Pre-tax profits in Lloyds TSB Asset Finance increased by 145 per cent to £162 million in 2003
Our key objective is to build strong customer franchises, and the guiding financial principle will be measuring and managing on economic profit growth. The result, we believe, will be top quartile shareholder return. In 2003, we have changed the strategic direction of the Lloyds TSB Group to improve our focus on our core customer franchises and to build sustainable competitive positions. The Group has also significantly strengthened its management team with a number of senior executive appointments to support the implementation of the new strategy. As a result, I believe Lloyds TSB Group has a real opportunity to reap the rewards of the very substantial efforts made by everyone in 2003, and thereby to realise the LloydsTSB Group’s full potential.
This reflects the successful development of our multi-channel distribution strategy. Overall, sales from direct channels amounted to nearly 40 per cent of total retail banking sales in 2003, representing a significant increase over the prior year.
In common with other life assurance companies in the UK, the life and pensions business of each of the life assurance companies in the Lloyds TSB Group is written in a long-term business fund. The long-term business fund is divided into With-Profits and Non-Participating sub-funds.
In the mortgage market, competitors include the traditional banks and building societies and new entrants to the market, with the market becoming increasingly competitive as both new entrants and incumbents endeavour to gain market share. Lloyds TSB Group’s competitors in the credit card market again include both the traditional banks and new entrants, including overseas companies. In the last few years a significant share of new business has been acquired by US and new UK competitors.
Lloyds TSB Group’s businesses are inherently subject to the risk of market fluctuations, which could reduce profitability.
Terrorist acts and other acts of war could have a negative impact on the business and results of operations of Lloyds TSB Group.
Premium income from general insurance underwriting increased by £58 million, or 14 per cent, to £486 million compared to £428 million in 2001. There was growth of £69 million in premiums from home insurance products, reflecting successful cross-selling to Lloyds TSB Group’s mortgage customers and the strength of the UK housing market. This has been partly offset by a further small decline in creditor insurance as this portfolio is now in run-off, following the outsourcing of the card protection book in 2000. Re-insurance premiums payable increased by £7 million following the decision to mitigate risks on policies with large sums assured.
Within Central group items there was a net release of provisions of £13 million from the provisions held against medium-term debt in the emerging markets portfolio. This portfolio has now either been disposed of or the lending has been repaid.
The operating profit from Insurance and Investments, calculated as explained under ‘Operating and financial review and prospects – Line of business information – Summary’, fell by £136 million to £1,094 million from £1,230 million in 2002.
Interest receivable and similar income Treasury bills and other eligible bills: Loans and advances to banks: Loans and advances to customers: Debt securities: Lease and hire purchase receivables: Total banking book interest receivable and similar income (400) 747 (1,147) (815) 880 (1,695) Total trading book interest receivable and similar income 64 80 (16) 58 127 (69)
The Lloyds TSB Group sets high standards for the conduct of its business and values its reputation. Responsibility for establishing an effective organisational structure is vested in Group and business management. Sound internal risk management practices are promoted through business directors who are ultimately responsible for identifying, measuring, monitoring and controlling the risks within their specific areas of accountability.
Group rating system. All business units operate an authorised rating system complying with the Lloyds TSB Group’s standard methodology. The Lloyds TSB Group uses a ‘Master Scale’ rating structure with ratings corresponding to a range of probability of future default.
Liabilities arising in the course of business from Lloyds TSB Group’s retail banking business fall into two broad categories: • those which are insensitive to interest rate movements, non-interest bearing liabilities such as shareholders’ funds and interest-free or very low interest current account deposits; and
Product promotion, distribution and sales. Businesses have a defined channel distribution strategy for products, consistent with the Lloyds TSB Group’s distribution strategy. Businesses launching new products are responsible for ensuring compliance with all applicable regulations, and that the proposed sales activity is appropriate for the type of customer and their attitude to risk.
• Require, and define the role of, an appointed actuary for each insurance company carrying out long-term business in the UK. The appointed actuary is responsible for monitoring the financial health of the company.
The Financial Ombudsman Service (‘FOS’) was established at N2 pursuant to the FMSA to provide customers with a free, independent service designed to resolve disputes where the customer is not satisfied with the response received from the regulated firm. The FOS resolves disputes that cover most financial products and services provided in (or from) the United Kingdom, from insurance and pension plans to bank accounts and investments, for eligible complainants, private individuals and small businesses, charities or trusts. The decisions made by the FOS are binding on firms. Under section 229 of the FMSA, if a complaint is determined in favour of the complainant, the determination may include a money award against the firm of such amount as the Ombudsman considers fair compensation for financial loss and subject to the maximum limit of £100,000, or a direction that the firm take such steps in relation to the complainant as the Ombudsman considers just and appropriate or, both of these.
A current industry issue concerns the sale of life assurance products related to the repayment of residential mortgages (‘mortgage endowments’). At sale, the premium is set at a level such that the projected benefits, including an estimate of growth over the life of the policy and allowing for an estimate of the expenses to be charged, will equal or exceed the mortgage debt. Falling investment returns have led to increased concern that the value of some of these policies will be less than the amount required to repay the mortgage. Certain customers have complained that this risk was not properly explained to them at the time of the sale.
It is currently intended that the other companies in the comparator group will be: Alliance & Leicester Abbey National Aviva Barclays Bradford & Bingley Friends Provident HBOS HSBC Holdings Legal & General Northern Rock Prudential Royal Bank of Scotland Royal & Sun Alliance Standard Chartered
Executive directors are either entitled to pensions based on salary and length of service, with a maximum pension of two thirds of final salary, or are members of the defined contribution scheme and their final entitlement will depend on their contributions and the final value of their fund. The defined benefits schemes are closed to new entrants on recruitment.
Mr Hampton’s employment was terminated on 12 January 2004 and the payments to which he is entitled will be settled in accordance with Lloyds TSB Group policy. Full details will be reported in the 2004 report and accounts.
Items in course of transmission to banks 626 775 Debt securities in issue 34 25,922 30,255
Total recognised gains and losses relating to the year 3,368 (544) 137 Prior year adjustment in respect of changes in accounting policy in 2003 (note 1) (29) – – Prior year adjustments in respect of changes in accounting policy in earlier years – (404) 248
Capital expenditure and financial investment: – Additions to fixed asset investments (35,420) (46,830) (47,049) – Disposals of fixed asset investments 36,281 45,507 40,530 – Additions to tangible fixed assets (778) (1,315) (1,157) – Disposals of tangible fixed assets 287 359 285 – Capital injections to long-term assurance business – (140) (100) Net cash inflow (outflow) from capital expenditure and financial investment 370 (2,419) (7,491)
It is the Group’s policy to make provisions for bad and doubtful debts, by way of a charge to the profit and loss account, to reflect the losses inherent in the loan portfolio at the balance sheet date. There are two types of provision, specific and general, and these are discussed further below.
Assets, liabilities and results in foreign currencies are expressed in sterling at the rates of exchange ruling on the dates of the respective balance sheets. Exchange adjustments on the translation of opening net assets held overseas are taken direct to reserves. All other exchange profits or losses, which arise from normal trading activities, are included in the profit and loss account.
Provisions for bad and doubtful debts (496) – – – (489) 7 (978) (51) (1,029) Amounts written off fixed asset investments – – – – (57) (30) (87) – (87) Share of results of joint ventures (11) – – – – – (11) – (11)
Capital expenditure contracted but not provided for at 31 December 2003 amounted to £77 million (2002: £117 million) of which £71 million (2002: £107 million) relates to assets to be leased to customers under operating leases.
At 1 January – as previously reported 6,213 6,366 Prior year adjustment (note 1) – (22)
Income from long-term assurance business is set out below: 2003 2002* 2001*
Movements in the provision over the last three years have been as follows: £m £m £m
Merger reserve (the Group): At 1 January and 31December 343 343 343
† The long-term assurance funds of Scottish Widows hold 31 million shares (2002: 31 million; 2001: 31 million) in Lloyds TSB Group plc which were bought prior to the acquisition of Scottish Widows by the Lloyds TSB Group. Due to the structure of these funds, the Lloyds TSB Group is effectively exposed to the risk and rewards of ownership of one tenth of these shares; the remaining nine tenths are held to meet liabilities to policyholders.
The financial assumptions used to calculate the projected benefit obligation at 31December 2003 and 2002 are as follows: Discount rate 5.40 5.60 Expected rate of salary increases 4.04 3.83 Rate of pension increases 2.50 2.30
The disclosures for investment securities in the tables below include those held within the banking business as reported in notes 18 and 19 and those held within the insurance business. Securities held by the general insurance business are included within notes 18 and 19 under UK GAAP; for the purposes of US GAAP they are classified within insurance activities. At 31 December 2003, the book and market values of these securities were £396 million (2002: £297 million). The Group had no held-to-maturity securities at 31 December 2003 or 31 December 2002.
US GAAP Deferred tax liability 1,444 1,422 * Under UK GAAP applicable to banking groups, the Group accounts for its life assurance operations using the embedded value basis of accounting and the shareholder’s and policyholders’ interests are accounted for as one-line items. Under US GAAP the constituent parts of the shareholder’s and policyholders’ interests are separately disclosed and as a result of this reclassification the total deferred tax liability has been decreased. There is no impact on the underlying shareholder’s equity.
There are no UK governmental laws, decrees or regulations that affect the remittance of dividends or other shareholder payments to non-residents of the UK who hold shares of Lloyds TSB Group plc.
Fourth quarter 37.75 27.85 Third quarter 41.84 28.97 Second quarter 48.55 38.30 First quarter 45.30 39.16 Monthly prices: On 4 March 2004, the closing price of ADSs on the New York Stock Exchange was $33.78.
Lloyds TSB Group plc does not know of any shareholder owning beneficially, directly or indirectly, 5 per cent or more of the shares of Lloyds TSB Group plc, or of any shareholder having more than 5 per cent of the voting rights.
Holders of ordinary shares or ADSs, other than US holders, who are not resident for tax purposes in the UK and who receive a dividend from the Lloyds TSB Group will not have any further UK tax to pay in respect of the dividend, but will not normally be able to claim any additional payment in respect of the dividend from the UK Inland Revenue under any applicable Double Tax Treaty.
Cheltenham & Gloucester plc England 100%* Mortgage lending and Barnett Way retail investments Gloucester GL4 3RL