Shareholder enquiries The Company’s share register is maintained by Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA. Telephone 0870 6003990; textphone 0870 6003950. Please contact them if you have enquiries about your Lloyds TSB shareholding, including those concerning the following matters: • change of name or address • loss of share certificate, dividend warrant or tax voucher • to obtain a form for dividends to be paid directly to your bank or building society account (tax vouchers will still be sent to your registered address unless you request otherwise)
Lloyds TSB Registrars operates a web based enquiry and portfolio management service for shareholders. Visit www.shareview.co.uk for details.
Efficiency ratio improved to 42.9 per cent compared with 43.4 per cent in 2000.
Profit before tax decreased 8 per cent to £3,550 million from £3,860 million. If short-term fluctuations in investment returns were excluded, statutory profit before tax would have increased by 6 per cent to £4,198 million from £3,954 million in 2000.
Final dividend of 23.5p per share, making a total of 33.7p for the year, an increase of 10 per cent.
We are the UK’s number one retail bank with the largest branch network in the UK and one of the largest telephone banking and internet banking operations in Europe. Through Cheltenham & Gloucester, we are one of the largest mortgage lenders in the UK with some £56 billion of mortgages on our balance sheet. Lloyds TSB is also a market leader in the provision of insurance and investment products through Scottish Widows, our specialist provider of life assurance, pensions and long-term
Maarten van den Bergh shareholder value During the year our share price rose by 5 per cent, outperforming both the
savings and investment products. In all of these areas we are well positioned for further income growth.
Whilst income generation is critical to our success, so is cost management. Our focus on maintaining and improving our efficiency has continued unabated and, as a consequence, we expect that our business as usual costs will grow at a slower rate than business as usual revenues, over the next few years.
We were naturally disappointed by the decision of the Secretary of State to block our proposed acquisition of Abbey National. We did not agree with the decision as competition in financial services has never been more fierce. We were absolutely right to pursue Abbey National when they put themselves in play as the transaction would have delivered additional value for shareholders and integrating companies is something we do very well.
Lloyds TSB is highly regarded for its considerable selling skills, its cost management and its ability to manage change effectively. We have a great deal we can contribute to any cross-border merger or acquisition, and we do expect that potential opportunities will arise in due course as consolidation throughout Europe accelerates. However, we remain very clear that any such deal will have to add value for our shareholders.
our people I have been tremendously impressed by the dedication and professionalism of the staff I have met during the year. It is the staff and the management of Lloyds TSB who continue to deliver the company’s success and I thank them most warmly for their continued hard work and great effort.
The clear focus of Lloyds TSB is on meeting our future vision; with total clarity of direction. Whilst we have a very successful track record of performance, the past is the past and it holds little interest for us.
• LloydsTSB.com is one of the most visited financial websites in Europe
The success of the Lloyds TSB Group in recent years has been undoubted. The combination of the skill, dedication and hard work of our 80,000 staff around the world, a large and discerning customer base, and some of the best brands in the financial services industry, together with our total focus on maximising value for shareholders, has helped to create an organisation valued at over £41 billion at the end of 2001, over three times more than our Group was worth just before the Lloyds TSB merger was announced in 1995.
Considerable progress has been made in the last 12 months to meet our strategic aims and world class aspirations.
Against a background of significant turbulence and uncertainty in global economies and stockmarkets, the Group has continued to perform well. On a business as usual basis, income rose by 10 per cent and operating profit increased by 6 per cent, with the trading profit before bad debts increasing by 11 per cent. Customer lending increased by 7 per cent, customer deposits increased by 7 per cent and the Group’s efficiency ratio improved to 42.9 per cent. Our return on equity was 29.1 per cent and return on assets 1.84 per cent. Our statutory profits fell, but this was after adverse investment fluctuations customer relationship management Our CRM systems are beginning to generate substantially more sales leads than ever before and our in-branch information systems have materially enhanced the ability of our staff to identify individual customers’ needs and to fulfil those needs.
During 2001, retail banking product sales increased by 14 per cent.
This year the four independent Lloyds TSB Foundations will receive £36 million to distribute to grassroots charities which help disadvantaged and disabled people to play a fuller role in their communities. The Foundations are among the UK’s largest general grant-making trusts, and receive one per cent of the Group’s pre-tax profits, averaged over three years, in lieu of their shareholder dividend.
In addition to our education programme, we also want to improve the condition of local communities because healthy communities mean healthy business. Lloyds TSB’s programme of regeneration initiatives aims to foster economic and social regeneration by creating access to finance for people in disadvantaged communities, backing for small business and by encouraging entrepreneurship.
The main businesses and activities of the Group during 2001 are described below: UK Retail Financial Services
TeleDirect. The Group is the third largest residential mortgage lender in the UK, with a market share of 9.5 per cent, loans outstanding at the end of 2001 of £56.6 billion and over 985,000 borrowers.
UK businesses, together with its activities in financial markets, are managed through dedicated offices in the UK
• Asset Finance provides leasing, hire purchase and loan products to the corporate and personal sectors. Lloyds TSB
Commercial Finance and Alex Lawrie Factors are leading invoice discounting and factoring companies, providing working capital finance to developing companies.
Financial Reporting Standard 18 ‘Accounting Policies’ (FRS 18). On implementation of this new standard, the Group has taken the opportunity to review the appropriateness of accounting policies in a number of areas and the following change has been made as a result. Debt securities acquired in exchange for advances to countries experiencing payment difficulties which are not (nor due to be) collateralised by US Treasury securities (‘uncollateralised bonds’)
In addition there were other items affecting the Group’s 2001 results when compared to 2000. During 2001 there were exceptional restructuring costs in support of the Group’s extensive efficiency programme (page 28), acquisition costs relating to the proposed acquisition of Abbey National (page 31), a profit on the sale of Lloyds TSB Asset
forward looking statements This document contains forward looking statements with respect to the business, strategy and plans of the Lloyds
TSB Group, its current goals and expectations relating to its future financial condition and performance. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Lloyds TSB Group’s actual future results may differ materially from the results expressed or implied in these forward looking statements as a result of a variety of factors, including UK
domestic and global economic and business conditions, risks concerning borrower credit quality, market related risks such as interest rate risk and exchange rate 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 Registration Statement on Form 20-F of Lloyds TSB
Customer lending and deposits continue to grow well with increases in market shares being achieved in many of our core retail markets. The net interest margin, excluding the impact of the funding cost of Scottish Widows, was 3.66 per cent, compared with 3.70 per cent in 2000. This reduction was more than compensated for by increased volumes and growth in other income. Non-interest income now represents 48 per cent of total income. The efficiency ratio improved to 42.9 per cent compared with 43.4 per cent in 2000. Profit attributable to shareholders increased by 8 per cent, earnings per share increased by 7 per cent to 57.6p and economic profit increased by 6 per cent to £2,204 million. The post-tax return on average shareholders’ equity was 29.1 per cent. The post-tax return on average assets was 1.84 per cent, and the post-tax return on average risk-weighted assets was 3.20 per cent.
On a statutory basis, profit before tax fell by £310 million, or 8 per cent, to £3,550 million from £3,860 million in 2000. This reduction was driven by adverse short-term fluctuations in investment earnings, totalling £648 million, caused by the overall fall in stockmarket values. Shareholders’ equity increased by 7 per cent, however earnings per share fell by 8 per cent to 45.2p. The post-tax return on average shareholders’ equity was 23.5 per cent.
National Bank of New Zealand increased by 13 per cent to £165 million. Our consumer finance business in Brazil,
Losango Consumer Finance, made a pre-tax profit of £43 million, compared with £41 million in 2000. Recent events in Argentina have led to profit before tax in 2001 being reduced by £100 million to reflect an increase in the general provision of £55 million, as a measure of prudence, and a £45 million write down of Argentine Government debt.
financial review profit before tax by main businesses UK Retail Financial Services
Total profit before tax on a business as usual basis from UK Retail Financial Services, which encompasses UK Retail
Financial Services is now beginning to be seen. We are very confident that our retail strategies will deliver superior growth in the future.
Total profit before tax from UK Retail Banking and Mortgages decreased by £77 million, or 5 per cent, to £1,588 million. Total income increased by £162 million, or 4 per cent, to £4,256 million. Net interest income increased by £164 million, or 6 per cent, to £3,115 million. Personal loans and credit card lending increased by 18 per cent and balances on current accounts and savings and investment accounts grew by 9 per cent. Mortgage balances outstanding increased by 7 per cent to £56.6 billion.
Other income decreased by £2 million to £1,141 million. There was a £21 million improvement in income earned from credit and debit cards, and increased income from added value current accounts and profits on the sale and leaseback of premises. These reflect the Group’s ongoing strategy, started some years ago, to sell and lease back a number of its branches and create greater future flexibility in the changing high street environment. This was partly offset by a £76 million reduction in ATM fees and planned reductions in unauthorised borrowing fees, and the impact of lower stockmarket related fees.
Bad debt provisions increased by £83 million, or 25 per cent, to £415 million. During 2000, UK Retail Banking had a one-off benefit of £42 million following the full centralisation of its arrears processing. In 2001 growth in provisions against personal loan and credit card balances, reflecting strong growth in the size of both portfolios, was offset by a £32 million release of general provisions relating to our mortgage business.
Profit before tax 1,588 1,665afffffffffffffffffffffffffff afffffffffffffffffffffffffff Profit before tax: Retail Banking 633 776 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,588 1,665afffffffffffffffffffffffffff afffffffffffffffffffffffffff Efficiency ratio 52.7% 51.3% Total assets (year-end) £77.9bn £71.3bn Total risk-weighted assets (year-end) £48.1bn £44.0bn
We have continued to develop our distribution channels in order to offer the broadest possible range of access points for our customers to improve service and to enhance revenue growth. Our branch network of over 2,100 branches provides a comprehensive base for the servicing and the recruitment of existing, and potential, customer needs.
Revenues in the Group’s wealth management businesses were reduced by some £33 million as a result of lower stockmarket levels, and the subsequent reduction in demand for wealth management products. The Group’s new wealth management brand, Create, was launched in October. The Create offer aims to meet the differing needs of the
Group’s affluent customers who will be the target market for the wealth management services which embrace current account banking through to personalised asset management services. The Group remains a significant player in the
UK wealth management market with over 40,000 clients and some £11 billion of funds under management.
The efficiency ratio of the Group’s total mortgage business was 20.2 per cent compared with 21.6 per cent in 2000.
Life and pensions and unit trusts 2001 2000* £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
The adequacy of the provision for redress to past purchasers of pension policies has been reviewed in the light of ongoing experience and, given that the review is now beginning to draw to a conclusion, greater certainty as to the number and size of compensation claims likely to be paid. Lower stockmarket levels have had a significant impact on total redress costs as the cost of restitution into company pension schemes rises as personal pension fund values reduce. As a result therefore, the cost of redress is forecast to increase by £70 million and an additional provision of this amount has been made. This brings the total provision charged for this purpose to £972 million, of which £897 million had been used at 31 December 2001. The pension review process should be substantially complete by 30 June 2002 and, given the closeness to completion, the Group believes that the overall level of provisions remaining will be sufficient to cover its outstanding liabilities.
After an extensive review of its existing practices carried out in the light of the judgement of the House of Lords in the guaranteed annuities case Equitable Life vs Hyman, Scottish Widows revised the way it calculates benefits for guaranteed annuity policies, with effect from 1 February 2002. As a result of this change, the terminal bonuses for most guaranteed annuity option policies will be increased, as announced on 31 January 2002. Under the terms of the transfer of Scottish Widows’ business to the Lloyds TSB Group in March 2000, an Additional Account was set up within the With Profits Fund. This Account had a value, at 31 December 2001, of approximately £1.7 billion and is available to meet any additional costs of providing guaranteed benefits on transferred policies, including guaranteed annuity option policies. The assets allocated to the Additional Account include certain hedge assets, to provide protection to the
The Group currently expects that the most likely outcome is that the balance in the Additional Account will be sufficient to meet the cost of the enhanced benefits payable to the guaranteed annuity options policyholders, as well as other contingencies. This cost, currently estimated to be approximately £1.4 billion, will be paid out over many years as policies mature. In the event that the amount in the Additional Account proves, over time, to be insufficient to meet these costs, the shortfall will be met by the Group. No provision is considered necessary for such risk.
Weighted sales (regular + 1⁄10 single) Life and pensions 556.1 389.1 423.6 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Wholesale Markets pre-tax profit increased by £191 million, or 26 per cent, to £937 million. The acquisition of
Chartered Trust contributed £116 million of net interest income (2000: £31 million), after funding costs of £25 million (2000: £12 million), £179 million of other income (2000: £53 million), £237 million of operating expenses (2000: £71 million), provisions for bad and doubtful debts of £39 million (2000: £12 million) and £19 million profit before tax (2000: £1 million).
Excluding Chartered Trust, the charge for provisions for bad and doubtful debts in Wholesale Markets increased by £34 million. The charge relating to the corporate and commercial lending portfolios increased by £53 million largely as a result of new provisions required against a small number of corporate exposures, notably a £30 million provision made against the Group’s loans and advances to one specific corporate customer, which total some £70 million. The
Assets grew by 20 per cent to £79.4 billion, an increase of £13 billion. Of this increase, over £9 billion resulted from a growth in debt securities reflecting an increase in the Group’s portfolio of asset backed and other investment grade securities, many of which were triple A rated. A high percentage of these assets, which are very liquid and marketable, have low capital weightings and represent a profitable deployment of the Group’s capital at a time when margins are improving. The residual growth in assets reflects an increase in Government guaranteed export credit transactions and general growth in our Wholesale operations. The Group has no exposure to high yield junk bonds.
Lloyds TSB Leasing maintained its position as the largest ‘big ticket’ leasing company in the UK and is now an established provider of operating leases within its chosen market sectors. Lloyds TSB Registrars had another very successful year with fee income growing by 18 per cent and pre-tax profits by 22 per cent, to £55 million. At the end of the year our registration market share of FTSE 100 companies had increased to 61 per cent and market leadership has been maintained in the important market for employee share administration services.
(banking and financial services overseas in four main areas: The Americas, New Zealand, Europe and Offshore
We are following the events in Argentina very closely and, as a result of the recent economic difficulties and the subsequent devaluation of the Argentine peso, the Group has taken a write-down of £45 million against Argentine
Net interest margin % 3.41 3.50 Domestic: Net interest income £m 4,224 3,956 Average interest-earning assets £m 121,244 110,574 Gross yield on interest-earning assets % 7.38 8.07
Income from long-term assurance business 865 735 General insurance premium income 428 399 Other operating income 708 436 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Short-term fluctuations in investment returns (648) (94) Changes in economic assumptions – 127 Pension provisions/stakeholder pension related charge (70) (180)
Other income increased by £516 million, or 13 per cent, to £4,600 million. This represented 48 per cent of total income. Excluding the impact of the Chartered Trust acquisition other income increased by £390 million, or 10 per cent, to £4,421 million.
Fees and commissions payable increased by £123 million against last year as a result of the impact of the Chartered
Trust acquisition, higher reciprocity fees and an increase in package costs relating to a number of products.
Income from long-term assurance business increased by £130 million reflecting growth in new business sales in part reflecting successful sales of the Group’s stakeholder pension product, and a change in the mix of new business to more profitable regular premium business. Other operating income increased to £708 million from £436 million in 2000. This reflects an increase in income from operating lease rentals, partly as a result of the acquisition of
Other expenses: Communications and external data processing 433 394 Advertising and promotion 152 167 Professional fees 89 126 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
We have undertaken a further review to identify all opportunities to extend the efficiency programme to deliver further productivity gains. Annualised benefits from the combined programme are now expected to rise by £190 million to £600 million in 2004. The combined efficiency programme will require total exceptional restructuring costs of approximately £300 million in 2002 and £100 million in 2003, largely to fund severance and infrastructure costs.
Total 188 217 300 100 –afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff £m £m £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Total – 75 300 500 600afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff The Group is committed to growing business as usual revenues at a materially higher rate than business as usual costs. In 2001 the Group started to benefit from the investments made in our customer relationship management and segmentation programmes, as we sold more products to more customers than ever before. We expect this positive performance to continue into 2002 and beyond, as we continue to invest for growth. The Group will therefore reinvest some of the efficiency gains achieved in the creation of new jobs to support increasing sales, enhanced customer service, and new and improved products. The enhanced efficiency programme will result in a reduction of 5,000 staff in 2002, primarily from central and support areas, whilst staff numbers in customer facing sales and service areas will increase by approximately 2,000, creating a net reduction in headcount of 3,000. It is expected that the vast majority of these reductions will be achieved through voluntary redundancy and normal staff turnover.
We will continue our clear focus on all areas of our cost base to ensure that we improve productivity wherever possible at a time when the global economic outlook is undoubtedly more uncertain than it has been for some years. These programmes will help us with our objective to deliver the level of earnings growth required each year to achieve our first quartile objective in terms of total shareholder return.
Total number of employees (full-time equivalent) 81,400 77,540afffffffffffffffffffffffffff afffffffffffffffffffffffffff * although the costs of distributing mortgages and insurance through the Lloyds TSB network are allocated to the mortgage and insurance businesses, the number of employees involved in these activities in the network is included under UK Retail Banking charge for bad and doubtful debts The total charge for bad and doubtful debts increased to £747 million from £541 million. The domestic charge increased to £570 million from £426 million, partly as a result of the acquisition of Chartered Trust which increased the charge during the year by £27 million. During 2000, UK Retail Banking had a one-off benefit of £42 million following the full centralisation of its arrears processing. In 2001 growth in provisions against personal loan and credit card balances, reflecting strong growth in the size of both portfolios, was offset by a £32 million release of general provisions relating to our mortgage business.
The charge against the corporate and commercial lending portfolios increased by £53 million largely as a result of provisions being required against a small number of corporate exposures, reflecting the slowdown in economic growth, but also as a result of a £30 million provision made against the Group’s loans and advances to one specific corporate customer, which total some £70 million. There was an £18 million reduction in the provisions made against the consumer finance portfolio of Lloyds UDT reflecting improved credit procedures. Provisions overseas increased to £177 million from £115 million, largely as a result of the £55 million general provision charge, taken as a measure of prudence, to cover ongoing credit difficulties in Argentina.
Notwithstanding the general slowdown in global economic growth, non-performing loans improved to £1,222 million compared with £1,259 million in December 2000 and £1,205 million in June 2001 and represented 1.0 per cent of total lending, compared with 1.1 per cent in December 2000 and 1.0 per cent in June 2001. Our high quality lending portfolio remains heavily influenced by our mortgage business and we are well positioned for any continued economic slowdown. In addition, the Group maintains a constant review of all large corporate and sector exposures and is satisfied that its prudent lending approach will continue to ensure that the Group’s high quality lending book remains well positioned.
Total domestic 570 426 International Banking – Normal coverage 122 115 – General provision re Argentina 55 –
Total charge 747 541afffffffffffffffffffffffffff afffffffffffffffffffffffffff Charge as % of average lending: % % (excluding general provision re Argentina)
Total charge 0.57 0.50 * restated for the effect of FRS 18 (page 61, note 1)
At the end of the year, total provisions represented over 120 per cent of non-performing loans.
Specific: aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff * restated for the effect of FRS 18 (page 61, note 1)
* restated for the effect of FRS 18 (page 61, note 1)
Notes: a) Tier 1 capital comprises mainly shareholders’ funds 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.
In October 2001, the Group sold its Brazilian fund management and private banking business, including its subsidiary Lloyds TSB Asset Management S.A., to Banco Itaú S.A. The net asset value of the business sold was less than £2 million and assets under management were approximately US$2.0 billion. The sale of this business did not affect the Group’s other Brazilian businesses. The profit before tax on the sale of £39 million has been included in the accounts of the Group for the year ended 31 December 2001.
changes in the economic assumptions applied to our long-term assurance business The shareholder ’s interest in the long-term assurance business (‘embedded value’) is calculated on the basis of a series of economic and actuarial assumptions. Following the acquisition of the business of Scottish Widows, a detailed review of the economic assumptions used in the embedded value calculation was carried out, to ensure that these assumptions remained appropriate for the enlarged life and pensions business in the context of forecast long-term economic trends. As a result of this review certain assumptions were amended, including the risk-adjusted discount rate which was reduced from 10 per cent to 8.5 per cent. The revised assumptions, which were used with effect from 1 January 2000 for Abbey Life and the bancassurance operation of Lloyds TSB Life, resulted in a one-off credit to the profit and loss account of £127 million in 2000. The same assumptions were used for the Scottish Widows business from the date of acquisition.
Trading activities are restricted to a few highly specialist authorised trading centres, the principal one being the
Group’s Treasury department in London. Most of the Group’s trading activity is to meet the requirements of customers for foreign exchange and interest rate products, from which the Group is able to earn a spread on the rates charged.
• Provision of lending guidelines. These define the responsibilities for lending officers and provide a disciplined and focused benchmark for sound credit decisions. Clear guidance is provided on the Group’s attitude towards and appetite for credit exposure on different market sectors, industries and products.
• Control of cross-border exposures. Country limits are authorised and managed by a dedicated unit, using an inhouse rating system which takes into account economic and political factors.
• Maintenance of a facilities database. Group Risk operates a centralised database of large corporate, sovereign and bank facilities designed to ensure that a consistent aggregation policy is maintained throughout the Group.
• Monitoring and controlling residual value risk exposure. The Group’s appetite for such exposure is communicated to the business by a series of time referenced sector caps, ensuring an acceptable distribution of future risk. Methods of mitigating downside risk include obtaining manufacturer’s guarantees and deficiency value insurance. For the element of downside risk not covered by such instruments, the need for provisions is regularly reviewed. Appropriate industry-specific information sources are used to assess future values and monitor the risk.
Trading activities are restricted to a few highly specialist trading centres, authorised by Group Risk, the principal one being the Group’s Treasury department in London. The level of exposure is strictly controlled and monitored within approved limits locally and centrally by Group Risk. Most of the Group’s trading activity is undertaken to meet the requirements of customers for foreign exchange and interest rate products. However, some interest rate and exchange rate positions are taken out using derivatives (forward foreign exchange contracts, interest rate swaps and forward rate agreements) and on-balance sheet instruments (mainly debt securities), with the objective of earning a profit from favourable movements in market rates. Accordingly, these transactions are reflected in the accounts at their fair value and gains and losses shown in the profit and loss account as dealing profits. Further details on trading derivatives can be found on page 80.
Various parameters are used to calculate the VaR on a given trading portfolio of positions, thus avoiding undue reliance on a single measure. Based on the commonly quoted 95 per cent confidence level, assuming positions are held overnight and using observation periods of the preceding three years, during 2001 the VaR on the Group’s global trading averaged £1.17 million (2000: £1.28 million) with a maximum of £1.62 million (2000: £1.67 million) and a minimum of £0.78 million (2000: £0.98 million). The figure at 31 December 2001 was £1.62 million (2000: £1.17 million).
Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. However, the table does not take into account the effect of interest rate options used by the Group to hedge its exposure.
To ensure that each business unit can meet its financial obligations as they fall due, the Group complies with the
The sources and maturities of assets and liabilities are closely monitored and diversified to avoid any undue concentration. A substantial proportion of deposits is made up of current and savings accounts which, although repayable on demand, have traditionally formed a stable deposit base.
Operational risk is the exposure to financial or other damage arising through unforeseen events or failure in the
Group’s operational processes/systems. Examples include inadequate or failed internal controls and procedures, human error, deliberate or malicious acts including fraud, and business interruptions.
Business units have primary responsibility for identifying and managing their operational risks. Internal control techniques to reduce their likelihood or impact include segregation of duties, exception and exposure reporting, business continuity planning, reconciliation, and delegation of authority, and are based on the submission of timely and reliable management reporting. Where appropriate, risk is mitigated by way of insurance with third parties.
Assurance: • Approval from a risk perspective of all new products launched throughout the Group, to ensure that the risks associated with them are understood by the business.
• 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 Group offers insurance products to its customers, and Group Risk actively reviews the extent to which the associated risk is underwritten internally, or reinsured with external underwriters. The risks associated with long term savings, investment and insurance products are also evaluated.
Investment strategy is determined by the term and nature of the underwriting liabilities, and asset/liability matching positions are actively monitored. General insurance exposure to accumulations of risk and possible catastrophes is
All compliance personnel also have a reporting line to Group Compliance, which sets compliance standards across the Group and provides independent reporting and assessment to the Group directors and the Board.
Group Compliance includes a dedicated unit, led by the Group Financial Crime Director, which is responsible for ensuring that the Group has effective processes in place to identify and report on suspicious transactions and customers in support of the world-wide fight against financial crime.
The Group Compliance Director has access to the Chairman, Group Chief Executive and members of senior management.
Income from associated undertakings and joint ventures (10) 3 12 14 23
Profit (loss) on sale and closure of businesses 39 – (126) 84 154 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Special items: Short-term fluctuations in investment returns (648) (94) 58 19 26
Loans and advances to banks and customers 138,159 129,722 119,196 113,706 108,290 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Long-term assurance assets attributable to policyholders 46,389 51,085 26,542 23,692 20,046 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Peter B Ellwood CBE Group Chief Executive Joined TSB Bank in 1989 as chief executive, retail banking. Appointed a director of TSB Group in 1990 and became group chief executive in 1992. Following the merger with Lloyds Bank in 1995, became deputy group chief executive of Lloyds TSB Group and then group chief executive in 1997. Joined Barclays Bank in 1961 and held a number of senior and general management appointments, including chief executive of Barclaycard from 1985 to 1989. Chairman of the Industrial Society. Former chairman of Visa International. Aged 58.
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
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 55.
Ewan Brown CBE FRSE** Chairman of Lloyds TSB Scotland A director since 1999. A non-executive director of Lloyds TSB Scotland since 1997. Executive director of Noble Grossart since 1971. Chairman of the court of Heriot-Watt University and a non-executive director of Stagecoach Holdings. Former chairman of Dunedin Income Growth Investment Trust. Aged 59.
Gavin J N Gemmell CBE* (from 17 April 2002) Chairman (designate) of Scottish Widows Joins the board on 17 April 2002. A non-executive director of Scottish Widows since 1984. Senior partner of Baillie Gifford & Co from 1989 to 2001, having held a number of appointments since joining the firm in 1964. A non-executive director of Scottish Enterprise Edinburgh and Lothian. Aged 60.
Thomas F W McKillop*† A director since 1999. Joined ICI in 1969 and held a number of senior and general management appointments before the demerger in 1993, when Zeneca was created. Chief executive of Zeneca Pharmaceuticals from 1994 to 1999 and chief executive of AstraZeneca from 1999. Pro-chancellor of Leicester University. Aged 58.
A review of the business and an indication of future developments are given on pages 2 to 39.
Dr Julius and Mr Daniels were appointed directors from 1 October 2001 and 1 November 2001, respectively, and
Act 1985, is nil. The equivalent figure for the Lloyds TSB Group in the UK is 27. This bears the same proportion to the number of days in the year as the aggregate of the amounts owed to trade creditors at 31 December 2001 bears to the aggregate of the amounts invoiced by suppliers during the year.
Miss Forbes, Dr Gibson-Smith, Dr Julius and Dr McKillop, makes recommendations to the board on the framework of executive directors’ remuneration and its cost, and determines, on the board’s behalf, specific remuneration packages for each of the chairman, the deputy chairman and the executive directors. Additionally, all the non-executive directors receive the minutes of remuneration committee meetings and have the opportunity to comment and have their views taken into account before the committee’s decisions are implemented.
The board considered whether to invite shareholders to vote on the directors’ remuneration policy, or report, at the annual general meeting in 2002. On the recommendation of the remuneration committee, the board decided not to do so, concluding that, as there had been no change in the directors’
Management Consultants were commissioned by the remuneration committee to conduct the review.
The annual incentive scheme is designed to reflect specific goals linked to the performance of the business.
In 2001 options were granted to executive directors and senior executives within the scheme limits. These limits relate to the number of shares under option and the price payable on the exercise of options. The maximum limit for the grant of options to an executive director in any one year would be equal to one and a half times annual basic salary multiplied by 3.5.
• If he were to be removed as a director or employee otherwise than in accordance with that agreement.
• If there were to be any material diminution of his duties.
The number of shares may be adjusted by the board on certain variations in the share capital of the company.
Mr Daniels’ recruitment, his service agreement provides for two years’ notice for the first eighteen months: after that, the notice
Current directors who served during 2001: Former directors who served during 2001: Former directors who served during 2000 126 aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff 3,797 381 1,286 285 5,749 5,048aad aad aad aad aad aad ‘Other benefits’ include the use of a car, private medical insurance and life insurance cover. 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. The total for the highest paid director (Mr Fairey), including the gain of £882,000 on the exercise of share options, mentioned in the table on page 50, was £1,673,000. (The total for the highest paid director in 2000 (Mr Ellwood) was £856,000). Gains on the exercise of share options arise from increases in the share price since the options were granted. Shareholders who held shares for the same periods would have gained similarly from these increases.
period reduces to one year. None of the other directors has a service agreement with a notice period of one year or more.
Column (a) above is the increase in pension built up during the year. It recognises (i) the accrual rate for the additional service based on the pensionable salary in force at the year end and (ii) the effect of pay changes in ‘real’ (inflation adjusted) terms on the pension already earned at the start of the year.
Members of the Group’s pension schemes have the option to pay additional voluntary contributions; neither the contributions nor the resulting benefits are included in the above table.
C S Gibson-Smith 3,151 3,151 M A van den Bergh 4,000 4,000 D S Julius 2,000 –
M K Atkinson Exercisable 253,056 147,600 344p Not exercisable 183,377 345,155 710p 38,583 655p 127,131 733p 1,245 591p
Gain made by Dennis Holt, who left the board on 31 August 2001 53 7 aaaaaaasfff aaaaaaasfff 1,793 27aas aas Share retention plan J E Daniels Not exercisable – 216,763 – 216,763 (see page 47)
directors’ remuneration directors’ interests (continued) Options to acquire shares (continued) Options may be exercised between 2002 and 2011.
Non-beneficial interests Directors had non-beneficial interests as follows: 1. Mr Atkinson, Mr Daniels, Mr Ellwood, Mr Fairey, Mr Kane, Mr Moore, Mr Pritchard, Mr Ross and Mr van den Bergh together with some 73,000 other employees, were potential beneficiaries in the 2,417,245 and 1,952,179 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. 749,896 and 3,100,000 shares, respectively, were held by these trusts at the beginning of the year. These holdings were 1,719,373 and 1,939,013, respectively, on 14 February 2002. In addition, the TSB Group Employee Trust held 66,536 shares at the beginning of the year and none at the end of the year. 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.
The board has a chairman’s committee, comprising the chairman, the deputy chairman, the group chief executive and his deputy. The chairman’s committee meets to discuss current issues and strategy, examine and test proposals and prepare for board meetings. It also has power to deal with routine matters between board meetings.
As described on page 52 this includes responsibility for preparing the financial statements in accordance with applicable
We review whether the corporate governance statement on pages 52 and 53 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, 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.
Interest receivable: Interest receivable and similar income arising from debt securities 530 443 Other interest receivable and similar income 10,834 10,611 Interest payable 6,420 6,467 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Net interest income 4,944 4,587 Other income Fees and commissions receivable 2,922 2,768 Fees and commissions payable (602) (479) Dealing profits (before expenses) 3 233 198 Income from long-term assurance business 30 193 615 General insurance premium income 428 399 Other operating income 708 436 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Profit on ordinary activities before tax 8 3,550 3,860 Tax on profit on ordinary activities 9 971 1,105 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
LLOYDS TSB GROUP 55 consolidated profit and loss account for the year ended 31 December 2001
Assets Cash and balances at central banks 1,240 1,027 Items in course of collection from banks 1,664 1,533 Treasury bills and other eligible bills 13 4,412 1,709 Loans and advances to banks 14 15,224 15,290 Loans and advances to customers 123,059 114,832 Non-returnable finance (124) (400)
M A van den Bergh P B Ellwood CBE M K Atkinson Chairman Group Chief Executive Group Finance Director 56 LLOYDS TSB GROUP
M A van den Bergh P B Ellwood CBE M K Atkinson Chairman Group Chief Executive Group Finance Director 58 LLOYDS TSB GROUP
Total recognised gains and losses relating to the year 2,414 2,695 Prior year adjustment in respect of the adoption of FRS 18 (note 1) 248 – Prior year adjustment in respect of the adoption of FRS 15 – (112)
historical cost profits and losses for the year ended 31 December 2001
Net cash (outflow) inflow from capital expenditure and financial investment (7,491) 358
(2000: £124 million) contribution to the QUEST (note 27) 194 74 Repayments of subordinated liabilities (loan capital) (131) (55) Capital element of finance lease rental payments (20) (4)
1 Accounting policies Accounting policies are unchanged from 2000, except that the Group has implemented the requirements of Financial Reporting Standard 18 ‘Accounting Policies’. On implementation of this new standard, the Group has taken the opportunity to review the appropriateness of accounting policies and the following change has been made as a result. Debt securities acquired in exchange for advances to countries experiencing payment difficulties which are not (nor due to be) collateralised by US Treasury securities (‘uncollateralised bonds’) were, like the original debt, previously included in loans and advances, at their written down value at the date of exchange as adjusted for any subsequent movements in bad debt provisions. This treatment is no longer considered to be the most appropriate and the uncollateralised bonds have been reclassified as debt securities where they are carried at an amount based on the market value at the date of the original exchange as adjusted for the amortisation of the discount on acquisition. A prior year adjustment, increasing reserves by £248 million, has been made to reflect the revised policy.
The consolidated accounts are prepared under the historical cost convention as modified by the revaluation of debt securities and equity shares held for dealing purposes (see g) and assets held in the long-term assurance business (see o), in compliance with Section 255A, Schedule 9 and other requirements of the Companies Act 1985 except as described below (see c), in accordance with applicable accounting standards, pronouncements of the Urgent Issues Task Force and with the Statements of Recommended Practice issued by the British Bankers’ Association and the Finance & Leasing Association.
Goodwill arising on acquisitions of or by group undertakings is capitalised. For acquisitions prior to 1 January 1998, goodwill was taken direct to reserves in the year of acquisition. As permitted by the transitional arrangements of Financial Reporting Standard 10, this goodwill was not reinstated when the Group adopted the standard in 1998.
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 stability of the industry; 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.
The Scottish Widows goodwill is not being amortised through the profit and loss account; however, it is subjected to annual impairment reviews in accordance with Financial Reporting Standard 11. Impairment of the goodwill is evaluated by comparing the present value of the expected future cash flows of the business, excluding financing and tax, (the ‘value-in-use’) to the carrying value of the underlying net assets. If the net assets were to exceed the value-in-use, an impairment would be deemed to have occurred and the resulting write-down in the goodwill would be charged to the profit and loss account immediately.
Where the customer continues to operate the account, but where there is doubt about the payment of interest, interest continues to be charged to the customer’s account, but it is not applied to income. Interest is placed on a suspense account and only taken to income if there ceases to be significant doubt about its being paid.
Land is not depreciated. Leasehold premises with unexpired lease terms of 50 years or less are depreciated by equal annual instalments over the remaining period of the lease. Freehold and long leasehold buildings are depreciated over 50 years. The costs of adapting premises for the use of the Group are separately identified and depreciated over 10 years, or over the term of the lease if less; such costs are included within premises in the balance sheet total of tangible fixed assets. Equipment is depreciated by equal annual instalments over the estimated useful lives of the assets, which for fixtures and furnishings are 10-20 years and for computer hardware, operating software and application software and the related development costs relating to separable new systems, motor vehicles and other equipment are 3-8 years.
The cost of providing post-retirement benefits other than pensions is charged to the profit and loss account on a systematic basis over employees’
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 cashflows 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 adequate evidence of the intention to hedge at the outset of the transaction and the derivative substantially matches or eliminates the exposure being hedged.
Fees and commissions receivable 2,636 286 2,922 Dealing profits (before expenses) 138 95 233 Income from long-term assurance business 181 12 193 General insurance premium income 428 – 428 Other operating income 538 170 708 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Fees and commissions receivable 2,480 288 2,768 Dealing profits (before expenses) 149 49 198 Income from long-term assurance business 607 8 615 General insurance premium income 399 – 399 Other operating income 269 167 436 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
UK corporation tax Current tax on profits for the year 836 941 Adjustments in respect of prior years (14) 3
The UK corporation tax charge includes £74 million (2000: £171 million) in respect of notional tax on the shareholder’s interest in the increase in the value of the long-term assurance business.
Bills sold or matured (26,213) (80) (26,293) Amortisation of premiums and discounts – 81 81 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Provisions for bad and doubtful debts (2) (6) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 15,224 15,290afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
15 Loans and advances to customers 2001 2000* £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 122,935 114,432afffffffffffffffffffffffffff afffffffffffffffffffffffffff Loans and advances by residual maturity repayable: 3 months or less 20,468 20,968 1 year or less but over 3 months 9,792 8,216 5 years or less but over 1 year 27,910 24,313
Specific General Specific General £m £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
The classification of lending as domestic or international is based on the location of the office recording the transaction, except for certain lending of the international business booked in London.
At 31 December 2001 11,960 759afffffffffffffffffffffffffff afffffffffffffffffffffffffff The Company’s shareholding in group undertakings represents an investment in an unlisted bank.
LLOYDS TSB GROUP 69 notes to the accounts 18 Debt securities (continued)
Balance sheet amount at 3,365afffffffffffffffffffffffffff Balance sheet amount at 3,037afffffffffffffffffffffffffff £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Residual value expected to be recovered in: 1 year or less 156 134 2 years or less but over 1 year 119 108 5 years or less but over 2 years 388 367 aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff
Leases on which the commitment is due to expire in: 5 years or less but over 1 year 33 3 18 2 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 221 8 205 3afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Obligations under finance leases were: Equipment Equipment £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Lloyds TSB Group plc sponsors the Lloyds TSB Group Employee Share Ownership Trust, a discretionary trust for the benefit of employees and former employees of the Lloyds TSB Group. The Company has lent £22 million to the trustees, interest free, to enable them to purchase Lloyds TSB Group plc ordinary shares, which are used to satisfy options granted by the Company or to meet commitments arising under other employee share schemes. Under the terms of the trust, the trustees have waived all but a nominal dividend on the shares they hold. The cost of providing these shares is charged to the profit and loss account on a systematic basis over the period that the employees are expected to benefit. At 31 December 2001, 2 million shares were held by the trustees with a book value of £15 million and a market value of £15 million. (2000: 3 million shares with a book value of £24 million and a market value of £22 million).
Interest receivable 843 875 Pensions prepayment 894 768 Deferred expenditure incurred under cash gift and discount mortgage schemes 256 242 Other debtors and prepayments 1,197 1,080 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 3,190 2,965afffffffffffffffffffffffffff afffffffffffffffffffffffffff 30 Long-term assurance business a Methodology
• The effects of changes in assumptions other than economic assumptions and other items.
Changes in economic assumptions: this represents the effect of changes in the economic assumptions referred to in f).
Operating profit 865 735 Short-term fluctuations in investment returns (602) (67) Changes in economic assumptions – 127 Exceptional items – Pension provisions (see d) (70) (100) – Stakeholder pension related charge (see e) – (80)
During the early 1990s, there was increasing concern in the UK that many customers had been given poor advice when they were advised to set up their own personal pension plan and that they would, in fact, have been in a better position if they had remained in, or joined, employer sponsored pension schemes. The regulator of the UK pension industry (now the responsibility of the Financial Services Authority) carried out an industry wide investigation into the conduct of business involving the transfer of pensions. The conclusion of the investigation was that a large number of customers had been poorly advised, by insurance companies and intermediaries across the industry. As a result of this investigation the regulator established an action plan for the UK pensions industry to follow in reviewing all cases of possible misselling and determining the necessary compensation. As the review of pension cases in the Group has progressed, provisions have been established for the estimated cost of compensation.
A further review of the adequacy of the provision has been carried out as at 31 December 2001. Lower stock market levels have had a significant impact on total redress costs as the cost of restitution into company pension schemes rises as personal pension fund values reduce. As a result of this and the fact that there is now greater certainty as to the number and size of compensation claims to be paid, an additional provision of £70 million has been made.
During 1999, the government announced changes intended to encourage more of the population to provide retirement income for themselves through increased rates of savings. One of these initiatives was the introduction of stakeholder pensions with effect from April 2001; a key feature of these products is that charges are limited to 1 per cent per annum, which is significantly lower than historic charging rates on other personal pension products. In anticipation of the introduction of stakeholder pension products in 2001, during 2000 the Group decided to reduce the charges made on certain existing policies, resulting in a cost of £80 million.
Following the acquisition of Scottish Widows in 2000, a detailed review of the economic assumptions was carried out to ensure that they remained appropriate. As a result certain changes were made which had effect from 1 January 2000 for the Group’s existing long-term assurance businesses and resulted in a credit to the profit and loss account of £127 million. The same assumptions were used to account for the Scottish Widows business from the date of acquisition.
Repayable on demand 6,634 4,330 Other deposits by banks with agreed maturity dates or periods of notice by residual maturity repayable: 3 months or less 14,227 9,712 1 year or less but over 3 months 2,529 1,790 5 years or less but over 1 year 751 695 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 24,310 16,735afffffffffffffffffffffffffff afffffffffffffffffffffffffff 33 Customer accounts 2001 2000* £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Repayable on demand 80,635 74,404 Other customer accounts with agreed maturity dates or periods of notice by residual maturity repayable: 3 months or less 19,902 21,064 1 year or less but over 3 months 2,889 3,522 5 years or less but over 1 year 3,369 2,582 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 109,116 101,989afffffffffffffffffffffffffff afffffffffffffffffffffffffff *restated (see note 1)
At 1 January 2001 – restated 1,683 Exchange and other adjustments 7 Adjustments on disposal (44) Tax provided 73 aaaaaffffffffffffffffffffffffff
Provision has been made for the liability to tax on overseas earnings which are expected to be remitted to the UK. No provision has been made for the liability to tax which could arise if premises, to the extent that the tax base cost has been reduced by rollover relief, or group undertakings were disposed of at their balance sheet amounts. It is expected that the majority of these assets will be retained in the business and that, in view of the substantial number of assets involved and the law relating to rollover relief, the likelihood of any such material tax liability arising is remote; no useful purpose would be served by attempting to quantify it. If deferred tax were to be provided in respect of general bad debt provisions the deferred tax asset would be £90 million.
notes to the accounts 39 Other provisions for liabilities and charges Post- Vacant Pension Insurance retirement leasehold obligations provisions healthcare property Other Total £m £m £m £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Insurance provisions The Group’s general insurance subsidiary maintains provisions for outstanding claims which represent the ultimate cost of settling all claims arising from events which have occurred up to the balance sheet date and these include provisions for the cost of claims notified but not settled and for claims incurred but not yet reported. In addition, in line with the requirements of the Insurance Companies (Reserves) Act 1995, claims equalisation provisions are maintained in relation to property, credit and suretyship business. The majority of provisions in respect of claims will be settled in the following year, although new provisions will then be required in respect of claims arising from that year. The level of the claims equalisation provision will be adjusted annually, taking into account the guidelines contained in the legislation, and such provisions will be held for as long as the Group continues to write the relevant types of general insurance business.
† Subordinated Floating Rate Notes 2020 (€100 million) 61 62 – –
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,006 4,119 413 512afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Total subordinated liabilities 7,657 7,510 413 512afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer.
Euro Step-up Non-Voting Non-Cumulative Preferred Securities (€430 million) callable 2012* 261 267 Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015† 248 248 6.625% Perpetual Capital Securities (€750 million)§ 451 –
LLOYDS TSB GROUP 77 notes to the accounts 40 Subordinated liabilities (continued)
At 31 December 2001 8,047 2,496afffffffffffffffffffffffffff afffffffffffffffffffffffffff The Group profit and loss account reserves at 31 December 2001 include £1,564 million (2000: £1,396 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 cumulative amount of premiums on acquisitions written off against reserves during previous years amounts to £2,271 million of which £1,817 million was within the last 10 years.
At 31 December 2001, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons and with officers included: Number of Total Number of Total persons £000 persons £000 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Details of the Group’s associated undertakings and joint ventures are provided in note 21. Information relating to transactions entered into between Group undertakings and the joint ventures and details of outstanding balances at 31 December 2001 are also shown in note 21.
The following balances relating to the Group’s pension schemes are included in the consolidated balance sheet: £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
The total cost for the Group in 2001 was £3 million (2000: £3 million). For the principal scheme, the latest actuarial valuation of the liability was carried out at 31 December 2000. This valuation showed the Group’s liability to be £72 million, which had been fully provided for at that date. The principal actuarial assumptions adopted were that, over the long term, the valuation discount rate and the rate of increase in medical costs would be 4 per cent and 3 per cent respectively higher than annual price inflation.
As explained in note 1, the Group has adopted the requirements of Financial Reporting Standard 17 “Retirement Benefits” during the year. Under the transitional arrangements of this accounting standard the Group continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24, but the following additional disclosures are required.
The majority of the Group’s employees are members of the defined benefit sections of Lloyds TSB Group Pension Schemes No’s 1 and 2. During the year ended 31 December 2001, the Group made no contributions to these schemes. Since the defined benefit sections of these schemes are now closed to new members and the age profile of the active members is increasing, under the projected unit method, the current service cost will increase as the members of the schemes approach retirement.
Net assets excluding net pension asset 10,168 Net pension asset 356 aaaaaffffffffffffffffffffffffff
Other: Other items serving as direct credit substitutes 460 266 Performance bonds and other transaction-related contingencies 1,469 1,271 Other contingent liabilities 2 4 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 7,963 5,147afffffffffffffffffffffffffff afffffffffffffffffffffffffff Commitments: Documentary credits and other short-term trade-related transactions 354 238 Forward asset purchases and forward forward deposits placed 783 779 Undrawn note issuing and revolving underwriting facilities 35 53 Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year maturity 42,594 33,815 1 year or over maturity 9,576 7,701
The limited voting ordinary shares are held by the Lloyds TSB Foundations for England & Wales, Scotland, Northern Ireland and the Channel Islands; these shares do not carry any entitlement to dividends. Lloyds TSB Group plc has entered into deeds of covenant with the four foundations, under the terms of which Lloyds TSB Group plc makes annual donations to the foundations equal, in total, to 1% of the Group’s pre-tax profits (after certain adjustments) averaged over three years. The deeds of covenant can be cancelled by the Group at nine years’ notice.
The Group uses derivatives as part of its trading activities and to reduce its own exposure to fluctuations in interest and exchange rates.
notes to the accounts b Interest rate sensitivity gap analysis for the non-trading book
The table below shows a comparison by category of book values and fair values of the Group’s on-balance sheet financial assets and liabilities.
At 31 December 2001, the unrecognised gains on financial instruments used for hedging were £242 million (2000: £200 million) and unrecognised losses were £820 million (2000: £457 million).
a Reconciliation of operating profit to net cash 2001 2000* inflow from operating activities £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Net cash outflow 180 5,110afffffffffffffffffffffffffff afffffffffffffffffffffffffff f Acquisition of group undertakings 2001 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Number % Millions % aaasfffaafaaaaafff aaasfffaafaaaaafff aaasfffaafaaaaafff aaasfffaafaaaaafff aaasfffaafaaaaafff aaasfffaafaaaaafff aaasfffaafaaaaafff aaasfffaafaaaaafff 980,513 100.00 5,564.3* 100.00aassfffs aassfffs aassfffs aassfffs *Includes 813 million shares (14.6%) registered in the names of some 855,000 individuals. 200 million shares (3.6%) are held by over 63,000 staff and Group pensioners, or on their behalf by the trustee of the staff profit sharing schemes.