Profit before tax 2,607 3,161 * Restated to reflect the implementation of UITF33, ‘Obligations in capital instruments’, FRS17, ‘Retirement benefits’, FRS19, ‘Deferred tax’ and detailed guidance from the Association of British Insurers for best practice in the preparation of results using the achieved profits method of accounting. 2001 figures have been restated to incorporate efficiency programme related restructuring costs within business units, and the reclassification of emerging markets debt earnings from International Banking to Central group items.
During 2002 the Group implemented a number of changes in accounting policies following the issue of new accounting standards and guidelines: Urgent Issues Task Force Abstract 33 – ‘Obligations in capital instruments’, FRS 17 – ‘Retirement benefits’, FRS 19 – ‘Deferred tax’, and detailed guidance from the Association of British Insurers (ABI) for best practice in the preparation of results using the achieved profits method of accounting. In accordance with the requirements of accounting standards, the Group has restated comparative figures to reflect these changes.
Final dividend of 23.5p per share, making a total of 34.2p for the year, an increase of 1.5 per cent.
Excluding changes in economic assumptions and investment variance: Profit before tax decreased by £516 million, or 13 per cent, to £3,504 million.
Customer lending grew by 9 per cent to £134.5 billion and customer deposits increased by 7 per cent to £116.3 billion.
The high level of government interference in all areas of our business has continued throughout 2002 and into 2003. The annual cost of responding to this government intervention is substantial and in 2003 the cost of implementing the findings of the Competition Commission’s ‘Report into the supply of banking services to small and medium-sized enterprises’ is alone likely to be in the region of £150 million.
Whilst these issues have had a direct effect on the Group’s results for 2002, and are likely to continue to have an impact until some stability returns to global stockmarkets, they do not impact our longterm strategic goals, the fundamental strength of the Group or the way in which we run our business. In the UK, from where the Group derives the vast majority of its earnings, the slowdown in economic growth has partly been alleviated by the continued strength of the housing market and high levels of consumer spending. We expect levels of growth in
Dividend The Group continues to generate strong cashflows from its banking businesses and, excluding investment variance, the profit attributable to shareholders in 2002 was £2,496 million. The Board has decided to maintain the final dividend at 23.5p, to make a total for the year of 34.2p, an increase of 1.5 per cent. The Board is mindful of the level of dividend cover and, consequently, profit growth may not necessarily result in increases in dividend. The Board recognises the importance attached by shareholders to the Group’s dividend.
Board changes After more than 40 years in the banking industry and over 12 years of outstanding service and leadership to TSB and the Lloyds TSB Group, Peter Ellwood will retire on 31 May 2003. His tremendous contribution to the Group has included bringing together Lloyds Bank and TSB in a most effective combination. Our highest regards and warmest wishes go with him. I am delighted that Peter will be succeeded by Eric Daniels, who has exceptional financial services experience throughout the world, and who has already made a significant impact on the quality and positioning of our retail business. Peter Ayliffe will succeed Eric Daniels as Group Executive Director, UK Retail Banking, and join the Board on 1 June 2003. We shall also bid farewell to Kent Atkinson who retires, with our best wishes, at the annual general meeting after more than 38 years with the Group. He was succeeded as Group Finance Director by Philip Hampton, who joined the Board on
Other non-executive directors leaving the Board at the annual general meeting are Clive Butler, who has served since 1993, and Sheila Forbes, who joined the Board in 1994.
Within our businesses, the performance of retail banking is now benefiting from the substantial investments we have made to reposition the business for profitable growth. Product sales were at an all time high during 2002 and the Group continues to grow its current account customer franchise in the light of intense competition. Scottish Widows, in line with the rest of the life assurance industry, has experienced difficult trading conditions as a result of the considerable fall in equity markets. However, we believe the long-term growth prospects for this sector of the market, and for Scottish Widows in particular, remain current account balances to £27.9 billion
The year has been characterised by some encouraging features but also by a number of issues which have adversely affected the
Against the volatile background, it is essential that we are not swayed from the successful implementation of our vision and strategic aims.
Group provides comprehensive financial solutions to meet the needs of all of our customers. But the environment in which we work is changing rapidly as customer needs are evolving and as customers continue to seek greater value in terms of the benefits they receive from their products and services. Customers expect excellent customer service and error free operation of their banking arrangements. Those organisations that can develop a reputation for providing excellent customer service will retain existing customers and attract new ones. Over the last twelve months Lloyds TSB has made considerable progress in addressing customer service issues, and these improvements in customer service during 2002 have been a significant contributory factor to strong recruitment of new customers during the year and the improvement in the Group’s cross selling rates.
areas despite high levels of competition throughout our business. In retail banking we continue to grow our customer franchise and during 2002 saw income growth of 5 per cent from our retail banking business. Our personal loan and credit card portfolios grew by 15 per cent and by 27 per cent respectively, again showing significant improvements in our market share. In Scottish Widows the second half of the year showed a good improvement in market share notwithstanding the very difficult stockmarket environment. In our general insurance business the Group further enhanced its UK market leadership position in the distribution of home and creditor insurance to deliver growth in premium and commission income of 19 per cent. Within asset finance, the Group has acquired First National Vehicle Holdings, Abbey National Vehicle Finance and the Dutton-Forshaw Group. These acquisitions have further enhanced the Group’s leading position in UK motor finance. So, in most areas of our business, the Group continues to maintain and develop market leading positions to enable high levels of returns to be sustained, or improved.
The Group is already amongst the leaders in cost efficiency. However, in a relatively low growth, low inflation and low interest rate macro-economic environment, cost control remains critically important. Augmented by our efficiency programmes the Group’s control and focus on costs has meant that in 2002 costs, excluding the impact of acquisitions and operating lease depreciation, were held flat. Overall Group staff numbers decreased by 4,191 to 79,537 during 2002, after adjusting for an increase of 2,328 from acquisitions during the year. The Group will, of course, continue its significant programme of investment in improved efficiency, to support business growth.
Our community programme was valued at £40 million in 2002 which makes us the UK’s largest corporate giver. The majority of our support is channelled through the independent Lloyds TSB Foundations which receive one per cent of the Group’s pre-tax profits, averaged over three years, instead of the dividend on their shareholdings. This year they will receive £33 million to distribute to grassroots causes which help to improve the quality of life for disabled and disadvantaged people.
Charity of the Year campaign. In 2002 staff raised some £685,000 for the Royal National Institute for Deaf People to fund its Information and Tinnitus Helpline for one year. This year we aim to raise £750,000 for Help the Hospices, to support both adult and children’s hospices across the country.
As well as providing charitable support, we also focus our resources on education and economic and social regeneration. Our Quality in Education programme promotes the use of a self-assessment and improvement tool which helps schools to drive their own efforts to raise standards. In 2002, the programme received a Business in the Community Impact Endorsement Mark in recognition of the results we have achieved. By working through local education authorities, professional teacher associations and in partnership with the Department for Education and Skills and the Cabinet Office, the programme has been introduced to over 4,000 schools so far.
Lloyds TSB is one of the leading UK-based financial services groups, whose businesses provide a comprehensive range of banking and financial services in the UK and overseas. At the end of 2002 total group assets were £253 billion and there were over 79,000 employees. Market capitalisation was £24.8 billion.
• Cash machines. The Group has one of the largest cash machine networks of any leading banking group in the UK and personal customers of Lloyds TSB Bank are able to withdraw cash, check balances and obtain mini statements through 4,210 cashpoint* machines at branches and external locations around the country. In addition, they have access to a further 37,000 cash machines via LINK in the UK and to cash machines worldwide through the VISA and MasterCard networks.
• Corporate provides a wide range of banking and related services, including electronic banking, large value lease finance, share registration, venture capital, correspondent banking and capital markets services to major UK and multinational companies, financial institutions and, through a network of dedicated offices, to medium-sized businesses in the UK.
• Middle East and Asia. There are banking operations in Hong Kong, Singapore, Tokyo, Malaysia and Dubai.
Financial review Accounting policies and presentation Accounting policies are set out on pages 64 to 67. During 2002 the Group has made a number of changes in accounting policy to implement the requirements of new accounting standards and guidelines. Comparative figures have been restated. The effect of these changes in policy on the results for the year and the comparative period is set out below.
In December 2001, the Association of British Insurers (ABI) published detailed guidance for the preparation of figures using the achieved profits method of accounting which are published as supplementary financial information accompanying the accounts of most listed insurance companies.
The ABI guidance recommends the use of unsmoothed fund values to calculate the value of in-force business. To improve the comparability of the results of the Group’s insurance operations with the supplementary financial information published by listed insurers the Group has changed the basis of its embedded value calculations to use unsmoothed fund values; previously the effect of investment fluctuations had been amortised in the profit and loss account over a two year period. An adjustment has been made reducing shareholders’ equity at 31 December 2001 by £208 million to reflect the revised policy.
The following tables show the impact of the changes in accounting policies: Investment Total UITF 33 FRS 19 FRS 17 variance adjustment 2002 £m £m £m £m £m
Financial review risk in its banking business and equity risk in its insurance businesses, changing demographic trends, unexpected changes to regulation or regulatory actions, changes in customer preferences, competition and other factors. Please refer to the latest Annual Report on Form 20-F of Lloyds
Pre-tax profit from UK Retail Banking and Mortgages decreased by £33 million to £1,172 million, compared to £1,205 million in 2001. Excluding the impact of a reduction of £57 million in profits from the sale and leaseback of premises and the non-recurrence of certain provision releases in 2001, profit before tax increased by £96 million, or 9 per cent. There was strong growth in personal loans, up 15 per cent, and in credit card lending, up 27 per cent. Current account and savings and investment account balances, within Retail Banking, increased by 10 per cent. Overall, retail banking product sales were 6 per cent higher than in 2001. Costs remained tightly controlled and asset quality generally remains satisfactory, notwithstanding the general slowdown in economic activity within the UK. Provisions for bad and doubtful debts increased by £148 million to £563 million, as a result of volume related asset growth in the personal loan and credit card portfolios and a lower level of recoveries and releases than in 2001. Overall the arrears position was stable. An improved arrears position in personal lending was offset by a slight deterioration in the credit card portfolio.
Economic activity in Brazil has remained reasonably robust and we believe this relative strength in the local economy, in conjunction with the significant International Monetary Fund support package which the newly elected president and incoming government have indicated they will support, should alleviate current concerns about the Brazilian economy. The economic situation in Argentina continues to be difficult and the outlook is likely to remain uncertain at least until after the new Argentine government takes office during 2003. In 2002 the Group increased its general provision relating to its exposure to Argentina by £50 million and the Group’s total exposure to Argentina at the end of the year was some £190 million, net of provisions and charges, compared with £610 million at the end of 2001. The Group has now provided for some 50 per cent of its total exposure to Argentina.
Growth Plan. This investigation is expected to be completed during 2003, when the Group will be in a position to estimate the financial effect.
To optimise the financial management of the Group’s life businesses Lloyds TSB Life was transferred into the ownership of Scottish Widows in
Amounts written off fixed asset investments – – 57 – 30 87 Income from joint ventures (11) – – – – (11)
Income from joint ventures (10) – – – – (10) Profit on sale of businesses – – – 39 – 39
UK Retail Banking and Mortgages 85,868 77,982 Insurance and Investments* 9,161 9,270 Wholesale Markets 89,066 79,370 International Banking 21,779 21,407 Central group items 1,544 1,375
(covering the Group’s UK retail businesses, providing banking and financial services to personal and small business customers; mortgages; private banking and stockbroking)
Operating expenses increased by £63 million, or 2 per cent, to £2,670 million during 2002, compared to £2,607 million in 2001. Staff numbers decreased by 3,329 to 47,895. The trading surplus increased by £116 million, or 7 per cent, to £1,746 million. Bad debt provisions increased by £148 million to £563 million, as a result of volume related asset growth in the personal loan and credit card portfolios and a lower level of recoveries and releases than in 2001. Excluding the impact of the non-recurrence of provision releases totalling £72 million in 2001, the provisions charge as a percentage of average lending for personal loans and overdrafts decreased to 3.73 per cent, from 3.88 per cent in 2001, and the charge in the credit card portfolio decreased to 3.52 per cent, from 3.60 per cent in 2001. Overall the arrears position remained stable.
UK Retail Banking has the responsibility for managing the core relationship with our current account customers and, therefore, acts as the principal gateway for the cross-sale of our full range of bancassurance products and services. As such it contributes significantly to the profitability of other businesses. There were good market share gains, particularly in customer deposits, credit cards and personal lending, and greater unit cost efficiencies, offset by the higher level of provisions for bad and doubtful debts. The Group is now starting to see the benefit of recent investments made in the strategic repositioning of the retail bank, which is well positioned to capture the benefits of future customer franchise development and growth.
The recent launch of the Group’s new, market leading, credit interest current account reflects the Group’s continuing commitment to invest in developing its retail banking franchise by attracting new high quality customers, and rewarding both new and existing customers for using lower cost distribution channels.
Gross new lending increased by 36 per cent to a record £19.0 billion, compared with £14.0 billion a year ago. Net new lending increased to £5.9 billion resulting in a market share of net new lending of 7.5 per cent. Mortgage balances outstanding increased by 10 per cent to £62.5 billion.
Mortgages remain a key recruitment vehicle in support of the Group’s cross-sell targets and, during 2002, the Group’s key objective in the mortgage business has been to achieve an appropriate balance between growth in market share and profitability. Gross new mortgage lending of £19.0 billion in the year was a record for the Group, and the Group’s market share of net new lending in the second half of 2002, at 8.8 per cent, was considerably better than in the first half of the year. Net new lending in the second half of 2002 was £3.9 billion, compared with £2.0 billion in the first half of the year. The Group’s market share of net new lending in the fourth quarter of 2002 was 10.0 per cent.
New provisions were offset by releases and recoveries resulting in a £1 million net provisions release for the year, compared with a net release of £24 million in 2001 which resulted from a release of £32 million of the Group’s mortgage general provision. The quality of our mortgage lending continues to be satisfactory. The average indexed loan-to-value ratio on the C&G mortgage portfolio was 46 per cent and the average loan-to-value ratio for C&G mortgage business written during 2002 was 67 per cent. C&G has a policy of not exceeding a 95 per cent loan-to-value ratio on new lending.
(the life, pensions and unit trust businesses of Scottish Widows and Abbey Life; general insurance underwriting and broking; and Scottish Widows
Profit before tax from Insurance and Investments, excluding changes in economic assumptions and investment variance, decreased by £190 million, or 13 per cent, to £1,231 million, from £1,421 million in 2001. On the same basis, profit before tax from our life, pensions and unit trust businesses decreased by £285 million, or 38 per cent, to £475 million, partly as a result of a £135 million increase in provisions for redress to past purchasers of endowment and pension products, but also following a reduction of £55 million in benefits from experience variances and actuarial assumption changes. The market for medium and long-term investments continued to be adversely affected by the continued volatility in global stockmarkets.
Fund, one of the largest sterling Institutional Money Market Funds, and the UK Balanced Property Trust, an innovative closed-end commercial property fund.
The Group has, along with other companies in the life assurance industry, been reviewing the past sales of certain endowment based and longterm savings products. As a result the Group has made a provision of £165 million to cover its liability for redress to policyholders in respect of past sales made, primarily in the late 1980s and early 1990s, by the Abbey Life salesforce prior to its disposal by the Group in February 2000.
Profit before tax, excluding investment variance, from our general insurance operations, comprising both underwriting and broking activities, rose by £103 million, or 16 per cent, to £754 million.
Total income increased to a record £1.1 billion. Premium income from underwriting increased by £58 million, or 14 per cent, largely as a result of higher home insurance income which increased by 25 per cent. Commissions from insurance broking increased by £119 million, or 23 per cent, largely as a result of higher levels of creditor insurance.
Claims were £55 million, or 32 per cent, higher at £229 million than in 2001. The overall claims ratio of 46 per cent was higher than in 2001
Trading surplus 994 1,022 Provisions for bad and doubtful debts 311 155 Amounts written off fixed asset investments 57 15
Efficiency ratio 53.4% 47.8% Total assets (period-end) £89.1bn £79.4bn Total risk-weighted assets (period-end) £52.9bn £45.4bn
Vehicle Holdings, Abbey National Vehicle Finance and the Dutton-Forshaw Group had a significant impact on the figures within Wholesale Markets.
Pre-tax profits in Lloyds TSB Asset Finance, which incorporates the Group’s asset finance and receivables finance businesses, were £86 million, compared with £87 million in 2001. Lloyds TSB Commercial Finance and Alex Lawrie Factors continued to expand their customer base, including a new venture in Germany through an agreement with Bertelsmann Finanz. In April 2002 Lloyds TSB Asset Finance acquired First National Vehicle
International Banking pre-tax profit was £22 million, or 6 per cent, higher at £379 million compared with 2001, despite a profit in 2001 of £39 million from the sale of the Group’s Brazilian fund management business.
(earnings on surplus capital and the emerging markets debt investment portfolio, central costs and other unallocated items)
Group: Net interest income £m 5,171 4,922 Average interest-earning assets £m 161,818 144,945 Gross yield on interest-earning assets % 6.52 7.84
Net interest margin % 3.20 3.40 Domestic: Net interest income £m 4,425 4,202 Average interest-earning assets £m 134,902 121,244 Gross yield on interest-earning assets % 6.10 7.38
Group net interest income increased by £249 million, or 5 per cent, to £5,171 million, despite a reduction of £290 million caused by a 20 basis point reduction in the net interest margin. Average interest-earning assets increased by 12 per cent to £162 billion. The 20 basis points decrease in the overall net interest margin, to 3.20 per cent, reflected a lower contribution from interest-free liabilities, caused by the lower average interest rates, the continuing shift in the mix of average interest-earning assets towards high quality, but finer margin, corporate and wholesale lending, and the impact of adverse exchange rate movements on our higher margin Latin American businesses, which led to a 27 basis point reduction in the international net interest margin. The interest spread reduced by 6 basis points.
Average interest-earning assets on a local currency basis increased by 16 per cent but again this was partly offset by the adverse effect of exchange rate movements. The net interest margin reduced by 27 basis points as a result of lower margins in our Latin American businesses. In particular, the effect of adverse exchange rate movements had a significant impact on the contribution to the interest margin from our higher margin businesses in Brazil.
Total operating expenses increased by £139 million, or 3 per cent, compared with 2001. Excluding the impact of acquisitions and operating lease depreciation, operating expenses were flat.
Administrative expenses decreased by £12 million to £4,214 million. Staff costs fell by £36 million to £2,517 million and other expenses decreased by £2 million to £1,154 million. Depreciation rose by £131 million, reflecting an increase of £95 million in operating lease depreciation.
The total charge for bad and doubtful debts increased to £1,029 million from £747 million. In UK Retail Banking the provisions charge increased by £125 million, from £439 million in 2001, to £564 million, as a result of volume related asset growth in the personal loan and credit card portfolios and a lower level of recoveries and releases. In Wholesale Markets the provisions charge increased by £156 million to £311 million from £155 million in 2001. Provisions against the Group’s exposure to certain large US corporate customers totalled some £100 million, and there was also an increase in the provision charge from the corporate lending portfolio, reflecting weak equity markets and the slowdown in economic activity in the UK. In International Banking provisions decreased by £21 million as a result of lower specific provisions in Losango, largely reflecting exchange rate movements. There was also an increase of £64 million in the Group’s overall general provision reflecting a £50 million general provision charge relating to the Group’s exposure to Argentina, and a more cautious outlook following the slowdown in economic growth in the UK.
UK Retail Banking and Mortgages 54.2 48.3 Insurance and Investments 0.2 0.2 Wholesale Markets 52.9 45.4 International Banking 14.3 13.2 Central group items 0.8 0.8
Notes: a) Tier 1 capital comprises mainly shareholders’ funds, tier 1 capital instruments and minority interests. b) Tier 2 capital comprises loan capital and the general provision for bad and doubtful debts. c) Supervisory deductions comprise mainly the investment in the insurance businesses.
At the end of December 2002 the risk asset ratios were 9.6 per cent for total capital and 7.8 per cent for tier 1 capital.
Tax The effective rate of tax was 29.3 per cent (2001: 27.7 per cent). The lower effective rate of tax, compared with the standard tax rate of 30 per cent, is largely due to tax relief on payments to the QUEST to satisfy Save As You Earn options, non taxable gains on disposals of properties sheltered by capital losses, and tier 1 capital interest payments, partly offset by a higher effective rate of tax in the Group’s life and pensions businesses in 2002 (see note 8b, page 70).
Economic profit In pursuit of our aim to maximise shareholder value, we use a system of value based management as a framework to identify and measure value in order to help us make better business decisions. Accounting profit is of limited use as a measure of value creation and performance as it ignores the cost of the equity capital that has to be invested to generate the profit. We choose economic profit as a measure of performance because it captures both growth in investment and return. Economic profit represents the difference between the earnings on the equity invested in a business and the cost of the equity. Our calculation of economic profit uses average equity for the year and is based on a cost of equity of 9 per cent
Economic profit instils a rigorous financial discipline in determining investment decisions throughout the Group. It enables us to evaluate alternative strategies objectively, with a clear understanding of the value created by each strategy, and then to select the strategy which creates the greatest value.
During 2002 the FTSE All-Share index fell by 24 per cent and this created an adverse investment variance totalling £952 million. This adverse variance should not represent a permanent impairment to the value of the Group’s reserves which fluctuate as stockmarket values fluctuate.
Enterprise-wide risk management (EWRM) is founded on four principal concepts: strong risk governance; empowerment; competitive advantage and common risk language.
The Director of Group Risk Management is responsible for the implementation of risk policy and the provision of independent assurance to the
Audit Committee and Board, who receive regular reports on risk issues prepared by Group Risk Management. The Director of Group Risk
These relationships are illustrated in the following diagram: Empowerment The directors of the Group’s business units have primary responsibility for measuring, monitoring and controlling risks within their areas of accountability. They are empowered to establish control frameworks for their businesses that are consistent with the Group’s high level policies and within parameters set by Group Risk Management.
Common risk language The Group has adopted a risk language in which all risks are classified by one or more of the following 11 Risk Drivers: The Group’s high level policy and reporting to the Group Risk Committee, Audit Committee and Board have been aligned to the Risk Drivers. Rollout of the risk language to the business has commenced and will be completed during 2003, ensuring a consistent approach to classifying and describing risks.
The Group’s governance and organisation policy is to: – Organise itself into three principal business units (UK Retail Banking and Mortgages, Wholesale and International Banking, and Insurance and
The Group believes that: – Long term success depends on the quality and skills of its staff.
A common approach is applied across the Group to assess the creation of shareholder value. This is measured by Economic Profit (the profit attributable to shareholders, less a notional charge for the equity invested in the business). The focus on Economic Profit allows the Group to compare the returns being made on capital employed in each business.
The Group’s strategy and those of its constituent business units are reviewed and approved by the Board. Regular reports are provided to the Group
Portfolio Analysis – in conjunction with Group Risk Management, Group businesses identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed in terms of credit risk exposure. This entails the production and analysis of regular portfolio monitoring reports for review by Group Risk Management.
– Maintenance of a facilities database. Group Risk Management operates a centralised database of large corporate, sovereign and bank facilities designed to ensure a consistent aggregation policy is maintained throughout the Group.
– Communication and provision of general guidance on all credit-related risk issues, including regulatory changes and environmental risk policy, to promote consistent and best practice throughout the Group.
Day-to-day credit management and asset quality within each business unit is the primary responsibility of the relevant business unit director. Such responsibility is fulfilled by: – Each business unit having in place established credit processes which are consistent with the corresponding Group policies.
Structural Foreign Exchange Risk – this arises from the Group’s investments in its overseas operations. The structural position is managed after having regard to the currency composition of the Group’s risk-weighted assets, the objective being to limit the effect of exchange rate movements on the risk asset ratio. The Group’s structural position at 31 December 2002 is set out on page 90 in note 46d. The position implies that a hypothetical increase of 10 per cent in the value of sterling against all other currencies would lead to a £191 million reduction in reserves. There would be no material impact upon the Group’s risk asset ratio.
Market Risk Limits – limits to control market risk in respect of trading positions, UK wholesale banking and overseas centres are set by Group Risk
Management (GBSM), which is established by the Group Asset and Liability Committee (ALCO) and ratified by the Board. The policy is to optimise the stability of future net interest income, and this is achieved by entering into hedging transactions using interest rate swaps and other financial instruments. Both short and long-term interest rate parameters are applied to management of the balance sheet. Overseas operations are managed within limits authorised by Group Risk Management, in addition to which some centres have adopted benchmark profiles for investment of interest rate insensitive liabilities as approved by Group Risk Management.
Financial risks are measured through deterministic studies of the impact of different insurance and investment market scenarios on the future free assets of the business.
Investment strategy is determined by the term and nature of the underwriting liabilities, and asset/liability matching positions are actively monitored.
– Approval from a risk perspective of all new products launched throughout the Group, to ensure their risks are understood by the business and managed appropriately (see ‘Product and Service Risk’ below).
– Identification of risk through formal risk reviews, covering specific risks, activities, business sectors or products, and ensuring that prompt and pre-emptive action is taken to address any actual or perceived risks that may emerge, whether specific to the Group or to the industry generally.
The risk of loss arising from the inherent characteristics, management or distribution of products or services, or from failure to meet or exceed customer expectations and competitor offerings.
Product Promotion, Distribution and Sales – business units have a defined channel distribution strategy for products, consistent with the Group’s distribution strategy. Business units launching new products are responsible for ensuring that proposed sales activity within delivery channels is compliant with regulatory requirements.
All advertising and marketing material complies with the Group’s governing policy on Business Conduct. Any statement of fact is substantiated through documentary evidence; any comparison is presented in a fair and balanced way; and any reference to past performance clearly states the basis of measurement.
Product Performance – business units establish and monitor performance standards for all marketed products across a range of indicators, e.g. sales volumes, customer service, risk profile. Significant deviations from these standards are investigated and appropriate action taken.
Accounting Policies – the Group seeks to use appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates.
The Liquidity Policy requires all authorised local treasury operations to maintain a liquidity ratio of over 100 per cent, in addition to ensuring compliance with local regulatory requirements.
– Prepare forecasts and detailed annual budgets that are subject to formal review and approval.
Trends across all the CARE Index categories are monitored and fed into a programme of continuous customer service improvement. Lloyds TSB
also provides its staff with clear FSA-compliant guidelines and processes for dealing with customer complaints.
Group is subject, and to monitor and report on adherence to these rules and regulations.
The risk of financial loss or reputational damage arising from programmes or projects failing to deliver to requirements, budget or timescale, or failing to implement change effectively.
– A specialist Group Project Services function provides a pool of experienced, professional project managers to be deployed on major projects across the Group.
The board Non-executive directors * Member of the audit committee ** Chairman of the audit committee † Member of the remuneration committee ‡ Chairman of the remuneration committee § Member of the nomination committee
(leaving on 16 April 2003) A director of TSB Group since 1993. Joined Unilever in 1970 and following a number of senior and general management appointments was appointed an executive director of Unilever in 1992. Aged 56.
Michael E Fairey Deputy Group Chief Executive Joined TSB Group in 1991 and held a number of senior and general management appointments before being appointed to the board in 1997 and deputy group chief executive in 1998. Joined Barclays Bank in 1967 and held a number of senior and general management appointments, including managing director of Barclays Direct Lending Services from 1990 to 1991. Aged 54.
Michael D Ross CBE Deputy Group Chief Executive Joined the board in 2000. Joined Scottish Widows in 1964 and following a number of senior and general management appointments became group chief executive of that company in 1991. Chairman of the Association of British Insurers. Aged 56.
J Eric Daniels Group Executive Director, UK Retail Banking (Group Chief Executive from 1 June 2003) Joined the board in 2001. Served with Citibank from 1975 and held a number of senior and general management appointments in the USA, South America and Europe before becoming chief operating officer of Citibank Consumer Bank in 1998. Following the Citibank/Travelers merger in 1998, he was chairman and chief executive officer of Travelers Life and Annuity until 2000.
Steve C Targett (Group Executive Director, Wholesale and International Banking from 16 April 2003) Joins the board on 10 March 2003. Served with National Australia Bank from 1997, where he held a number of senior and general management appointments in Australia and the UK before becoming chief executive officer, Europe, in 2002. Previously held a number of senior and general management appointments in Cargill, a commodity trading group, from 1980 to 1988, State Bank of South Australia from 1988 to 1991 and ANZ Bank from 1991 to 1997. His early career, between 1972 and 1980, was spent with National Australia Bank. Aged 47.
Mr Kane and Mr Ross retire by rotation at the annual general meeting and offer themselves for re-election.
Employees The group is committed to employment policies which follow best practice, based on equal opportunities for all employees irrespective of sex, race, national origin, religion, colour, disability, sexual orientation, age or marital status.
Schemes offering share options or the acquisition of shares are available for most staff, to encourage their financial involvement in the group.
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. Details of how to obtain a copy of the code and other related information is shown on page 93.
The company’s policy is to agree terms of payment with suppliers and these normally provide for settlement within 30 days after the date of the invoice, except where other arrangements have been negotiated. It is the policy of the company to abide by the agreed terms of payment, provided the supplier performs according to the terms of the contract.
Auditors Following the transfer of substantially all of the business of the UK firm of PricewaterhouseCoopers, the company’s auditors, to a limited liability partnership on 1 January 2003, PricewaterhouseCoopers resigned and the directors appointed the new firm, PricewaterhouseCoopers LLP. Resolutions concerning the re-appointment of the auditors and authorising the directors to set their remuneration will be proposed at the annual general meeting.
Executive share option schemes The Group is committed to the governing objective of maximising shareholder value over time. The board believes that the executive share option schemes for senior executives, approved by the shareholders at the annual general meeting in 1997 and amended at the annual general meeting in 2001, provide an effective method of giving executives an incentive to achieve that objective.
Mr Fairey, Mr Kane and Mr Hampton each has a service agreement which the company may terminate by giving one year’s notice. Mr Ross’s service agreement, entered into in connection with the arrangements for the transfer of the business of Scottish Widows to the Group in March 2000, provided for two years’ notice for the first two years, but since March 2002 the notice period has decreased by one month for each month of service, to one year’s notice. From March 2003, therefore, Mr Ross’s agreement may be terminated on one year’s notice.
The remuneration committee has considered the provisions of the UK listing authority’s corporate governance code and the recent ABI/NAPF joint statement mentioned above, relating to compensation in the event of early termination of directors’ service agreements and a departing director’s duty to mitigate his or her loss. The Group will have regard to that duty on a case by case basis when assessing the appropriate level of compensation which may be payable. It is the Group’s policy that where compensation on early termination is due, in appropriate circumstances it should be paid on a phased basis.
Rebased to 100 on 1 January 1998 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
Current directors who served during 2002: M K Atkinson (service agreement dated 2 February 1999) 174 370 18 5 567 588
J E Daniels (service agreement dated 19 October 2001) 450 349 450 14 1,263 192 P B Ellwood (service agreement dated 19 June 1989) 660 22 31 20 733 1,001 M E Fairey (service agreement dated 28 August 1991) 470 137 22 14 643 791
P R Hampton (service agreement dated 30 May 2002) 268 9 13 8 298 –
D P Pritchard (service agreement dated 13 February 1998) 390 17 18 12 437 588 M D Ross (service agreement dated 7 March 2000) 430 15 20 13 478 650
‘Other benefits’ include the use of a car, private medical insurance, life insurance cover and payments to a former executive director on termination of his service contract (see below). Allowances for relocation, housing and legal advice arising from Mr Daniels’ service agreement, and an additional payment in respect of the contribution to the separate fund relating to Mr Fairey’s pension, are also included. The separate fund, which was mentioned in previous annual reports, was established to cover pension obligations of those who joined the Group after 1 June 1989 and who are subject to the Inland Revenue earnings cap relating to pensions, introduced by the Finance Act 1989.
Column (f) is the capital value of the pension in column (e). The disclosures in columns (e) and (f) are as required by the UK listing authority’s listing rules. The requirements of the listing rules differ from those of the Companies Act. The listing rules require the additional pension earned over the year to be calculated as the difference between the pension accrued at the end of the financial year and the pension accrued at the start of the financial year less the increase in the pension earned over the year solely due to inflation. The change in the transfer value required by the Companies Act will also be significantly influenced by the assumptions underlying the calculation at the beginning and the end of the financial year and market conditions.
The directors’ interests, all beneficial, in shares in Lloyds TSB Group were: At 1 January 2002 At 1 January 2002 (or date of (or date of
Exercisable* – 92,000 670p Not exercisable* 92,000 232,122 676p 916† 442p 1,245† 591p 91,817† 733p 252,404† 715p
† These share options lapsed following termination of Mr Atkinson’s service contract. The market price for a share in the Company at 1 January 2002 and 31 December 2002 was 746p and 446p respectively. The range of prices between 1 January 2002 and 31 December 2002 was 427.5p to 817p. None of the other directors at 31 December 2002 had options to acquire shares in the Company or its subsidiaries.
Non-beneficial interests Directors had non-beneficial interests as follows: 1. Mr Daniels, Mr Ellwood, Mr Fairey, Mr Hampton, Mr Kane, Mr Moore, Mr Pritchard, Mr Ross and Mr van den Bergh together with some 80,000 other employees, were potential beneficiaries in the 1,721,503 and 1,684,041 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. 2,417,245 and 1,952,179 shares, respectively, were held by these trusts at the beginning of the year. These holdings were 1,487,696 and 1,677,280, respectively, on 13 February 2003. 2. At the beginning and end of the year, Mr Ellwood also had a non-beneficial interest in 7,000 shares held in another trust.
None of those who were directors at the end of the year had any other interest in the capital of the Company or its subsidiaries and there were no changes in their beneficial interests between 31 December 2002 and 13 February 2003. The register of directors’ interests, which is open to inspection, contains full particulars of directors’ shareholdings and options to acquire shares in the Company.
The UK listing authority’s rules require companies to make statements on corporate governance in their annual reports. The following comments are, therefore, included to comply with these rules.
Corporate governance principles The board considers that good governance is central to achieving the Group’s governing objective of maximising shareholder value. That has been uppermost in directors’ minds when applying the governance principles contained in the code annexed to the UK listing authority’s listing rules.
The information on pages 44 and 45 shows that the Company is led and controlled by a board comprising executive and non-executive directors with wide experience. The appointment of directors is considered by the board and, following the provisions in the articles of association, they must retire by rotation, and may stand for re-election by the shareholders, at least every three years.
The board meets nine times a year and a programme is prepared and agreed each year, which ensures that the directors are able regularly to review corporate strategy and the operations and results of the business units in the Group and to discharge their other duties. The roles of the chairman, the group chief executive and the board and its governance arrangements are reviewed annually.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of directors’ responsibilities on page 55. The directors are also responsible for preparing the directors’ remuneration report.
Our responsibility is to audit the financial statements and the auditable part of the directors’ remuneration report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. Our report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the United Kingdom Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or in to whose hands it may come save where expressly agreed by our prior consent in writing.
We report to you our opinion, as to whether the financial statements give a true and fair view and are properly prepared in accordance with the United Kingdom Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions is not disclosed.
We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises only the directors’ report, the chairman’s statement, the group chief executive’s review, the financial review, the remainder of the directors’ remuneration report and the corporate governance statement.
We review whether the corporate governance statement on pages 55 and 56 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Company’s or Group’s corporate governance procedures or its risk and control procedures.
Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the auditable part of the directors’ remuneration report. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed.
Opinion In our opinion: • the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2002 and of the profit and cash flows of the Group for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985; and
Statement of total recognised gains and losses for the year ended 31 December 2002 2002 2001* £ million £ million
Prior year adjustment at 1 January 2002 in respect of current year changes in accounting policy (note 1) (404) –
Total gains and losses recognised during the year (957) 381 * restated (see note 1)
Comparative figures for 2001 have been restated in respect of all of the above changes.
The useful economic life of the goodwill arising on each acquisition is determined at the time of the acquisition. The directors consider that it is appropriate to assign an indefinite life to the goodwill which arose on the acquisition of Scottish Widows during 2000 in view of the strength of the Scottish Widows brand, developed through over 185 years of trading, and the position of the business as one of the leading providers of life, pensions, unit trust and fund management products. Both of these attributes are deemed to have indefinite durability, which has been determined based on the following factors: the nature of the business; the typical lifespans of the products; the extent to which the acquisition overcomes market entry barriers; and the expected future impact of competition on the business.
Income from both finance and operating leases is credited to the profit and loss account in proportion to the net cash invested so as to give a constant rate of return over each period after taking account of tax. Income from instalment credit transactions is credited to the profit and loss account using the sum of the digits method.
The assets held within the long-term business funds are legally owned by the life assurance companies, however the shareholder will only benefit from ownership of these assets to the extent that surpluses are declared or from other cash flows attributable to the shareholder. Reflecting the different nature of these assets, they are classified separately on the Group’s balance sheet as ‘Long-term assurance assets attributable to policyholders’, with a corresponding liability to the policyholders also shown. Investments held within the long-term business funds are included on the following basis: equity shares, debt securities and unit trusts held for unit linked funds are valued in accordance with policy conditions at market prices; other equity shares and debt securities are valued at middle market price and other unit trusts at bid price; investment properties are included at valuation by independent valuers at existing use value at the balance sheet date, and mortgages and loans are at cost less amounts written off.
A derivative will only be classified as a hedge in circumstances where there was evidence of the intention to hedge at the outset of the transaction and the derivative substantially matches or eliminates the risk associated with the exposure being hedged.
Other finance income 307 – 307 Fees and commissions receivable 2,636 286 2,922 Dealing profits (before expenses) 138 95 233 Income from long-term assurance business (41) 12 (29) General insurance premium income 428 – 428 Other operating income 538 170 708
**The geographical distribution of gross income sources, profit on ordinary activities before tax and assets by domestic and international operations is based on the location of the office recording the transaction, except for lending by the international business booked in London.
Audit and audit related fees 8.7 15.9 Tax fees 0.7 0.4 Management consultancy fees 0.1 3.5 Other fees 1.0 1.3
Current tax charge 868 830 Deferred tax (106) 44 Associated undertakings and joint ventures 2 1 *restated (see note 1)
In addition to the tax charge in the profit and loss account detailed above, £968 million (2001: £863 million) of deferred tax has been credited to the statement of total recognised gains and losses in respect of actuarial losses recognised in post-retirement benefit schemes (note 44).
A reconciliation of the charge that would result from applying the standard UK corporation tax rate to profit before tax to the current tax charge and total tax charge for the year is given below: £m £m
Current tax charge 868 830 Deferred tax – capital allowances in excess of depreciation (7) 48 – other timing differences (99) (4) Associated undertakings and joint ventures 2 1
In December 2002 the Inland Revenue announced its intention to introduce legislation which may affect the tax treatment of certain transfers from Scottish Widows plc’s long term business fund to its shareholder’s fund. The precise impact of these proposals is yet to be determined, however it is possible that these transfers will be subject to a higher tax charge than was previously anticipated.
pence pence per share per share £m £m 11 Earnings per share 2002 2001*
††The weighted average number of shares for the year has been calculated after deducting 5 million (2001: 15 million) ordinary shares held by Lloyds TSB Group Holdings (Jersey) Limited and the trustees of the TSB Group Employee Trust, the Lloyds TSB Group Employee Share Ownership Trust and the Lloyds TSB Qualifying Employee Share Ownership Trust, on which dividends have been waived (note 27).
Bills sold or matured (31,301) (76) (31,377) Amortisation of premiums and discounts – 75 75
Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes.
It is expected that tax of £1 million (2001: £1 million) would be recoverable if the investment securities were sold at their year end valuation.
The cost of assets acquired during the year for letting to customers under finance leases and hire purchase contracts amounted to £3,752 million (2001: £3,166 million).
Black Horse Limited and CARS 4 have also entered into interest rate swaps in respect of this transaction, the interest rates payable and receivable under these swaps are set by reference to market rates of interest on an arm’s length basis.
In respect of: Loans and advances to banks 1 2 Loans and advances to customers 1,766 1,466 12 Treasury bills and other eligible bills (continued)
Non-performing lending comprises: Accruing loans on which interest is being placed in suspense 752 843 Loans accounted for on a non-accrual basis 662 379
Other securities: Other public sector securities 112 112 151 151 Bank and building society
Other asset backed securities 1,191 1,191 592 592 Other debt securities 94 94 – –
Movements in investment securities comprise: Premiums and Cost discounts Provisions Total £m £m £m £m
Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. Transfers to other securities mainly relates to the reclassification of the Group’s portfolio of emerging market securities, following the decision to accelerate the disposal programme for these investments.
It is expected that tax of £4 million (2001: £60 million) would be payable if the investment securities were sold at their year end valuation.
Notes to the accounts 21 Interests in group undertakings Company Shares Loans £m £m
The primary financial statements of these entities can be summarised as follows: Equipment Structured leasing vehicles finance vehicles £m £m £m £m
Profit on ordinary activities before taxation 1 9 8 – Tax on profit on ordinary activities 5 (6) – –
Cash flow statement Net cash inflow (outflow) from operating activities 422 391 (250) –
Depreciation: Exchange and other adjustments (2) 1 – Charge for the year 64 286 292
Balance sheet amount of premises comprises: Leaseholds 50 years and over unexpired 132 36 Leaseholds less than 50 years unexpired 273 268
The Group’s residual value exposure in respect of operating lease assets, all of which are expected to be disposed of at the end of the lease terms, was as follows: £m £m
Leases on which the commitment is due to expire in: 5 years or less but over 1 year 29 1 33 3
Capital expenditure contracted but not provided for at 31 December 2002 amounted to £117 million (2001: £137 million), of which £107 million (2001: £125 million) relates to assets to be leased to customers under operating leases.
In addition, a further 0.4 million ordinary shares were held by Lloyds TSB Group Holdings (Jersey) Limited at 31 December 2002 (2001: 0.5 million shares). These shares, on which the dividend entitlement has been waived, were gifted to the Group some years ago at nil cost and are used to satisfy outstanding options or to meet commitments arising under other employee share schemes.
Interest receivable 931 843 Deferred expenditure incurred under cash gift and discount mortgage schemes 201 256 Other debtors and prepayments 1,173 1,197 *restated (see note 1)
Changes in the embedded value, which are determined on a post-tax basis, are included in the profit and loss account and described as income from long-term assurance business. For the purpose of presentation the change in this value is grossed up at the underlying rate of corporation tax.
Net tangible assets of life companies including surplus 3,324 3,628 Value of other shareholder’s interests in the long-term assurance business 2,904 2,738
Contribution from existing business: this comprises the following elements: • The expected return arising from the unwinding of the discount applied to the expected cash flows at the beginning of the year; • Experience variances caused by the differences between the actual experience during the year and the expected experience; • The effects of changes in assumptions, other than economic assumptions, and other items; • Pension provisions (see d); and
Distribution costs: this represents the actual costs of acquiring new business during the year and includes commissions paid to independent financial advisors and other direct sales costs.
New business contribution 413 374 Contribution from existing business – expected return 312 348 – experience variances (1) 37 – changes in assumptions and other items 78 95 – pension provisions (see d) (40) (70) – endowment provision (see e) (165) – Investment earnings 214 247 Distribution costs (277) (247)
Movements in the provision over the last two years have been as follows: £m £m
The adequacy of the provision has again been reviewed at 31 December 2002, in the light of final experience as to the amount of compensation to be paid. Lower stockmarket levels have increased the final cost of redress and a further provision of £40 million has been made in the year ended e Endowment provision
• The value of the in-force business does not allow for future premiums under recurring single premium business or non-contractual increments, which are included in new business when the premium is received. Department of Social Security rebates have been treated as recurring single premiums.
The liabilities to policyholders comprise: Technical provisions: Long-term business provision (net of reinsurance) 23,217 24,129 Claims outstanding (net of reinsurance) 225 211
Interest payable 1,385 1,310 Other creditors and accruals 2,311 2,253 37 Deferred tax 2002 2001* £m £m
At 1 January 2002 – as previously reported 1,719 Prior year adjustment (note 1) (308)
Notes to the accounts 38 Other provisions for liabilities and charges Post- Vacant leasehold Pension Insurance retirement property and obligations provisions healthcare other Total £m £m £m £m £m
Subordinated Fixed Rate Bonds 2011 (NZ$100 million) g 33 28 – – Subordinated Fixed Rate Bonds 2012 (NZ$125 million) g, k 41 – – – Subordinated Fixed Rate Bonds 2012 (NZ$125 million) g, k 41 – – – 57⁄8% Subordinated Guaranteed Bonds 2014 (€750 million) k 461 – 461 – 57⁄8% Subordinated Notes 2014 k 148 – – –
a) These notes bear interest at rates fixed periodically in advance based on London Interbank rates. b) In certain circumstances the interest payments on these securities can be deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB
Euro Step-up Non-Voting Non-Cumulative Preferred Securities (€430 million) callable 2012** 278 261 Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015† 248 248
Capital instruments 526 509 European Financial Institution Investments Partnership• 123 – LM ABS Investment Partnership 45 –
Authorised: Sterling Ordinary shares of 25p each 1,728 1,728 Limited voting ordinary shares of 25p each 20 20 Preference shares of 25p each 44 44
The Group profit and loss account reserves at 31 December 2002 include £1,310 million (2001: £1,222 million) not presently available for distribution representing the Group’s share of the value of long-term assurance business in force and the surplus retained within the long-term assurance funds. The Group profit and loss account reserves at 31 December 2002 are stated after including a deficit of £2,077 million relating to the Group’s post-retirement defined benefit schemes (2001: surplus of £281 million).
Certain administrative properties used by Scottish Widows are owned by the long-term assurance funds. During 2002 Scottish Widows paid rent to the long-term assurance funds amounting to £5 million (2001: £4 million). In addition, at 31 December 2002, the long-term assurance funds owned 31 million ordinary shares in the Company (2001: 31 million shares).
The principal assumptions used in the scheme valuations were as follows: 31 December 31 December
Rate of inflation 2.30 2.50 Rate of salary increases 3.83 4.04 Rate of increase for pensions in payment and deferred pensions 2.30 2.50 Discount rate 5.60 6.00
In addition, the Group operates a number of schemes which provide postretirement healthcare benefits to certain employees, retired employees and their dependent relatives. The principal scheme relates to former Lloyds Bank staff and under this scheme the Group has undertaken to meet the cost of post-retirement healthcare for all eligible former employees (and their dependants) who retired prior to 1 January 1996. For retirements subsequent to this date, the Group will meet a reducing proportion of the cost until 31 December 2004, after which date the only obligation will be in respect of the pre 1 January 1996 retirements.
The amounts recognised in the statement of total recognised gains and losses are comprised of: £m £m
Actual return less expected return on scheme assets (2,582) (2,015) Experience gains and losses arising on scheme liabilities (240) (71) Effect of changes in demographic and financial assumptions (477) (787)
The experience gains and losses recognised can also be interpreted as follows: £m £m
(Deficit) surplus in the schemes (2,931) 433 Related deferred tax asset (liability) 854 (152)
Information about the Group’s use of financial instruments and management of the associated risks is given on pages 31 to 41 in the financial review.
Non-trading Through intra company and intra group transactions, Group companies establish non-trading derivatives positions with the Group’s independent trading operations, which then enter into similar positions with third parties. The notional principal amounts and fair values of non-trading instruments entered into with third parties were as follows: Notional principal Fair values amount Positive Negative
Interest rate contracts: Interest rate swaps 2,919 164 68 Forward rate agreements 62 – –
Assets: Treasury bills and other eligible bills 2,709 37 26 4 6 – 1,630 4,412 Loans and advances to banks 11,311 1,621 1,076 142 289 452 333 15,224 Loans and advances to customers 74,361 5,252 8,798 28,497 7,108 (1,353) 272 122,935 Debt securities and equity shares 2,545 1,662 718 1,940 4,168 (6) 13,423 24,450
Liabilities: Minority interests and shareholders’ funds – – – – – 10,800 102 10,902 Internal funding of trading business (3,736) (741) (1,171) (6,051) (1,384) – 13,083 –
The table above does not take into account the effect of interest rate options used by the Group to hedge its exposure; details of options are given in note 46a.
Assets: Treasury bills and other eligible bills 530 530 1,879 1,878 Loans and advances to banks and customers 2,032 2,032 149,971 151,526 Debt securities and equity shares 17,620 17,620 11,900 11,932 Liabilities: Deposits by banks and customers 2,927 2,927 138,850 138,428 Debt securities in issue 1,122 1,122 29,133 29,005 Subordinated liabilities – – 10,168 11,156
Assets: Treasury bills and other eligible bills 1,630 1,630 2,782 2,780 Loans and advances to banks and customers 605 605 137,554 138,287 Debt securities and equity shares 13,423 13,423 11,027 11,269 Liabilities: Deposits by banks and customers 1,582 1,582 131,844 131,813 Debt securities in issue 1,187 1,187 23,233 23,266 Subordinated liabilities – – 8,108 8,544 *restated (see note 1)
Structural currency exposures The Group’s main overseas operations are in New Zealand, the Americas and Europe. Details of the Group’s structural foreign currency exposures are as follows: £m £m
The net losses arising in 2001 and earlier years and recognised in 2002 amounted to £344 million. Net losses of £6 million arose in 2002 but were not recognised in the year.
Notes to the accounts 47 Acquisitions a) On 18 April 2002 the Group’s subsidiary, Lloyds TSB Asset Finance Division Limited, completed the acquisition of First National Vehicle Holdings and Abbey National Vehicle Finance, both previously wholly owned subsidiaries of Abbey National plc operating in the UK contract hire and fleet management market; the results of these businesses have been consolidated in full from that date, the effect on the results of the Group is not material. The premium on acquisition of £86 million has been capitalised and will be written off to the profit and loss account over its estimated useful life of 20 years.
The results of this business have been consolidated in full from the date of acquisition, the effect on the results of the Group is not material.
c) On 16 December 2002 the Group’s subsidiary, Lloyds TSB Asset Finance Division Limited, completed the purchase of the business of the Dutton-Forshaw Group, a motor dealer which has a network of 38 franchised dealerships representing 14 motor vehicle manufacturers. The consideration for the purchase was £49 million which was settled in cash. The premium on acquisition of £10 million has been capitalised and will be written off to the profit and loss account over its estimated useful life of 20 years. Fair value adjustments were made to the carrying value of tangible fixed assets and in respect of certain liabilities. Negotiations regarding the completion of this acquisition are still ongoing and, whilst no further significant adjustments to consideration or fair value adjustments are expected, in accordance with the requirements of paragraph 27 of Financial Reporting Standard 6, it is noted that the goodwill arising stated above is provisional. The results of this business have been consolidated in full from the date of acquisition, the effect on the results of the Group is not material.
48 Consolidated cash flow statement a Reconciliation of operating profit to net cash 2002 2001*
Operating profit 2,618 3,132 Increase in prepayments and accrued income (21) (285) Increase (decrease) in accruals and deferred income 113 (439) Provisions for bad and doubtful debts 1,029 747 Net advances written off (675) (691) Insurance claims 233 174 Insurance claims paid (210) (178) Amounts written off fixed asset investments 87 60 Income from long-term assurance business 303 29 Transfer from long-term assurance business – 155 Interest on subordinated liabilities (loan capital) 537 515 Interest element of finance lease rental payments – 1 Depreciation and amortisation 701 550 Other non-cash movements (189) (376)
The Group is required to maintain balances with the Bank of England which, at 31 December 2002, amounted to £165 million (2001: £156 million).
Notes to the accounts c Analysis of changes in cash during the year 2002 2001 £m £m
Net assets acquired: Loans and advances 66 – Other assets 137 15 Tangible fixed assets 384 – Deposits by banks and other liabilities (590) (13)
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Share dealing facilities The Company provides a low cost, execution only, postal dealing service for the purchase and sale of Lloyds TSB shares through Lloyds TSB Registrars. The current rate of commission is 0.75%, for both purchases and sales, no minimum. For full details please contact Lloyds TSB Registrars.