In the 2003 IFA Service Awards, Scottish Widows achieved 5-star ratings in all categories
Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks and financial institutions, and small and medium-sized UK businesses, including venture capital finance. It also provides asset finance and share registration services to personal and corporate customers, manages Lloyds TSB Group’s activities in financial markets through its treasury function and provides banking and financial services overseas.
In circumstances where there is significant doubt over the recoverability of specific loans and advances, provisions are made to reduce the carrying value of those advances to their expected ultimate net realisable value; at 31December 2003, the Lloyds TSB Group held specific provisions totalling £1,313 million. The methodology used to calculate the required provision varies according to the type of lending portfolio. For portfolios of smaller balance homogenous loans, such as residential mortgages, personal loans and credit card balances, specific provisions are calculated using formulae which take into account factors such as the length of time that the customer’s account has been delinquent, historic loss rates and the value of any collateral held. The variables used in the formulae are kept under regular review to ensure that as far as possible they reflect the current economic circumstances, although actual experience may differ from that assumed.
Total income was £1,021 million higher at £9,908 million, compared to £8,887 million in 2002. Lloyds TSB Group’s net interest income increased by £84 million, or 2 per cent, to £5,255 million. Average interest-earning assets increased by £11,078 million, or 7 per cent, to £172,896 million, adding £284 million to net interest income. In the UK, average personal lending and mortgage balances increased by £10,140 million driven by the strong residential housing market and the continuing demand for consumer credit. Wholesale balances were £1,558 million higher as a result of increased asset finance lending and the full year effect of structured finance transactions entered into during 2002. Average balances overseas decreased by £720 million, following the reclassification at the end of 2002 to trading assets of the Lloyds TSB Group’s portfolio of emerging markets debt securities. The effect of volume growth was partly offset by a 16 basis point fall in the net interest margin, reducing net interest income by £259 million; the implementation of the Competition Commission’s SME report remedies caused the margin to reduce by 10 basis points. Favourable exchange movements increased net interest income by £59 million.
Other finance income, at £34 million, was down £131 million from £165 million in 2002. The expected return on pension scheme assets was £121 million lower, reflecting the significant reduction in market value of scheme assets at the end of 2002, as a result of stock market conditions. The interest charge in respect of the unwinding of the discount on scheme liabilities was £10 million higher, as the effect of the increased level of scheme liabilities at the start of 2003 has been partly offset by a lower discount rate.
The domestic net interest margin decreased by 19 basis points, reducing net interest income by £226 million, as a result of a reduction in the contribution of interest-free liabilities and the continuing shift in the mix of average interest-earning assets towards finer margin corporate and wholesale lending. In UK Retail Banking and Mortgages there was a 7 basis point decrease in the net interest margin. In Wholesale there was a 20 basis point reduction caused by the further growth in finer margin corporate lending.
Fees and commissions payable (722) (645) (602) Dealing profits (before expenses): – Foreign exchange trading income 228 173 158 – Securities and other gains 332 15 75
Premises and equipment costs were £1 million higher; there was little change in costs during 2003 as the effect of branch closures offset the impact of acquisitions made during 2002.
The operating profit from the general insurance businesses fell by £33 million, or 4 per cent, to £720 million. Profit from the broking business was £54 million lower reflecting both a reduction in commission income and an increase in operating expenses, principally in relation to staff costs as a result of the annual pay review and increased numbers to support new business volumes and other initiatives. Within the underwriting business, profits improved by £21 million supported by growth in income coupled with a reduction in the claims ratio to 42.4 per cent from 45.7 per cent in 2002. See ‘Operating and financial review and prospects – Line of business information – General Insurance’.
• Independent review of credit exposures at divisional and Group level.
Trading activities. Trading is restricted to a number of specialist centres, authorised by Group Treasury, the most important centre being the Lloyds TSB Group’s Financial Markets Division in London. The level of exposure is strictly controlled and monitored within approved limits locally and centrally by Group Treasury. Most of the Lloyds TSB 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 are shown in the profit and loss account as dealing profits.
Lloyds TSB Group is committed to the fair treatment of its customers. A range of management information measures is in place across the Lloyds TSB Group to support the tracking of key customer treatment indicators. Group Risk Management and Group Audit are required to report regularly on customer treatment risk, management information trends and on compliance with the Lloyds TSB Group’s standards.
The credit ratings of Lloyds TSB Group plc were one notch lower. The ratings outlook from Moody’s and Fitch for Lloyds TSB Bank is stable. The Standard & Poor’s rating outlook is negative. These credit ratings are not a recommendation to buy, hold or sell any security; and each rating should be evaluated independently of every other rating.
Maturity analysis and interest rate sensitivity of loans and advances to customers and banks as at 31 December 2003
Certificates of deposit issued Balance at the period end 16,415 21,246 17,060 Average balance for the period 20,663 22,040 14,643 Maximum balance during the period 22,500 26,199 18,160 Average interest rate during the period 3.1% 3.2% 5.0% Interest rate at the period end 3.2% 3.2% 3.7%
Directors’ remuneration policy The Lloyds TSB Group’s remuneration policy is to ensure that individual rewards are aligned with Lloyds TSB Group’s performance and the interests of its shareholders, and that packages are provided which attract, retain and motivate executive directors and senior management to perform to the highest standards.
In 2004, options will be granted to executive directors and senior executives within the scheme limits. These limits relate to the number of shares under option and the price payable on exercise. The maximum limit for the grant of options to an executive director in any one year is equal to 1.5 times annual basic salary multiplied by a performance multiplier of 3.5, although in exceptional circumstances, for example on the recruitment of a new executive director, that could be increased to 4 times annual basic salary multiplied by 3.5.
The option is designed to encourage Mr Targett to remain with Lloyds TSB Group plc. Accordingly, the option, which is not subject to any performance conditions, will normally become exercisable only if Mr Targett remains as an employee, and has not given notice of resignation, on 31December 2005. The option will also be exercisable if Mr Targett ceases to be an employee before that date in certain circumstances described in his service agreement, in which case the option will be exercisable for six months and then lapse. These circumstances include Mr Targett’s being entitled to terminate his service agreement without notice by reason of his employer’s conduct or being removed as a director or employee otherwise than in accordance with that agreement. The option may also become exercisable early on a takeover or reconstruction of Lloyds TSB Group plc, if Mr Targett’s service agreement is terminated by Lloyds TSB Group plc due to sickness or injury, or if he dies (in which case his personal representatives would generally have twelve months from the date of death to exercise the option).
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.
Income from long-term assurance business 30 436 17 453 (294) (30) General insurance premium income 535 – 535 486 428
Returns on investments and servicing of finance: – Dividends paid to equity minority interests (note 49d) (14) (18) (17) – Payments made to non-equity minority interests (note 49d) (81) (43) (40) – Interest paid on subordinated liabilities (loan capital) (600) (463) (514) – Interest element of finance lease rental payments – – (1) Net cash outflow from returns on investments and servicing of finance (695) (524) (572)
Accounting policies are unchanged from 2002 except that: (i) The Group has implemented the requirements of Urgent Issues Task Force (‘UITF’) Abstract 37 ‘Purchases and sales of own shares’ and UITF Abstract 38 ‘Accounting for ESOP trusts’. As a result, holdings of shares in Lloyds TSB Group plc owned by subsidiaries and the Group’s employee share ownership trusts, which were previously shown as assets in the balance sheet, are now treated as a deduction from shareholders’ funds. Purchases and sales of Lloyds TSB Group plc shares are accounted for as movements in shareholders’ funds and no gains or losses are recognised in the profit and loss account. The charge to the profit and loss account in respect of share options granted to employees, that are expected to be satisfied from shares held within the employee share ownership trusts, is now calculated on the basis of the original intrinsic value of the options, rather than the carrying value of the shares. In the case of Lloyds TSB Group plc shares held within the with-profits long-term assurance fund an appropriate adjustment has been made to long-term assurance liabilities to policyholders.
Income from long-term assurance business 436 – 436 17 453 General insurance premium income 535 – 535 – 535
• The sale, announced on 9 October 2003 and completed on 15 December 2003, of its Brazilian subsidiaries Banco Lloyds TSB S.A. and Losango Promotora de Vendas Ltda, together with substantially all of the business of the Brazilian branch of Lloyds TSB Bank plc and certain offshore Brazilian assets.
The charge for tax on the profit for the year is based on a UK corporation tax rate of 30 per cent (2002: 30 per cent; 2001: 30 per cent).
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.
51/4% Subordinated Notes 2008 (DM 750 million) 269 249 – – 105/8% Guaranteed Subordinated Loan Stock 2008 e 100 100 – –
Profit and loss account (the Company): At 1 January – as previously reported 2,438 Prior year adjustment (note 1) (18)
The charge to the Group’s profit and loss account reserves represents the loss on transactions in own shares of £10 million (2002: £65 million; 2001: £183 million) less the net reduction in the cost of own shares of £4 million (2002: a reduction of £7 million; 2001: an increase of £3 million) and an increase in the accrual in respect of free shares to be awarded in respect of Shareplan of £4 million (2002: decrease of £12 million; 2001: decrease of £9 million).
All own shares held are reclassified as Treasury stock and deducted from shareholders’ equity in accordance with the AICPA Accounting Research Bulletin (ARB) No. 51 ‘Consolidated Financial Statements’.
Under US GAAP, from 1 January 2002 the Group adopted the remaining provisions of SFAS No. 142 and accordingly all goodwill arising in respect of acquisitions is capitalised but no longer amortised and is subject to regular review for impairment; in periods prior to 1 January 2002, goodwill arising in respect of acquisitions was amortised over periods of up to 20 years. Goodwill amortised prior to the full adoption of SFAS No. 142 is not permitted to be reinstated.
Realised gains and losses are computed using the weighted average cost method. Gross gains of £13 million (2002: £nil) were recorded on securities transferred from available-for-sale to trading.
UK GAAP Profit and loss tax charge 1,025 766 877 Deferred tax – US GAAP (21) (25) (52) Deferred tax – US GAAP reconciling items (83) (165) (296)
Lloyds TSB Group utilises a number of different types of lending-related financial instruments, such as commitments and guarantees, to meet the financing needs of its customers. These are discussed more fully in note 46. Most of these guarantees and commitments expire without being drawn. Under the provisions of FIN 45, which establishes accounting and disclosure requirements for guarantors, a liability is required to be recognised for the fair value of guarantees issued from 1 January 2003. The fair value of the obligation is, in the substantial majority of cases, the amount of premium received under the contract. The adoption of FIN 45 did not have a material impact on Lloyds TSB Group’s US GAAP financial statements.
Price per ADS (in US dollars) Price per ADS (in US dollars) High Low
Subject to certain exceptions, such as for dealers in securities and for some insurance companies with overseas business, UK resident corporate shareholders or ADS holders will generally not be subject to corporation tax in respect of dividends received from Lloyds TSB Group, but will not be entitled to the payment of any tax credit with respect to the dividends.
Embedded value See definition under ‘Operating and financial review and prospects – Critical accounting policies’.
Weighted sales The sum of regular premiums plus one-tenth of single premiums paid by customers on life insurance, pensions and unit trusts.