† Changes in economic assumptions and investment variance relate to Insurance and Investments, loss on sale of businesses in 2004 and discontinued operations in 2003 relate to Wholesale and International Banking.
In order to provide a clearer representation of the underlying performance of the Group, the results of the Group’s life and pensions, and general insurance businesses include investment earnings calculated using longer-term investment rates of return. The difference between the normalised investment earnings and the actual return (‘the investment variance’) together with the impact of changes in the economic assumptions used in the embedded value calculation, the profit/loss on the sale of a number of overseas businesses in 2003 and 2004 and the trading results of businesses sold in 2003 have been separately analysed and a reconciliation to the Group’s profit before tax is shown on this page.
Profit before tax increased by £301 million, or 10 per cent, to £3,363 million.
Post-tax return on average risk-weighted assets increased from 1.87 per cent to 1.95 per cent.
Lloyds TSB has a clearly articulated organic growth strategy that is focused on improving and deepening relationships with our personal and business customers. During 2004 this strategy has started to gain traction, with good progress being made in each of our business units. The successful delivery of profitable franchise growth has been central to the Group’s return to positive earnings momentum during 2004.
Increasing levels of regulation, from both the UK and overseas, have already become a significant burden on all UK financial companies. With the adoption of international financial reporting standards in 2005, this burden is unlikely to ease and the financial services industry in the UK is likely to continue to face significant challenges in the arena of accounting and regulatory change. Whilst Lloyds TSB is well prepared for these challenges, the ongoing cost of compliance will remain considerable.
Our enhanced risk governance framework is now well embedded throughout the Group and risk is a key part of all executive decision making. Reporting and risk aggregation has been enhanced and through our better understanding of risk in the business, we are well placed to take advantage of opportunities to continue to grow our business profitably and safely.
I am pleased to report that we have made good progress on each of these priorities and, in doing so, we have also addressed many of the concerns of our shareholders, which centred on the adequacy of our capital, the sustainability of the dividend and the achievement of growth whilst continuing to deliver strong returns.
I look forward to seeing continued growth and progress against our revised set of priorities in 2005 and beyond.
There is a business case for corporate responsibility. We know very clearly that companies which adopt and embrace corporate responsibility, and link it to their core business, are more likely to create wealth and shareholder value than those that do not.
Community investment is not just about giving money to good causes. It is also about the substantial time given by our staff in supporting the work of community organisations, whether raising money, providing business expertise or simply providing another willing pair of hands.
UK Retail Banking UK Retail Banking provides banking, financial services, mortgages and private banking to some 15 million personal customers through our multi channel distribution capabilities.
Savings accounts. Lloyds TSB Bank and Lloyds TSB Scotland offer a wide range of savings accounts and Cheltenham & Gloucester provide retail investments through their branch networks and a postal investment centre.
Mortgages. Cheltenham & Gloucester is Lloyds TSB Group’s specialist residential mortgage provider, offering a range of mortgage products to personal customers through its own branches and those of Lloyds TSB Bank in England and Wales, as well as through the telephone, internet and postal service, C&G TeleDirect. Lloyds TSB Group also provides mortgages through Lloyds TSB Scotland and Scottish Widows Bank. Lloyds TSB Group is the third largest residential mortgage lender in the UK on the basis of outstanding balances, with mortgages outstanding at 31 December 2004 of £80.1 billion, representing a market share of 9.1 per cent.
Asset Finance. Lloyds TSB Group’s asset finance businesses provide individuals and companies with finance through leasing, hire purchase and contract hire packages. Through its invoice discounting and factoring subsidiary, Lloyds TSB Commercial Finance, Lloyds TSB Group provides working capital finance for customers. Specialist personal lending, store credit and the Dutton-Forshaw motor dealership group complete this group of businesses.
Europe. Lloyds TSB Group has private banking operations for wealthy individuals outside their country of residence. The business is conducted through branches of Lloyds TSB Bank located in Switzerland, Luxembourg, Monaco and Gibraltar. There are also personal and corporate banking operations in Belgium, The Netherlands and Spain.
To enable meaningful comparisons with 2003, it is appropriate to exclude the impact of these 2003 disposals, together with the investment variance and changes in economic assumptions in the Group’s life assurance businesses. On this basis, as a result of earnings growth in each business unit, profit before tax increased by £301 million, or 10 per cent, to £3,363 million. Earnings per share increased by 12 per cent to 41.8p and economic profit increased by 9 per cent to £1,442 million. The post-tax return on average shareholders’ equity was 23.5 per cent and the post-tax return on average risk-weighted assets increased to 1.95 per cent, from 1.87 per cent in 2003.
Operating expenses on a continuing operations basis, excluding the impact of customer redress provisions, continued to be tightly controlled and increased by only 2 per cent to £4,817 million. Significant improvements have been made in processing and operational efficiency and the Group has continued to expand its programme of offshoring a number of its processing and back office operations to India. As a result of this constant focus on day-to-day operating cost control, the Group’s cost:income ratio improved to 51.1 per cent, from 52.5 per cent in 2003. Revenue growth exceeded cost growth in each division and at Group level.
Trading surplus 2,324 2,087 Provisions for bad and doubtful debts (673) (594) Share of results of joint ventures – (22)
Provisions for customer redress (12) (100) Development costs (11) (13) Investment earnings 167 153
Profit before tax, excluding provisions for customer redress* 785 665 New business margin (life and pensions) 28.6% 25.8%
Pre-tax profit from Scottish Widows Investment Partnership (‘SWIP’) increased to £8 million, compared with £1 million in 2003, reflecting improved market performance and increased revenues from new business. SWIP won a record £2.1 billion of gross new business in 2004 and increased its assets under management by 6 per cent to £82 billion. The investment performance of fixed income and property remained strong in 2004. Corporate composite bonds outperformed the market in the three year period to 31 December 2004, and the principal property unitlinked funds have performed in the top quartile in each of the last three years. UK and European equity performance has shown steady improvement over 2004 and UK equities within SWIP’s largest institutional funds have been significantly ahead of the benchmark in the second half of 2004. SWIP has introduced a new simplified fund range to support Lloyds TSB’s bancassurance offer.
Group funds under management: Scottish Widows Investment Partnership 82 77 UK Wealth Management 13 11
Cost:income ratio* 57.9% 59.6% Total assets (year-end) £113.0bn £101.3bn Total risk-weighted assets (year-end) £71.1bn £62.8bn
In December 2004, we agreed the acquisition of a UK corporate loan portfolio from Danske Bank comprising some 110 relationships, with total assets of £1.2 billion and risk-weighted assets of some £2.0 billion. The transaction is expected to enable us to deepen the relationships we have with a number of our existing corporate customers and acquire some important new corporate relationships to support the growth within our Corporate Markets businesses.
Profit before tax in Business Banking grew by £23 million, or 22 per cent, to £126 million reflecting good growth in customer income and tight control of costs. Customer deposits rose by 3 per cent to £10.3 billion and customer lending increased by 9 per cent to £6.0 billion. Business Banking continued to grow its customer franchise, with net customer recruitment of some 12,000 during the year, regaining leadership in the start-up market with a share of 22 per cent in 2004.
Risk awareness has improved significantly. The ground work of embedding the risk governance framework has been completed and the challenge and support provided by specialist risk functions has been located closer to business units, whilst maintaining independence. This is reflected in dual reporting lines to both the chief risk director and business managers. Risk analysis has been strengthened and a new reporting system has been developed and implemented which better identifies opportunities as well as risks, improves the ability to take an aggregate view of the overall risk portfolio and assigns clear responsibilities and timetables at Group and divisional level for risk mitigation strategies. Risk continues to be a key component of all routine management information reporting and is embedded in the balanced scorecards, which are cascaded to every member of staff. The objective is to go beyond risk mitigation and control to developing risk capabilities as a key strategic differentiator for Lloyds TSB.
Sub-risks have been developed for these high level risks to further refine the identification and classification of risk and enable risk events to be accurately categorised to facilitate analysis of root causes.
Governance, people and organisation risk, operations risk, customer treatment risk, legal and regulatory risk, and change management risk are collectively managed as operational risks. A more detailed language has been identified for these operational risks.
The Group’s high level policies and reporting to the group business risk committee, risk oversight committee, audit committee and board are aligned to the risk drivers.
The chief risk director, a member of the group executive committee, oversees and promotes the development and implementation of a consistent group wide risk management framework and provides objective challenge to the group executive committee. Group Risk supports the chief risk director in performing the role.
There is an annual control self-assessment exercise under which key businesses and head office functions across the Group review specific controls and certify the accuracy of their assessments.
A number of tools, including group level credit policy where appropriate, are used to control the Group’s exposure to undue levels of credit risk: • High-level credit policies designed to ensure a balanced and managed approach to the identification and mitigation of credit risk.
• Lending guidelines defining the responsibilities of lending officers seek to provide a disciplined and focused benchmark for credit decisions.
• Sector caps, encompassing both industry sectors and specific product types are established by Group Risk to communicate the Group’s risk appetite for specific types of business, primarily in the non-retail markets.
• Monitoring and controlling residual value risk exposure. The Group’s appetite for such exposure is communicated to the business by a series of time referenced sector caps, seeking to ensure an acceptable distribution of risk.
Day-to-day credit management and asset quality within each business is primarily the responsibility of the relevant business director. Businesses have established credit policies and processes reflecting Group policy. Businesses’ lending authorities are delegated by officers holding divisional lending authority. All material authorities are advised to Group Risk.
Trading is restricted to a number of specialist centres, authorised by Group Treasury, the most important centre being Financial Markets in London. The level of exposure is strictly controlled and monitored within approved limits by Group Treasury. Most of the Group’s trading activity is undertaken to meet the requirements of customers for foreign exchange and interest rate products. However, some interest rate and exchange rate positions are taken out using derivatives (including forward foreign exchange contracts, interest rate swaps and forward rate agreements) and on-balance sheet instruments (mainly debt securities), with the objective of earning a profit from favourable movements in market rates. Accordingly, these transactions are reflected in the accounts at their fair value and gains and losses are shown in the profit and loss account as dealing profits and losses.
Derivatives are used to meet customers’ financial needs; as part of the Group’s trading activities; and to reduce the Group’s own exposure to fluctuations in interest and exchange rates. The principal derivatives used by the Group are interest rate contracts (including interest rate swaps, forward rate agreements and options) and exchange rate contracts (including forward foreign exchange contracts, currency swaps and options). Particular attention is paid to the liquidity of the markets and products in which the Group trades to seek to ensure that there are no undue concentrations of activity and risk.
• Periods of severe market illiquidity, both in terms of the extent of the illiquidity and the time that it lasts, could mean that it might not be possible to hedge, or close, all positions in the timescales assumed in the VaR model.
• VaR is not well suited to options positions. As a result these positions are controlled by additional sensitivity limits.
In practice, positions in both the retail and wholesale books are actively managed and actual impact on net interest income may be different to the model.
Liabilities arising in the course of business from the Group’s retail banking business fall into two broad categories: • those which are insensitive to interest rate movements, non-interest bearing liabilities such as shareholders’ funds and interest-free or very low interest current account deposits; and
• those which are sensitive to interest rate movements, primarily savings deposits bearing interest rates which are varied at the Group’s discretion (‘managed rate liabilities’) but which for competitive reasons generally reflect changes in the Bank of England’s base rate.
Most banking assets, with the exception of such non-interest earning items as premises, are sensitive to interest rate movements. There is a large volume of managed rate assets such as variable rate mortgage loans and these may be considered as a natural offset to managed rate liabilities. However many assets, such as personal loans and fixed rate mortgages, bear interest which is contractually fixed for periods of up to five years or longer.
The structural position is managed by Lloyds TSB Group Capital Funds having regard to the currency composition of the Group’s risk-weighted assets and reported to the group asset and liability committee on a monthly basis. The objective is to limit the effect of exchange rate movements on the published risk asset ratio.
• For other insurance liabilities the investment strategy is determined by the term and nature of the underlying liabilities and asset/liability matching positions are actively monitored. The aim is to invest in assets such that the cash flows on the investments will match those on the projected future liabilities. Actuarial tools are used to project and match the cash flows. It is not possible to eliminate risk completely as the timing of insured events is uncertain and bonds are not available at all of the required maturities. As a result the cash flows cannot be precisely matched and so sensitivity tests are used to test the extent of the mismatch.
• Investment strategy for surplus assets held in excess of liabilities takes account of the regulatory and internal business requirements for capital to be held to support the business now and in the future. Surplus assets are held primarily in three portfolios: the surplus in the non-participating fund within the Long-Term Fund of Scottish Widows plc, assets in shareholder funds of life assurance companies and an investment portfolio within the General Insurance business.
Equity derivatives are used by the Group to match equivalent liabilities arising from some of its retail products. Derivatives may also be used for efficient portfolio management purposes in client funds where such activity is in accordance with approved policy and the customer mandate.
The composition, and value, of both the Scottish Widows plc Non-Participating Fund and the General Insurance portfolio are reported to Group Risk on a monthly basis and a VaR is calculated which is presented to the group asset and liability committee. The risk of loss measured by the VaR model is the potential loss in earnings over a given time horizon. The VaR methodology used is the same in all respects to that used for the traded risk in banking activities, except that in the case of equity risk, the model maps the portfolio composition onto a series of appropriate indices by region and sector. In addition the risks are calculated based on a 99 per cent confidence level and a ten day holding period. The figures quoted below are the sum of the two portfolios with no allowance for diversification between portfolios or asset classes and represents the potential loss in earnings.
Expenses are monitored by an analysis of the Group’s experience relative to budget. Reasons for any significant divergence from expectation are investigated and remedial action taken.
The risk of loss resulting from inadequate or failed internal processes and systems, or from people related or external events. For internal purposes, reputational impact is also included.
The risk of financial loss or reputational damage arising from failing to comply with the laws, regulations or codes applicable to the financial services industry. The Group’s business is regulated overall by the Financial Services Authority (’FSA’), and additionally by local regulators in offshore and overseas jurisdictions.
Each business has a nominated individual with ‘compliance oversight’ responsibility under FSA rules. The role of such individuals is to ensure that management has in place within the business a control structure which creates awareness of the rules and regulations to which the Group is subject, and to monitor and report on adherence to these rules and regulations.
This comprises the risks arising from the adoption of the Group’s agreed strategy and its implementation at corporate or business level. At corporate and business level these risks are managed through a number of processes.
An annual strategic planning process is conducted at Lloyds TSB Group and business level and includes a quantitative and qualitative assessment of the risks in the Group’s plan.
Significant company mergers and acquisitions require specific approval by the board. In addition to the standard due diligence conducted during a merger or acquisition, Group Risk conducts, where appropriate, an independent risk assessment of the target company and its proposed integration into the Lloyds TSB Group.
The risk of loss arising from the inherent characteristics, management or distribution of products or services, or from failure to meet or exceed customer expectations and competitor offerings. For the Group to achieve its objective to maximise value for shareholders over time, product life cycles must be effectively managed and new products developed to meet customer needs.
A significant part of the liquidity of the Group’s banking businesses arises from their ability to generate customer deposits. A substantial proportion of the customer deposit base is made up of current and savings accounts which, although repayable on demand, have traditionally provided a stable source of funding. During 2004, amounts deposited by customers increased by £5,566 million from £116,496 million at 31 December 2003 to £122,062 million at 31 December 2004. These customer deposits are supplemented by the issue of subordinated loan capital and wholesale funding sources in the capital markets, as well as from direct customer contracts. Wholesale funding sources include deposits taken on the inter-bank market, certificates of deposit, sale and repurchase agreements, a Euro Medium Term Note programme, of which £5,097 million had been utilised for senior funding at 31 December 2004, and a commercial paper programme, under which £3,281 million had been utilised at 31 December 2004.
The Group recognises that social, ethical and environmental (SEE) issues bring both risks and opportunities. The Group’s full response to such issues is detailed in its separate corporate responsibility report, The community and our business, (see page 9 for details).
A steering committee has been overseeing the adoption of IFRS for the Group and has closely monitored developments in IFRS and the impact for the Group’s accounting policies and financial position. Work streams evaluated the impact of specific accounting changes and undertook significant work during 2004 including technical analysis, development of IFRS-compliant solutions and project management of necessary systems and process changes. The Group has been preparing its internal management accounts using IFRS since 1 January 2005.
Derecognition of financial liabilities Under IFRS a financial liability may only be derecognised after it has been settled or alternatively the debtor has been legally released from the liability, either by process of law or by the creditor. Upon adoption of IFRS, certain financial liabilities previously released to the profit and loss account will be reinstated.
Following the implementation of FRS 27 in 2005 the Group will be required to: • exclude from the value of in-force business recognised in the balance sheet any amounts that reflect future investment margins; and
• measure the liabilities of the Scottish Widows With-Profits Fund in accordance with the FSA’s realistic capital regime, subject to certain specified adjustments. Consequential adjustments are made to the related assets.
The principal subsidiaries involved in the Group’s life assurance operations during the year were Scottish Widows plc (‘Scottish Widows’, the Group’s principal provider of life assurance, pensions and investment products, which holds the only large with-profits fund managed by the Group), Scottish Widows Annuities Limited (a subsidiary of Scottish Widows that accepts the reinsurance of annuity business from its parent), Abbey Life Assurance Company Limited (‘Abbey Life’) and Lloyds TSB Life Assurance Company Limited (‘Lloyds TSB Life’). Since March 2000 both Abbey Life and Lloyds TSB Life have continued to administer existing policies and have undertaken only limited new business. No change in this activity is anticipated in respect of Abbey Life. On 31 December 2004, Lloyds TSB Life ceased trading and transferred most of its assets and insurance business to Scottish Widows.
Other restrictions in the Non-Participating Fund. The Scheme states that no amounts can be transferred from the Non-Participating Fund of Scottish Widows unless there are sufficient assets within the Long-Term Fund to meet both policyholders reasonable expectations in light of liabilities in force at a year end and the new business expected to be written over the following year.
Scottish Widows continues to be well capitalised with the working capital ratios for the With-Profits Fund and the Long-Term Fund being an estimated 5.1 per cent and 19.0 per cent respectively.
Total available capital resources on an FSA statutory basis 5,433 Capital resources held outside the Long-Term Fund of Scottish Widows (1,260) Net effect of adjustments to restate amounts onto a realistic basis 12
The with-profits realistic liabilities and the available capital for the With-Profits Fund are sensitive to both market conditions and changes to a number of non-economic assumptions that affect the valuation of the liabilities of the fund. The available capital resources (and capital requirements) are most sensitive to the level of the stock market, with the position worsening at lower stock market levels as a result of the guarantees to policyholders increasing in value. An increase in the level of equity volatility implied by the market cost of equity put options also increases the market consistent value of the options given to policyholders and worsens the capital position.
The most significant economic assumptions included in the model are: • Risk-free yield curve. This is derived from the yield on UK gilts, with an additional 0.1 per cent yield assumed to be risk-free; • Investment volatility. This is derived from derivatives where possible, or historical observed volatility where it is not possible to observe meaningful prices. As at 31 December 2004, the assumptions were set at 18 per cent for equities, 15 per cent for properties and 13 per cent for interest rates.
Basic earnings per ordinary share 43.3p 58.3p 32.1p 40.4p 48.4p Diluted earnings per ordinary share 43.0p 58.1p 32.0p 40.0p 47.9p Net asset value per ordinary share 176p 170p 140p 183p 213p
Post-tax return on average shareholders’ equity 24.3 38.5 16.8 18.1 21.2 Post-tax return on average assets 1.17 1.57 0.93 1.28 1.68 Post-tax return on average risk-weighted assets 2.01 2.63 1.62 2.26 3.08 Average shareholders’ equity to average assets 4.7 4.0 5.4 6.9 7.8
2 Assets exclude long-term assurance assets attributable to policyholders. 3 Annual dividends comprise both interim and final dividend payments. Final dividends (which are always paid in the following year) are included in the year to which they relate rather than in the year in which they are paid.
4 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds TSB Group. 5 The cost:income ratio is calculated as total operating expenses as a percentage of total income. 6 This figure excludes 79 million limited voting ordinary shares.
Chairman Joined the Group in 2000 as deputy chairman and was appointed chairman in 2001. Joined the Royal Dutch/Shell Group of companies in 1968 and after a number of senior and general management appointments in that group, became group managing director in 1992. Appointed president of Royal Dutch Petroleum Company and vice chairman of the committee of managing directors of the Royal Dutch/Shell Group in 1998 and continued in these roles until 2000. A non-executive director of Royal Dutch Petroleum Company, BT Group and British Airways.
Gavin J N Gemmell CBE✠* Chairman of Scottish Widows Joined the board in 2002. A non-executive director of Scottish Widows, having been appointed to the board of that company before it became a member of the Lloyds TSB Group. 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 63.
Joined the board on 1 January 2005. Joined Vodafone in 1984 and held a number of senior and general management appointments before being appointed to the board of that company in 1996 and deputy chief executive officer in 2005. Previously held positions in Rediffusion from 1972 to 1982 and Mars GB from 1982 to 1984. A non-executive director of Smiths Group. Aged 56.
Non-executive directors * Member of the audit committee ** Chairman of the audit committee ◆ Member of the nomination committee
J Eric Daniels Group Chief Executive Joined the board in 2001 as group executive director, UK Retail Banking before his appointment as group chief executive in June 2003. 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
The Earl of Selborne left the board at the annual general meeting in 2004. Mr Hampton, Mr Targett, Sir Tom McKillop and Mr Ayliffe left the board on 12 January 2004, 30 April 2004, 31 December 2004 and 31 January 2005, respectively. Dr Gibson-Smith and Mr Pritchard will leave the board at the annual general meeting in 2005.
Auditors Resolutions concerning the re-appointment of PricewaterhouseCoopers LLP as auditors and authorising the directors to set their remuneration will be proposed at the annual general meeting.
Compliance with the combined code The board considers that good governance is central to achieving the Group’s governing objective of maximising shareholder value over time. That has been uppermost in directors’ minds when applying the principles contained in the combined code on corporate governance annexed to the UK Listing Authority listing rules. The Group has complied with the provisions of the code, and has done so throughout the year regarding the code provisions whose requirements are of a continuing nature.
The roles of the chairman, the group chief executive and the board and its governance arrangements, including the schedule of matters specifically reserved to the board for decision, are reviewed annually. The matters reserved to the board for decision include the approval of the annual report and accounts and any other financial statements; the payment of dividends; the long-term objectives of the Group; the strategies necessary to achieve these objectives; the Group’s budgets and plans; significant capital expenditure items; significant investments and disposals; the basis of allocation of capital within the Group; the organisation structure of the Group; the arrangements for ensuring that the Group manages risks effectively; any significant change in accounting policies or practices; the appointment of the Company’s main professional advisers; and the appointment of senior executives within the organisation and the related forward planning.
The audit committee comprises Mr Brown (chairman), Mr Gemmell and Mrs Knight. The committee’s terms of reference are available from the company secretary and are displayed on the Company’s website www.lloydstsb.com.
The audit committee met five times in 2004, during which it received reports from, and held discussions with, management and the auditors. In discharging its duties, the committee has reviewed the auditors’ remuneration and, in discussion with them, has assessed their independence and objectivity (more information about which is given in note 4 to the accounts, in relation to the procedure for approving fees for audit and non-audit work) and recommended their re-appointment at the annual general meeting. The committee also reviewed the financial statements published in the name of the board and the quality and acceptability of the related accounting policies, practices and financial reporting disclosures; the scope of the work of the Group’s internal audit department, reports from that department and the adequacy of its resources; the effectiveness of the systems for internal control, risk management and
The chairman’s committee, comprising the chairman, the deputy chairman, the group chief executive and the deputy group chief executive, generally meets twice a month, to assist the chairman in preparing for board meetings.
The remuneration committee met five times in 2004 and further information about its membership and work is given in the directors’ remuneration report on pages 47 to 57.
The annual incentive scheme for executive directors is designed to reflect specific goals linked to the performance of the business.
PricewaterhouseCoopers LLP check the calculation of the annual incentive payments for executive directors based on the achievement of performance against targets set. In respect of performance in 2004, bonuses ranging from 40 per cent to 125 per cent have been paid to the directors with an average payment of 89 per cent of salary.
The other companies in the comparator group will be: Alliance & Leicester Aviva Banco Santander Barclays Bradford & Bingley Friends Provident HBOS HSBC Holdings Legal & General Northern Rock Prudential Royal Bank of Scotland Royal & Sun Alliance Standard Chartered
The other constituents of the comparator group are: Abbey National ABN Amro Alliance & Leicester Aviva Barclays Citigroup Fortis HBOS HSBC Holdings ING Legal & General National Australia Bank Prudential Royal Bank of Scotland Royal & Sun Alliance Standard Chartered
The performance condition for options granted from 2005 will be based on TSR over the relevant (three year) period measured against the group of 14 financial services companies listed on page 48. The options will become exercisable in full if the Company is placed fourth or above in the comparator group (at or above the upper quartile) and as to 30 per cent if the Company is placed eighth (i.e. median). The options will lapse if the Company is placed below eighth. A sliding scale will apply between fourth and eighth positions. There will be no retest.
Independent non-executive directors do not have service agreements and, in accordance with the articles of association, their appointment may be terminated at any time without compensation.
Performance-related payments relate to cash bonuses based on Group performance and the attainment of pre-determined targets relating to profit before tax and economic profit. For 2004, bonuses ranging from 40 per cent to 125 per cent are payable to the directors with an average payment of 89 per cent of salary. These payments also include the value of any award made under shareplan, the first £3,000 of which is made in the form of shares in Lloyds TSB Group plc.
Mrs Weir is a member of a defined contribution scheme. She joined the Lloyds TSB Group on 26 April 2004. During the year to 31 December 2004, the employer has made contributions to the defined contribution scheme in respect of her totalling £26,224.
In addition, the following unfunded benefits have accrued for Mr van den Bergh instead of a salary increase in 2002: Mr Hampton’s pension entitlement at 31 December 2004 includes an additional 12 months service in respect of his notice period in accordance with the terms of his contract.
Sir Julian Horn-Smith joined the board on 1 January 2005 and at 3 March 2005 he had a beneficial interest in 5,000 shares in Lloyds TSB Group plc.
The option granted to Mr Targett to acquire 331,125 ordinary shares when he joined the Group lapsed following his departure.
General insurance claims 224 236 – 236 Provisions for bad and doubtful debts 15
Profit on ordinary activities before tax 7 3,493 3,165 1,183 4,348 Tax on profit on ordinary activities 8 1,004 1,025
Profit on ordinary activities after tax 2,489 3,323 Minority interests: Profit for the year attributable to shareholders 9 2,421 3,254
Prepayments and accrued income 28 2,573 1,918 Long-term assurance business attributable to the shareholder 29 6,781 6,481
Accruals and deferred income 35 3,866 3,206 Post-retirement benefit liability 45 2,231 2,139 Provisions for liabilities and charges: Other provisions for liabilities and charges 37 417 402
Fixed assets Investments: Shares in group undertakings 21 11,080 10,753 Loans to group undertakings 21 1,723 1,723
Current assets Debtors falling due within one year: Amounts owed by group undertakings 1,390 1,387 Other debtors 97 88 Cash balances with group undertakings 208 362
Capital and reserves Called-up share capital 40 1,419 1,418 Share premium account 41 1,145 1,136
Net increase in shareholders’ funds 353 1,681 Shareholders’ funds at beginning of year 9,624 7,943
Assets, liabilities and results of group undertakings and joint ventures are included in the consolidated accounts on the basis of accounts made up to 31 December. Entities that do not meet the legal definition of a subsidiary but which give rise to benefits that are in substance no different to those that would arise from subsidiaries are also included in the consolidated accounts. In order to reflect the different nature of the shareholder’s and policyholders’ interests in the long-term assurance business, the value of long-term assurance business attributable to the shareholder and the assets and liabilities attributable to policyholders are classified under separate headings in the consolidated balance sheet. Details of transactions entered into by the Group which are not eliminated on consolidation are given in note 44.
Where the customer continues to operate the account, but there is doubt about the payment of interest, interest continues to be charged to the customer’s account, but it is not applied to income. Interest is placed on a suspense account and only taken to income if there ceases to be doubt about its being paid.
Debt securities and equity shares held for dealing purposes are included at market value. In circumstances where securities are transferred between the dealing and investment portfolios, the transfer is effected at an amount based on the market value at the date of transfer. Any resulting profit or loss is reflected in the profit and loss account.
UK Retail General and asset and International Central Continuing Discontinued Banking insurance management Investments Banking group items operations operations§ Total
Provisions for bad and doubtful debts (594) – – – (306) 13 (887) (63) (950) Amounts written off fixed asset investments – – – – (44) – (44) – (44) Share of results of joint ventures (22) – – – – – (22) – (22) Profit on sale of businesses – – – – – – – 865 865
Notes to the accounts 2 Segmental analysis (continued) Net Assets† Net Assets† Assets‡ Assets‡
§ Discontinued operations related to the Wholesale and International Banking segment.
The average number of persons on a headcount basis employed by the Group during the year was as follows: The above staff numbers exclude 4,657 (2003: 5,202) staff employed in the long-term assurance business. Costs of £190 million (2003: £194 million) in relation to those staff are reflected in the valuation of the long-term assurance business.
Details of directors’ emoluments, pensions and interests are given on pages 52 to 57.
Audit and audit related fees 12.5 9.7 Tax advisory 0.8 1.6 Other non-audit fees: – Due diligence services 0.9 0.7
The auditors’ remuneration for the holding company was £51,500 (2003: £51,500).
5 Amounts written off fixed asset investments 2004 2003 £m £m.
Profit on sale of businesses in Argentina (tax: £6 million) 6 – Loss on sale of businesses in Colombia (after charging £3 million of goodwill previously written off to reserves) (tax: nil) (20) – Loss on sale of businesses in Panama, Guatemala and Honduras (tax: £1 million) (1) – Loss on sale of French fund management and private banking businesses (tax: nil) – (15) Loss on sale of Brazilian businesses (after charging £161 million of goodwill previously written off to reserves) (tax: nil) – (41) Profit on sale of New Zealand operations (after charging £20 million of goodwill previously written off to reserves) (tax: nil) – 921
7 Profit on ordinary activities before tax 2004 2003 £m £m
The current tax charge includes a charge of £199 million (2003: charge of £157 million) in respect of notional tax on the shareholder’s interest in the movement in value of the long-term assurance business (note 29b). Since this derives from the use of a combination of tax rates it can give rise to a higher or lower charge compared to an expected 30 per cent rate.
‡ The weighted average number of shares for the year has been calculated after deducting 6 million (2003: 8 million) ordinary shares representing the Group’s holdings of own shares (note 43).
Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. It is expected that tax of £1 million would be payable (2003: £2 million recoverable) if the investment securities were sold at their year end valuation.
Lending to banks 2,483 2,292 Deposits placed with banks 21,083 13,273
Provisions for bad and doubtful debts (1,662) (1,677) Interest held in suspense (21) (28)
The cost of assets acquired during the year for letting to customers under finance leases and hire purchase contracts amounted to £5,472 million (2003: £4,478 million).
Equipment leased to customers, which is stated after deducting £4,551 million (2003: £4,907 million) of unearned charges, is repayable as follows: £m £m 3 months or less 247 91 1 year or less but over 3 months 282 345 5 years or less but over 1 year 1,516 1,465
*Figures exclude provisions and interest held in suspense relating to loans and advances to banks.
Bank and building society certificates of deposit 1,901 1,902 2,515 2,515
Movements in investment securities: Exchange and other adjustments (1) (1) –
In the year ended 31 December 2004 £16 million (2003: £25 million) of fees payable to iPSL have been included in the Group’s administrative expenses and £3 million (2003: £3 million) of charges to iPSL have been included in the Group’s income. The Group has also prepaid £17 million (2003: £13 million) of fees in respect of 2005 and this amount is included in prepayments and accrued income.
On an historical basis, shares in group undertakings would have been included at cost of £6,066 million (2003: £6,066 million). No deferred tax provision has been made against the liability which could arise if group undertakings were disposed of at their balance sheet carrying value because of surplus capital losses and the exemptions for disposal of substantial shareholding investments.
(Loss) profit on ordinary activites after taxation (10) 4 36 26 Dividends paid – – (24) _
Development costs. This represents the costs associated with new product development and implementation of the bancassurance strategy.
Movements in the provision over the last two years: Accrual of interest on the provision – 2 Charge for the year – 44 Compensation paid (12) (58)
During 2002, a review was carried out in conjunction with the FSA into sales of mortgage endowment and other long-term savings products made by the Abbey Life sales force between 1988 and its disposal by Lloyds TSB Group in February 2000. As a result of this review, the Group is required to pay compensation to customers in those cases where sales practices are found to have been deficient. A provision has been established to meet the cost of the payments to those customers; a provision is also held against the estimated cost of redress payments to customers in respect of products sold by the Abbey Life sales force prior to 1988. During 2004 management has reviewed the adequacy of the provisions held in the light of experience and changing market conditions and an additional charge of £12 million (2003: £56 million) has been made.
Movements in the provision over the last two years: Accrual of interest on the provision 3 5 Charge for the year 12 56 Compensation paid (140) (77)
Details of the provisions held in respect of the estimated cost of making redress payments to customers in respect of past product sales by the Group’s banking operations are given in note 37.
Since demutualisation in 2000, Scottish Widows continued to write policies containing similar features, although the volume of products written has since reduced and is now not significant. The Additional Account is not available to meet any additional cost of providing the benefits on these policies.
The principal economic assumptions have been revised at 31 December 2004 as follows: Risk-adjusted discount rate (net of tax) 7.40 7.60 Return on equities (gross of tax) 7.17 7.45 Return on fixed interest securities (gross of tax) 4.57 4.85 Expenses inflation 3.76 3.80
Investment income 1,981 2,073 Unrealised gains on investments 2,815 4,833 Other income – 6
Profit on ordinary activities after tax on a modified statutory solvency basis 496 250
Liabilities Shareholder’s funds 4,581 4,234 Fund for future appropriations 1,379 346 Long-term business provision† 23,705 23,730 Technical provision for linked liabilities† 28,256 25,023 Other creditors 1,396 1,176
Other differences: Deferred acquisition costs 585 496 Tax adjustment 152 145 Other adjustments 2 (9)
International: Non-interest bearing 32 61 Interest bearing 6,497 5,035 £m £m
Other debt securities by residual maturity repayable: 3 months or less 18,489 17,942 1 year or less but over 3 months 2,941 2,015 5 years or less but over 1 year 424 283 Over 5 years – 168
Debt securities in issue include certificates of deposit of £15,226 million (2003: £16,415 million) and commercial paper of £6,473 million (2003: £3,625 million). An amount of £5,097 million (2003: £5,184 million) relating to debt securities issued under the Group’s Euro Medium Term Note programme is included in these figures.
Settlement balances 38 40 Other liabilities 1,065 1,148 35 Accruals and deferred income 2004 2003 £m £m
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 run off during the remaining life of the leases concerned; the run off period currently averages 5 years. Where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
† Any repayments of undated loan capital would require the prior consent of the Financial Services Authority.
Dated subordinated liabilities are repayable as follows: 1 year or less – 505 – – 2 years or less but over 1 year 250 – 250 – 5 years or less but over 2 years 769 917 – 249 39 Non-equity minority interests
US dollars US$m US$m 160 million Preference shares of US25 cents each 40 40
Limited voting ordinary shares of 25p each 78,947,368 78,947,368 6% Non-Cumulative Redeemable Preference shares of 25p each 400 –
Share premium account (the Group and the Company): Premium arising on issue of shares 9
Revaluation reserve (the Company): Transfer to profit and loss account (1) Increase in net tangible assets of subsidiary undertakings 328
The profit and loss account reserves of the Group at 31 December 2004 include approximately £1 billion (2003: £1 billion) not presently available for distribution representing the Group’s share of the value of long-term assurance business in force and the surplus retained within the long-term assurance funds. The Group’s profit and loss account reserves at 31 December 2004 are stated after including a deficit of £2,231 million relating to the Group’s post-retirement defined benefit schemes (2003: £2,139 million) and after deducting £31 million (2003: £39 million) in respect of own shares held.
The cumulative amount of premiums on acquisitions written off against Group reserves during previous years amounts to £2,087 million (2003: £2,090 million) of which £1,682 million (2003: £1,662 million) was within the last 10 years.
42 Shareholders’ funds Group Group Company Company £m £m £m £m
Own shares – the Group 31 39 * Lloyds TSB Group plc sponsors the Lloyds TSB Group Employee Share Ownership Trust, a discretionary trust for the benefit of employees and former employees of Lloyds TSB Group. The Company has lent £20.6 million to the trustees, interest free, to enable them to purchase Lloyds TSB Group plc ordinary shares, which are used to satisfy options granted by the Company or to meet commitments arising under other employee share schemes. Under the terms of the trust, the trustees have waived all but a nominal dividend on the shares they hold. At 31 December 2004, 1.5 million shares were held by the trustees with a cost of £11.5 million (2003: 1.6 million shares with a cost of £12.6 million).
Lloyds TSB Group has also established the Lloyds TSB Qualifying Employee Share Ownership Trust (‘the QUEST’) for the purpose of providing shares on the exercise of options under certain of the Group’s Save As You Earn (SAYE) share option schemes. At 31 December 2004, 1,364 shares were held by the QUEST (2003: 0.2 million shares with a cost of £0.7 million). Under the terms of the QUEST’s trust deed, the trustees have waived all but a nominal dividend on the shares they hold.
Movements in the amount deducted from reserves in respect of own shares have been as follows: £m
The credit of £10 million to Lloyds TSB Group’s profit and loss account reserves represents the net reduction in the cost of own shares of £8 million and an increase in the accrual in respect of the free shares to be awarded in respect of Shareplan of £2 million.
Certain administrative properties used by Scottish Widows are owned by the long-term assurance funds. During 2004 Scottish Widows paid rent to the longterm assurance funds amounting to £5 million (2003: £5 million). In addition, at 31 December 2004, the long-term assurance funds owned 30.5 million ordinary shares in the Company (2003: 30.5 million shares).
Rate of inflation 2.60 2.50 2.30 Rate of salary increases 4.14 4.04 3.83 Rate of increase for pensions in payment and deferred pensions 2.60 2.50 2.30
The amounts recognised in the statement of total recognised gains and losses comprise: £m £m
Where guarantees are issued on behalf of customers, Lloyds TSB Group usually holds collateral against the exposure or has a right of recourse to the customer.
Through intra company and intra group transactions, Group companies establish non-trading derivatives positions with the Group’s independent trading operations, which then enter into similar positions with third parties. The notional principal amounts and fair values of non-trading instruments entered into with third parties were as follows: Notional principal Fair value Fair value amount assets liabilities
Exchange rate contracts: Spot, forwards and futures 155 3 3 Currency swaps 60 2 – Options purchased 1 – –
An analysis of the net replacement cost of both trading and non-trading instruments entered into with third parties by counterparty type is set out below; the Group’s exposure is further reduced by qualifying collateral held.
Assets Treasury bills and other eligible bills 43 40 – 5 – – 4 92 Loans and advances to banks 19,663 1,351 154 470 82 602 1,243 23,565 Loans and advances to customers 99,216 6,443 6,937 36,783 6,203 (1,655) 313 154,240 Debt securities and equity shares 8,193 1,009 770 1,976 2,527 (68) 11,002 25,409
Assets Treasury bills and other eligible bills 408 48 65 6 3 – 9 539 Loans and advances to banks 10,686 1,311 463 746 86 366 1,889 15,547 Loans and advances to customers 88,298 4,680 5,549 30,777 6,171 (1,648) 1,424 135,251 Debt securities and equity shares 8,718 606 279 1,856 2,372 (55) 15,351 29,127
The valuation technique for each major category of financial instrument is discussed below: Treasury bills and other eligible bills
Assets Treasury bills and other eligible bills 9 9 530 523 Loans and advances to banks and customers 3,313 3,313 147,485 148,870 Debt securities and equity shares 15,351 15,351 13,776 13,885 Liabilities Deposits by banks and customers 807 807 139,644 139,695 Debt securities in issue – – 25,922 26,254 Subordinated liabilities – – 10,454 11,684
During the year ended 31 December 2002, the Group’s retail operations acquired the business of Accucard, a credit card technology development and marketing company. Further cash payments of £1 million in respect of this acquisition were made in each of 2003 and 2004.
Net cash inflow from trading activities 3,882 4,375 Net increase in loans and advances (28,921) (11,710) Net decrease in investments other than investment securities 3,981 248 Net decrease in other assets 956 816 Net increase (decrease) in deposits by banks 15,864 (1,000) Net increase in customer accounts 6,121 7,658 Net increase in debt securities in issue 1,859 685 Net decrease in other liabilities (115) (645) Net (increase) decrease in items in course of collection/transmission (13) 169 Other non-cash movements (145) 176
Cash consideration paid (see f) – 1,096 Payments to former members of Scottish Widows Fund and Life Assurance Society
g Disposal of group undertakings and businesses 2004 2003 £m £m
Financial calendar 2005 4 March Results for 2004 announced 16 March Ex-dividend date for 2004 final dividend 18 March Record date for final dividend 6 April Final date for joining or leaving the dividend reinvestment plan for the final dividend 4 May Final dividend paid 5 May Annual general meeting in Glasgow 29 July Results for half-year to 30 June 2005 announced 10 August Ex-dividend date for 2005 interim dividend 12 August Record date for interim dividend 7 September Final date for joining or leaving the dividend reinvestment plan for the interim dividend 5 October Interim dividend paid