10 Financial review 42 Five year financial summary 44 The board 46 Directors’ report 48 Directors’ remuneration 55 Corporate governance 57 Independent auditors’ report 58 Consolidated profit and loss account 59 Consolidated balance sheet 61 Company balance sheet 62 Other statements 63 Consolidated cash flow statement 64 Notes to the accounts 93 Information for shareholders
Profit before tax, excluding changes in economic assumptions and investment variance 3,504 4,020 Changes in economic assumptions 55 – Investment variance (952) (859)
Profit attributable to shareholders decreased by 20 per cent to £1,781 million.
Significant repositioning of UK Retail Banking to support customer franchise development and growth.
Improved market share in many key product areas, including personal lending, credit cards, life, pensions and long-term savings and, in the fourth quarter of 2002, mortgages.
Market leadership in personal finance During 2002, the Group increased its market share in both personal loans and credit card lending. Personal loan balances increased by 15 per cent to £8.6 billion, while more than 700,000 new credit cards were issued, leading to a growth of 27 per cent in credit card balances outstanding to £4.9 billion.
Our results Notwithstanding the slowdown in the UK and all major global economies, Lloyds TSB continues to trade satisfactorily, with strong market share performances in many of its key product areas, and good growth in customer lending and deposits. During the year the Group also achieved its target of an average 2.5 products per customer, whilst maintaining its strict control on operational expenses with costs in 2002, excluding acquisitions and growth in operating lease depreciation, held flat, in part as a result of the significant investment in efficiency programmes made over the last three years. Profit before tax for the year, however, fell by 18 per cent to £2,607 million, partly as a result of a significant increase in provisions for bad and doubtful debts but also as a result of a number of special items including additional provisions for redress to past purchasers of certain pension and endowment products and a higher negative investment variance of £952 million in our insurance businesses, reflecting the weakness of equity markets.
This industry is already immensely competitive. If the Government wishes to foster greater competition within financial services it should recognise that the level of returns available must be acceptable to both existing and new competitors.
If interference continues, there is a danger that one of the UK’s great success stories – the financial services industry – will be less able to compete on the world financial scene where the really strong players will dominate in the future.
The turmoil surrounding the operating, regulatory and stockmarket environment in which we operate has been unprecedented in recent times.
Our people In all of my dealings with staff throughout the Group it never ceases to amaze me how professional and motivated the entire staff of the Group continues to be, in the face of very difficult circumstances. Lloyds TSB’s continuing success is underpinned by the significant contribution made by its entire staff and the Group’s people strategy will continue to be shaped around harnessing this superb commitment, creating a workplace where staff understand their roles and contribution, and continue to feel proud to work for Lloyds TSB. I know the management and staff remain as committed as ever to the future development of the Group and delivery of value to its shareholders.
Our future The business environment in which we operate is characterised by increasing levels of competition, volatile equity markets and increasing government intervention in, and regulation of, the financial services industry. Against this backdrop, Lloyds TSB will continue to focus on its long standing principles of prudent and sustainable revenue growth from the creation of value for customers, tight management of its cost base and strong credit risk management. With a clear focus on these core strengths, and supported by a dedicated and resourceful team of people, Lloyds TSB is well positioned for future growth and the challenges ahead.
profit and loss account. The encouraging side of the story is the growth in market share in personal loans, credit cards, general insurance, and life and pensions, and the fact that we sold more products to more people than we have ever done before, with a record net increase in products of 1.6 million compared with 1.3 million last year. Our improved crossselling ratio of 2.5 products per customer remains industry leading. Customer lending increased by 9 per cent and customer deposits increased by 7 per cent. Our efficiency programme delivered benefits in 2002 in line with our forecasts resulting in a significant improvement in our underlying efficiency. Excluding the impact of acquisitions and operating lease depreciation, operating costs were flat in comparison with 2001, and there was a reduction in our headcount of over 4,000. At the same time we have continued to invest heavily in improving our service to customers.
Whilst overall credit quality continues to be robust, the Group does have a cautious outlook on a number of corporate sectors and exposures which has led to these higher levels of corporate provisioning. 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. During 2002 the Group increased its general provision for its exposure to Argentina by £50 million and the Group’s total exposure to Argentina at the end of the year had been reduced to £190 million, net of provisions and charges, compared to £610 million a year ago.
As a Group we have a unifying vision whereby our first strategic aim is to be first choice for our customers because we understand and meet their needs more effectively than any of our competitors. It is a vision of a business where we truly create value for our customers; where our customers trust us enough to give us the privilege of looking after more of their business. It is a vision of a business where our staff understand the Group’s strategy, understand what we are seeking to do, agree with it and know that what they do is vital to our future success. Our second strategic aim of being a leader in our chosen markets also links in to the customer. Market leaders earn higher returns and generate greater value, some of which can be passed on to the customer. Our third strategic aim of driving down day-to-day operational costs allows the Group to create headroom to invest for the future. Throughout the Group these three themes underpin the development of our businesses and in the last twelve months considerable progress has been made to meet these strategic aims and our world class aspirations.
strengthened its leading position in the motor finance market, growing its business by 17 per cent. Lloyds TSB is also the leading contract hire and fleet management company in the
On a personal note, we announced in December last year that I will retire as Group Chief Executive on 31 May 2003, shortly after my 60th birthday. I have thoroughly enjoyed my time at Lloyds TSB and it has been a great privilege to lead this organisation as Chief Executive for the last six years. I am delighted to hand over the mantle to Eric Daniels, who shares my passion for this organisation, and my drive to create value for our customers and shareholders by providing excellent products and superior service. He will be supported by a fantastic team of over 79,000 people across the Group to whom my heartfelt thanks go for their help and support over the years.
Lloyds TSB is an extremely successful organisation with strong returns on shareholders’ equity and a first class efficiency ratio. However, the Group does operate in a world of greater competitive ferocity, greater regulation and a tough global economic environment, exacerbated by concerns over geo-political stability. The Group has continued to strive constantly to refresh existing and new revenue streams, build upon its financial and intellectual capital and optimally manage risk and cost. These are not easy times but we have three businesses, UK Retail Banking and Mortgages, Insurance and Investments, and Wholesale Markets and International Banking, all of which have considerable scope for sustainable profitable growth and which can build on the track record in income growth which the Group has seen over the last six years, with costs growing at a considerably slower pace. For any successful business to maintain and improve on such an excellent track record it is important to go forward with realism, confidence and excitement about the future. This, we do.
Peter Ellwood CBE Group Chief Executive mortgage balancesup 10% to £62.5 billion
The leading corporate donor in the UK Since 1996, the Lloyds TSB
• Card Services provides a range of card-based products and services, including credit and debit cards and card transaction processing services for retailers. The Group is a member of both the VISA and MasterCard payment systems and is the third largest credit card issuer in the UK.
• Internet Banking. Internet Banking provides online banking facilities for personal and business customers and enables them to conduct their financial affairs without using the branch network. Over 1.9 million customers have registered to use the Group’s internet banking services.
• Business Banking. Small businesses are served by dedicated business managers based in some 450 locations throughout the UK. Customers have access to a wide range of tailored business services ranging from traditional banking products through factoring, insurance and investments to nonfinancial solutions to their business problems such as Debtor Management service providing legal support to help customers recover debts and Prospect Finder providing customers with a tailored list of potential customers for their business. Lloyds TSB is one of the leading banks for new business start-ups with around one in five opening accounts with the Group.
• General insurance. Lloyds TSB General Insurance provides general insurance and broking services through the retail branches of Lloyds TSB Bank and C&G, and through a direct telephone operation and the internet. The business is the market leader in the distribution of household insurance in the UK.
Wholesale Markets The Group’s relationships with major UK and multinational companies, banks and financial institutions, and mediumsized UK businesses, together with its activities in financial markets, are managed through dedicated offices in the UK and a number of locations overseas, including New York.
International Banking • The Americas. The Group has operated in The Americas for over 130 years and has offices in Brazil, Argentina, Colombia and 6 other countries. In addition there are private banking and investment operations in the United States.
• Europe. The Group has private banking operations for wealthy individuals outside their country of residence. The business is conducted through Switzerland and through four other countries overseas. There are additional corporate and private banking operations in Belgium, Netherlands, France and Spain.
• Offshore Banking comprises all the Group’s offices in the Channel Islands and Isle of Man providing a full range of retail banking, private banking, trust and financial services to overseas residents and islanders, together with deposit services offshore for UK residents.
The new standard requires the Group to include the assets of its defined benefit schemes on its balance sheet together with the related liability to make benefit payments. The profit and loss account includes a charge in respect of the cost of accruing benefits for active employees, any benefit improvements and the cost of severances borne by the schemes; the expected return on the schemes’ assets is included as other finance income less a charge in respect of the unwinding of the discount applied to the schemes’ liabilities. Under SSAP 24 the profit and loss account included a charge in respect of the cost of accruing benefits for active employees offset by a credit representing the amortisation of the surplus in the Group’s defined benefit schemes; a pension prepayment was included in the Group’s balance sheet together with a provision in respect of post-retirement healthcare obligations. An adjustment has been made reducing shareholders’ equity at 31 December 2001 by £236 million to reflect the revised policy.
Provisions/claims – – – – – Joint ventures – – – – –
Original Investment Restated results UITF 33 FRS 19 FRS 17 variance results 2001 £m £m £m £m £m £m
Provisions/claims 981 – – – – 981 Joint ventures (10) – – – – (10) Profit on sale of businesses 39 – – – – 39
Summary of group results In 2002 the Group’s profit before tax decreased by £554 million to £2,607 million from £3,161 million in 2001. Total income decreased by £11 million whilst operating expenses increased by £139 million, or 3 per cent. Excluding changes in economic assumptions, investment variance, endowment and pension related provisions, investment returns on the Group’s pension scheme assets, the netting of operating lease depreciation and the impact of acquisitions, total income increased by 2 per cent whilst total costs, excluding the impact of acquisitions and operating lease depreciation, were held flat
Profit attributable to shareholders was 20 per cent lower at £1,781 million and earnings per share decreased by 21 per cent to 32.0p.
Wholesale Markets pre-tax profit decreased by £226 million, or 27 per cent, to £626 million, partly as a result of a substantial increase in provisions for bad and doubtful debts. Growth in customer lending, increased operating lease assets and the impact of acquisitions in the asset finance business resulted in a £174 million, or 9 per cent, increase in total income. Operating expenses increased by £202 million, again largely as a result of the asset finance acquisitions and higher operating lease depreciation. The provisions charge for bad and doubtful debts increased by £156 million. In 2002, provisions against Group loans and advances to certain large US corporate customers, caused by accounting and operational irregularities, totalled some £100 million. There was also an increase in provisions within the corporate lending portfolio, reflecting weak equity markets and the slowdown in economic activity in the UK. In the less favourable economic and trading environment, all the individual businesses continued to perform well.
International Banking pre-tax profit was £22 million, or 6 per cent, higher at £379 million compared with 2001. Profits from New Zealand increased by 32 per cent to £218 million as a result of good growth in all core businesses. Our consumer finance business in Brazil, Losango
Banking the provisions charge increased by £125 million, or 28 per cent, to £564 million, largely as a result of volume related asset growth in the personal loan and credit card portfolios which grew by 15 per cent and 27 per cent respectively. In Wholesale Markets the provisions charge increased by £156 million to £311 million, reflecting the higher provisions against certain large US customers and an increase in the provisions charge from the corporate lending portfolio, reflecting weak equity markets and the slowdown in economic activity in the UK.
Group totalled £1,767 million, representing over 120 per cent of non-performing loans (2001: 120 per cent), and the level of non-performing loans increased to £1,414 million, compared with £1,222 million in December 2001, largely reflecting higher levels of non-performing lending in the corporate portfolio, and general portfolio growth throughout the Group. Importantly, non-performing lending as a percentage of total lending was unchanged at 1.0 per cent. The Group’s customer lending portfolio continues to be heavily infuenced by our high quality, relatively low risk, mortgage business and, as a result, the Group remains well positioned to withstand a continued economic slowdown.
Scottish Widows’ investment policy for the with-profit fund is determined, in conjunction with the views of the fund’s investment advisors, taking into account the long-term commitments of the fund. From time to time investment policy necessitates the use of derivatives and other hedging instruments, and at the end of 2002 such instruments were held to provide some protection against the short-term volatility in the UK equity markets. The Group keeps its investment policy under review. The equity backing ratio for traditional with-profits policies at 31 December 2002 was 53 per cent (equities 40 per cent; property 13 per cent). Scottish Widows remains sufficiently well capitalised to be able to sustain further stockmarket falls without an injection of capital. During 2002 the Group has not needed to inject additional capital from outside the Group’s insurance businesses into Scottish Widows. Scottish Widows is, however, well positioned to participate in a rapidly changing market and to support business growth, as well as maintaining prudent financial management. The Group may inject some capital into Scottish Widows if the level of the FTSE 100 index falls to, and remains at, approximately 3,000. At this FTSE 100 level the capital injection is unlikely to exceed £300 million.
Changes in economic assumptions – 55 – – – 55 Investment variance – (952) – – – (952)
Mortgages Investments Markets Banking group items Total Year ended 31 December 2001 £m £m £m £m £m £m
PhoneBank and PhoneBank Express, is one of the largest in the UK with over 3 million registered customers. Our telephone banking contact centres handled some 46 million calls in 2002, making extensive use of interactive voice recognition technology to improve efficiency and service.
Business Banking continued to grow its customer franchise with customer deposits growing by 8 per cent to £9,412 million from £8,715 million in December 2001, and customer lending by 1 per cent to £5,487 million from £5,435 million in December 2001. Following the launch of the
Group’s unique segmentation strategy for the Business Banking market in 2001, roll-out to all existing customers is complete with customers now migrated to their choice of relationship offer. Underpinning these offers, and central to ensuring that our customers continue to grow their businesses successfully, is RouteMap, a suite of diagnostic tools to help and support customers. Use of success4business.com, our small business portal, also continues to grow.
A slightly improved arrears position and the beneficial effect of house price increases have meant that bad debt provisions remained at low levels.
* excluding changes in economic assumptions and investment variance £m £m
Operating profit from Insurance 1,229 1,411 Scottish Widows Investment Partnership 2 10
The Group’s market share of the life, pensions and unit trusts market to September 2002 was 5.3 per cent, with a market share in the third quarter of 2002 of 5.9 per cent. By distribution channel, weighted sales from independent financial advisors rose by 25 per cent as a result of strong life and pensions sales. This compares with an increase of 11 per cent in the first half of the year, compared with the first half of 2001. Our share of the IFA market to September 2002 was 4.5 per cent, a significant improvement on the 3.8 per cent market share in 2001. In the branch network weighted sales were 7 per cent lower, as a result of the substantial reduction in sales of unit trusts, in comparison to a 10 per cent reduction in the first half of the year, compared with the first half of 2001. Scottish Widows remains the leading equity-based ISA provider in the UK as confirmed by the Investment Management Association (IMA) and the Group remains well placed in this sector of the market.
External unit trust sales: Regular payments 71.5 65.0 Single amounts 1,009.5 1,335.5
Investment earnings 214 247 Life and pensions distribution costs (283) (255)
Profit before tax from existing business fell by 61 per cent to £145 million, reflecting the £135 million increase in provisions for redress to past purchasers of endowment and pension products, and a reduction of £55 million in benefits from experience variances and actuarial assumption changes, largely reflecting the implementation of revised actuarial mortality assumptions. The expected return from existing business, which reflects the unwinding of the long-term discount rate applied to the expected cash flows from the Group’s portfolio of in-force business, decreased by £34 million, or 11 per cent, to £273 million. This reduction reflects the lower value of in-force business at the beginning of the year, caused by the effect of lower stockmarkets on annual management charges.
The adequacy of the provision for redress to past purchasers of pension policies has been reviewed as lower stockmarket levels have increased the expected remaining cost of redress. The Group has made a final provision for this purpose of £40 million. The Group is also carrying out, in conjunction with the regulator, an investigation into the appropriateness of sales of a stockmarket related investment product, the Extra Income &
As a leading distributor of general insurance products, Lloyds TSB now has over 9 million policies in force and we estimate that the Group is a
In 2002 these acquisitions contributed £101 million of income, and £102 million of operating expenses, including goodwill amortisation of £3 million, resulting in a loss before tax of £1 million. The acquisitions are expected to achieve substantial synergies in 2003 and beyond.
Assets grew by 12 per cent to £89 billion, an increase of £10 billion. Of this increase, some £5 billion resulted from a growth in debt securities, reflecting an increase in the Group’s portfolio of asset backed securities, most of which were triple A rated, and £2.6 billion from an increase in customer lending. The Group’s policy to grow its asset backed securities portfolio is conservative, only targeting high quality tranches of asset backed securities issues, concentrating on mainstream asset classes such as mortgages, credit cards, student loans and retail car loans. The portfolio allows the Group to provide a securitised asset funding service for its corporate clients and to participate in structured deals with a limited number of global financial institutions. The high level of recent growth in the portfolio largely reflects the development of the Group’s capability in this market and, having now achieved a meaningful presence in the market, it is not intended that recent rates of portfolio growth will continue into 2003 and beyond.
Profit on sale of Lloyds TSB Asset Management S.A. – 39
The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly disabled and disadvantaged people, to play a fuller role in society. The Foundations receive 1 per cent of the Group’s pre-tax profit, averaged over three years, instead of the dividend on their shareholdings. In 2003 they will receive £33 million (2002: £36 million) to distribute to charities, making them in aggregate the largest independent grant giving body in the UK.
Notes: a) Gross yield is the rate of interest earned on average interest-earning assets. b) Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities.
Markets there was an 18 basis point reduction caused by further growth in finer margin corporate lending. The interest spread reduced by only 3 basis points.
Income from long-term assurance business (303) (29) General insurance premium income 486 428 Other operating income 763 708
Other income decreased by £118 million, or 3 per cent, to £3,542 million, partly as a result of a £38 million reduction in income from the combined effect of changes in economic assumptions and the higher negative investment variance.
Insurance broking commission income increased by £119 million, compared with 2001, with continued strong growth in creditor insurance products. Income from credit and debit card services increased by £82 million, mainly as a result of higher merchant service charges and fees.
Fees and commissions payable increased by £43 million against last year as a result of higher reciprocity fees and an increase in package costs relating to a number of products.
Dealing profits decreased by £45 million compared with 2001 as a result of a reduction of £60 million in gains from securities trading. Income from long-term assurance business decreased by £274 million however, excluding changes in economic assumptions, investment variance and the impact of a £135 million increase in provisions for redress to past purchasers of endowment and pension products, it was £115 million lower, partly reflecting a reduction of £55 million in benefits from experience variances and actuarial assumption changes.
Abbey National Vehicle Finance, were partly offset by a £35 million reduction in the realisation of venture capital gains by Lloyds TSB Development
Other expenses: Communications and external data processing 446 483 Advertising and promotion 147 154 Professional fees 113 110
Efficiency ratio, excluding changes in economic assumptions and investment variance 50.3% 49.0%
Efficiency programme In February 2000 the Group announced the commencement of a substantial medium-term efficiency programme to improve the Group’s overall efficiency, to maintain our continuing focus on operating costs and to support increasing levels of investment in the Group’s businesses. The efficiency programme has been a major contributing factor to the net reduction in Group staff numbers of 4,191, after adjusting for an additional 2,328 staff following a number of acquisitions, against the targeted net reduction in staff numbers of 3,000 by the end of 2002.
Number of employees (full-time equivalent) Staff numbers decreased by 1,863 to 79,537 during the year, notwithstanding an increase of 2,328 from acquisitions made during the year.
Wholesale Markets 311 155 International Banking 162 183 Central group items (7) (6)
Closing provisions as % of lending (excluding unapplied interest) £m % £m %
(including actuarial reserves but before the required regulatory minimum solvency margin) expressed as a percentage of the liabilities. It is derived from annual insurance returns which are due to be completed in March 2003, and have yet to be finalised. However, based on current expectations, at 31 December 2002 the free asset ratio for Scottish Widows plc was an estimated 10.0 per cent, compared with 11.5 per cent at 31 December 2001. This free asset ratio included some £400 million allowance for future profits (December 2001: nil). After adjusting for the inclusion of the required regulatory minimum solvency margin within liabilities, the Scottish Widows plc ratio was an estimated 5.5 per cent at 31 December 2002, compared with 6.6 per cent at 31 December 2001.
needs and maximise shareholder value by aligning risk management with the corporate strategy; assessing the impact of emerging risks from new technologies or markets; and developing risk tolerances and mitigating strategies.
The Group Executive Committee is responsible to the Group Chief Executive for the development and implementation of strategy, operational plans, policies and budgets. It monitors operating and financial performance, assesses and controls risk, and prioritises and allocates resources.
The Group Risk Committee is responsible to the Group Executive Committee for protecting shareholder value through assessment and control of the high level risks assumed by the Group; approving the Group’s high level policies; ensuring that the necessary culture, practices and systems are in place to enable the Group to meet its internal and external obligations; and reviewing the allocation and deployment of capital at risk, taking into account the Group’s risk appetite.
Competitive advantage The EWRM model strengthens the Group’s ability to identify and assess risks; aggregate risks and define the corporate risk appetite; develop solutions for reducing or transferring risk, where appropriate; and exploit risks to gain competitive advantage, thereby increasing shareholder value.
The risk of loss from poor corporate governance at Group and business unit level, sub-optimal organisational structuring, or failure to recruit, manage and retain appropriate skilled staff to achieve business objectives.
The Group seeks to identify and classify risks in a timely manner. The likelihood of risks crystallising and the significance of the consequent impact on the business, the Group and its customers are evaluated. The Group’s business control environment ensures effective and efficient operational management; reliability, integrity and consistency of financial and other reporting; and compliance with governing laws and regulations. Business unit directors ensure that material risks are reported to the relevant Group Executive Director and to Group Risk Management.
Group Audit independently reviews adherence to the policies and processes that make up the control environment, disseminating best practices throughout the Group in the course of its monitoring and corrective action activities. The Group Audit Director meets regularly with the Group Chief
– Recognise the contribution of individuals in the context of the pay market and the performance of the business in which they work, and reward appropriately.
The use of risk-based economic capital and regulatory capital is closely monitored at business unit and Group level. The Group’s equity attribution model covers credit, market, insurance, business and operational risks.
The Group uses a ‘Master Scale’ rating structure with ratings corresponding to a range of probability of future default.
Concentration Risk – formulation of concentration limits on certain industries and sectors. Group Risk Management sets Sector Caps that reflect risk appetite, and monitors exposures to prevent excessive concentration of risk.
Credit Risk Arising from the Use of Derivatives – note 46 on page 87 shows the total notional principal amount of interest rate, exchange rate and equity contracts outstanding at 31 December 2002. The notional principal amount does not, however, represent the Group’s real exposure to credit risk, which is limited to the current cost of replacing contracts with a positive value to the Group, should the counterparty default. This replacement cost is also shown in note 46. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure.
The processes by which Group Risk Management discharges its responsibilities in respect of credit risk include the following: – Formulation of high-level credit policies designed to ensure a balanced and managed approach to the identification and mitigation of credit risk.
– Establishment and maintenance of the Group’s Large Exposure and Provisioning policies, in accordance with regulatory reporting requirements.
– Authority to delegate lending authorities within business units resting with officers holding divisional delegated lending authority. All material authorities are advised to Group Risk Management.
Trading Portfolios – market risk within the Group’s trading portfolios is calculated using various parameters 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 with greater emphasis given to more recent data, during 2002 the VaR on the Group’s global trading averaged £1.26 million (2001: £1.17 million) with a maximum of £2.07 million (2001: £1.62 million) and a minimum of £0.93 million (2001: £0.78 million). The figure at 31 December 2002 was £1.02 million (2001: £1.62 million).
Trading Activities – trading is restricted to a number of specialist centres, authorised by Group Risk Management, the most important centre being the Group’s principal Treasury department in London. The level of exposure is strictly controlled and monitored within approved limits locally and centrally by Group Risk Management. 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.
Derivatives – these are used to meet customers’ financial needs; as part of the Group’s trading activities; and to reduce the Group’s own exposure to fluctuations in interest and exchange rates. The principal derivatives used by the Group are interest rate contracts (including interest rate swaps, forward rate agreements and options) and exchange rate contracts (including forward foreign exchange contracts, currency swaps and options).
The risk of loss arising from the sensitivity of profits to movements in claims experience and expectation; movements in the market value of invested assets which are not matched by similar movements in the value of insurance liabilities; the presence of options and guarantees in insurance products; and changes in the legal, regulatory and fiscal environment.
With-profits life and pensions business involves guaranteed benefits that create a contingent market risk to the Group. Accordingly, in extreme investment market conditions the surplus assets in the life and pensions business could be called upon to support with-profits benefits. Options and guarantees are only incorporated in new insurance products after careful consideration of the risk management issues that they present. This occurs under the New Product Approval process (see ‘Product and Service Risk’ below).
Business units have primary responsibility for identifying and managing their operational risks. They employ internal control techniques to reduce their likelihood or impact to tolerable levels within the Group’s risk appetite. Where appropriate, risk is mitigated by way of insurance.
Group Risk Management’s responsibilities in relation to operational risk include: – Defining high-level operational risk policies to ensure a comprehensive and consistent approach to the identification and management of operational risk.
Product Pricing – business units have pricing objectives consistent with Group strategy.
Group or business unit level. In line with defined policy, business units provide Group Risk Management with details of New Products at an early stage of product or service development to ensure compliance with the Group’s risk appetite and strategy.
The international standard for measuring capital adequacy is the risk asset ratio, which relates to on- and off-balance sheet exposures weighted according to broad categories of risk. The Group’s capital ratios, calculated in line with the requirements of the Financial Services Authority (FSA), are set out in detail within this report.
– Review and formally approve management accounts at a determined level of detail, ensuring consistency with financial accounts.
Service improvements are monitored by customer satisfaction surveys. The results of the research are fed into the Group’s CARE Index, which measures ongoing performance against five principal objectives: customer understanding; accessibility; responsibility; expertise; and overall service quality improvement.
Each Group business has a nominated individual with ‘Compliance Oversight’ responsibility under FSA rules. The role of such individuals is to ensure that management have in place within the business a control structure which creates awareness of the rules and regulations to which the
Financial Crime – 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.
During the year, the Group has reviewed its SEE performance and is of the opinion that it already complies with the majority of the guidelines published by the Association of British Insurers in 2001. The Group continues to develop its policies and procedures and will monitor its performance more rigorously in 2003.
Profit (loss) on sale and closure of businesses – 39 – (126) 84
Note Figures for 2001 and earlier years have been restated to reflect the implementation of UITF33, ‘Obligations in capital instruments’, FRS 17, ‘Retirement benefits’, FRS 19, ‘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.
Excluding central group items, changes in economic assumptions and investment variance
Long-term assurance assets attributable to policyholders 45,340 46,389 51,085 26,542 23,692
Risk asset ratio : total capital 9.6% 8.8% 8.7% 14.9% 11.2%
Maarten A van den Bergh� Chairman Joined the Group in 2000 as deputy chairman and was appointed chairman in 2001. Joined the Royal Dutch/Shell Group of companies in 1968 and after a number of senior and general management appointments in that group, became group managing director in 1992. Appointed president of Royal Dutch Petroleum Company and vice chairman of the committee of managing directors of the Royal Dutch/Shell Group in 1998 and continued in these roles until 2000. A non-executive director of Royal Dutch Petroleum Company, BT Group and British Airways. Aged 60.
A Clive ButIer‡§� (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.
Christopher S Gibson-Smith✠† A director since 1999. Chairman of National Air Traffic Services. Managing director of BP from 1997 to 2001, having held senior and general management appointments in the UK, USA, Canada and Europe, since joining that company in 1970. A non-executive director of The British Land Company. Aged 57.
Sir Tom McKillop✠*† (� from 16 April 2003) 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 59.
Mr Hampton joined the board on 1 June 2002 and Mr Targett will join the board on 10 March 2003. Under the articles of association they offer themselves for election at the annual general meeting.
In the UK, the group supports Opportunity Now and Race for Opportunity; campaigns to improve opportunities for women and ethnic minorities in the work place. The group is a member of the Employers’ Forum on Disability in support of employment of people with disabilities. This recognises the need for ensuring fair employment practices in recruitment and selection, and the retention, training and career development of disabled staff.
As the company owed no amounts to trade creditors at 31 December 2002, the number of days required to be shown in this report, to comply with the provisions of the Companies 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 2002 bears to the aggregate of the amounts invoiced by suppliers during the year.
Each year, with the help of external management consultants, the total remuneration package of the directors is reviewed, and in 2002 The Hay Group Management Limited were commissioned by the remuneration committee to conduct the review. The consultants have also provided services, such as salary survey information and job evaluation, to other parts of the Group.
The aim is to ensure that salaries are competitively set in relation to similar jobs in a wide range of FTSE 100 companies.
In 2002, the group chief executive had a maximum incentive opportunity equal to 100 per cent of his salary as did Mr Daniels, whose bonus opportunity and payment for 2002 were agreed as part of his recruitment package. Each of the other executive directors could earn an incentive equal to 75 per cent of their salary. The awards were based on group performance and the attainment of predetermined targets relating to total income, profit before tax and economic profit. Each will receive an award equal to 4.7 per cent of salary based on achievement against the income target, which was met in part. No bonus has been earned for the other targets.
The remuneration committee reviewed the attainment of targets in 2002 and agreed the incentive payments, and the auditors confirmed the calculations. These payments are not pensionable.
In addition, share options have been granted in previous years in accordance with the relevant scheme rules and market practice at that time. The table on page 53 includes options granted under these previous schemes.
March 1996-August 1999 That the company’s ranking based on shareholder return (calculated by reference to both dividends and growth in share price) over the relevant period should be in the top fifty companies of the FTSE 100 and that there must have been growth in earnings per share which is equal to the aggregate percentage change in the Retail Price Index plus two percentage points for each complete year of the relevant period.
March 2000-March 2001 As for March 1996 – August 1999 except that there must have been growth in the earnings per share equal to the change in the Retail Price Index plus three percentage points for each complete year of the relevant period.
At the annual general meeting in April 2003, shareholders will be asked to approve an amendment to the rules of the executive share option schemes. Under the existing rules, a share option may not be granted to any person who, at the date of grant, is within 2 years of retirement. It is proposed to amend the rules of the schemes to allow share options to be granted to executives up to six months before retirement.
Since the introduction of the new performance condition in 2001, the exercise of options after retirement would still require the condition to be satisfied over the original performance period. Also, if the optionholder retired within 3 years of the date of grant, the number of shares which could be acquired on exercise would be reduced according to the length of time the optionholder was employed between the date of grant and the date of retirement.
Executive directors are entitled to pensions based on salary and length of service with the Group, with a maximum pension of two thirds of final salary.
£348,637 included in ‘other benefits’ for Mr Atkinson represents the amount to which he was contractually entitled when his employment was terminated on 31 May 2002. This included 12 months’ salary from which he elected to pay £318,637 to purchase additional pension from Lloyds TSB Group Pension Scheme No. 1. As part of his termination package, he is also entitled to a bonus reflecting what he would have received during his notice period. He became entitled to a pension of £273,514 immediately when his employment terminated, which took into account the additional 12 months’ service for the notice period. He also continues to receive beneficial rights to medical insurance and use of a car for 12 months after departure. His outstanding share options are exercisable either up to 12 months after departure or, for those options granted after August 2001, at the later appropriate time providing the performance condition has been met.
Performance-related payments These payments relate solely to cash bonuses earned in 2002 under the annual incentive scheme. They do not include any amounts relating to the former medium-term incentive plan, approved by shareholders in 2000, which ended in 2002 without any payments being made, as the relevant performance targets were not met.
Column (c) is the transfer value of the deferred pension in column (a) calculated as at 31 December 2002 based on factors supplied by the actuary of the relevant Group pension scheme in accordance with actuarial guidance note GN11.
Shares At 31December 2002 appointment if later) At 31December 2002 appointment if later)
C S Gibson-Smith 3,151 3,151 M A van den Bergh 5,079 4,000
Retirement pensions accrue at rates of between 1/60 and 1/30 of basic salary.
Exercisable* – – – Not exercisable* – 1,238,597 700p 330,419 715p 398 474p
P B Ellwood** Exercisable 321,340 211,340 280p Not exercisable 276,725 – –
P R Hampton Exercisable – – – Not exercisable – – –
Exercisable* – – – Not exercisable* – 326,351 740p 326,351 740p
Exercisable* – 90,000 716p Not exercisable* 77,000 531,913 701p 275,349 715p
Exercisable* – 50,000 860p Not exercisable* 90,000 571,772 700p 286,363 715p
M D Ross Exercisable – – – Not exercisable 440,549 – –
The following remarks demonstrate how the board has applied these principles.
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 specific powers delegated to it by the board from time to time.
The directors have responsibility for ensuring that the Company keeps accounting records which disclose with reasonable accuracy the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Internal control The board of directors is responsible for the Group’s system of internal control, which is designed to ensure effective and efficient operations, internal control, including financial reporting, and compliance with laws and regulations. It should be noted, however, that such a system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. In establishing and reviewing the system of internal control the directors have regard to the materiality of relevant risks, the likelihood of a loss being incurred and the costs of control. It follows, therefore, that the system of internal control can only provide reasonable but not absolute assurance against the risk of material loss.
The directors and senior management of the Group are committed to maintaining a control-conscious culture across all areas of operation. This is communicated to all employees by way of procedures manuals and regular management briefings. Key business risks are identified, and these are controlled by means of procedures such as physical controls, credit, trading and other authorisation limits and segregation of duties. There are well established budgeting and forecasting procedures in place and reports are presented regularly to the board detailing the results of each principal business unit, variances against budget and prior year, and other performance data. Internal controls contain procedures which assist the board in identifying new and emerging risks.
Diluted earnings per share 11 31.8p 39.9p * restated (see note 1)
Amounts falling due within one year: Amounts owed to group undertakings 1,801 1,760
Amounts falling due after more than one year: Net assets 7,972 10,760
Total recognised gains and losses relating to the year (553) 133
Historical cost profits and losses for the year ended 31 December 2002
Net cash outflow from capital expenditure and financial investment (2,419) (7,491)
(2001: £185 million) charge in respect of the QUEST (note 27) 77 194
(ii) The Group has implemented the requirements of Financial Reporting Standard 19 (‘FRS 19’) ‘Deferred Tax’. Following its implementation, the Group makes full provision for deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. Previously provision was only made where it was considered that there was a reasonable probability that a liability or asset would crystallise in the foreseeable future. A prior year adjustment has been made increasing shareholders’ funds by £54 million to reflect the revised policy. The effect of this change on the profit and loss account for the year ended 31 December 2002 has been to reduce the tax charge by £29 million (2001: increase the tax charge by £14 million). The effect on the Group’s balance sheet at 31 December 2002 has been to reduce the deferred tax liability and increase shareholders’ funds by £69 million (2001: £40 million).
(iii) The Group has adopted fully the accounting requirements of Financial Reporting Standard 17 (‘FRS 17’) ‘Retirement Benefits’. FRS 17 replaces Statement of Standard Accounting Practice 24 and the Urgent Issues Task Force’s Abstract 6 as the accounting standard dealing with post-retirement benefits. The Group has decided to implement the requirements of FRS 17 in 2002 to coincide with the triennial full actuarial valuations of the Group’s pension schemes and because of the significant impact that implementation has on the Group’s reported results.
The prior year adjustments in respect of these changes can be summarised as follows: Actuarial losses recognised in post-
Assets, liabilities and results of group undertakings and joint ventures are included in the consolidated accounts on the basis of accounts made up to 31 December. Entities that do not meet the legal definition of a subsidiary but which give rise to benefits that are in substance no different to those that would arise from subsidiaries are also included in the consolidated accounts. In order to reflect the different nature of the shareholder’s and policyholders’ interests in the long-term assurance business, the value of long-term assurance business attributable to the shareholder and the assets and liabilities attributable to policyholders are classified under separate headings in the consolidated balance sheet. Details of transactions entered into by the Group which are not eliminated on consolidation are given in note 43.
An advance becomes non-performing when interest ceases to be credited to the profit and loss account. There are two types of non-performing lending which are discussed further below.
Debt securities and equity shares held for dealing purposes are included at market value. In rare circumstances where securities are transferred from dealing portfolios to investment portfolios or vice versa, the transfer is effected at an amount based on the market value at the date of transfer. Any resulting profit or loss is reflected in the profit and loss account.
Full actuarial valuations of the Group’s main defined benefit schemes are carried out every three years with interim reviews in the intervening years; these valuations are updated to 31 December each year by qualified independent actuaries. For the purposes of these annual updates, scheme assets are included at market value and scheme liabilities are measured on an actuarial basis using the projected unit method; these liabilities are discounted at the current rate of return on a high quality corporate bond of equivalent currency and term. The post-retirement benefit surplus or deficit is included on the Group’s balance sheet, net of the related amount of deferred tax. Surpluses are only included to the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes. The current service cost and any past service costs are included in the profit and loss account within operating expenses and the expected return on the schemes’ assets, net of the impact of the unwinding of the discount on scheme liabilities, is included within other finance income. Actuarial gains and losses, including differences between the expected and actual return on scheme assets, are recognised, net of the related deferred tax, in the statement of total recognised gains and losses.
Changes in the embedded value, which are determined on a post-tax basis, are included in the profit and loss account. For the purpose of presentation, the change in this value is grossed up at the underlying rate of corporation tax.
The underwriting business makes provision for the estimated cost of claims notified but not settled and claims incurred but not reported at the balance sheet date. The provision for the cost of claims notified but not settled is based upon a best estimate of the cost of settling the outstanding claims after taking into account all known facts. In those cases where there is insufficient information to determine the required provision, statistical techniques are used which take into account the cost of claims that have recently been settled and make assumptions about the future development of the outstanding cases. Similar statistical techniques are used to determine the provision for claims incurred but not reported at the balance sheet date. Claims equalisation provisions are calculated in accordance with the relevant legislative requirements.
Wholesale Markets and International Banking 1,005 1,209 Central group items 96 185
Life and pensions segmental profit 474 719 Changes in economic assumptions 55 – Investment variance relating to the life and pensions business (892) (813) Other items 60 65
Notes to the accounts 4 Administrative expenses 2002 2001* £m £m
The average number of persons on a headcount basis employed by the Group during the year was as follows: The above staff numbers exclude 5,870 (2001: 5,450) staff employed in the long-term assurance business. Costs of £209 million (2001: £168 million) in relation to those staff are reflected in the valuation of the long-term assurance business.
During the year the auditors earned the following fees: £m £m
It is the Group’s policy to employ the auditors on assignments additional to their statutory audit duties, where their expertise and experience with the Group are important, principally relating to tax advice and due diligence reporting on acquisitions and disposals. Following a change in policy earlier this year, the auditors are no longer permitted to perform management consultancy work on behalf of the Group.
Notes to the accounts b Factors affecting the tax charge for the year
The profit attributable to shareholders includes a profit of £1,912 million (2001: £1,893 million) dealt with in the accounts of the parent company, for which no profit and loss account is shown as permitted by Section 230 of the Companies Act 1985.
Profit attributable to shareholders† £1,781m £2,229m Weighted average number of ordinary shares in issue during the year†† 5,570m 5,533m Dilutive effect of options outstanding 27m 50m Diluted weighted average number of ordinary shares in issue during the year 5,597m 5,583m Earnings per share 32.0p 40.3p Diluted earnings per share 31.8p 39.9p *restated (see note 1)
Investment securities: Treasury bills and similar securities 257 258 748 748
Geographical analysis by issuer: United Kingdom 1,726 2,620 Latin America 567 1,412
Loans and advances by residual maturity repayable: 3 months or less 23,989 21,393 1 year or less but over 3 months 10,357 8,867 5 years or less but over 1 year 30,637 27,910
Of which repayable on demand or at short notice 11,852 10,116
Exchange and other adjustments (55) (3) (15) 1 Adjustments on acquisition – 3 – – Advances written off (878) – (885) – Recoveries of advances written off in previous years 203 – 194 – Charge to profit and loss account: New and additional provisions 1,544 64 1,310 64 Releases and recoveries (579) – (574) (53)
Loans and advances to customers: Domestic: Agriculture, forestry and fishing 2,076 2,074
Total domestic 118,057 108,038 International: Latin America 1,591 2,347 New Zealand 10,447 8,435 Rest of the world 6,202 5,651
Due within 1 year 6,412 6,745 Due 1 year and over 22,902 17,480
Transfers to other securities (694) (451) (63) (1,082) Securities sold or matured (13,913) (61) (11) (13,963) Charge for the year – – 84 (84) Amortisation of premiums and discounts – 87 – 87
Treasury bills and other eligible bills 588 1,036 Debt securities 5,651 4,498
These investments have been sold to third parties but, since the Group is committed to reacquire them at a future date and at a predetermined price, they are shown in the balance sheet.
Goldfish Holdings Limited 25.0% of issued Financial services ordinary share capital
Shares in banks 9,093 11,960 Shares in other group undertakings (2) –
On an historical cost basis, shares in group undertakings would have been included at cost of £6,066 million (2001: £6,066 million). No deferred tax provision has been made against the liability which could arise if group undertakings were disposed of at their balance sheet carrying value because of surplus capital losses and the exemptions for disposals of substantial shareholding investments.
Cheltenham & Gloucester plc England †100% Mortgage lending and retail investments
The country of registration/incorporation is also the principal area of operation for each of the above group undertakings except as follows: Lloyds TSB Bank plc operates principally in the UK but also through branches in Argentina, Belgium, Brazil, Dubai, Ecuador, Gibraltar, Guatemala, Hong Kong, Honduras, Japan, Luxembourg, Malaysia, Monaco, Netherlands, Panama, Paraguay, Singapore, Spain, Switzerland, Uruguay, the USA and a representative office in Iran. The National Bank of New Zealand Limited also operates through representative offices in the UK and Hong Kong.
Residual value expected to be recovered in: 1 year or less 272 156 2 years or less but over 1 year 173 119 5 years or less but over 2 years 542 388
Amounts payable in 1 year or less 1 3 26 Capital commitments
For the purposes of the Group’s consolidated accounts, the value of the shareholder’s interest in the long-term assurance business is calculated on an embedded value basis. The embedded value is comprised of the net tangible assets of the life assurance subsidiaries, including any surplus retained in the long-term business funds, which could be transferred to shareholders, and the present value of the in-force business. The value of the in-force business is calculated by projecting future surpluses and other net cash flows attributable to the shareholder arising from business written by the balance sheet date and discounting the result at a rate which reflects the shareholder’s overall risk premium attributable to this business.
Changes in economic assumptions: this represents the effect of changes in the economic assumptions referred to in g.
Income from long-term assurance business is set out below: 2002 2001*
Operating profit 534 784 Investment variance (892) (813) Changes in economic assumptions (see g) 55 –
During the early 1990s, there was increasing concern 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 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 this 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 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.
In common with a number of companies in the life assurance industry, Abbey Life Assurance Company Limited (‘Abbey Life’), one of the Group’s life assurance subsidiaries, has been carrying out a review of the past sales of certain endowment based and long-term savings products made, primarily in the late 1980s and early 1990s, by the Abbey Life sales force prior to its disposal by the Group in February 2000. The Group has assessed the likely implications for redress to policyholders and as a result a provision of £165 million has been raised.
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, it was announced that Scottish Widows was revising 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 guaranteed annuity option policies were increased.
Under the terms of the transfer of the Scottish Widows business, a separate memorandum account was created within the With Profits Fund called the Additional Account. This Account had a value at 31 December 2002 of approximately £1.5 billion (2001: £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 With Profits Fund against the consequences of a future fall in interest rates.
The eventual costs of providing the enhanced benefits is dependent upon a number of factors, including in particular: • The proportion of policyholders with a guaranteed annuity option policy who choose to exercise their options; • The effect of future interest rate and mortality trends on the cost of annuities; and
Other assumptions used to derive the embedded value are as follows: • Assumed rates of mortality and morbidity are taken from published tables adjusted for demographic differences. Assumptions in respect of lapse rates reflect the recent actual experience of the companies concerned.
The table below shows the effect on both the embedded value at 31 December 2002 and the new business contribution for the year then ended of theoretical changes in the main economic assumptions.
(Loss) profit on ordinary activities before tax (506) 74 Tax on (loss) profit on ordinary activities 179 94
(Loss) profit for the financial year – modified statutory solvency basis (327) 168
Other differences: – deferred acquisition costs 430 385 – tax adjustment 205 150 – other adjustments (30) (40)
Net tangible assets of life operations – modified statutory solvency basis 3,929 4,123 31 Assets and liabilities denominated in foreign currencies 2002 2001*
Assets: denominated in sterling 142,661 132,812 : denominated in other currencies 64,757 56,592
Other debt securities by residual maturity repayable: 3 months or less 19,525 17,070 1 year or less but over 3 months 7,174 4,931 5 years or less but over 1 year 30 104 30 Long-term assurance business (continued)
At 1 January 2002 – restated 1,411 Exchange and other adjustments 25 Adjustments on acquisition (13) Tax provided (106)
Subordinated Floating Rate Notes 2004 a, j 100 100 – –
Subordinated Fixed Rate Bonds 2007 (NZ$150 million) g – 43 – – 51⁄4% Subordinated Notes 2008 (DM750 million) 249 234 – – 105⁄8% Guaranteed Subordinated Loan Stock 2008 e 100 100 – –
Subordinated Floating Rate Notes 2010 (US$400 million) a 248 274 – –
Subordinated Floating Rate Notes 2020 (€100 million) a 65 61 – –
d) In certain circumstances the interest payments on these securities can be deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB Group plc can declare or pay a dividend until any deferred payments have been made. In the event of a winding up of Lloyds TSB Bank plc, these securities will acquire the characteristics of preference shares. The securities can be redeemed at par at the option of Lloyds TSB Bank plc on or after e) Issued by a group undertaking under the Company’s subordinated guarantee and, in the case of the Eurocurrency Zero Coupon Bonds 2003, on-lent to the Company on a subordinated basis.
*restated (see note 1) **These securities constitute limited partnership interests in Lloyds TSB
Capital 1 L.P., a Jersey limited partnership in which Lloyds TSB (General Partner) Limited, a wholly owned subsidiary, is the general partner. Noncumulative income distributions accrue at a fixed rate of 7.375 per cent per annum up to 7 February 2012; thereafter they will accrue at a rate of 2.33 per cent above EURIBOR, to be set annually.
Euro €m €m Preference shares of €25 cents each 40 40
At 31 December 2002, options to acquire 126 million Lloyds TSB Group ordinary shares of 25p each were outstanding under the executive share option schemes, the share retention plan, and the staff sharesave share option schemes exercisable up to 2012. These include the option, described on page 54, to acquire 216,763 shares under the share retention plan: otherwise the options are exercisable at prices ranging from 160p to 888p per share.
Share premium account: Premium arising on issue of shares 134 134
Exchange and other adjustments (3) – Actuarial losses recognised in post-retirement benefit schemes (note 44) (2,331) – Charge in respect of the QUEST (note 27) (62) (62) (Loss) profit for the year (127) 4
The cumulative amount of premiums on acquisitions written off against reserves during previous years amounts to £2,271 million of which £1,823 million was within the last 10 years.
43 Related party transactions a Transactions, arrangements and agreements involving directors and others
At 31 December 2002, 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
Loans and credit card transactions: Directors and connected persons 4 3,334 7 1,343
Details of the Group’s joint ventures are provided in note 20. Information relating to transactions entered into between Group undertakings and the joint ventures and details of outstanding balances at 31 December 2002 are also shown in note 20.
The Group enters into certain transactions with its long-term assurance businesses, which cannot be eliminated in the consolidated accounts because of the basis of accounting used for the Group’s long-term assurance businesses. After taking into account legally enforceable netting agreements, at 31 December 2002 Group entities owed £1,372 million (2001: £1,186 million) and were owed £145 million (2001: £299 million); these amounts are included in customer accounts and loans and advances to customers respectively. In addition, fees of £76 million (2001: £62 million) were received, and fees of £35 million (2001: £28 million) were paid, in respect of asset management services.
Group entities provide a number of banking and other services to the Group’s pension funds, which are conducted on similar terms to third party transactions. At 31 December 2002, the Group’s pension funds had call deposits with Lloyds TSB Bank plc amounting to £89 million (2001: £572 million).
The pension costs included in administrative expenses are comprised as follows: £m £m
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 years ended 31 December 2001 and 2002, 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.
For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 31 December 2000; this valuation has been updated to 31 December 2002 by qualified independent actuaries. The principal assumptions used were as set out above, except that the rate of increase in healthcare premiums has been assumed at 4.86 per cent.
Fair value rate of Fair value rate of at return at at return at 31 December 31 December 31December 31December
Market values of scheme assets: Total fair value of scheme assets 9,083 11,126
Amount recognised in the statement of total recognised gains and losses (2,331) (2,010)
Percentage of scheme assets at balance sheet date 28.4% 18.1% Experience gains and losses arising on scheme liabilities
The movements in the (deficit) surplus in the schemes over the year have been as follows: £m £m
Other complaints, including those related to the sale of life assurance products, are dealt with on a case by case basis and where appropriate compensation is paid. Provision has been made, based upon the level of complaints for the estimated cost of redress which is not significant. If the position changes, further provisions may be required.
The aggregate carrying value of non-trading derivatives with a positive fair value was an asset of £54 million (2001: an asset of £18 million) and with a negative fair value was an asset of £9 million (2001: an asset of £1 million).
Potential credit risk exposure 3,022 1,888 46 Derivatives and other financial instruments (continued)
Notes to the accounts 46 Derivatives and other financial instruments (continued)
As at 31 December 2002 £m £m £m £m £m £m £m £m
Cumulative interest rate repricing gap (20,173) (15,381) (17,946) 1,549 5,951 – – –
As at 31 December 2001* £m £m £m £m £m £m £m £m
Cumulative interest rate repricing gap (13,179) (22,892) (21,778) 6,983 10,314 – – –
Trading book Non-trading book Book Fair Book Fair value value value value
US dollar 259 147 Swiss franc 100 104 Other non-sterling 323 438
Non-structural currency exposures All foreign exchange exposures in the non-trading book are transferred to the trading area where they are monitored and controlled.
Details of value at risk in the Group’s global trading activities are given on page 36 in the financial review.
Loss after tax for the period to 17 April 2002 (6)
Profit after tax for the year ended 31 December 2001 –
All recognised gains and losses are included in the profit and loss account.
Loans and advances to customers 64 – 64 Tangible fixed assets 355 (8) 347 Other assets and prepayments 63 – 63 Deposits by banks (405) – (405) Other liabilities and accruals (107) (6) (113)
Net increase in loans and advances (11,970) (9,340) Net increase in investments other than investment securities (2,494) (5,664) Net increase in other assets (683) (327) Net increase in deposits by banks 1,018 7,689 Net increase in customer accounts 6,900 7,525 Net increase in debt securities in issue 5,904 6,557 Net increase in other liabilities 1,511 109 Net decrease (increase) in items in course of collection/transmission 147 (17) Other non-cash movements 535 1
g Disposal of group undertakings and businesses 2002 2001 £m £m
Sundry net assets disposed of – 1 Profit on sale – 39
The Company also provides a telephone dealing service through Lloyds TSB Stockbrokers for the purchase and sale of Lloyds TSB shares on preferential commission terms. The current rate for both purchases and sales is 0.75%, minimum £18.50 maximum £75, for transactions up to £75,000. For full details please contact Lloyds TSB Stockbrokers.
The Better Payment Practice Code A copy of the code and information about it may be obtained from the DTI Publications Orderline 0870 1502500, quoting ref URN 01/621.
Financial calendar 14 February Results for 2002 announced 26 February Ex-dividend date for 2002 final dividend 28 February Record date for final dividend 9 April Final date for joining or leaving the dividend reinvestment plan for the final dividend 16 April Annual general meeting in Glasgow 7 May Final dividend paid 1 August Results for half-year to 30 June 2003 announced 13 August Ex-dividend date for 2003 interim dividend 15 August Record date for interim dividend 10 September Final date for joining or leaving the dividend reinvestment plan for the interim dividend 8 October Interim dividend paid
*Includes 710 million shares (12.7%) registered in the names of some 864,000 individuals. 203 million shares (3.6%) are held by over 67,000 staff and Group pensioners, or on their behalf by the trustee of the staff profit sharing schemes.