• Excellent cost control, with a clear focus on improving processing efficiency and service quality.
One of the cornerstones of our business model is engaging our staff as we believe this is critical to driving customer satisfaction. I am pleased that we again achieved record employee engagement scores in 2006. These scores match those achieved by other high performing companies, and reflect the focus we place on developing our people in support of our strategy. We have also continued to strengthen the broader management team, which is enhancing our ability to grow the business in a sustainable fashion.
The Group’s key market place is the UK, in the retail and corporate banking, and insurance sectors. Retail banking markets have shown strong rates of growth in recent years, notably in unsecured consumer borrowing but the combination of higher interest rates and higher living costs have started to normalise future growth expectations. We forecasted this change last year and have increasingly focused our strategies towards non-lending related product sales and have made good progress in growing current account, bank savings and bancassurance product sales. The markets for mortgage lending, bank savings and life, pensions and investment products are expected to continue to show good rates of growth over the next few years and this will support our growth plans.
The businesses of Lloyds TSB Lloyds TSB Group’s activities are organised into three divisions: UK Retail Banking, Insurance and Investments, and Wholesale and International Banking. The main activities of Lloyds TSB Group’s three divisions are described below.
Structured Finance comprises the structured asset finance, leveraged lending and private equity, and other transactional lending and structuring businesses of Corporate Markets. Structured Finance executes transactions with existing corporate customers as well as introducing new-to-bank relationships to the franchise.
The Group has also continued to deliver good levels of growth in the mortgage business, particularly focusing on better quality, prime mortgage business and seeking to maintain economic returns in what, in 2006, was a competitive market. Gross new mortgage lending for the Group totalled £27.6 billion (2005: £26.0 billion). Mortgage balances outstanding increased by 8 per cent to £95.3 billion and net new lending totalled £6.9 billion, resulting in a market share of net new lending of approximately 10 per cent of the prime mortgage market and 6.3 per cent of the overall mortgage market.
Value of in-force business (certainty equivalent) 3,220 3,466 Value of financial options and guarantees (56) (193) Cost of capital (248) (262) Non-market risk (75) (70)
Profit before tax increased by £116 million, or 8 per cent, to £1,640 million. Good trading momentum has continued and has generated strong income growth of 8 per cent, driven by Corporate Markets income growth of 15 per cent. This exceeded cost growth of 4 per cent, leading to a reduction in the cost:income ratio to 53.8 per cent, from 56.0 per cent last year. Trading surplus increased by £236 million, or 14 per cent, to £1,948 million.
Continuing to grow a successful business is the best way for Lloyds TSB to create value for all its stakeholders and contribute to the wider economy. We are a major employer with some 63,000 employees. In 2006, salaries, national insurance, pension contributions and other staff costs totalled over £2.7 billion. Over £1.3 billion was paid to governments in tax and £1.9 billion was distributed to shareholders in the form of dividends. When dividends are added to share price appreciation, we delivered a total return to our shareholders of 24.8 per cent in 2006 (10.9 per cent in 2005).
• Credit portfolio model. The Group models portfolio credit risk based on defaults, using a statistically-based model which calculates the economic equity employed and credit value at risk for each portfolio.
The Group’s structural foreign exchange position at 31 December 2006 is set out in note 47 to the financial statements. The position implies that at 31 December 2006 a hypothetical increase of 10 per cent in the value of sterling against all other currencies would have led to a £43 million reduction in reserves, and vice versa. On this basis, there would have been no material impact on Lloyds TSB Group’s risk asset ratios.
Group functions (e.g. Group Human Resources, Group Risk, Group Finance, Group Strategy, Group Audit) are established to provide functional leadership (e.g. policy, strategy and standards), challenge and support across the Group and ensure information is consolidated at group level.
• Standards of behaviour. The Group has a code of business conduct which applies to all employees. It seeks to ensure that employees act with integrity and endeavour to deliver high levels of customer service. It promotes a working environment free from discrimination, harassment, bullying or victimisation of any kind. Employees are encouraged and expected to alert management to suspected misconduct, fraud or other serious malpractice. We provide mechanisms to facilitate disclosure if an employee is unable to inform their direct line management and will thoroughly investigate any reports made in good faith. The code as amended from time to time is available to the public on the Group’s website at www.lloydstsb.com.
• Performance and reward management. The Group seeks to ensure that all employees understand their role, the purpose of the role and where it fits into the wider team and organisational context. It manages and measures employees’ performance and contribution to collective goals and recognises the contribution of individuals in the context of the pay market and the performance of the business in which they work and rewards appropriately.
Change-related risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from change initiatives failing to deliver to requirements, budget or timescale or failing to implement change effectively or realise the desired benefits.
The Group’s regulatory capital is divided into tiers defined by the European Community Banking Consolidation Directive as implemented in the UK by the FSA’s Interim Prudential Sourcebook for Banks. Tier 1 comprises mainly shareholders’ equity, tier 1 capital instruments and minority interests, after deducting goodwill and other intangible assets. Tier 2 comprises collective impairment provisions, and qualifying subordinated loan capital, with restrictions on the amount of collective impairment provisions and loan capital which may be included. The amount of qualifying tier 2 capital cannot exceed that of tier 1 capital. Total capital is reduced by deducting investments in subsidiaries and associates which are not consolidated for regulatory purposes and investments in the capital of other credit/financial institutions. In the case of Lloyds TSB Group, this means that the net assets of its life assurance and general insurance businesses are deducted from its regulatory capital.
Archie G Kane Group Executive Director, Insurance and Investments Joined TSB Commercial Holdings in 1986 and held a number of senior and general management appointments in Lloyds TSB Group before being appointed to the board in 2000, as group executive director, IT and operations. Appointed group executive director, insurance and investments in October 2003. After some 10 years in the accountancy profession, joined General Telephone & Electronics Corporation in 1980, serving as finance director in the UK from 1983 to 1985. A member of the board of the Association of British Insurers.
Directors’ indemnities At the Company’s annual general meeting, new arrangements for indemnifying directors were approved. The Company subsequently agreed individual contracts of indemnity with the directors which constitute ‘qualifying third party indemnity provisions’ for the purposes of the Companies Act 1985. These contracts were in force from 11 May 2006 until the end of the financial year and are available for inspection at the Company’s registered office.
Audits of Group pension schemes 0.2 0.1 Audits of the unconsolidated Open Ended Investment Companies managed by the Group 0.4 0.2 Reviews of the financial position of corporate and other borrowers 1.6 1.2 Acquisition due diligence and other work performed in respect of potential venture capital investments 1.0 0.6
Rental income 313 272 Direct operating expenses arising from investment properties that generate rental income 24 24
Present value of funded obligations 17,378 17,320 Fair value of scheme assets (15,279) (14,026)
During the year ended 31 December 2006 the charge to the income statement in respect of these schemes was £56 million (2005: £49 million), representing the contributions payable by the employer in accordance with each scheme’s rules.
The movement in the net deferred tax balance is as follows: 2006 2005 £m £m
k) 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. 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 margin of 2.33 per cent over EURIBOR. This issue was made under the limited subordinated guarantee of Lloyds TSB Bank plc. In certain circumstances these preferred securities will be mandatorily exchanged for preference shares in Lloyds TSB Group plc. Lloyds TSB Group plc has entered into an agreement whereby dividends may only be paid on its ordinary shares if sufficient distributable profits are available for distributions due in the financial year on these preferred securities.
The charge to the income statement is set out below: 2006 2005 £m £m
Loans and advances to banks 40,639 31,656 Loans and advances to customers 190,478 177,016 Deposit amounts available for offset1 (6,392) (6,414) Impairment losses (2,194) (2,073)
Subordinated liabilities and finance leases: At 1 January 12,418 11,232 Exchange and other adjustments (687) 59 Issue of subordinated liabilities 1,116 1,361 Repayments of subordinated liabilities (759) (232) Finance lease capital repayments – (2)
Clarifies the application of IFRS 2 Sharebased Payment to certain share-based payment arrangements involving own equity instruments and arrangements involving equity instruments of a parent entity.
• requesting copies of the report and accounts in alternative formats for shareholders with disabilities