11 Financial review 34 Five year financial summary 37 The board 38 Directors’ report 40 Directors’ remuneration 46 Corporate governance 48 Auditors’ report 49 Consolidated profit and loss account 50 Consolidated balance sheet 52 Company balance sheet 53 Other statements 54 Consolidated cash flow statement 55 Notes to the accounts 77 Information for shareholders
Other items also had a significant impact on the Group’s 2000 results: changes in the economic assumptions applied to our long-term assurance business (page 29), exceptional restructuring costs
Other significant achievements during 2000 include: The Group completed the acquisitions of Scottish Widows and
We have no illusions. We have to continue to produce favourable results. If we can do that, our share price should follow.
In little more than a year, we have become one of the UK’s leading e-commerce providers of financial services, which is a considerable achievement.
Because it remains highly fragmented, the financial services industry is ripe for further consolidation. It is not a question of whether restructuring is necessary, but how it will be achieved. The acquisition of Scottish Widows and Chartered Trust are further examples of our participation in the continuing industry consolidation.
We are at heart a service company. More sales do not always lead to better service, but better service almost always leads to better sales. Even in the age of the internet, the most critical constituency in our success is our people. The scale and pace of change and the success of the company would not have been possible without the professionalism, dedication and sheer energy of our staff at home and overseas.
Scottish Widows, concluded in March, which made us one of the top three suppliers of long-term savings and protection products in the UK. Scottish Widows also brought a leading and powerful brand to the Group. In September we also concluded the purchase of Chartered Trust which gave us market leadership in the independent provision of motor finance.
So, we have made significant progress towards meeting this important strategic aim, but the most exciting developments and progress have been made in the critically important strategic aim of being first choice for our customers by better understanding and meeting their needs.
practice throughout the world. Full roll out throughout our UK branch network is to be completed during the first quarter of 2001.
The first stage of our new approach in the wealth management segment has been the development of our plans to provide a new set of products and services for more affluent customers, which are now being implemented under a new brand ‘Create’. For these customers we will provide tailored independent advice, superior service and a choice of investment options from quality providers. Key elements will be our online share dealing and funds hypermarket, and a new Wealth
The Create offer will be underpinned by access to the comprehensive broking services of Goldman Sachs PrimeAccess™.
Our added value current account product range continues to be in strong demand and over 2 million of our customers now have either a Gold or Select current account, making us a market leader in this field. In addition, we increased the number of our higher value personal choice customers to over 850,000 during 2000, and increased our customers’ total product holdings by a net 700,000. We are targeting to increase our product sales substantially during 2001 and we remain confident of achieving a net 3 million increase in total product holdings by the end of 2002.
Centrica will bring the Goldfish brand, together with immediate access to 9 million Centrica customers.
Given the increasing competition and unprecedented level of change within our industry, the quality of our staff will be absolutely crucial to the success of our organisation. During 2000, Lloyds TSB staff at every level have responded with vigour and commitment to the challenges we face and they can be justly proud of their achievements. Our staff are our greatest asset, and I am confident that they have the talent to ensure our continued success. I am most grateful for their tremendous contribution.
I look forward to working equally closely with him, over the next few years.
Lloyds TSB has taken a leading role in making a positive difference to local communities.
To help tackle financial exclusion and promote regeneration, we have launched a new Bank Account for low-income customers, developed a package of support for community credit unions and extended our support for money advice services. Working in partnership with voluntary and public organisations, we have also helped to create a blueprint for a new community-based financial service to bring mainstream financial services to deprived communities. And to ensure that no community where we are currently represented is left without access to a bank, we will no longer close any Lloyds
Education’ we are working with 2,750 schools and 50 local education authorities to promote quality in school management and more than 600 members of staff receive training and support for their school governor responsibilities.
Lloyds TSB Group’s pre-tax profits, averaged over three years, in lieu of their shareholder dividend. In 2001, they will receive more than £34 million to support registered charities and make £1.2 million available to match funds raised, and time given, by staff to charities through the
in 1995, including the £34 million to be paid in respect of 2000, the four
Cheltenham & Gloucester (C&G), the Group provides comprehensive geographic coverage in England, Scotland and
• Cash machines. The Group has one of the largest cash machine networks of any leading banking group in the UK and personal customers of Lloyds TSB Bank are able to withdraw cash, check balances and obtain mini statements through 4,400 cashpoints at branches and external locations around the country.
• 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 1.2 million customers have registered to use the
UK. Customers have access to a full range of tailored business services including money transmission, lending and deposits, asset finance, factoring, mortgages, insurance and investments, as well as success4business, an internet portal for business customers. Lloyds TSB is the leading bank for new business start-ups with around one in four opening accounts with the
• Private Banking and Stockbroking. Private Banking provides a range of tailor-made wealth management services and products to individuals from 40 offices throughout the UK. In addition to asset management, these include tax and estate planning, executor and trustee services, deposit taking and lending, insurance, and personal equity plan and ISA products.
• Scottish Widows is the Group’s specialist provider of life assurance, pensions and investment products, which are distributed through the Lloyds TSB branch network, through independent financial advisers and directly via the telephone and the internet.
Clients also include corporate pension schemes, local authorities and other institutions in the UK and overseas. At the end of 2000 funds under management totalled some £87 billion.
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 and Tokyo.
• Corporate and Commercial provides a full range of banking and related services, including electronic banking, large value lease finance, share registration, venture capital, correspondent banking and capital markets services to major UK and multinational companies, financial institutions and, through a network of dedicated offices, to medium-sized businesses in the
• Europe. International Private Banking covers services to wealthy individuals outside their country of residence. The business is conducted through Switzerland and through 4 other countries overseas. There are additional private and corporate banking operations in Spain and France.
In addition, the Group has reassessed the useful economic lives and residual values of its freehold and long leasehold premises and with effect from 1 January 2000, the cost of these properties, after deducting the value of land, is being depreciated over 50 years. Previously it was considered that the residual values were such that depreciation was not significant. The effect of this change has been to increase the depreciation charge in 2000 by £8 million.
On 3 March 2000 the Group completed the acquisition of Scottish Widows and, as a result, the investments now held to support the with-profits business of the Group’s life companies are much more significant than in previous years. In accordance with generally accepted accounting practice amongst listed insurance companies in the UK, the results of the
Excluding the impact of these items, profit before tax on a business as usual basis rose by £425 million, or 11 per cent, to £4,246 million from £3,821 million in 1999. Total income increased by 8 per cent, operating expenses increased by 10 per cent and there was a 6 per cent increase in the trading surplus. Customer lending and deposits continued to grow, however the net interest margin decreased by 37 basis points to 3.49 per cent, partly as a result of the impact of the funding cost of the purchase of Scottish Widows which, as expected, reduced the margin by 20 basis points. Excluding the funding cost of
The total group charge for bad and doubtful debts was 19 per cent lower at £475 million, compared with £588 million in 1999. The domestic charge decreased to £426 million from £500 million, lower provisions in retail banking and mortgages were partially offset by a higher charge in the motor finance businesses. Provisions overseas decreased to £49 million from £88 million mainly as a result of higher Emerging Market Debt provision releases, following debt repayments and some asset sales, which offset higher provisions in Argentina. The Group’s charge for bad and doubtful debts, expressed as a percentage of average lending, was 0.43 per cent compared to 0.57 per cent in 1999. At the end of the year specific provisions for bad and doubtful debts for the Group totalled £1,816 million, representing over 140 per cent of non-performing loans.
Staff eligible to participate in the staff profit sharing scheme will receive 10 per cent of basic salary (1999: 10.5 per cent).
customers with access to the Bank’s internet banking service, as well as a range of other online services. We have also started to provide, in association with Telewest, a product information service on digital interactive television, and will launch a banking service in Spring 2001.
Gross new mortgage lending £11.5bn £10.7bn Market share of gross new mortgage lending 9.6% 9.4% Net new mortgage lending £4.6bn £2.8bn Market share of net new mortgage lending 11.4% 7.4% Mortgages outstanding (year-end) £52.7bn £47.5bn Market share of mortgages outstanding 9.8% 9.5%
The Group continues to be one of the most efficient mortgage providers in the UK.
Scottish Widows within our life and pensions business. Since that date Scottish Widows contributed pre-tax profits of £403 million, before funding costs of £258 million. This compares with normalised pre-tax profits of £349 million in 1999.
Profit before tax from our life and pensions business increased by £426 million, or 109 per cent, to £816 million. Weighted sales of life, pensions and unit trusts increased by 40 per cent as the sale, on 1 February 2000, of the new business capability of Abbey
Weighted sales of life, pensions and unit trusts increased by 40 per cent to £789.5 million from £565.2 million in 1999 as a result of the inclusion, from 3 March 2000, of Scottish Widows. The withdrawal from sale of mortgage-related endowment policies slowed the sales of regular premium life policies.
The adequacy of the provision for redress to past purchasers of pension policies has been reviewed in the light of the changes arising from SERPS adjustments, further experience and improved knowledge as to the number and size of compensation claims likely to be paid. The cost of redress is forecast to increase by £100 million and a provision of this amount has been made, bringing the total provision charged for this purpose to £902 million, of which £654 million had been used at
In 1998, a provision was made within Abbey Life for liabilities under certain unit-linked products with guaranteed annuity options written in the mid-1960s to the mid-1980s and at 31 December 2000 this provision was £152 million. We continually review the adequacy of the provision and remain satisfied that no further provision is necessary at this stage. As part of the acquisition of Scottish Widows by the Group, certain measures were taken to protect shareholders from any likely potential exposure to this issue. Scottish Widows has assets to match its liabilities in respect of guaranteed annuity options.
Trading surplus 857 810 Provisions for bad and doubtful debts 94 75 Amounts written off fixed asset investments 14 7 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Lloyds TSB Development Capital continued to expand its presence in the venture capital market and achieved record profits in 2000. The Agricultural Mortgage Corporation maintained its position as a market leader in the provision of long-term finance to farmers.
Our consumer finance business in Brazil, Losango Consumer Finance, made a pre-tax profit of £41 million, compared with a profit of £31 million in 1999.
The Emerging Markets Debt portfolio contributed £104 million, which included a release of provisions of £85 million following the repayment of debt by certain borrowers and some asset sales. This compared with a contribution of £48 million in 1999, which included a release of provisions of £32 million.
Other operating income increased by £139 million, largely reflecting the acquisition of Chartered Trust and increased operating lease rental income within Lloyds TSB Leasing. There were also higher gains on the realisation of venture capital investments.
Total operating expenses increased by £535 million, or 16 per cent, compared with 1999. On a like-for-like basis, excluding exceptional restructuring costs of £188 million, increased costs following the acquisitions of Scottish Widows and Chartered
The efficiency ratio was 46.7 per cent compared to 43.1 per cent a year ago. Excluding short-term fluctuations in investment returns, changes in the economic assumptions applied to our long-term assurance business, exceptional restructuring costs, pension provisions and the stakeholder pension related charge in 2000, the efficiency ratio deteriorated slightly to 43.6 per cent, from 42.7 per cent in 1999.
Since the merger of Lloyds Bank and TSB Group at the end of 1995, there has been an underlying reduction of 20,076 staff of which 5,407 relate to staff employed in businesses sold and 14,669 to reductions in our ongoing businesses.
Total provisions for bad and doubtful 31 December 31 December debts as % of lending (excluding 2000 1999 unapplied interest) £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
In 2000, following the acquisitions of Scottish Widows and Chartered Trust, total capital for regulatory purposes fell by £4,219 million to £8,379 million. Tier 1 capital was reduced by £686 million, as retained profits and the raising of the necessary capital required to complete the purchases of Scottish Widows and Chartered Trust was offset by the £2.4 billion goodwill arising on the acquisitions. Tier 2 capital increased by £741 million and supervisory deductions increased by £4,274 million, largely resulting from the acquisition of the Scottish Widows insurance business.
The main features of the efficiency programme, which is primarily focused on non-customer facing activities, are: • the centralisation of computer operations
• the further consolidation of all our large scale processing operations and support functions including the complete removal of all back office processing from branches
Dividends of £1,683 million (an increase of 15 per cent per share) are covered 1.6 times by earnings. Profit of £1,041 million will be retained in the business. Total shareholders’ funds grew by £1,156 million, or 13 per cent, to £9,737 million (174p per share) from £8,581 million (155p per share) at the end of 1999.
Widows are substantial and changes in market values will result in significant volatility in the Group’s embedded value earnings. Consequently, in order to provide a clearer representation of the underlying performance, the results of the life and pensions business have been analysed between an operating profit, which includes investment earnings calculated using longer-term rates of investment return, and a profit before tax, separately identifying the short-term fluctuations in investment returns and other one-off items. This approach is already established practice amongst listed insurance companies in the UK.
The shareholders’ 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 has been carried out, to ensure that these assumptions remain 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 have been amended, including the risk-adjusted discount rate which has been reduced from 10 per cent to 8.5 per cent. The revised assumptions, which have been used with effect from 1 January 2000 for Abbey Life and the bancassurance operation of Lloyds TSB Life, have resulted in a one-off credit to the profit and loss account of £127 million. The same assumptions have been used for the Scottish Widows business from the date of acquisition.
Specialist units are established within group business units to provide intensive management and control in order to maximise recoveries of doubtful debts.
The Group’s trading activities expose it to the risk of adverse movements in interest rates or exchange rates. Trading activities are restricted to a few highly specialist trading centres and the level of exposure is strictly controlled and monitored within approved limits locally and centrally by Group Risk.
These are supplemented by a range of value at risk techniques in use in individual businesses, where suitable methodologies have been developed in consultation with Group Risk to meet the specific requirements of each centre. At Group level, global positions are incorporated into a central value at risk model, taking into account natural offset positions between different trading centres, and stress tests are carried out to simulate extreme conditions.
Various parameters are used to calculate the value at risk on a given 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 3 years, during 2000 the value at risk on the Group’s global trading averaged £1.28 million (1999: £1.16 million) with a maximum of £1.67 million (1999: £1.78 million) and a minimum of £0.98 million (1999: £0.77 million). The figure at 31 December 2000 was £1.17 million (1999: £1.04 million).
Services Authority’s Sterling Stock Liquidity policy in the UK, with similar liquidity policies in place across all trading centres worldwide. Compliance is monitored by regular liquidity returns to Group Risk.
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 internal controls and procedures, human error, deliberate malicious acts including fraud, and business interruptions.
The Group offers insurance products to its customers, and actively reviews the extent to which the associated risk is underwritten internally, or reinsured with external underwriters.
Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. At 31 December 2000 the total notional principal amount of exchange rate related contracts outstanding was £95.1 billion (1999: £95.1 billion) of which £86.7 billion (1999: £86.1 billion) related to futures and forward foreign exchange contracts.
The volume of notional principal amounts 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. At the end of 2000 the total potential loss (or net replacement cost) on interest rate contracts was £1.0 billion (1999: £1.0 billion)
Profit on ordinary activities before tax 2,431 2,746 3,015 3,621 3,886aaddfff aaddfff aaddfff aaddfff aaddfff Profit on ordinary activities after tax 1,655 2,014 2,133 2,520 2,773aaddfff aaddfff aaddfff aaddfff aaddfff Profit for the year attributable to shareholders 1,511 2,000 2,120 2,514 2,724aaddfff aaddfff aaddfff aaddfff aaddfff Economic profit 1,032 1,427 1,417 1,772 1,882aaddfff aaddfff aaddfff aaddfff aaddfff Results excluding special items
Loans and advances to banks and customers 100,957 108,402 113,739 119,112 129,745 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Deposits by banks and customers and debt securities in issue 107,429 114,000 118,678 122,805 135,372
Long-term assurance liabilities to policyholders 18,139 20,046 23,692 26,542 51,085 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff
Maarten A van den Bergh§ (succeeding Sir Brian Pitman as Chairman) Deputy Chairman Joined Lloyds TSB Group in 2000 as deputy chairman. Will succeed Sir Brian Pitman as chairman when Sir Brian retires at the annual general meeting in April 2001. Joined the Royal Dutch/Shell Group of companies in 1968. After a number of senior and general management appointments in that group, became group managing director in July 1992. Appointed president of Royal Dutch Petroleum Company and vice chairman of the committee of managing directors of the Royal Dutch/Shell Group in July 1998 and continued in these roles until June 2000. A non-executive director of Royal Dutch Petroleum Company and British Telecommunications. Aged 58.
Christopher S Gibson-Smith† A director since 1999. Joined the British Petroleum Company in 1970 and held senior and general management appointments in the UK, USA, Canada and Europe. Became a managing director of BP in 1997 and managing director and executive vice president of BP Amoco in
* Member of the audit committee ** Chairman of the audit committee
The consolidated profit and loss account on page 49 shows a profit attributable to shareholders for the year ended 31 December 2000 of £2,724 million.
Scottish Widows plc and Scottish Widows Annuities Limited was completed on 3 March 2000. Following this acquisition, the Group is bringing together its life, pensions, unit trust and fund management businesses.
Autolease Holdings Limited, the UK consumer finance and contract hire subsidiaries of Standard Chartered Bank.
Mr Atkinson, Professor Brown, Mr Ellwood and Mr Pritchard retire by rotation at the annual general meeting and offer themselves for re-election.
Company to abide by the agreed terms of payment, provided the supplier performs according to the terms of the contract.
Account is taken of information, from internal and independent sources, on the remuneration for comparable positions in a wide range of FTSE 100 companies.
For the year 2000, the group’s efficiency ratio was 46.7 per cent and return on equity was 29.1 per cent.
In 2000 options were granted to executive directors and senior executives within limits set by the rules of the schemes. These limits relate to the number of shares under option and the price payable on the exercise of options. Normally, the limit for the grant of options to an executive in any one year would be equal to one year’s remuneration. Performance conditions are set when the grant of options is made. To meet the performance conditions under the current schemes the Company’s ranking, based on total shareholder return (calculated by reference to both dividends and growth in share price) over the relevant period, should be in the top fifty companies in the FTSE 100.
Executive directors are, like most other employees, entitled to pensions based on salary and length of service with the Group, with a maximum pension of two thirds of final salary, unless otherwise disclosed.
Other benefits include the use of a car, medical and other insurance and participation in the staff profit sharing scheme.
Former directors who served during 1999 557 aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff 3,543 183 1,009 313 5,048 4,585aad aad aad aad aad aad
* Includes additional benefits from the separate fund, mentioned in previous annual reports, 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.
At (or date of At (or date of 31 December appointment 31 December appointment 2000 if later) 2000 if later)
appointment during the during the 31 December 31 December during the at date of 2000 1999 if later) year year 2000 2000 year exercise £000 £000 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff 916 442p 282† 718p 356† 580p 8 237† 580p 269† 768p 218† 632p 187† 719p 376† 718p 136† 253p 127† 288p 125† 416p 4,157 442p 1,015† 768p 562† 719p
*These directors will receive additional Lloyds TSB Group shares on exercising share options held on 28 December 1995. These shares will compensate them for the special dividend of 68.3p per share which was paid to former TSB Group shareholders following the merger with Lloyds Bank, but which was not paid to optionholders. In that regard Mr Kane received 402 additional shares when he exercised the share options shown above.
The market price for a share in the Company at 31 December 2000 was 708p. The range of prices between 1 January 2000 and 31 December 2000 was 517p to 742.5p.
None of the other directors at 31 December 2000 had options to acquire shares in the Company or its subsidiaries.
None of those who were directors at the end of the year had any other interest in the capital of the Company or its subsidiaries and there were no changes in their beneficial interests between 31 December 2000 and 15 February 2001. The register of directors’ interests, which is open to inspection, contains full particulars of directors’ shareholdings and options to acquire shares in the Company.
The information on page 37 shows that the Company is led and controlled by a board comprising executive and non-executive directors with wide experience. The appointment of directors is considered by the board and, following the provisions in the articles of association, they must retire by rotation, and may stand for re-election by the shareholders, at least every three years.
The board has audit, nomination and remuneration committees which comply with the provisions of the code. Additionally, all the non-executive directors receive copies of the minutes of the remuneration committee’s meetings and have the opportunity to comment and have their views taken into account before the committee’s decisions are implemented.
Group as at the end of the year and of the profit or loss for the year. Following discussions with the auditors, the directors consider that in preparing the financial statements on pages 49 to 76, the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider applicable have been followed.
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. 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.
As described on page 46 this includes responsibility for preparing the financial statements in accordance with applicable
UK Accounting Standards. Our responsibilities, as independent auditors, are established in the UK by statute, the Auditing
We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the UK Companies Act. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’
We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.
We review whether the statement on page 46 reflects the company’s compliance with the seven provisions of the
Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the company’s corporate governance procedures or its risk and control procedures.
Other income Fees and commissions receivable 2,706 62 2,768 2,497 Fees and commissions payable (461) (18) (479) (426)
Amounts written off fixed asset investments 5 14 – 14 7 aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaafffffffffffffffffffffffffff
Retained profit 45 1,041 1,063aafffffff aafffffff Earnings per share 12 49.6p 46.2p Diluted earnings per share 12 49.1p 45.3p profit and loss account consolidated * restated (note 1)
Prepayments and accrued income 31 2,965 2,628 Long-term assurance business attributable to aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Items in course of transmission to banks 420 757 Debt securities in issue 36 17,899 12,260
Accruals and deferred income 39 4,325 3,309 Provisions for liabilities and charges: Other provisions for liabilities and charges 41 442 474
Subordinated liabilities: Undated loan capital 42 3,391 3,294 Dated loan capital 42 4,119 3,199
Contingent liabilities: Acceptances and endorsements 357 459 Guarantees and assets pledged as collateral
Shares in group undertakings 23 11,152 10,197 Loans to group undertakings 23 759 759
Total assets less current liabilities 10,246 9,204 Creditors Amounts falling due after more than one year
Retained profit 1,041 1,063 Currency translation differences on foreign currency net investments (68) (33) Issue of shares 74 108 Goodwill written back on sale and closure of businesses 109 80 aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Net increase in shareholders’ funds 1,156 1,218 Shareholders’ funds at beginning of year 8,581 7,475 Prior year adjustment (note 1) – (112)
for the year ended 31 December 2000 2000 1999* £ million £ million aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff
Net cash outflow from acquisitions and disposals (5,027) (24) Equity dividends paid (1,522) (1,285)
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, in compliance with Section 255A, Schedule 9 and other requirements of the Companies Act 1985, in accordance with applicable accounting standards, pronouncements of the Urgent Issues Task Force and with the Statements of Recommended Accounting Practice issued by the British Bankers’ Association.
The Group has taken advantage of the dispensation in the Urgent Issues Task Force’s Abstract 17 ‘Employee Share Schemes’ not to apply that Abstract to the Group’s Inland Revenue approved SAYE schemes.
Paragraph 28 of Schedule 9 to the Companies Act 1985 requires that all goodwill carried on the balance sheet should be amortised. In the case of the goodwill arising on the acquisition of Scottish Widows, the directors consider that it is appropriate to depart from this requirement in order to comply with the over-riding requirement for the accounts to show a true and fair view. If this goodwill was amortised over a period of 20 years, profit before tax for the year ended 31 December 2000 would be £78 million lower, with a corresponding reduction in reserves; intangible assets on the balance sheet would also be £78 million lower.
Income from instalment credit transactions is calculated by the sum of the digits method.
The cost of providing post-retirement benefits other than pensions is charged to the profit and loss account on a systematic basis over employees’ working lives. The unfunded liability is included in provisions in the balance sheet.
Changes in the value placed on long-term assurance business attributable to shareholders, 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.
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 relating to separable new systems, motor vehicles and other equipment are 3-8 years.
Staff costs 1,888 1,717 Other administrative expenses 1,490 1,423 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 3,378 3,140afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3 Administrative expenses (continued) 2000 1999 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Audit and similar services 11 8 Consultancy and advisory services 25 25 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Total fees 36 33afffffffffffffffffffffffffff afffffffffffffffffffffffffff The auditors’ remuneration for the holding company was £50,000 (1999: £50,000).
Following completion of the acquisition of Scottish Widows in March 2000, the Group has been integrating its businesses with the Group’s existing insurance and investments activities. During 2000 costs of £59 million have been incurred on this integration. In addition, a provision of £21 million has been made to cover the cost of integrating Chartered Trust Group plc and ACL Autolease Holdings Limited following their acquisition in September 2000.
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 14 7afffffffffffffffffffffffffff afffffffffffffffffffffffffff 6 Loss before tax on sale and 2000 1999 closure of businesses £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
– (126)afffffffffffffffffffffffffff afffffffffffffffffffffffffff During 1999 the Group announced its decision to withdraw from the global custody and unit trust trusteeship business and the consequential run-down and closure of Lloyds TSB Securities Services. A provision was raised in 1999 for the expected operating losses up to the date of closure and this provision has been released as the operating losses have been incurred over 2000; the closure of Lloyds TSB Securities Services has now been completed.
The new business capability of Abbey Life was sold on 1 February 2000. A provision of £98 million was made for the loss on sale in 1999; this loss included £80 million in respect of goodwill previously written off to reserves and other asset write-downs.
Profit on ordinary activities before tax is stated after taking account of: Income from: Aggregate amounts receivable in respect of assets leased to customers and banks under: Finance leases and hire purchase contracts 3,295 3,578 Operating leases 151 62
Profit less losses on disposal of investment securities 109 59 Share of results of associated undertakings and joint ventures 3 12
Charges: Rental of premises 193 195 Hire of equipment 26 33 Interest on subordinated liabilities (loan capital) 490 362 8 Segment analysis Profit on ordinary activities before tax 2000 1999*
Central group items (133) 119 Loss on sale and closure of businesses – (126)
Life and pensions segmental profit 768 333 Items separately disclosed: Short-term fluctuations in investment returns (92) 6 Changes in economic assumptions 127 – Stakeholder pension related charge (80) – Pension provisions (100) (102)
Income net of claims and technical provisions 937 621 Pension provisions (100) (102) Operating expenses (471) (291) Tax charged to technical account (191) (159)
UK Retail Financial Services 8,743 4,973 80,729 67,379 Wholesale Markets and aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 9,774 8,614 166,897 149,437afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 9,774 8,614 166,897 149,437afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff *1999 figures have been restated to take account of changes in internal cost allocation, a number of organisational changes, and a change in treatment of certain central income items, which were previously allocated to business units but are now reported within central group items.
**The weighted average number of shares for the year has been calculated after deducting 9 million (1999: 11 million) ordinary shares held by TSB Group Holdings (Jersey) Limited, and the trustees of the TSB Group Employee Trust, the Lloyds TSB Group Employee Share Ownership Trust and the Lloyds TSB Qualifying Employee Share Ownership Trust, on which dividends have been waived (note 29).
Bills sold or matured (8,332) (50) (8,382) Amortisation of premiums and discounts – 45 45 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 15,290 16,963afffffffffffffffffffffffffff afffffffffffffffffffffffffff Repayable on demand 2,794 1,132 Other loans and advances by residual maturity repayable: 3 months or less 10,352 12,266 1 year or less but over 3 months 1,365 2,780 5 years or less but over 1 year 478 490
Total loans and advances to customers 116,662 104,316 Provisions for bad and doubtful debts (2,117) (2,067) Interest held in suspense (90) (100)
Provisions for bad and doubtful debts (2,117) (2,067) Interest held in suspense (90) (100)
CARS Trustee (UK) No 4 Limited is responsible for the collection and onward payment of all amounts falling due under the terms of the receivables sold to CARS 4. Principal receipts are used either to redeem floating rate notes or to purchase further receivables; to date all principal receipts have been used to purchase further receivables. Income receipts are applied in the following order of priority: interest due on the floating rate notes; credit manager fees; payments under swaps; amounts due to third parties; dividends; and residual income to Chartered Trust plc. Chartered Trust plc has been appointed by CARS Trustee (UK) No 4 Limited as credit manager and receives a fee for fulfilling this function. It has no liability to the noteholders or any creditor of CARS 4 or CARS Trustee (UK) No 4 Limited other than through failure to meet its obligations as credit manager or for breach of warranties given. Chartered Trust plc has no interest in the share capital of CARS 4 or CARS Trustee (UK) No 4 Limited.
doubtful debts Specific General Specific General £m £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
In respect of: Loans and advances to banks 56 56 Loans and advances to customers 2,117 2,067 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,173 2,123afffffffffffffffffffffffffff afffffffffffffffffffffffffff 17 Interest held in suspense and non-performing 2000 1999 lending £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Exchange and other adjustments – (5) Interest written off (20) (77) Interest taken to income (8) (9) Interest suspended during the year 18 46 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Investment securities: Other public sector securities 1 1 4 4 Bank and building society aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Treasury bills and other eligible bills 546 429 Debt securities 3,543 3,496 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,089 3,925afffffffffffffffffffffffffff afffffffffffffffffffffffffff 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.
On an historical cost basis, shares in group undertakings would have been included as follows: Cost Provisions Book value £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Scottish Widows plc Scotland †100% Life assurance Scottish Widows Annuities Scotland †100% Life assurance Limited
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, Gibraltar, Guatemala, Hong Kong, Honduras, Japan, Luxembourg, Malaysia, Monaco, Netherlands, Panama, Paraguay, Singapore, Spain, Switzerland, Uruguay, the USA and a representative office in Iran. Lloyds Bank (BLSA) Limited operates in Ecuador. The National Bank of New Zealand Limited also operates through a representative office in Hong Kong.
During 2000 the Group was party to the creation of a new payments processing company, Intelligent Processing Solutions Limited (‘iPSL’), in conjunction with Unisys and Barclays Bank. This new company began operating in December 2000 and now handles all of the Group’s UK cheque processing activities, for which fees are charged by iPSL to the Group. The staff previously employed by the Group in its UK cheque processing activities have been transferred to the employment of iPSL.
25 Intangible fixed assets Net Cost Amortisation book value £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
At 31 December 2000 2,635 36 2,599afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 26 Tangible fixed assets Operating lease
Lloyds TSB Group plc sponsors the TSB Group Employee Trust and the Lloyds TSB Group Employee Share Ownership Trust, two discretionary trusts for the benefit of employees and former employees of the Lloyds TSB Group. The Company has lent £44 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 trusts, 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 2000, 3 million shares were held by the trustees with a book value of £24 million and a market value of £22 million. (1999: 6 million shares with a book value of £30 million and a market value of £44 million).
In addition, a further 1 million ordinary shares were held by TSB Group Holdings (Jersey) Limited at 31 December 2000 (1999: 1 million shares). These shares, on which the dividend entitlement has been waived, were gifted to the Group some years ago at nil cost and are used to satisfy outstanding options or to meet commitments arising under other employee share schemes.
Risk-adjusted discount rate (net of tax) 8.50 10.00 Return on equities (gross of tax) 8.00 8.50 Return on fixed interest securities (gross of tax) 5.25 5.25 Expenses inflation 3.00 3.00
The long-term assurance assets attributable to policyholders comprise: Value of other shareholders’ interests in long-term assurance funds 2,421 1,551 Premises and equipment 20 30 Net current assets (liabilities) 2,510 (483)
Short-term timing differences (59) (94) Pensions prepayment 230 185 Provision for Emerging Markets Debt (198) (212) Accelerated depreciation allowances 1,586 1,580 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,559 1,459afffffffffffffffffffffffffff afffffffffffffffffffffffffff £m aaaaaffffffffffffffffffffffffff
In July 1999 the Group announced its decision to withdraw from the global custody and unit trust trusteeship business. As a result, a provision of £28 million was raised for the anticipated operating losses to be incurred by Lloyds TSB Securities Services until the business was closed. The provision has been released to match losses as they have been incurred over the period of run down of the business; this was completed by the end of 2000.
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,119 3,199 512 511afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Total subordinated liabilities 7,510 6,493 512 511afffffffffffffffffffffffffff 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.
Company on a subordinated basis. ✠ Issued during 2000 primarily to provide capital resources in connection with the acquisition of Chartered Trust. ¶ At the callable date the coupon on these Notes will be reset by reference to the applicable five year benchmark gilt rate. § These bonds bear interest, to be reset 5 years before redemption date, at a fixed margin over New Zealand Government stocks. ■ In the event that the Notes are not redeemed at the callable date, the coupon will be reset to a floating rate. ✜ In the event that the Notes are not redeemed at the callable date, the coupon will be reset to a fixed margin over the then 5 year Yen swap rate. ❖ Exchangeable at the election of the Group for further subordinated floating rate notes. ▲ Issued during 2000 primarily to finance the general business of the Group.
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 515 –afffffffffffffffffffffffffff afffffffffffffffffffffffffff *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 of the Group, is the general partner. Non-cumulative 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.
Ordinary ordinary shares of shares of 25p each 25p each Total £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
The Group profit and loss account reserves at 31 December 2000 include £1,396 million (1999: £1,165 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 £1,828 million was within the last 10 years.
The Group enters into certain transactions with its long-term assurance businesses which are not eliminated in the consolidated accounts. At 31 December 2000 Group entities owed £2,126 million (1999: £1,775 million) and were owed £1,164 million (1999: £1,337 million). In addition, fees of £68 million (1999: £42 million) were received, and fees of £29 million (1999: £30 million) were paid, in respect of asset management services.
Details of transactions with the Group’s joint venture are set out in note 24.
Other commitments 3 14 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 42,589 27,876afffffffffffffffffffffffffff afffffffffffffffffffffffffff 48 Derivatives and other financial instruments
Exchange rate contracts: Spot, forwards and futures 85,939 1,648 1,529 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 94,795 1,927 1,774afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff Interest rate contracts: Interest rate swaps 382,812 3,939 4,002 Forward rate agreements 85,613 83 67 Options purchased 4,545 97 – Options written 3,067 – 72 Futures 40,022 – –
Non-trading Through intra company and intra group transactions the Group establishes non-trading derivatives positions with the Group’s independent trading operations. Similar positions are also established with third parties. The notional principal amounts and fair values of non-trading instruments entered into with third parties were as follows: Notional Fair values principal aaaaaffffffffffffffffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffffss amount Positive Negative aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Net balances with group trading books (148) 982 264 6,188 374 – 7,660 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Net balances with group trading books 1,372 272 733 4,051 204 – 6,632 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Loans and advances to banks and customers 322 322 – – Debt securities and equity shares 8,416 8,416 5,713 5,972 Liabilities: Deposits by banks and customers 1,201 1,201 – – Debt securities in issue 956 956 16,943 16,982 Subordinated liabilities – – 7,510 7,692
Total 1,703 1,690afffffffffffffffffffffffffff afffffffffffffffffffffffffff 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.
At 31 December 2000, the unrecognised gains on financial instruments used for hedging were £200 million (1999: £161 million) and unrecognised losses were £457 million (1999: £253 million).
The balance sheet of Scottish Widows at 3 March 2000 was as follows: Book value Fair value at Fair value at 3 March adjustments acquisition £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Under the terms of the transfer of Scottish Widows’ business, as set out in the Policyholder Circular dated 19 November 1999, a separate memorandum account was created within the With Profits Fund on 3 March 2000 called the Additional Account with a balance of £1.7 billion. This account included £1.3 billion which is available to meet any additional costs of meeting guaranteed benefits including annuity benefits on transferred policies allocated to the With Profits Fund and any unexpected liabilities which arise in the future but relate (with certain exceptions) to the operations of Scottish Widows and its subsidiaries prior to 3 March. The assets allocated to the Additional Account include certain hedge assets which are intended to protect the With Profits Fund against the consequences of a future fall in interest rates including increases in the costs of meeting policy guarantees.
The balance sheet of Chartered Trust at 1 September 2000 was as follows: Book value Fair value at Fair value at 1 September adjustments acquisition £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Operating profit 3,886 3,747 Increase in prepayments and accrued income (121) (231) Increase in accruals and deferred income 830 183 Provisions for bad and doubtful debts 475 588 Net advances written off (583) (614) Restructuring costs incurred – (62) General insurance claims 142 169 General insurance claims paid (146) (145) Amounts written off fixed asset investments 14 7 Income from long-term assurance business (615) (227) Interest on subordinated liabilities (loan capital) 490 362 Interest element of finance lease rental payments 1 – Depreciation and amortisation 386 277 Other non-cash movements (192) (186)
Net cash inflow from operating activities 7,558 1,261afffffffffffffffffffffffffff afffffffffffffffffffffffffff b Analysis of cash as shown in the balance sheet 2000 1999 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
At 31 December 515 –affffffffffffffffffffffff afffffffffffffffffffffffffff Subordinated liabilities and finance leases £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Effect of foreign exchange movements 120 (69) Cash inflow from financing 897 2,541 Capital repayments (4) (3) Adjustments on acquisition 23 –
aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 6,588 27afffffffffffffffffffffffffff afffffffffffffffffffffffffff g Disposal of group undertakings and businesses 2000 1999 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff
Net assets disposed of: Interests in associated undertakings – 2 Other net assets 2 – Goodwill written back on disposal 93 –
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