Executing brilliantly • flawlessly for the customer • doing what we say we are going to do
• Final dividend of 23.5p per share, making a total of 34.2p for the year (2005: 34.2p).
• Good income growth of 4 per cent supported by second half acceleration to 6 per cent.
• Excellent progress in increasing bancassurance sales, up 62 per cent, with OEIC sales more than doubled.
• Good momentum maintained in sales through Independent Financial Advisers. Sales increased by 14 per cent.
• Good progress with General Insurance’s strategy to develop its manufacturing business and build distribution capability.
** Excluding volatility and insurance grossing. Also excludes the impact of 2005 capital repatriation and strengthening of reserves for mortality.
• Statutory profit before tax increased by 11 per cent to £4,248 million.
• Excellent cost control. Income growth exceeded cost growth of 2 per cent.†
• Post-tax return on average shareholders’ equity remained strong at 25.1 per cent.†
• Significantly improved profit performance. Profit before tax increased by 15 per cent to £950 million.**
• Profit before tax increased by 8 per cent to £1,640 million.
• Income growth exceeded cost growth of 4 per cent. Continued investment in people and systems to support new product capabilities.
• Further good progress in delivering the strategy to build an integrated wholesale bank for corporate markets, with a 13 per cent increase in Corporate Markets profit before tax.
For 2006, the Group has introduced supplementary financial reporting relating to Scottish Widows Group using European Embedded Value
(‘EEV’) Principles as published by the Chief Financial Officers’ Forum in 2004. The Group has also aligned the accounting for insurance products which are recognised on an embedded value basis under IFRS to a basis consistent with relevant EEV Principles.
Lloyds TSB Group plc FTSE 100 Index FTSE 350 Banks Index
Rebased to 100 on 31 December 2005 Source : Datastream 85 D ec 06
The real strength of Lloyds TSB lies in its broadly based, well positioned set of businesses in both the retail and corporate financial services markets. During 2006 we performed strongly throughout the Group but, equally importantly, each division continues to build its franchises for long-term, sustainable growth. In each division we have strong customer relationships, broad distribution strength and well respected brands. We see in each rising levels of customer satisfaction and advocacy, strong sales performances, high levels of new customer recruitment and greater relationship depth. There are, of course, challenges in our market place – slow growth in consumer credit markets, increased levels of impairment and an ongoing regulatory burden. But we are confident in our ability to continue to perform well.
Over the last few years our management team has achieved a great deal against its twin objectives: to improve the financial performance of the Group significantly, and to invest for the future in building strong customer franchises. In this way we will continue to create value for you, our shareholders.
In Retail Banking we will earn the right to meet 100% of our customers’ financial services needs
In Insurance and Investments our focus is on profitability and returns, combined with strong new business sales and capital management 4 LLOYDS TSB GROUP
Our business model is based on building long-lasting relationships with our customers, meeting more of their financial needs and thereby generating sustainable, high quality earnings growth. Our success is reflected in higher customer satisfaction scores, rising levels of customer recruitment and a significant increase in sales. We are continuing to grow strong customer franchises that support our future development.
I am pleased with the progress we made during the year. In line with the second phase of our strategic plan, we are building strong customer franchises, improving our product capabilities, enhancing our processing efficiency and working our capital harder. We have made considerable progress across each of the divisions.
The Retail Bank has made considerable progress against its key priorities. By enhancing our customer service, re-engineering processes and developing a series of new and innovative products and services, we are able to offer customers compelling reasons to choose Lloyds TSB.
Our General Insurance business continued to grow successfully, delivering a 16 per cent growth in profits. The results particularly reflect the growth in sales to our franchise customers in retail and Business Banking, as well as continued investment in enhancing our service performance and claims processing capacity.
Turning to 2007, we are well positioned to drive further growth as we continue to embed our
This annual report includes certain forward looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 with respect to the business, strategy and plans of Lloyds TSB Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds TSB Group’s or management’s beliefs and expectations, are forward looking statements. Words such as ‘believes’, ‘anticipates ’, ‘estimates ’, ‘expects’, ‘intends’, ‘aims’, ‘potential ’, ‘will ’, ‘would ’, ‘could ’, ‘considered’, ‘likely ’, ‘estimate’ and variations of these words and similar future or conditional expressions are intended to identify forward looking statements but are not the exclusive means of identifying such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future.
To enable meaningful comparisons to be made with 2005, the income statement commentaries below exclude volatility, the 2006 pension schemes related credit and, in 2005, profit on sale and closure of businesses, customer redress provisions and the strengthening of reserves for annuitant mortality.
Profit before tax increased by £263 million, or 8 per cent, to £3,713 million, underpinned by continued momentum in all divisions. Revenue growth of 6 per cent exceeded cost growth of 2 per cent, with each division delivering stronger year-on-year revenue growth than cost growth. Our strategy to deepen customer relationships at the same time as improving productivity has led to strong levels of trading surplus growth in each division. Earnings per share increased by 6 per cent to 46.9p and economic profit also increased by 6 per cent to £1,692 million. The post-tax return on average shareholders’ equity remains strong at 25.1 per cent.
The net interest margin from our banking businesses decreased by 11 basis points, from 3.11 per cent in 2005 to 3.00 per cent in 2006. Whilst individual product margins were broadly stable, stronger growth in finer margin mortgage and corporate lending led to a negative mix effect which accounted for 8 basis points of the margin decline.
The Group’s programme of productivity improvement initiatives has exceeded its 2006 target, delivering net benefits of £47 million, largely reflecting earlier than expected procurement benefits. In 2006 we invested £95 million in a number of initiatives, and delivered benefits of £142 million. During 2007, we expect net benefits to total approximately £125 million and, in 2008, the Group expects to increase the net annual benefits of the programme to circa £250 million.
The Group’s defined benefit pension schemes’ gross deficit at 31 December 2006 improved by £1,195 million to £2,099 million, comprising net recognised liabilities of £2,362 million partly offset by unrecognised actuarial gains of £263 million. This improvement largely reflects continued strong returns from the schemes’ assets, Group contributions to the schemes and an increase in the real discount rate used to value the schemes’ liabilities. The decision to stop augmenting the pension entitlement of employees taking early retirement reduced the pension deficit by £129 million.
Branches. Lloyds TSB Group provides wide-reaching geographic branch coverage in England, Scotland and Wales, with over 2,000 branches of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester as at the end of 2006.
Scottish Widows Investment Partnership. Scottish Widows Investment Partnership manages funds for Lloyds TSB Group’s retail life, pensions and investment products. Clients also include corporate pension schemes, local authorities and other institutions in the UK and overseas. At 31 December 2006 funds under management amounted to some £102 billion.
Business Banking. A growing business which has relationships with some 600,000 small businesses managed by business managers based in 500 locations throughout the UK. Lloyds TSB Group has a leading share of the new business start-up market, with some 100,000 new businesses opening an account with Lloyds TSB in 2006. The main activity of the Agricultural Mortgage Corporation is to provide long-term finance to the agricultural sector.
International private banking. Lloyds TSB Group has international private banking operations for wealthy individuals. The business is conducted through branches of Lloyds TSB Bank located in Switzerland, Luxembourg, Monaco, Gibraltar, Uruguay, Dubai and the US, supported by representative offices in Latin America.
Latin American banking. Lloyds TSB Group continues to have offices in Ecuador and Uruguay which provide mainly corporate banking services. The sale of the business in Paraguay is now expected to complete in 2007 after receipt of the required regulatory approval.
Pension schemes related credit – – – 128 128 – 128
Retail and International group insurance Insurance Banking Investments** Banking items gross up gross up** Group 2005 £m £m £m £m £m £m £m
Total income, net of insurance claims 5,057 1,469 3,893 (354) 10,065 5 10,070
Impairment losses on loans and advances (1,065) – (188) (46) (1,299) – (1,299)
* Excluding volatility and profit (loss) on sale and closure of businesses; † also excludes pension schemes related credit and, in 2005, customer redress provisions and the strengthening of reserves for mortality.
Profit before tax from UK Retail Banking, before provisions for customer redress, increased by £79 million, or 5 per cent, to £1,549 million, as strong levels of business growth were partly offset by the impact of higher impairment losses. Increased income from the Group’s mortgage lending and customer deposit portfolios more than offset the impact of lower levels of unsecured consumer lending and related insurance products. Total income increased by £206 million, or 4 per cent, notwithstanding a significant decrease in income from creditor insurance, whilst costs fell by 2 per cent. As a result, the trading surplus increased by 10 per cent.
During 2006, UK Retail Banking has made substantial progress in each of its key strategic priorities: growing income from its existing customer base; expanding its customer franchise; and improving productivity and efficiency. In each of these areas, a key focus has been on improving sales of recurring income products, such as savings and bancassurance products. This has started to generate a better quality, more annuity-like, revenue stream and has supported the accelerating rate of revenue growth in the second half of 2006, compared to that in the first half of the year.
Overall sales increased by 16 per cent, with strong performance improvements in each key distribution channel and over a broad range of products, particularly current accounts, bank savings and OEICs. This growth has been supported by higher levels of new product innovation during the year with the launch, for example, of enhanced regular savings products. In addition, a number of improved service initiatives, such as the introduction of instant cheque value and the recent ‘Save the Change’ launch, have been made. These have improved both customer value and our brand perception and will, we believe, create further shareholder value over time.
Over the last 12 months, substantial progress has been made in re-balancing the sales mix towards an increasing focus on non-lending related income streams, with a significant year-on-year increase in the sale of added value current accounts, bank savings products, bancassurance products and in the level of retail bank customer introductions to the Group’s wealth management business. Our wider savings product range has led to an improved market share of bank savings and an increase in savings margins. Credit balances on current accounts and savings and investment accounts increased by 7 per cent to £75.7 billion, supported by good growth in Wealth Management and bank savings. Branch network sales rose by 30 per cent and product sales via the internet and telephone increased by 33 per cent as customers increasingly choose to buy through direct channels as well as through our branches. These increases were offset by a 15 per cent reduction in sales from direct mail, following a significant reduction in our direct mailing activity, particularly in the credit card market.
In unsecured consumer lending, tightening of credit criteria over the last two years, together with the slowdown in consumer demand, has led to unsecured consumer credit balances remaining at broadly the same level as last year end. Personal loan balances outstanding at the year end were £11.1 billion, an increase of 1 per cent, and credit card balances totalled £6.9 billion, a decrease of 5 per cent.
Profit before tax analysis Life, pensions and OEICs* 701 655 General insurance 243 209 Scottish Widows Investment Partnership 29 16
During 2006 Scottish Widows has made strong progress in each of its key business priorities: to maximise bancassurance success; to profitably grow IFA sales; to improve service and operational efficiency and to optimise capital management.
Operational efficiencies have continued to improve during 2006, and expense growth has been controlled to significantly below the rate of income growth. Scottish Widows’ customer satisfaction levels continued to improve, as did levels of IFA satisfaction. Scottish Widows has again won a significant number of awards for service quality.
Scottish Widows’ strong capital management has been reinforced by continuing to deliver improving capital efficiency and self-financing growth, a more capital efficient product profile, and improved internal rates of return and new business margins. As a result, the post-tax return on embedded value increased to 9.3 per cent, from 8.0 per cent last year. During 2006, surplus capital generated, excluding volatility and non-recurring items, in excess of the regular annual dividend totalled £227 million. £540 million of capital was repatriated to Lloyds TSB in December 2006, giving a total capital repatriation to the Group of over £1.7 billion over the last two years. We continue to explore a number of opportunities to repatriate surplus capital from Scottish Widows, in order to further improve capital efficiency.
Overall, sales in 2006 increased by 24 per cent reflecting, in particular, strong growth in the sales of OEICs and corporate pension products. Bancassurance sales improved significantly and were 62 per cent higher at £3,421 million, including excellent growth in the sales of OEICs through the branch network and to Lloyds TSB private banking clients. IFA sales grew 14 per cent to £5,358 million, supported by significant product and service enhancements in pensions and retirement income. Sales of savings and investment products declined during the year, following the limiting of investment in the Property Fund in June 2006, but this reduction was more than offset by a significant increase in the sale of OEIC and pension products.
Pre-tax profit from Scottish Widows Investment Partnership (‘SWIP’) increased to £29 million, compared with £16 million in 2005, reflecting increased revenues from higher funds under management throughout the period. SWIP’s assets under management increased by 7 per cent to £102 billion, and group wide funds under management increased by 4 per cent to £126 billion.
Lloyds TSB continues to report under IFRS, however, in line with industry best practice, the Group has introduced supplementary financial reporting relating to Scottish Widows on an EEV basis. The following EEV supplementary results have been prepared in accordance with the CFO Forum’s EEV Principles and Guidance.
Expected return on shareholders’ net assets 160 7 167 202 7 209
Strengthening of annuitant mortality reserves – (162) Other items** 76 172
Adjusting for the impact of last year’s capital repatriation, EEV profit before tax from the Group’s life, pensions and OEICs business increased by 24 per cent to £852 million. The Group’s strategy to improve its returns by focusing on more profitable, less capital intensive, business whilst constantly seeking to improve process and distribution efficiency has led to a 36 per cent increase in new business profit to £346 million. As a result of improvements in key individual product margins and strong sales of corporate pensions and OEICs the new business margin increased to 3.6 per cent, compared with 3.2 per cent for 2005.
Overall the post-tax return on embedded value increased to 9.3 per cent from 8.0 per cent.
This section provides further details of the Scottish Widows’ EEV financial information.
Total EEV of covered business 6,413 6,386 * Excluding volatility, other items and, in 2005, the strengthening of reserves for mortality.
Reconciliation of opening EEV balance sheet to closing EEV balance sheet on covered business Value of
A bottom up approach is used to determine the economic assumptions for valuing the business in order to determine a market consistent valuation.
Impact on new Impact business profit on EEV before tax £m £m 2006 EEV/new business profit before tax 6,413 346 100 basis points reduction in risk-free rates1 237 10 10% reduction in market values of equity and property assets2 (228) n/a 10% reduction in expenses3 82 35 10% reduction in lapses4 95 21 5% reduction in annuitant mortality5 (88) (5) 5% reduction in mortality and morbidity (excluding annuitants)6 28 3 100 basis points increase in equity and property returns7 nil nil
Whilst claims increased slightly to £200 million, the claims ratio improved to 32 per cent (2005: 34 per cent), as further progress in re-engineering the claims process and improvements in the cost effectiveness of the claims supply chain offset the impact of higher subsidence related claims. The combined ratio relating to the underwriting business improved to 80 per cent.
3 This sensitivity shows the impact of reducing new business and maintenance expenses to 90 per cent of the expected rate.
4 This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.
6 This sensitivity shows the impact of reducing mortality rates on non-annuity business to 95 per cent of the expected rate.
Profit before tax in Asset Finance decreased by 13 per cent to £190 million, reflecting higher levels of consumer finance impairment losses. Income increased by £12 million, or 1 per cent, as good fee income growth in the consumer lending business and growth in the asset backed lending and contract hire businesses, was largely offset by the impact of the tightening of lending credit criteria in the consumer lending portfolios. Lloyds TSB Commercial Finance has continued to be a major presence in its market, with a 19 per cent market share measured by client numbers, and the motor and leisure business continues to be the largest independent lender in the UK motor and leisure point-of-sale market with a share of 15 per cent. Costs were held flat, leading to a 3 per cent growth in the trading surplus. The impairment charge increased by £40 million to £245 million, reflecting the ongoing impact of higher levels of retail consumers experiencing repayment difficulties.
During 2006, profit before tax included banking volatility of £(3) million, being a charge of £136 million to net interest income and a credit of £133 million to other income, (2005: £(124) million, being a charge of £79 million to net interest income and a charge of £45 million to other income). The significant reduction in this source of volatility reflects the beneficial effect of rising interest rates which has had the result of changing the way in which the gradual unwind of the Group’s fair value hedging relationships has impacted the income statement.
The expected investment returns used to determine the normalised profit of the business, which are based on prevailing market rates and published research into historic investment return differentials, are set out below: Gilt yields (gross) 4.62 4.12 4.57 Equity returns (gross) 7.62 6.72 7.17 Dividend yield 3.00 3.00 3.00 Property return (gross) 7.62 6.72 7.17 Corporate bonds (gross) 5.22 4.72 5.17
During 2006, profit before tax included positive policyholder interests volatility of £326 million, being a charge of £33 million to net interest income and a credit of £359 million to other income (2005: £311 million, being a credit to other income). The increase reflects an improved return from a property partnership majority owned by the policyholders, which more than offset a reduction in the policyholder tax charge as a result of a fall in the capital values of gilts and bonds and a smaller rise in equity markets.
Our approach to corporate responsibility focuses on five areas: our people, our customers, our suppliers, our community and the environment.
Equality and diversity is not just a legal issue or something which is socially desirable, it is key for competitive advantage. In an ever-tightening employment market, we need to differentiate ourselves as an employer of choice to ensure that we attract and retain the best cross section of talent. We also need to be close to our customers, to understand their needs and provide them with the right products and services. By attracting and retaining a diverse workforce, we will better understand the needs of all our customers and be able to explore the immense opportunities available right across communities.
Over the last few years we have been working to increase the number of women and ethnic minority employees in management and senior management positions across the organisation. At the end of 2006, twenty-one per cent of our senior managers are women, including three female board directors. We are included in the Times top 50 places for women to work and we are the top FTSE 100 company in terms of the number of female executive directors. During the year we won several diversity awards including first in the Race for Opportunity Benchmarking and fourth in the Employers’ Forum on Disability Benchmarking.
We are committed to being a responsible lender. It is in our interest to help customers borrow only those amounts they can repay. We have a responsible lending programme with internal management reporting and accountability. Our employees are trained to offer the necessary advice and support to help customers manage their borrowing. Our Customer Support Unit provides help for customers who are in financial difficulties to find an appropriate solution through effective budgeting or rescheduling their borrowing. We also support independent money advice networks including the Money Advice Trust and the Consumer Credit Counselling Service. Payments totalling more than £2.5 million were made in 2006.
We measure our customers’ satisfaction with the service they receive via monthly surveys and use the results to calculate our CARE Index which is based on customer understanding, accessibility, responsibility and expertise. We seek to address customer complaints as quickly as prudent whilst ensuring appropriate standards of investigation and communication are maintained (see page 27).
Each year we buy around £2 billion worth of goods and services. Our suppliers are important to us and we want to ensure that we treat them fairly and pay them on time. Our supplier relationships are governed by a strict Code of Purchasing Ethics that defines the way we do business. We also have an established supplier review process that allows us to assess our suppliers’ social, ethical and environmental performance as part of the tendering process (see page 27).
Through their shares in the Lloyds TSB Group, the Lloyds TSB Foundations together receive one per cent of the Group’s pre-tax profits, averaged over three years, in lieu of their shareholder dividend. Over the last 10 years, we have given a total of over £300 million to the Foundations, making Lloyds TSB one of the largest corporate charitable donors in the United Kingdom.
The Charity of the Year is chosen in an open ballot of staff. A team of Charity Champions across all parts of the Group leads the fundraising, inspiring and motivating their colleagues to organise and take part in events, sell pin badges and find new and innovative ways of raising money. In 2006 our staff raised over £1.8 million for Breast Cancer Care, the third year in a row that over £1 million has been raised for our chosen charity. Our staff have chosen Barnardo’s as the charity of the year for 2007.
The board is satisfied that the systems in place to manage corporate responsibility risks are effective and that the relevant risks have been assessed during 2006 and managed in compliance with relevant policies and procedures.
Women in management positions 36% 37% 38% 38% Women in senior management positions 17% 19% 20% 21%
Payment of suppliers Number of supplier payments 360,257 379,613 344,422 Value £2.20 billion £2.16 billion £2.29 billion Average time to pay 28.02 days 27.01 days 29.72 days Number/amount of compensation payments for late settlement 1 payment totalling £25 None None
† The service quality index is based on SIGMA, deriving its provenance from the manufacturing world, where it measures Defects per Million Opportunities (‘DPMO’). For the Group’s purposes, a ‘defect’ is registered whenever there is a failure to deliver a process or product within a certain time period or to the required standard. The Lloyds TSB DPMO score is measured for over 150 end-to-end processes across eight business units, covering in excess of eighty per cent of transactions by volume.
The board, assisted by its sub-committees, the risk oversight committee, the group executive committee, and the audit committee, approves the Group’s overall risk management framework. The board also reviews the Group’s aggregate risk exposures and concentrations of risk to seek to ensure that these are consistent with the board’s appetite for risk. The risk oversight responsibilities of the board, audit committee and risk oversight committee are shown in the corporate governance section on pages 49 and 50, and further key risk oversight roles are described on the next page.
Through Lloyds TSB’s risk management processes these risks are assessed on an ongoing basis to ensure optimisation of risk and reward and that, where required, appropriate mitigation is in place. Both quantitative and qualitative factors are considered in assessing Lloyds TSB’s current and potential future risks. At present the two most significant risks for the Group are: • Legal and regulatory risk, reflecting the volume and pace of change from within the UK and Europe. This impacts Lloyds TSB both operationally in terms of cost of compliance and uncertainty about regulatory expectations, and strategically through pressure on key earnings streams. The latter could potentially result in major changes to business and pricing models, particularly in the UK retail market. Our business planning processes continue to reflect change to the regulatory environment. Major current regulatory reviews are described on page 24.
Strategy risk is the risk arising from developing a strategy that does not maximise franchise value and/or fails to achieve the initiatives in the agreed strategic plan due to changing or flawed assumptions. In assessing strategic risk consideration is given to both: • external factors (i.e. economic, technological, political, social and ethical, environmental, legal and regulatory, market expectations, reputation and competitive behaviour), and
The market for UK financial services and the other markets within which the Group operates are highly competitive, and management expects such competition to intensify to response to consumer demand, technological changes, the impact of consolidation, regulatory actions and other factors, which could result in a reduction in profit margins. The Group’s ability to generate an appropriate return for its shareholders depends significantly upon the competitive environment and management’s response to it.
As well as the Group’s organic growth plans, management and planning resources are also devoted to identifying possible acquisitions which would provide further opportunities for growth. If these strategic plans do not meet with success, the Group’s earnings could grow more slowly or decline.
Businesses establish and monitor performance standards for all marketed products across a range of indicators, for example sales volumes, customer service and risk profile. Significant deviations from these standards are investigated and appropriate action taken.
Credit risk also arises from the use of derivatives. Note 16 to the financial statements shows the total notional principal amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2006. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group.
Day-to-day credit management and asset quality within each business is primarily the responsibility of the relevant business director.
The risk of reductions in earnings and/or value, through financial or reputational loss, arising from unexpected changes in financial prices, including interest rates, exchange rates and bond, commodity and equity prices. It arises in all areas of Lloyds TSB Group’s activities and is managed by a variety of different techniques.
• Most of the Group’s trading activity is undertaken to meet the requirements of wholesale and retail customers for foreign exchange and interest rate products. However, some interest rate and exchange rate positions are taken using derivatives and on-balance sheet instruments with the objective of earning a profit from favourable movements in market rates
Change in net interest income from a +100 basis point shift in yield curves (207.6) (12.8) 0.3 (17.7) (237.8) (112.5) Change in net interest income from a –100 basis point shift in yield curves 207.2 12.8 (0.3) 17.7 237.4 104.7
Insurance activity: • Market risk exposures from the insurance businesses are controlled via approved investment policies set with reference to the Group’s overall risk appetite and regularly reviewed by the group asset and liability committee
The main sources of operational risk within Lloyds TSB Group relate to uncertainties created by the changing business environment in which we operate and how this is managed across the Group. Throughout 2006 there has been ongoing development of operational risk metrics to ensure both current and potential future operational risk exposures are understood in terms of both risk and reward potential.
Group Compliance also provides leadership on compliance with money laundering and terrorist financing legislation and regulation across the Group. It sets group policy and standards on the topic and undertakes high level oversight of anti-money laundering risks. A specialist team within Group Compliance provides a centre of excellence on the relevant legislation and regulation as well as interfacing with external public and private bodies in order to evolve the Group’s approach and seek to ensure greater effectiveness and focus on key risk areas. Its remit also includes compliance with financial sanctions.
A framework is in place to guide the consideration and documentation of customer treatment risk when developing policies and procedures. The Group has defined customer treatment principles and benchmark standards in all the key areas and enhanced its processes and procedures for a number of individual initiatives including the governance of responsible lending and complaints handling. The divisions are required to meet or exceed these standards, tailoring customer treatment to the needs of each customer segment. The revised detailed group product governance policy also requires customer treatment standards to be tailored.
The Group has defined high-level process and resource risk policies to seek to ensure a wide-ranging and consistent approach to the identification and management of process and resource risk. These include policies covering physical and information security, business continuity, outsourcing, procurement and incident management when policy implementation and oversight is lead by specialist teams with a group wide remit.
Financial soundness risk appetite is set and reported through various metrics that enable the Group to manage liquidity and capital constraints and shareholder expectations.
Liquidity sources: The principal sources of liquidity for Lloyds TSB Group plc are dividends received from its directly owned subsidiary company, Lloyds TSB Bank, and loans from this and other Lloyds TSB Group companies. The ability of Lloyds TSB Bank to pay dividends, or for Lloyds TSB Bank or other Lloyds TSB Group companies to make loans to Lloyds TSB Group plc, depends on a number of factors, including their own regulatory capital requirements, distributable reserves and financial performance.
At 31 December 2006, the risk asset ratios were 10.7 per cent for total capital and 8.2 per cent for tier 1 capital.
Lloyds TSB Group and its regulated subsidiary banks have been allocated an Individual Capital Ratio by the FSA, and the board has agreed a formal buffer to be maintained in addition to the Individual Capital Ratio. Any breaches of the formal buffer must be notified to the FSA, together with proposed remedial action. No such notifications have been made during 2006.
As at 31 December 2006 Assets attributable to the shareholder held outside the long-term funds – – – 1,947 1,947 Assets attributable to the shareholder held within the long-term funds – 2,317 2,317 – 2,317
Adjustments onto a regulatory basis: Life assurance business Unallocated surplus within insurance business 631 – 631 – 631 Adjustments to remove differences between IFRS and regulatory valuation of assets and liabilities – (109) (109) (855) (964) Adjustment to include estimated ‘realistic’ liabilities payable to the shareholder (693) – (693) – (693) Adjustment to replace ‘realistic’ liabilities with statutory liabilities 3,721 – 3,721 – 3,721 Adjustment to remove the value of future profits recognised in respect of non-participating contracts written in the With Profit Fund (32) – (32) – (32) Recognition of future profits for regulatory capital purposes – – – – – Qualifying loan capital – – – 525 525
As at 31 December 2005 Assets attributable to the shareholder held outside the long-term funds – – – 1,513 1,513 Assets attributable to the shareholder held within the long-term funds – 2,619 2,619 – 2,619
Further Support Account: The Further Support Account is an extra tier of capital support for the with-profits policies in existence at the date of demutualisation. The Scheme requires that assets can only be transferred from the Non-Participating Fund if the economic value of the remaining assets in the fund exceeds the aggregate of the Support Account and Further Support Account. Unlike the Support Account test, the economic value used for this test includes both admissible assets and the present value of future profits of business written in the Non-Participating Fund or by any subsidiaries of that fund. The balance of the Further Support Account is expected to reduce to nil by the year 2030. At 31 December 2006, the estimated net economic value of the Non-Participating Fund and its subsidiaries for the purposes of this test was £4,219 million (31 December 2005: £4,140 million) and the estimated combined value of the Support Account and Further Support Account was £2,869 million (31 December 2005: £2,836 million).
Other restrictions in the Non-Participating Fund: In addition to the policies which existed at the date of demutualisation, the With Profit Fund includes policies which have been written since that date. As a result of statements made to policyholders that investment policy will usually be the same for both types of business, there is an implicit requirement to hold additional regulatory assets in respect of the business written after demutualisation. The estimated amount required to provide such support at 31 December 2006 is £210 million (31 December 2005: £267 million). Scottish Widows has obtained from the FSA permission to include the value of this support in assessing the realistic value of assets available to the With Profit Fund. There is a further test requiring 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.
Shareholder Fund: Available capital in the Shareholder Fund has increased from £1,307 million at 31 December 2005 to an estimated £1,617 million at 31 December 2006. During the year Scottish Widows Unit Trust Managers Limited was purchased at its market value of £380 million, and was written down to £47 million as required by the regulations. The resultant reduction in capital, together with dividends paid of £251 million, is offset by the proposed transfer from the Non-Participating Fund noted above and by net investment returns.
Insurance and participating investment contract liabilities 18,720 21,236 39,956 Non-participating investment contract liabilities – 21,839 21,839
The Group has sold insurance products that contain options and guarantees, both within the With Profit Fund and in other funds.
The most significant economic assumptions included in the model are: • Risk-free yield. The risk-free yield is defined as 0.1 per cent higher than spot yields derived from the UK gilt yield curve
4 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims for the IFRS numbers in 2004 and later years).
Impairment losses on loans and advances (1,555) (1,299) (866) (866) (950) (1,029)
Loans and advances to customers 188,285 174,944 161,162 154,240 135,251 134,474
Number of ordinary shares in issue (millions)2 5,638 5,603 5,596 5,596 5,594 5,583
Lord Leitch�*�+ Joined the board in 2005. Held a number of senior and general management appointments in Allied Dunbar, Eagle Star and Threadneedle Asset Management before the merger of Zurich Group and British American Tobacco’s financial services businesses in 1998. Subsequently served as chairman and chief executive officer of Zurich Financial Services (UK & Asia Pacific) until his retirement in 2004. Chairman of the government’s Review of Skills and deputy chairman of the Commonwealth Education Fund.
* Member of the audit committee ** Chairman of the audit committee �� Member of the nomination committee �� Chairman of the nomination committee
++Chairman of the risk oversight committee � Independent director � Senior independent director
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 2000 to 2001. Aged 55.
Terri A Dial Group Executive Director, UK Retail Banking Joined the board in 2005. Served with Wells Fargo in the USA from 1973 to 2001 where she held a number of senior and general management appointments before becoming president and chief executive officer of Wells Fargo Bank in 1998. A non-executive director of the LookSmart Corporation and a member of the London Skills and Employment Board. Aged 57.
Policy and practice on payment of creditors The Company follows ‘The Better Payment Practice Code’ published by the Department of Trade and Industry, regarding the making of payments to suppliers. A copy of the code and information about it may be obtained from the Department of Trade and Industry as shown on page 128.
As the Company owed no amounts to trade creditors at 31 December 2006, the number of days required to be shown in this report, to comply with the provisions of the Companies Act 1985, is nil.
During the year, the board conducted a formal evaluation of its performance and that of its committees and individual directors, with advice and assistance from Dr Tracy Long, of Boardroom Review. Directors were invited to comment, through questionnaires and interviews, and responses were reviewed and discussed by the board. Where areas for improvement were identified, action has been agreed.
The directors and senior management are committed to maintaining a control-conscious culture across all areas of operation. This is communicated to all employees by way of published policies and procedures and regular management briefings. A requirement to comply with internal control risk policies is a key component of individual staff objectives expressed in the balanced scorecard. Key business risks are identified, and these are controlled by means of procedures such as physical controls, credit, trading and other authorisation limits and segregation of duties. In addition, there is an annual control self assessment exercise whereby the key businesses and head office functions review specific controls and attest to the accuracy of their assessments. The assessment covers all risk categories and is in accordance with the principles of the Combined Code. As in previous years, this exercise was completed for the year ended 31 December 2006. All returns have been satisfactorily completed and appropriately certified. The overall assessment of the control framework is satisfactory, acknowledging that there are specific areas for improvement where action plans are now in place and will be tracked to completion. None of the actions or areas of focus identified constitutes a significant failing or weakness.
Going concern The directors are satisfied that the Company and the Group have adequate resources to continue to operate for the foreseeable future and are financially sound. For this reason they continue to adopt the going concern basis in preparing the accounts.
1 Appointed to the nomination committee from 1 August 2006. 2 Appointed to the board from 1 March 2006, nomination committee from 11 May 2006, remuneration committee from 1 August 2006 and risk oversight committee from 21 April 2006.
Mr van den Bergh (until 11 May 2006), Mr Daniels, Mr Hijkoop (Group Human Resources Director) and Mr Farley (Group Compensation & Benefits Director) provided guidance to the committee (other than for their own remuneration).
• The long-term rewards are aligned to shareholder interests, which is achieved by taking account of measures that reflect shareholder interests, and by expecting executive directors to build a shareholding in the Group equivalent to 1.5 times (2 times for the group chief executive) the directors’ base pay. Executives are expected to retain at least 50 per cent of all net vested equity until the guideline is met.
Incentive awards for executive directors are based upon individual contribution and overall corporate results. Half of the bonus opportunity is driven by corporate performance based on the stretching budget relating to profit before tax and economic profit. The lower of profit before tax and economic profit will determine the extent to which the target has been met. The other half of the bonus opportunity is determined by divisional achievement driven through individual performance. Individual targets are contained in a balanced scorecard and include profitability, franchise growth, risk, service and other specific goals that are relevant to improving overall business performance. These targets are weighted differently for each of the executive directors, reflecting differing strategic priorities. The maximum bonus opportunity is 150 per cent (200 per cent from 2007) of basic salary for the achievement of exceptional performance targets; an amount equal to 75 per cent (100 per cent from 2007) of basic salary is available on the achievement of stretching budget and individual targets. Failure to achieve at least 90 per cent of the stretching budget target would result in no payment under the corporate half of the bonus.
The aim of the new long-term incentive plan, approved by shareholders in 2006, is to deliver shareholder value through linking the receipt of shares to an improvement in the performance of the Group over a three year period. Under the plan, awards of shares may be made, with the number of shares received subject to the satisfaction of two distinct pre-determined performance conditions, measuring performance of the Group.
50 per cent of the award (the ‘TSR Award’) will be based on a condition measuring the Group’s TSR against the comparator group listed below. In order for the TSR Award to vest in full, it will be necessary for the Group’s TSR to exceed the median of the TSR of the comparator group by an average of 7.5 per cent per annum. 17.5 per cent of the TSR Award (8.75 per cent of the total award) will vest where the Group’s TSR is equal to median and vesting will occur on a straight line basis in between these points. Where the Group’s TSR is below the median of the comparator group, the TSR Award will lapse.
The other 50 per cent of the award (the ‘EPS Award’) will be based on earnings per share (‘EPS’) growth calculated on a compound annualised basis. In order for the EPS Award to vest in full, the EPS growth over the performance period must be at least equivalent to an average of the Retail Price Index (RPI) plus 6 per cent per annum. 17.5 per cent of the EPS Award (8.75 per cent of the total award) will vest where EPS growth is an average of the RPI plus 3 per cent per annum and vesting will occur on a straight line basis in between these points. Where the EPS growth is less than an average of the RPI plus 3 per cent per annum, the EPS Award will lapse.
Details of previous long-term incentive plans are shown on pages 60 and 61.
Sir Victor Blank 6 months 25 January 2006 J E Daniels 12 months 19 October 2001 M E Fairey 12 months 28 August 1991 T A Dial 12 months 23 May 2005 A G Kane 12 months 9 February 2000 G T Tate 12 months 29 July 2004 H A Weir 12 months 4 March 2004
Performance graph The graph illustrates the performance of the Group measured by TSR against a ‘broad equity market index’ over the past five years. As the Group has been a constituent of the FTSE 100 index throughout this five-year period, that index is considered to be the most appropriate benchmark.
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. 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.
Directors had non-beneficial interests as follows: Sir Victor Blank, Mr Daniels, Mr Fairey, Ms Dial, Mr Kane, Mr Tate and Mrs Weir, together with some 70,000 other employees, were potential beneficiaries in the 1,364 and 1,138,311 shares held at the end of the year by the Lloyds TSB qualifying employee share ownership trust and the Lloyds TSB Group employee share ownership trust respectively. 1,364 and 1,237,191 shares, respectively, were held by these trusts at the beginning of the year. These holdings were 1,364 and 1,040,107 respectively on 22 February 2007. In addition, the above directors, together with some 70,000 other employees, were potential participants in shareplan and were, therefore, treated as interested in the 898,320 shares held at the end of the year by the trustee of the shareplan. 582,462 shares were held by the trustee at the beginning of the year. This holding was 1,072,882 on 22 February 2007.
Exercise periods1 January during during 31 December Exercise 2006 the year the year 2006 price From To Notes
g) Not exercisable as the performance conditions had not been met.
The market price for a share in the Company at 1 January 2006 and 31 December 2006 was 488.5p and 571.5p, respectively. The range of prices between 1 January
March 1997 – August 1999 Growth in earnings per share which is equal to the aggregate percentage change in the retail price index plus two percentage points for each complete year of the relevant period plus a further condition that the Company’s ranking based on TSR over the relevant period should be in the top fifty companies of the FTSE 100.
The following bonus and performance shares relating to the bonus awards for 2004 and 2005 are available under the plan.
March 2005 and March 2006 That the Company’s ranking based on TSR over the relevant period against a comparator group (15 companies including Lloyds TSB) must be at least eighth for any shares to be received. If ranked ninth or below no shares would be received. The maximum of two performance shares for each bonus share will be awarded only if the Company is first in the comparator group; one performance share will be awarded for each bonus share if the Company is placed fifth; and one performance share for every two bonus shares if the Company is placed eighth. Between first and fifth positions and fifth and eighth positions a sliding scale will apply.
Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the consolidated financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the consolidated financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Southampton, England 62 LLOYDS TSB GROUP
Net interest income 4 5,537 5,671 Fee and commission income 3,116 2,990 Fee and commission expense (846) (842)
Trading surplus 5,803 5,069 Impairment losses on loans and advances 11 (1,555) (1,299) Profit on sale and closure of businesses 12 – 50
Profit attributable to minority interests 104 62 Profit attributable to equity shareholders 2,803 2,493
Assets Cash and balances at central banks 1,898 1,156 Items in the course of collection from banks 1,431 1,310 Trading and other financial assets at fair value through profit or loss 15 67,695 60,374 Derivative financial instruments 16 5,565 5,878 Loans and advances to banks 17 40,638 31,655 Loans and advances to customers 18 188,285 174,944 Available-for-sale financial assets 20 19,178 14,940
Value of in-force business 23 2,723 2,922 Other intangible assets 24 138 50 Tangible fixed assets 25 4,252 4,291
The directors approved the consolidated financial statements on 22 February 2007.
Cash flows from financing activities: Dividends paid to equity shareholders (1,919) (1,914) Dividends paid to minority interests 49(e) (32) (37) Interest paid on subordinated liabilities (713) (668) Proceeds from issue of subordinated liabilities 49(e) 1,116 1,361 Proceeds from issue of ordinary shares 49(e) 105 26 Repayment of subordinated liabilities 49(e) (759) (232) Capital element of finance lease rental payments 49(e) – (2) Capital invested by minority shareholders 49(e) – 329 Repayment of capital to minority shareholders 49(e) (151) –
Cash and cash equivalents at end of year 49(d) 25,438 26,753
The following IFRS pronouncements relevant to the Group have been adopted in these consolidated financial statements: (i) Amendment to IAS 19 ‘Actuarial Gains and Losses, Group Plans and Disclosures’. The Group has not changed its accounting policy for the recognition of actuarial gains and losses as a result of this amendment; the additional disclosures required have been provided in note 35.
• – the assets and liabilities are part of a group which is managed, and its performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy with management information also prepared on this basis, or
Securities sold subject to repurchase agreements (‘repos’) are recognised on the balance sheet where all of the risks and rewards are retained; the counterparty liability is included in deposits from banks or customer accounts, as appropriate. Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements.
When a loan or advance is uncollectable, it is written off against the related provision once all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement.
Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership to the lessee; all other leases are classified as operating leases. When assets are subject to finance leases, the present value of the lease payments is recognised as a receivable within loans and advances to banks and customers. Finance lease income is recognised over the term of the lease using the net investment method (before tax) reflecting a constant periodic rate of return.
Investment contracts containing a discretionary participation feature – these contracts do not contain significant insurance risk, but contain features which entitle the holder to receive, in addition to the guaranteed benefits, further amounts that are likely to be a significant proportion of the total benefits and the amount and timing of which is at the discretion of the Group and based upon the performance of specified assets. Contracts with a discretionary participation feature are referred to as participating investment contracts.
Non-participating investment contracts – these contracts do not contain significant insurance risk or a discretionary participation feature.
Liabilities of the Group’s With Profit Fund, including guarantees and options embedded within products written by that fund, are stated at their realistic values in accordance with the Financial Services Authority’s realistic capital regime.
Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on one or more contracts issued by the Group and that meet the classification requirements for insurance contracts are classified as reinsurance contracts held. Insurance contracts entered into by the Group under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts.
Two important assumptions are the rate of inflation and the expected lifetime of the schemes’ members. The assumed rate of inflation affects the rate at which salaries are projected to grow and therefore the size of the pension that employees receive upon retirement and also the rate at which pensions in payment increase. Over the longer term rates of inflation can vary significantly; at 31 December 2006 it was assumed that the rate of inflation would be 2.9 per cent per annum (2005: 2.7 per cent), although if this was increased by 0.2 per cent the overall deficit would increase by approximately £559 million and the annual cost by approximately £20 million. A reduction of 0.2 per cent would reduce the overall deficit by approximately £539 million and the annual cost by approximately £15 million.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. The impairment review is performed by projecting future cash flows, excluding finance and tax, based upon budgets and plans and making appropriate assumptions about rates of growth and discounting these using a rate that takes into account prevailing market interest rates and the risks inherent in the business. If the present value of the projected cash flows is less than the carrying value of the underlying net assets and related goodwill an impairment charge is required in the income statement. This calculation requires the exercise of significant judgement by management; if the estimates made prove to be incorrect or changes in the performance of the subsidiaries affect the amount and timing of future cash flows, goodwill may become impaired in future periods.
At 31 December 2006 the Group also carried substantial liabilities to holders of life insurance policies in its balance sheet. The methodology used to value the liabilities is described in note 1 (r) (1). Liabilities arising from insurance contracts and participating investment contracts were £25,763 million and £15,095 million respectively (2005: £25,888 million and £14,068 million) and those arising from non-participating investment contracts totalled £24,370 million (2005: £21,839 million). Elements of the liabilities require assumptions about future investment returns, future mortality rates and future policyholder behaviour. The process for determining the key assumptions that have been made at 31 December 2006 and the impact on profit before tax of changes in key assumptions is detailed in note 31.
Significant judgement is required in determining the Group’s income tax liabilities. In arriving at the current tax liability of £817 million and deferred tax liability of £1,416 million at 31 December 2006 (2005: current tax liability of £552 million and deferred tax liability of £1,145 million), the Group has taken account of tax issues that are subject to ongoing discussions with HM Revenue & Customs and other tax authorities. Calculations of these liabilities have been based on management’s assessment of legal and professional advice, case law and other relevant guidance. In these situations, the various risks are categorised and approximate weightings applied in arriving at the assessment of the expected liability. Where the expected tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax amounts in the period in which such determination is made.
Lloyds TSB Group is a leading financial services group, whose businesses provide a wide range of banking and financial services predominantly in the UK.
The Group’s activities are organised into three segments: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Services provided by UK Retail Banking encompass the provision of banking and other financial services to personal customers, private banking and mortgages. Insurance and Investments offers life assurance, pensions and savings products, general insurance and asset management services. Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks and financial institutions, and small and medium-sized UK businesses. It also provides asset finance to personal and corporate customers, manages the Group’s activities in financial markets through its Treasury function and provides banking and financial services overseas.
As the activities of the Group are predominantly carried out in the UK, no geographical analysis is presented.
Foreign exchange translation gains 32 13 Gains on foreign exchange trading transactions 98 150
Life insurance and participating investment contracts Claims and surrenders: Reinsurers’ share (76) (56)
A non-life insurance claims development table is included in note 31.
Social security costs 161 154 Pensions and other post-retirement benefit schemes (note 35) 165 308 Other staff costs 298 325
Staff costs 2,741 2,855 Other administrative expenses: Operating lease rentals 254 252 Repairs and maintenance 165 136 Communications and data processing 499 467 Advertising 184 207 Professional fees 231 216 Provisions for customer remediation (note 37) – 150 Other 608 543 1,941 1,971 Depreciation of tangible fixed assets (note 25) 602 621 Amortisation of other intangible assets (note 24) 17 18 Impairment charges: Total operating expenses 5,301 5,471
Total audit and audit related fees 15.0 10.4 Services relating to taxation 0.6 0.6 Other non-audit fees: Services relating to corporate finance transactions 1.0 0.3 Other services 0.4 0.5 Total other non-audit fees 1.4 0.8
Total fees payable to the Company’s auditors by the Group 17.0 11.8
Services relating to taxation: This category includes tax compliance and tax advisory services. Other non-audit fees: This category includes due diligence relating to corporate finance, including venture capital, transactions and other assurance and advisory services.
UK corporation tax: Current tax on profit for the year 1,024 862 Adjustments in respect of prior years (137) (20)
Foreign tax: Current tax on profit for the year 83 78 Adjustments in respect of prior years (8) (8)
Current tax charge 767 774 Deferred tax (note 36) 574 491
In addition to the income statement current tax charge, £15 million (2005: £nil) has been credited to equity in respect of share based payments and £33 million (2005: £nil) has been charged to equity in respect of foreign exchange differences.
Weighted average number of ordinary shares for diluted earnings per share 5,667m 5,639m
The weighted average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 7 million at 31 December 15 Trading and other financial assets at fair value through profit or loss 2006 2005 £m £m
Trading assets 5,756 5,442 Other financial assets at fair value through profit or loss 61,939 54,932
Loans and advances to banks 34 3 5 5 Loans and advances to customers 350 448 161 445
Debt securities: Other public sector securities – 44 35 84 Bank and building society certificates of deposit – 573 – 898
Credit derivatives, principally credit default swaps, are used by the Group as part of its customer product activity and to manage its own exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place. As discussed in note 18, during 2006 the Group used credit default swaps to synthetically securitise £961 million of the Group’s commercial banking loans.
Equity derivatives are also used by the Group as part of its equity based retail product activity to eliminate the Group’s exposure to fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or before a specified future date.
16 Derivative financial instruments (continued) Contract/notional Fair value Fair value amount assets liabilities £m £m £m
Total loans and advances to banks 40,639 31,656 Allowance for impairment losses (note 19) (1) (1)
Transport, distribution and hotels 10,490 9,465 Postal and telecommunications 831 546 Property companies 12,896 8,713 Financial, business and other services 22,999 21,261 Personal: Allowance for impairment losses (note 19) (2,193) (2,072)
The Group holds collateral with a fair value of £444 million (2005: £1,018 million), which it is permitted to sell or repledge, of which £238 million (2005: £741 million) was repledged or sold to third parties for periods not exceeding three months from the transfer.
Gross investment in finance leases, receivable: Not later than 1 year 637 673 Later than 1 year and not later than 5 years 2,358 2,388 Later than 5 years 5,358 6,025
At 31 December 2006 the total amount of residential mortgages subject to securitisation is £14,927million (2005: £nil) in respect of which external funding at the year end amounted to £10,048 million (2005: £nil); external funding is shown in debt securities in issue (see note 30).
In addition, the following amounts have been recognised in the income statement: 2006 2005 £m £m
Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements 85 31 £m £m
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate cash generating unit; of the total balance of £2,377 million (2005: £2,373 million), £1,836 million (or 77 per cent of the total) has been allocated to Scottish Widows and £521 million (or 22 per cent of the total) to Asset Finance.
The recoverable amount of Asset Finance has also been based on a value in use calculation using cash flow projections based on financial budgets and plans approved by management covering a five-year period and a discount rate of 10 per cent (gross of tax). Due to similarities in the risk profile and the funding model management believes that Asset Finance is closely aligned to Lloyds TSB Group; the discount rate represents the Group’s weighted average cost of capital. The cash flows for each of the businesses of Asset Finance beyond the five-year period are extrapolated using steady growth rates, in each case not exceeding 4 per cent nor the long-term average growth rates for the markets in which the respective businesses of Asset Finance participate. Management also believes that any reasonably possible change in the key assumptions on which the recoverable amount of Asset Finance is based would not cause the carrying amount of Asset Finance to exceed its recoverable amount.
The movement in value of in-force business over 2006 contains effects from the introduction of the new valuation rules in the Financial Services Authority’s (‘FSA’s’) Policy Statement 06/14 and a revised allowance for risk. This reduced the amount of reserves required to be held for certain contract types. The value of in-force for these contract types is £429 million lower than it would have been if the FSA valuation rules had not changed. The reduction in the value of in-force business is more than offset by the lower reserves held under the new FSA valuation rules; the income statement impact of these changes is quantified in note 31, and further information on the Group’s life assurance business, including its available capital resources and regulatory capital requirements, the realistic value of its assets and liabilities and its capital sensitivities is given in note 31 and on pages 40 to 44.
The principal economic assumptions used in calculating the value of in-force business at 31 December 2005 were as follows: %
The risk-free rate assumed in valuing in-force business is 10 basis points over the 15-year gilt yield. In valuing financial options and guarantees the risk-free rate is derived from gilt yields plus 10 basis points, in line with Scottish Widows’ FSA realistic balance sheet assumptions. The table below shows the range of resulting yields and other key assumptions at 31 December 2006: %%
At 31 December 2005 – 97 97 Charge for the year – 17 17
Cost: At 1 January 2005 1,360 2,526 2,767 6,653 Exchange and other adjustments 1 (3) 63 61 Adjustments on acquisition and disposal of businesses 8 – – 8 Additions 89 280 615 984 Disposals (37) (136) (484) (657)
At 31 December 2005 1,421 2,667 2,961 7,049 Exchange and other adjustments – (3) (96) (99)
Balance sheet amount at 31 December 2006 813 889 2,550 4,252
In addition, total future minimum sub-lease income of £120 million at 31 December 2006 (£141 million at 31 December 2005) is expected to be received under non-cancellable sub-leases of the Group’s premises.
Assets arising from reinsurance contracts held 451 548 Deferred acquisition costs 443 429 Settlement balances 285 336 Other assets and prepayments 3,500 4,288
Non-interest bearing current accounts 4,338 4,203 Interest bearing current accounts 43,064 40,365 Savings and investment accounts 66,151 62,206 Other customer deposits 25,789 24,296
International: Non-interest bearing 336 335 Interest bearing 3,223 3,345 92 LLOYDS TSB GROUP
Euro medium-term note programme 5,650 6,683 Other bonds and medium-term notes 10,157 141 Certificates of deposit issued 25,244 22,101 Commercial paper 13,067 10,421
Debt securities in issue at 31 December 2006 included £10,048 million (2005: £nil) in respect of the securitisation of mortgages (see note 18).
Insurance contract liabilities, substantially all of which relate to business written in the United Kingdom, are comprised as follows: Gross Reinsurance* Net Gross Reinsurance* Net £m £m £m £m £m £m
Life insurance (see (i) below) 25,763 (425) 25,338 25,888 (511) 25,377 Non-life insurance (see (ii) below): (i) Life insurance
The guaranteed annuity option take-up rates are set with regard to the Group’s actual experience and make allowance for potential increases in take-up rates when the Guaranteed Annuity Options become more valuable to the policyholder.
The rates used are derived in accordance with the FSA Rules. These limit the rates of interest that can be used by reference to a number of factors including the redemption yields on fixed interest assets at the valuation date.
The mortality and morbidity assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s actual experience where this provides a reliable basis, and relevant industry data otherwise, and includes a margin for adverse deviation.
Changes in certain key assumptions were made during 2006 with the following impacts on profit before tax. These amounts include movements in liabilities and value of the in-force business in respect of insurance contracts and participating investment contracts: Impact on profit before tax £m
The following table demonstrates the effect of changes in key assumptions on profit before tax disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical: Impact on Change in profit before tax variable £m
For the above sensitivities a 5 per cent reduction means a reduction to 95 per cent of the expected rate.
4 The value of in-force business asset is now derived using market-consistent methodology, consistent with the approach adopted for European Embedded Value supplementary reporting.
Notes to the group accounts 31 Liabilities arising from insurance contracts and participating investment contracts (continued)
At 31 December 2005 447 – 447 Increase in the year 608 (17) 591 Release in the year (617) 17 (600)
Estimate of ultimate claims costs: At end of accident year 242 234 227 211 208 1,122
Current estimate of cumulative claims 224 221 207 207 208 1,067
Liability recognised in the balance sheet 1 10 8 18 93 130
Defined benefit pension schemes* 104 243 Other post-retirement benefit schemes 5 16
The latest full valuations of the two main schemes were carried out as at 30 June 2005; these have been updated to 31 December 2006 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 2006 by qualified independent actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.
Changes in the fair value of scheme assets: 2006 2005 £m £m
The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows: Discount rate 5.10 4.80 Rate of inflation 2.90 2.70 Rate of salary increases 3.93 3.98 Rate of increase for pensions in payment and deferred pensions 2.70 2.50
Fixed interest gilts 4.1 4.6 Index linked gilts 3.9 4.3 Non-government bonds 4.8 5.3 Property 6.4 6.9 Cash 3.7 3.6
Equities 9,677 9,021 Fixed interest gilts 1,114 946 Index linked gilts 921 920 Non-government bonds 1,543 1,415 Property 1,333 1,185 Cash 691 539
Current service cost 325 292 Interest cost 817 775 Expected return on scheme assets (942) (839) Curtailment* (128) – Past service cost 32 15
Deferred tax assets: Pensions and other post-retirement benefits (739) (873) Allowances for impairment losses (143) (165) Other provisions (39) (31)
In addition, deferred tax assets have not been recognised in respect of Eligible Unrelieved Foreign Tax (‘EUFT’) and other foreign tax credits carried forward as at 31 December 2006 of £138 million (2005: £88 million), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can be utilised. EUFT can be carried forward indefinitely.
Undated subordinated liabilities Primary Capital Undated Floating Rate Notes: b, c Series 1 (US$750 million) 383 436 Series 2 (US$500 million) 255 291 Series 3 (US$600 million) 306 349 113/4% Perpetual Subordinated Bonds (£100 million) 100 100 55/8% Undated Subordinated Step-up Notes callable 2009 (c1,250 million) b, i 845 892 Undated Step-up Floating Rate Notes callable 2009 (c150 million) b, c 101 103 65/8% Undated Subordinated Step-up Notes callable 2010 (£410 million) b, h 408 407 5.125% Step-up Perpetual Subordinated Notes callable 2015 (£560 million) b, f 525 553 5.57% Undated Subordinated Step-up Coupon Notes callable 2015 (¥20,000 million) b, j 107 127 5.125% Undated Subordinated Step-up Notes callable 2016 (£500 million) b 475 501 61/2% Undated Subordinated Step-up Notes callable 2019 (£270 million) b, h 255 269 8% Undated Subordinated Step-up Notes callable 2023 (£200 million) b, h 189 202 61/2% Undated Subordinated Step-up Notes callable 2029 (£450 million) b, h 447 457 6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million) b, h 467 497 4,863 5,184 Dated subordinated liabilities 81/2% Subordinated Bonds 2006 (£250 million) – 250 73/4% Subordinated Bonds 2007 (£300 million) 300 300 51/4% Subordinated Notes 2008 (DM 750 million) 260 274 105/8% Guaranteed Subordinated Loan Stock 2008 (£100 million) g 100 100 91/2% Subordinated Bonds 2009 (£100 million) 99 99 61/4% Subordinated Notes 2010 (c400 million) 283 303 43/4% Subordinated Notes 2011 (c850 million) 562 597 57/8% Subordinated Guaranteed Bonds 2014 (c750 million) 560 606 57/8% Subordinated Notes 2014 (£150 million) 149 148 65/8% Subordinated Notes 2015 (£350 million) 330 345 Subordinated Step-up Floating Rate Notes 2016 callable 2011 (£300 million) c 300 300 Subordinated Step-up Floating Rate Notes 2016 callable 2011 (c500 million) c 336 343 Subordinated Floating Rate Notes 2020 (c100 million) c 67 68 5.75% Subordinated Step-up Notes 2025 callable 2020 (£350 million) 328 346
i) In the event that these notes are not redeemed at the callable date, the coupon will be reset to a floating rate.
j) In the event that these notes are not redeemed at the callable date, the coupon will be reset to a margin of 1.60 per cent over the five year Yen swap rate.
The limited voting ordinary shares are held by the Lloyds TSB Foundations. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares. Lloyds TSB Group plc has entered into deeds of covenant with the Lloyds TSB Foundations, under the terms of which the Company makes annual donations to the foundations equal, in total, to 1 per cent of the Group’s pre-tax profits (after certain adjustments) averaged over three years. The deeds of covenant can be cancelled by the Company at nine years’ notice.
Movements in other reserves were as follows: 2006 2005 £m £m
Value of employee services includes a credit of £31 million (2005: £31 million) reflecting the income statement charge in respect of SAYE and executive options, together with a related tax credit of £34 million (2005: £16 million). Purchase/sale of treasury shares includes a credit of £27 million (2005: £45 million) relating to the cost of other share scheme awards.
In respect of options granted between March 1996 and March 2001, the relevant period for the performance conditions begins at the end of the financial year preceding the date of grant and will continue until the end of the third subsequent year following commencement or, if not met, the end of such later year in which the conditions are met. Once the conditions have been satisfied the options will remain exercisable without further conditions. If they are not satisfied by the tenth anniversary of the grant the option will lapse.
The weighted average share price at the time that the options were exercised during 2006 was 552.29 pence (2005: 490.15 pence). The weighted average remaining contractual life of options outstanding at the end of the year was 6.8 years (2005: 7.4 years).
The weighted average share price at the time that the options were exercised during 2006 was 524.36 pence (2005: 465.51 pence). The weighted average remaining contractual life of options outstanding at the end of the year was 2.2 years (2005: 2.2 years).
The weighted average fair value of options granted in the year was £4.58 (2005: £4.18). The weighted average share price at the time that the options were exercised during 2006 was 557.25 pence. No options outstanding at 31 December were exercisable. The weighted average remaining contractual life of options outstanding at the end of the year was 2.0 years (2005: 1.9 years).
Outstanding at 1 January 242,825 Nil – – Granted – – 242,825 Nil
The weighted average fair value of options granted in 2005 was £3.63. No options outstanding at 31 December were exercisable. The weighted average remaining contractual life of options outstanding at the end of the year was 1.9 years (2005: 2.9 years).
The Long-Term Incentive Plan introduced in 2006 is a long-term incentive scheme aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary, in exceptional circumstances this may increase up to four times annual salary.
For awards made in 2006 there are two performance conditions measured over a performance period commencing on 1 January 2006 and ending on 50 per cent of the award will be based on a condition measuring the Group’s total shareholder return (calculated by reference to both dividends and growth in share price) against a comparator group of 15 companies including Lloyds TSB Group plc. To vest in full, the Group’s total shareholder return must exceed the median of the total shareholder return of the comparator group by an average of 7.5 per cent per annum. 8.75 per cent of the award will vest where the Group’s total shareholder return is equal to the median and vesting will be on a straight-line basis between these points. Where the Group’s total shareholder return is below the median, this part of the award will lapse.
The fair value of the share awards granted in 2006 was £2.96.
Outstanding at 1 January 826,438 – Granted 1,035,564 854 ,116 Forfeited (12,900) (27,678)
The ranges of exercise prices, weighted average exercise prices, weighted average remaining contractual life and number of options outstanding for the option schemes were as follows: Executive schemes SAYE schemes Other share option plans Weighted Weighted Weighted Weighted Weighted Weighted average average average average average average exercise remaining Number of exercise remaining Number of exercise remaining Number of price (pence) life (years) options price (pence) life (years) options price (pence) life (years) options
Expected dividend yield 6.5% 6.2% 6.7% Weighted average share price £5.23 £5.50 £5.15 Weighted average exercise price £4.18 – –
An award of shares may be made annually to employees based on a percentage of the employees’ salary in the preceding year up to maximum of £3,000. The percentage is normally announced concurrently with the Group’s annual results and the price of the shares awarded is announced at the time of grant. The shares awarded are held in trust for a mandatory period of three years on the employees’ behalf. The award is subject to a non-market based condition: if an employee leaves the Group within this three year period for other than a ‘good’ reason, all of the shares awarded will be forfeited (for awards made up to April 2005, only a portion of the shares would be forfeited: 75 per cent within one year of the award, 50 per cent within two years and 25 per cent within three years).
The Group undertakes to match shares purchased by employees up to the value of £30 per month, these shares are held in trust for a mandatory period of three years on the employees’ behalf. The award is subject to a non-market based condition; if an employee leaves within this three year period for other than a ‘good’ reason or the accompanying partnership shares are sold within that time, 100 per cent of the matching shares are forfeited (or the portion relating to the shares sold).
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the Group’s key management personnel are the members of the Lloyds TSB Group plc group executive committee together with its non-executive directors.
Share options At 1 January 12 12 Granted (including options of appointed directors) – 3 Exercised/lapsed (including options of retired directors) (1) (3)
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 5.1 per cent and 19.9 per cent in 2006 (2005: 4.6 per cent and 17.9 per cent).
At 31 December 2006, the Group’s pension funds had call deposits with Lloyds TSB Bank plc amounting to £19 million (2005: £14 million).
The Group has a number of venture capital associates that it accounts for at fair value through profit or loss. At 31 December 2006, these companies had total assets of approximately £1,625 million (2005: £1,194 million), total liabilities of approximately £1,609 million (2005: £1,072 million) and for the year ended 31 December 2006 had turnover of £2,409 million (2005: £1,782 million) and made a net loss of approximately £5 million (2005: net profit £36 million). In addition, the Group has provided £460 million (2005: £363 million) of financing to these companies on which it received £20 million (2005: £19 million) of interest income in the year.
Commitments Documentary credits and other short-term trade-related transactions 374 283 Forward asset purchases and forward deposits placed 5,764 277 Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year maturity: Mortgage offers made 4,071 2,983 Other commitments 49,731 55,310 1 year or over maturity 28,477 24,123
The Group uses financial instruments (including derivatives) to meet the financial needs of its customers, as part of its trading activities and to reduce its own exposure to market and credit risks.
In the Group’s retail banking business interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the Group’s discretion and that for competitive reasons generally reflect changes in the Bank of England’s base rate. There are a relatively small volume of deposits whose rate is contractually fixed for their term to maturity.
Derivative financial instruments, trading and other liabilities at fair value through profit or loss* – – 55 467 634 5,791 6,947
As at 31 December 2005 Assets Trading and other financial assets at fair value through profit or loss 1,734 2,418 1,035 3,796 17,886 33,505 60,374 Derivative financial instruments* – – – – – 5,878 5,878 Loans and advances to banks 25,107 2,483 2,923 370 57 715 31,655 Loans and advances to customers 72,912 17,048 20,327 51,044 13,594 19 174,944 Available-for-sale financial assets 1,695 8,674 1,221 1,497 1,678 175 14,940
* Derivative financial instruments which are exposed to interest rate risk are carried in the balance sheet at fair value and for the purposes of this analysis have been
The Group hedges part of the currency translation risk of a net investment in a foreign operation using a cross currency swap. At 31 December 2006 the notional principal of this cross currency swap was £2,589 million with a net fair value asset of £139 million (see note 16) and was designated on an after-tax basis as a hedge of a net investment in a foreign operation.
As at 31 December 2006 Assets Trading and other financial assets at fair value through profit or loss 886 782 905 5,589 59,533 67,695
Derivative financial instruments, trading and other liabilities at fair value through profit or loss 932 709 751 1,972 2,583 6,947
As at 31 December 2005 Assets Trading and other financial assets at fair value through profit or loss 520 818 1,051 6,271 51,714 60,374
Financial instruments include financial assets, financial liabilities and derivatives. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. The carrying value of the variable rate loans and those relating to lease financing is assumed to be their fair value. For fixed rate lending, several different techniques are used to estimate fair value, as considered appropriate. For commercial and personal customers, fair value is principally estimated by discounting anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. The fair value for corporate loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period.
Fair value is determined using valuation techniques based upon market prices.
The value of the Group’s non-participating investment contracts, all of which are unit-linked, is contractually linked to the fair values of financial assets within the Group’s unitised investment funds and is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable.
During 2006, the Group, through its Asset Finance subsidiaries, acquired two businesses engaged in consumer finance for a total consideration of £16 million, settled in cash. Goodwill of £4 million arose on these acquisitions; no significant fair value adjustments were made.
Change in loans and advances to banks (11,063) (1,319) Change in loans and advances to customers (13,910) (14,525) Change in derivative financial instruments, trading and other financial assets at fair value through profit or loss (7,072) (103) Change in other operating assets 50 (1,211)
Depreciation of fixed assets 619 639 Revaluation of investment property (631) (430) Allowance for loan losses 1,560 1,302 Write-off of allowance for loan losses (1,299) (1,078) Impairment of goodwill – 6 Insurance claims 8,569 12,186 Insurance claims paid (7,509) (8,269) Customer remediation provision – 150 Customer remediation paid (93) (77) Other provision movements (19) (7) Net charge in respect of defined benefit schemes 109 259 Contributions to defined benefit schemes (556) (425) Other non-cash items 104 (525)
Minority interests: At 1 January 435 81 Exchange and other adjustments (4) – Capital invested by minority shareholders – 329 Repayment of capital to minority shareholders (151) – Minority share of profit after tax 104 62 Dividends to minority shareholders (32) (37)
(f) Acquisition of group undertakings and businesses 2006 2005 £m £m
Net assets acquired: Loans and advances to customers 11 – Other assets 1 8 Tangible fixed assets – 8 Other liabilities – (3)
Net cash outflow from acquisitions 20 27 * The consideration in respect of the acquisitions in both 2005 and 2006 was settled in cash in the year concerned.
– (50) Profit on sale and closure of businesses – 50
The full impact of these accounting changes is being assessed by the Group; none of these pronouncements are expected to cause any material adjustments to the financial statements.
2 At the date of this report, these pronouncements are awaiting EU endorsement.
Amendment to IAS 1 Presentation of Financial Statements – Capital Disclosures
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report, the directors’ remuneration report and the parent company financial statements in accordance with applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union are set out in the statement of directors’ responsibilities on page 51.
We read other information contained in the annual report and consider whether it is consistent with the audited parent company financial statements. The other information comprises only the chairman’s statement, the group chief executive’s review, the business review, the directors’ report, the corporate governance disclosures, the unaudited part of the directors’ remuneration report and the information for shareholders. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information.
Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed.
Opinion In our opinion: • the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2006 and cash flows for the year then ended; • the parent company financial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985; and
Assets Non-current assets: Investment in subsidiaries 7 5,589 5,589 Loans to subsidiaries 7 1,723 1,723 Deferred tax assets 2 – 21
Equity and liabilities Capital and reserves: Share premium account 4 1,266 1,170
Sir Victor Blank J Eric Daniels Helen A Weir Chairman Group Chief Executive Group Finance Director 122 LLOYDS TSB GROUP
Cash flows from financing activities: Dividends received from subsidiaries 1,918 1,913 Dividends paid to equity shareholders (1,919) (1,914) Proceeds from issue of subordinated liabilities 1,116 – Proceeds from issue of ordinary shares 105 26 Repayment of subordinated liabilities (250) –
The parent company has applied International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’) in its financial statements for the year ended 31 December 2006.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of all derivative contracts, on the basis of IFRS adopted by the EU.
Income statement (charge) credit (8) 2 Amount (debited) credited to equity in respect of employee share schemes (13) 16
Details of the Company’s share capital and share premium account are as set out in notes 39 and 40 to the consolidated financial statements.
Profit for the year 1,877 Dividends (1,919) Purchase/sale of treasury shares (20) Employee share option schemes: value of employee services 33
† Any repayment of preference shares would require prior notification to the Financial Services Authority. The preference shares can be redeemed at the option of the Company on or after 25 August 2015; at this call date, dividends will be reset at a margin of 1.28 per cent over 3 month LIBOR. The US dollar preference shares can be redeemed at the option of the Company on or after 14 November 2016; at this call date, dividends will be reset at a margin of 1.035 per cent over 3 month LIBOR. In certain circumstances, the shares may be mandatorily exchanged for qualifying non-innovative tier 1 securities. The Company may declare no dividend or a partial dividend on these preference shares. Dividends may be reduced if the distributable profits of the Company are insufficient to cover the payment in full of the dividends and also the payment in full of all other dividends on shares issued by the Company. These securities were issued during 2006 primarily to finance the development and expansion of the business of the Group.
Related party information in respect of other related party transactions is given in note 45 to the consolidated financial statements.
The parent company financial statements were approved by the directors of Lloyds TSB Group plc on 22 February 2007.
Analysis of shareholders at 31 December 2006 Shareholders Number of ordinary shares
Individual Savings Accounts (‘ISAs’) The Company provides a facility for investing in Lloyds TSB shares through an ISA. For details contact: Retail Investor Operations, Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6UY. Telephone 0870 242 4244.
Lloyds TSB Registrars operates a web based enquiry and portfolio management service for you to receive shareholder communications electronically. In addition, you can change your address or bank details and vote your shareholding online. Visit www.shareview.co.uk for details.
Financial calendar 2007 23 February Results for 2006 announced 7 March Ex-dividend date for 2006 final dividend 9 March Record date for final dividend 4 April Final date for joining or leaving the dividend reinvestment plan for the final dividend 2 May Final dividend paid 9 May Annual general meeting in Glasgow 31 July Results for half-year to 30 June 2007 announced 8 August Ex-dividend date for 2007 interim dividend 10 August Record date for interim dividend 5 September Final date for joining or leaving the dividend reinvestment plan for the interim dividend 3 October Interim dividend paid
We will achieve this by: Building strong customer franchises, that are based on deep customer relationships • that give value to the customer • that give sustainable earnings growth to the shareholder
Our strategy Phase 1 – focus on core markets • successfully enhanced earnings quality • exited businesses not regarded as core and/or unnecessarily volatile
Phase 3 – expand from strength • look to leverage our financial strength and enhanced capabilities • new product, customer and geographical markets