and then group chief executive in 1997. Joined Barclays Bank in 1961 and held a number of senior and general management appointments, including chief executive of Barclaycard from 1985 to 1989. Chairman of the Work Foundation. Former chairman of Visa International. Aged 59.
David P Pritchard Group Executive Director, Wholesale and International Banking (Deputy Chairman from 16 April 2003) Joined TSB Group in 1995 as group treasurer. Seconded to the Securities and Investments Board as head of supervision & standards, markets & exchanges, from 1996 to 1998. Appointed to the board in 1998. Held senior and general management appointments with Citicorp from 1978 to 1986 and Royal Bank of Canada from 1986 to 1995. A nonexecutive director of The London Clearing House. Aged 58.
Business review and future developments A review of the business and an indication of future developments are given on pages 2 to 41.
Authority to purchase shares The authority for the company to purchase, in the market, up to 564 million of its shares, representing some 10 per cent of the issued ordinary share capital, expires at the annual general meeting. It was not used during the year and shareholders will be asked to give a similar authority at the annual general meeting. Details are contained in the accompanying notice of 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 remuneration committee The remuneration committee, comprising Mr Butler (chairman), Miss Forbes, Dr Gibson-Smith, Dr Julius and Sir Tom McKillop, makes recommendations to the board on the framework of executive directors’ remuneration and its cost, and determines, on the board’s behalf, specific remuneration packages for each of the chairman, the deputy chairman and the executive directors. Additionally, all the non-executive directors receive the minutes of remuneration committee meetings and have the opportunity to comment and have their views taken into account before the committee’s decisions are implemented.
Mr van den Bergh, Mr Ellwood, Mr Fairey, Mr Mitchinson, Director of Group Human Resources, and Mr Wilson, Compensation and Benefits Director, assisted the committee in their deliberations but did not participate in any decision relating to their own remuneration.
Directors’ remuneration policy The Group aims to ensure that the executive directors’ remuneration arrangements, in line with the Group’s overall practice on pay and benefits, are competitive and designed to attract, retain and motivate executive directors of the highest calibre, who are expected to perform to the highest standards. 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 directors’ pay is for basic salaries to reflect the relevant market median; for benefits such as a company car, medical insurance and pension to reflect market practice; and for 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. This strategy is consistent with the Group’s belief that performance should determine a significant proportion of the total remuneration package for executive directors. There are no plans to change the strategy.
In 2003, all the executive directors will have a maximum incentive opportunity equal to 100 per cent of their salaries. Awards will be based on group performance, with predetermined targets relating to profit before tax and economic profit. 75 per cent of the award will be payable on achievement of profit before tax and economic profit relating to the Group’s stretching budget for 2003 and the remuneration committee has set a higher target for the maximum award. The threshold performance levels, below which no bonus will be payable, have also been set by the remuneration committee at higher figures than those achieved in 2002.
The remuneration committee chose the relevant performance condition, where applicable, because it was felt to be challenging, aligned to shareholder interests and appropriate at the time.
Service agreements The general group policy is for executive directors to have service agreements with notice periods of no greater than one year, to reflect current corporate governance best practice. Executive directors are required to give the Group six months’ notice if they wish to leave. The Association of British Insurers and the National Association of Pension Funds published a joint statement of best practice on executive contracts and severance in December 2002 and, during 2003, the remuneration committee will consider what changes would be desirable in respect of service agreements.
None of the other directors has a service agreement with a notice period of one year or more.
Lloyds TSB Group plc FTSE 100 index Source: Datastream 31 Dec
Former director who served during 2002: Former directors who served during 2001 391
Additional Accrued pension at Accrued pension at Transfer value at Transfer value at Change in pension earned to Transfer value 31December 2002 31December 2001 31December 2002 31December 2001 transfer value 31December 2002 of the increase
Columns (a) and (b) represent the deferred pension to which the directors would have been entitled had they left the Group on 31 December 2002 and 2001, respectively (ignoring the two-year requirement to qualify for a deferred pension).
With the exception of Mr Pritchard, directors have a normal retirement age of 60. Mr Pritchard’s retirement date is 16 April 2003. In the event of death in service, a lump sum of 4 times salary is payable plus a spouse’s pension of 2/3 of the member’s prospective pension. On death in retirement, a spouse’s pension of 2/3 of the member’s pension is payable.
Mr Pritchard has a deferred cash entitlement of £71,310 from his membership of the defined contribution section of the
M K Atkinson Exercisable 147,600 97,600 259p Not exercisable 253,155 – –
J E Daniels Exercisable – – – Not exercisable 907,780 – –
M E Fairey Exercisable 54,000 – – Not exercisable 288,329 – –
Exercisable* – 102,809 675p Not exercisable* 105,809 691,230 701p 345,104 715p
A G Kane** Exercisable 171,547 131,547 252p Not exercisable 233,721 4,157 442p
D P Pritchard Exercisable – – – Not exercisable 250,096 4,687 416p
Exercisable* – – – Not exercisable* – 756,283 657p 315,734 715p Gain made by Dennis Holt, who left the board on 31 August 2001 – 53 Gain made by A E Moore, who no longer holds share options – 281
Share retention plan J E Daniels Not exercisable 216,763 216,763 (see page 54)
The option is designed to encourage him to remain with the Company and, accordingly, is not subject to any performance condition but will normally become exercisable only if he remains an employee, and has not given notice of resignation, on 31 December 2004. However, the option will become exercisable if before that date Mr Daniels becomes entitled to terminate his service agreement by way of breach (including circumstances treated as breach) or if, following a reconstruction or takeover of the Company, the remuneration committee so decides. The option will lapse if before 31 December 2004 Mr Daniels dies, or ceases to be an employee or resigns, except in the circumstances described in the preceding paragraph. Otherwise, the option will become exercisable between 1 January 2005 and 30 June 2005. The benefits conferred by the option are not pensionable and the option is not transferable.
Information about directors’ remuneration is given in the directors’ remuneration report on pages 48 to 54 and details of how the board reviews financial and operational controls and risk management generally are shown on page 56 and in the financial review on pages 10 to 41.
The effectiveness of the internal control system is reviewed regularly by the board and the audit committee, which also receives reports of reviews undertaken around the Group by the Group’s risk management function, including Group Audit and Group Compliance. The audit committee receives reports from the Company’s auditors, PricewaterhouseCoopers LLP, (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.
Interest receivable: Interest receivable and similar income arising from debt securities 567 530
at 31 December 2002 2002 2001* Note £ million £ million
M A van den Bergh P B Ellwood CBE P R Hampton Chairman Group Chief Executive Group Finance Director
Actuarial losses recognised in post-retirement benefit schemes (note 44) (3,299) (2,873)
Prior year adjustment in respect of the adoption of FRS 18 – 248
Reconciliation of movements in shareholders’ funds for the year ended 31 December 2002 2002 2001* £ million £ million
Prior year adjustment at 1 January 2001 (note 1) – 1,877
Shareholders’ funds at end of year 7,972 10,356 * restated (see note 1)
for the year ended 31 December 2002 2002 2001* £ million £ million
Net cash outflow from returns on investments and servicing of finance (524) (572)
Capital expenditure and financial investment: Additions to fixed asset investments (46,830) (47,049)
Accounting policies are unchanged from 2001, except that: (i) The Group has implemented the requirements of the Urgent Issues Task Force’s Abstract 33 ‘Obligations in capital instruments’. Following its implementation the Group has reclassified €750 million of Perpetual Capital Securities as undated loan capital and the related cost is included within interest expense. Previously these securities were included within minority interests in the balance sheet and the cost was treated as a minority interest deduction. The effect of this change on the profit and loss account for the year ended 31 December 2002 has been to increase interest payable and reduce non-equity minority interests by £31 million (2001: £22 million); there has been no effect on attributable profit. The effect on the Group’s balance sheet at 31 December 2002 has been to increase undated loan capital and reduce non-equity minority interests by £482 million (2001: £451 million).
The effect of this change on the profit and loss account for the year ended 31 December 2002 has been to introduce other finance income of £165 million (2001: £307 million), and to increase administrative expenses by £323 million (2001: £452 million). Profit before tax has been reduced by £158 million (2001: £145 million). The effect on the Group’s balance sheet at 31 December 2002 has been to reflect a net postretirement benefit liability of £2,077 million (2001: a net post-retirement benefit asset of £356 million and a post-retirement benefit liability of £75 million), to reduce prepayments and accrued income by £928 million (2001: £894 million), to reduce the deferred tax liability by £251 million (2001: £268 million), to reduce other provisions for liabilities and charges by £76 million (2001: £109 million) and to reduce shareholders’ funds by £2,678 million (2001: £236 million).
The effect of this change on the profit and loss account for the year ended 31 December 2002 has been to reduce income from long-term assurance business before tax by £104 million (2001: £222 million). The effect on the Group’s balance sheet at 31 December 2002 has been to reduce the value of the long-term assurance business attributable to the shareholder by £281 million (2001: £208 million) and to reduce shareholders’ funds by the same amount.
Paragraph 28 of Schedule 9 to the Companies Act 1985 requires that all goodwill carried on the balance sheet should be amortised. In the case of the goodwill arising on the acquisition of Scottish Widows, the directors consider that it is appropriate to depart from this requirement in order to comply with the over-riding requirement for the accounts to show a true and fair view. If this goodwill was amortised over a period of 20 years, profit before tax for the year ended 31 December 2002 would be £93 million lower (2001: £94 million lower), with a corresponding reduction in reserves of £265 million (2001: £172 million); intangible assets on the balance sheet would also be £265 million lower (2001: £172 million lower).
Notes to the accounts advance is written down to its estimated realisable value and interest is no longer charged to the customer’s account as its recovery is considered unlikely. Interest is only taken to income if it is received.
Debt securities, apart from those held for dealing purposes, are stated at cost as adjusted for the amortisation of any premiums and discounts arising on acquisition, which are amortised from purchase to maturity in equal annual instalments, less amounts written off for any permanent diminution in their value. Equity shares, apart from those held for dealing purposes, are stated at cost less amounts written off for any permanent diminution in their value.
Operating profit from Insurance and Investments is further analysed as follows: 2002 2001*
Foreign exchange trading income 173 158 Securities and other gains 15 75
Salaries and profit sharing 2,065 2,066 Social security costs 134 140 Other pension costs (note 44) 318 347
Staff costs 2,517 2,553 Other administrative expenses 1,697 1,673 *restated (see note 1)
The auditors’ remuneration for the holding company was £50,000 (2001: £50,000).
5 Amounts written off fixed asset investments 2002 2001 £m £m
Debt securities 84 58 Equity shares 3 2 6 Profit before tax on sale of businesses
On 3 October 2001 the Group announced the sale of its Brazilian fund management and private banking business, including its subsidiary, Lloyds TSB Asset Management S.A. This resulted in a profit on sale of £39 million (tax: £11 million).
8 Tax on profit on ordinary activities 2002 2001* a Analysis of charge for the year £m £m
Foreign tax Current tax on profits for the year 216 179 Adjustments in respect of prior years (15) (17)
Lending to banks 2,212 1,616 Deposits placed with banks 15,318 13,610
Total loans and advances to banks 17,530 15,226 Provisions for bad and doubtful debts (1) (2)
Repayable on demand 4,313 2,443 Other loans and advances by residual maturity repayable: 3 months or less 8,512 8,995 1 year or less but over 3 months 2,624 2,698 5 years or less but over 1 year 1,700 708
Lending to customers 123,007 111,541 Hire purchase debtors 5,990 5,345 Equipment leased to customers 7,300 7,585
If investment securities were sold at their year end valuation no tax is expected to be payable as any such gains would be covered by available capital losses.
The Group’s principal investments are in two joint ventures: Group interest Nature of business iPSL 19.5% of issued Cheque processing ordinary share capital
Notes to the accounts 23 Intangible fixed assets Net Cost Amortisation book value £m £m £m
Balances arising from derivatives used for trading purposes (note 46a) 3,428 2,090 Balances arising from derivatives used for hedging purposes 778 931 Settlement balances 76 570 Other assets 981 877 29 Prepayments and accrued income 2002 2001* £m £m
Movements in the embedded value balance have been as follows: 2002 2001*
At 1 January – as previously reported 6,366 6,549 Prior year adjustment (note 1) – (53)
Income from long-term assurance business before tax (303) (29) Attributed tax 46 (11)
*In some cases, rather than pay cash compensation directly into the customer’s personal pension plan, the Group has guaranteed to ‘top-up’ the customer’s pension income, on retirement, to the level that they would have received under the relevant occupational scheme.
A review of the adequacy of the provision was carried out as at 31 December 2001. Lower stock market levels had had a significant impact on total redress costs as the cost of restitution into company pension schemes rose as personal pension fund values reduced. As a result of this and the fact that there was greater certainty as to the number and size of compensation claims to be paid, an additional provision of £70 million was made in the Group’s results for the year ended
The principal economic assumptions have been revised at 31 December 2002 as follows: Risk-adjusted discount rate (net of tax) 7.35 8.50 Return on equities (gross of tax) 7.10 8.00 Return on fixed interest securities (gross of tax) 4.50 5.25 Expenses inflation 3.30 3.00
The revised assumptions have resulted in a net credit to the profit and loss account of £55 million.
As published 6,228 413 Effect of a 1% increase in the discount rate (152) (27) Effect of a 1% reduction in the discount rate 166 32 Effect of a 1% reduction in the return on equities (70) (12)
Income from long-term assurance business attributable to the shareholder after tax (257) (40) (Increase) decrease in value-in-force (166) 111
Assets held to cover linked liabilities 20,996 21,098 Other assets 1,718 2,210
Long-term assurance business attributable to the shareholder – embedded value basis 6,228 6,366 Value of in-force business (2,904) (2,738)
Repayable on demand 87,918 80,635 Other customer accounts with agreed maturity dates or periods of notice by residual maturity repayable: 3 months or less 19,047 19,902 1 year or less but over 3 months 3,099 2,889 5 years or less but over 1 year 4,140 3,369 34 Debt securities in issue 2002 2001 £m £m
Bonds and medium-term notes by residual maturity repayable: 1 year or less 437 589 2 years or less but over 1 year 443 178 5 years or less but over 2 years 746 405
Short-term timing differences (353) (271) Accelerated depreciation allowances 1,670 1,682 £m
Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in future has been entered into. Deferred tax balances have not been discounted.
At 1 January 2002 – as previously reported 34 204 75 88 401 Prior year adjustment (note 1) (34) – (75) – (109)
Vacant leasehold property and other Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub-let income and the possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on an annual basis and will normally run off over the remaining life of the leases concerned, currently averaging five years; where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
Undated loan capital (see below) 5,496 4,102 497 – Dated loan capital (see below) 4,672 4,006 873 413 **Undated loan capital: Primary Capital Undated Floating Rate Notes: a
Group plc can declare or pay a dividend until any deferred payments have been made. In the event of a winding up of Lloyds TSB Bank plc, these securities will acquire the characteristics of preference shares. The securities can be redeemed at par at the option of Lloyds TSB Bank plc on or after 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.
f) At the callable date the coupon on these Notes will be reset by reference to the applicable five year benchmark gilt rate. g) These bonds bear interest, to be reset 5 years before redemption date, at a fixed margin over New Zealand Government stocks. h) In the event that these Notes are not redeemed at the callable date, the coupon will be reset to a floating rate. i) 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) Exchangeable at the election of the Group for further subordinated floating rate notes. k) Issued during 2002 primarily to finance the general business of the Group.
These securities constitute interests in LM ABS Investment Partnership, an English law general partnership in which the principal partner is Lime Street Holdings Limited, a wholly owned subsidiary of the Group. The minority interests are entitled to 95 per cent of the partnership’s profits. In the event of a winding-up, at least 85 per cent of the capital of the partnership would be returned to Lime Street Holdings Limited.
US dollars US$m US$m Preference shares of US25 cents each 40 40
Japanese yen ¥m ¥m Preference shares of ¥25 each 1,250 1,250
Issued and fully paid: Issued to the QUEST (note 27) 5 – 5
Revaluation reserve: Decrease in net tangible assets of subsidiary undertakings (2,869)
Merger reserve: Profit and loss account: At 1 January 2002 – as previously reported 8,047 2,496 Prior year adjustment (note 1) (404) –
The latest full valuations of the schemes were carried out as at 30 June 2002; these have been updated to 31 December 2002 by qualified independent actuaries. The last full valuations of other group schemes were carried out on a number of different dates; these have been updated to 31 December 2002 by qualified independent actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.
Market value of assets 9,083 11,126 Present value of scheme liabilities (12,014) (10,693)
Disclosed in the accounts as follows: Post-retirement benefit asset – 356 Post-retirement benefit liability (2,077) (75)
Surplus at beginning of year 433 3,325 Exchange and other adjustments 26 – Other finance income 165 307 Current service costs (244) (212)
Other: Other items serving as direct credit substitutes 1,103 460 Performance bonds and other transaction-related contingencies 1,436 1,469 Other contingent liabilities 1 2
Commitments: Documentary credits and other short-term trade-related transactions 289 354 Forward asset purchases and forward forward deposits placed 394 783 Undrawn note issuing and revolving underwriting facilities 32 35 Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year maturity 49,417 42,594 1 year or over maturity 14,372 9,576 b Contingent liabilities arising out of past sales of savings and investment products
In common with other companies providing savings and investment products to retail consumers, matters arise from time to time as a result of customer complaints or investigations by the regulator requiring remedial action to be taken, which may include the payment of compensation.
Trading The notional principal amounts and fair values (which, after netting, are the carrying values) of trading instruments entered into with third parties were as follows: Notional principal Fair values amount Assets Liabilities
Interest rate contracts: Interest rate swaps 17,261 129 223 Forward rate agreements 1,279 2 2 Options written 41 – 1
The Company held non-trading derivatives with a notional principal amount of £1,852 million (2001: £400 million).
At 31 December 2002, the unrecognised gains on financial instruments used for hedging were £518 million (2001: £242 million) and unrecognised losses were £744 million (2001: £820 million).
b) On 17 October 2002 the Group’s subsidiary, Lloyds TSB Bank (No. 5) Limited, completed the purchase of the business of Accucard, a credit card technology development and marketing company. The consideration for the purchase was £9 million, of which £7 million was settled in cash with a further £1 million payable in 2003 and £1 million payable in 2004. The premium on acquisition of £7 million has been capitalised and will be written off to the profit and loss account over its estimated useful life of 5 years. There were no fair value adjustments made to the assets acquired.
Cash and balances with central banks 1,140 1,240 Loans and advances to banks repayable on demand 4,313 2,443
d Analysis of changes in financing during Share capital (including the year premium and merger reserve)
e Analysis of the net cash outflow in respect 2002 2001 of the acquisition of group undertakings £m £m
Satisfied by: Amounts receivable (5) – Issue of loan notes – 9 Deferred consideration 2 –
Share price information In addition to information published in the financial pages of the press, the latest price of Lloyds TSB shares on the London Stock Exchange can be obtained by
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 149, Haywards Heath, West Sussex RH16 3BR. Telephone
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Registrar Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA