Final Results - Part 2
Lloyds TSB Group PLC
22 February 2008
PART 2
NOTES
Page
1 Accounting policies, presentation and estimates 36
2 Volatility 36
3 Mortgage lending 38
4 Group net interest income 39
5 Other income 40
6 General insurance income 40
7 Operating expenses 41
8 Number of employees (full-time equivalent) 41
9 Impairment losses by division 42
10 Retirement benefit obligations 42
11 Capital ratios 43
12 Total assets by division 44
13 Balance sheet information 44
14 Loans and advances to customers 45
15 Credit market positions in Corporate Markets 46
16 Profit on sale of businesses 47
17 Economic profit 48
18 Earnings per share 48
19 Scottish Widows - realistic balance sheet information 49
20 European Embedded Value reporting - results for the year ended 31 December 2007 50
21 Scottish Widows - weighted sales (Annual Premium Equivalent) 55
22 Legal and regulatory matters 55
23 Taxation 56
24 Dividend 57
25 Other information 57
Page 35 of 58
1. Accounting policies, presentation and estimates
The 2007 results have been prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union (EU). The
accounting policies adopted in the preparation of these results are unchanged
from those disclosed in the Group's consolidated financial statements as at and
for the year ended 31 December 2006 ('2006 Annual Report and Accounts') copies
of which can be found on the Group's website at
www.investorrelations.lloydstsb.com/ir/company_reports_page.asp or are available
upon request from the Company Secretary's Department, Lloyds TSB Group plc, 25
Gresham Street, London EC2V 7HN.
The following pronouncements relevant to the Group are applicable for the year
ended 31 December 2007:
Pronouncement Nature of change Effective date
IFRS 7 Financial Instruments: Consolidates financial instruments Annual periods beginning on or after
disclosures into a single standard and 1 January 2007
Disclosures requires more detailed qualitative and
quantitative disclosures about exposure
to risks arising from financial
instruments.
Amendment to IAS 1 Presentation Introduces additional disclosures of Annual periods beginning on or after
of Financial Statements - Capital the objectives, policies and processes 1 January 2007
Disclosures for managing capital, quantitative data
about what the entity regards as
capital, and compliance with capital
requirements.
The relevant disclosures are included in the Group's consolidated financial
statements for the year ended 31 December 2007.
2. Volatility
Banking volatility
Since the introduction of IFRS in 2005, in order to provide a clearer view of
the underlying performance of the business, the Group has separately disclosed
within Central group items the effects of marking-to-market derivatives held for
risk management purposes. This amount, net of the effect of the Group's IAS 39
compliant hedge accounting relationships, was previously disclosed as banking
volatility.
The use of fair values in financial reporting is now more widespread and there
is a better understanding of their effects; consequently, in line with evolving
best practice, the Group no longer considers it appropriate to disclose banking
volatility separately. Divisions will continue to transfer, through the Group's
internal transfer pricing arrangements, to Group Corporate Treasury (included in
Central group items) the movements in the market value of hedging derivatives
where the impact is not locally managed.
Page 36 of 58
2. Volatility (continued)
Insurance volatility
The Group's insurance businesses have liability products that are supported by
substantial holdings of investments, including equities, property and fixed
interest investments, all of which have a volatile fair value. The value of the
liabilities does not move exactly in line with changes in the fair value of the
investments, yet IFRS requires that the changes in both the value of the
liabilities and investments be reflected within the income statement. As these
investments are substantial and movements in their fair value can have a
significant impact on the profitability of the Insurance and Investments
division, management believes that it is appropriate to disclose the division's
results on the basis of an expected return in addition to the actual return.
The difference between the actual return on these investments and the expected
return based upon economic assumptions made at the beginning of the year is
included within insurance volatility.
Changes in market variables also affect the realistic valuation of the
guarantees and options embedded within products written in the Scottish Widows
With Profit Fund, the value of the in-force business and the value of
shareholders' funds. Fluctuations in these values caused by changes in market
variables, including market spreads reflecting credit risk premia, are also
included within insurance volatility. These market credit spreads represent the
gap between the yield on corporate bonds and the yield on government bonds, and
reflect the market's assessment of credit risk. Changes in the credit spreads
affect the value of the in-force business asset in respect of the annuity
portfolio.
The expected investment returns used to determine the normalised profit of the
business, which are based on prevailing market rates and published research into
historic investment return differentials, are set out below:
2008 2007 2006
% % %
Gilt yields (gross) 4.55 4.62 4.12
Equity returns (gross) 7.55 7.62 6.72
Dividend yield 3.00 3.00 3.00
Property return (gross) 7.55 7.62 6.72
Corporate bonds (gross) 5.15 5.22 4.72
During 2007, profit before tax included negative insurance volatility of £267
million, being a credit of £7 million to net interest income and a charge of
£274 million to other income (2006: positive volatility of £84 million, being a
credit of £2 million to net interest income and a credit of £82 million to other
income). The effect of widening credit risk spreads and falling gilt values
more than offset the favourable impact of a modest increase in equity values and
changes in market consistent assumptions. During 2006 increases in equity
values were partly offset by lower gilt values.
Policyholder interests volatility
As a result of the requirement under IFRS to consolidate the Group's life and
pensions businesses on a line-by-line basis, the Group's income statement
includes amounts attributable to policyholders which affect profit before tax;
the most significant of these items is policyholder tax.
Page 37 of 58
2. Volatility (continued)
Under IFRS, tax on policyholder investment returns is required to be included in
the Group's tax charge rather than being offset against the related income, as
it is in actual distributions made to policyholders. The impact is, therefore,
to either increase or decrease profit before tax with a corresponding change in
the tax charge. Other items classified within policyholder interests volatility
include the effects of investment vehicles which are only majority owned by the
long-term assurance funds. In the case of these vehicles, the Group's profit
for the year includes the minorities' share of the profits earned. As set out
below these amounts do not accrue to the equity holders, accordingly management
believes a clearer representation of the underlying performance of the Group's
life and pensions businesses is presented by excluding policyholder interests
volatility.
2007 2006
£m £m
Net interest income - (33)
Other income (233) 359
Profit before tax (233) 326
Taxation - policyholder 243 (222)
Minority interests (10) (104)
Profit attributable to equity shareholders - -
During 2007, profit before tax included negative policyholder interests
volatility of £233 million, being a charge to other income (2006: positive
volatility of £326 million, being a charge of £33 million to net interest income
and a credit of £359 million to other income). In 2007, substantial
policyholder tax losses have been generated as a result of a fall in property,
gilt and bond values. These losses reduce future policyholder tax liabilities
and have led to a policyholder tax credit during the year. Profits were
recognised in 2006 as a result of positive market movements combined with
realised gains in the holdings in property investment vehicles majority owned by
the long-term assurance funds.
3. Mortgage lending
2007 2006
Gross new mortgage lending £29.4bn £27.6bn
Market share of gross new mortgage lending 8.1% 8.0%
Redemptions £22.7bn £20.7bn
Market share of redemptions 8.9% 8.8%
Net new mortgage lending £6.7bn £6.9bn
Market share of net new mortgage lending 6.2% 6.3%
Mortgages outstanding (year end)* £102.0bn £95.3bn
Market share of mortgages outstanding 8.5% 8.8%
*Excluding the effect of IFRS related adjustments in order to conform with industry statistics.
In Cheltenham & Gloucester, the average indexed loan-to-value ratio on the
mortgage portfolio was 43 per cent (31 December 2006: 44 per cent), and the
average loan-to-value ratio for new mortgages and further advances written
during 2007 was 63 per cent (2006: 64 per cent). At 31 December 2007, only 1.7
per cent of balances had an indexed loan-to-value ratio in excess of 95 per
cent.
Page 38 of 58
4. Group net interest income
2007 2006
£m £m
Banking margin
Net interest income 5,167 4,914
Average interest-earning assets, excluding reverse repos 185,022 170,743
Net interest margin 2.79% 2.88%
Statutory basis
Net interest income 6,099 5,329
Average interest-earning assets, excluding reverse repos 248,233 226,990
Net interest margin 2.46% 2.35%
The Group's net interest income includes certain amounts attributable to
policyholders, in addition to the interest earnings on shareholders' funds held
in the Group's insurance businesses. In addition, the Group's net interest
margin is significantly affected by the accounting treatment of a number of
Products and Markets and other products, principally those where funding costs
are treated as an interest expense and related revenues are recognised within
other income. In order to enhance comparability in the Group's banking net
interest margin these items have been excluded in determining both net interest
income and average interest-earning assets.
A reconciliation of banking net interest income to Group net interest income
follows:
2007 2006
£m £m
Banking net interest income 5,167 4,914
Products and Markets, and other products 464 368
Volatility and insurance grossing adjustment 468 47
Group net interest income 6,099 5,329
Certain fees payable by the Group's asset finance business have been
reclassified from other income to interest income as part of the effective yield
of the related lending; there is no impact upon profit before tax. Comparative
figures have been restated accordingly.
Page 39 of 58
5. Other income
2007 2006
£m £m
Fee and commission income:
UK current account fees 693 652
Other UK fees and commissions 1,215 1,210
Insurance broking 648 629
Card services 536 493
International fees and commissions 132 132
3,224 3,116
Fee and commission expense (600) (638)
Net fee and commission income 2,624 2,478
Net trading income 3,570 5,981
Insurance premium income 5,430 4,719
Other operating income 1,012 725
Total other income* 12,636 13,903
Insurance claims (7,522) (8,569)
Total other income, net of insurance claims* 5,114 5,334
Volatility
- Insurance (274) 82
- Policyholder interests (233) 359
Total other income, net of insurance claims 4,607 5,775
*Excluding volatility. For statutory reporting purposes, volatility totalling £
(507) million in 2007 (2006: £441 million); is included in total other income;
comprising net trading income of £(447) million (2006: £360 million) and other
operating income of £(60) million (2006: £81 million).
Certain fees payable by the Group's asset finance business have been
reclassified from other income to interest income as part of the effective yield
of the related lending; there is no impact upon profit before tax. Comparative
figures have been restated accordingly.
6. General insurance income
2007 2006
£m £m
Premium income from underwriting
Creditor 164 180
Home 441 424
Health 9 13
Reinsurance premiums (23) (17)
591 600
Commissions from insurance broking
Creditor 394 377
Home 49 47
Health 12 13
Other 193 192
648 629
Page 40 of 58
7. Operating expenses
2007 2006
Administrative expenses: £m £m
Staff:
Salaries 2,127 2,117
National insurance 167 161
Pensions
- Before pension schemes related credit 238 293
- Pension schemes related credit - (128)
238 165
Other staff costs 372 298
2,904 2,741
Premises and equipment:
Rent and rates 304 310
Hire of equipment 16 15
Repairs and maintenance 154 165
Other 145 149
619 639
Other expenses:
Communications and external data processing 462 499
Advertising and promotion 192 184
Professional fees 279 231
Settlement of overdraft claims 76 -
Other 405 388
1,414 1,302
Administrative expenses 4,937 4,682
Depreciation and amortisation 630 619
Total operating expenses 5,567 5,301
Cost:income ratio - statutory basis* 52.0% 47.7%
Cost:income ratio - excluding volatility, the settlement of 49.0% 50.8%
overdraft claims and, in 2006, the pension schemes related credit
*Total operating expenses divided by total income, net of insurance claims.
8. Number of employees (full-time equivalent)
2007 2006
UK Retail Banking 29,943 30,204
Insurance and Investments 5,276 5,685
Wholesale and International Banking 15,997 19,210
Other, largely IT and Operations 10,111 10,400
61,327 65,499
Agency staff (full-time equivalent) (3,249) (2,869)
Total number of employees (full-time equivalent) 58,078 62,630
The total number of employees reduced by 4,552 to 58,078. Of this reduction
2,790 related to the impact of business disposals (Lloyds TSB Registrars 1,485,
Dutton-Forshaw 1,277 and Abbey Life 28).
Page 41 of 58
9. Impairment losses by division
2007 2006
£m £m
Impairment losses by division
UK Retail Banking
Personal loans/overdrafts 679 740
Credit cards 527 490
Mortgages 18 8
1,224 1,238
Wholesale and International Banking
Excluding market dislocation and 2007 Finance Act 447 313
Market dislocation 22 -
2007 Finance Act 28 -
497 313
Central group items - 9
Impairment losses on loans and advances 1,721 1,560
Other credit risk provisions 5 (5)
Impairment of available-for-sale financial assets 70 -
Total impairment charge 1,796 1,555
Charge as % of average lending:
Personal loans/overdrafts 5.32 5.85
Credit cards 7.96 6.99
Mortgages 0.02 0.01
UK Retail Banking 1.10 1.18
Wholesale and International Banking* 0.51 0.39
Total charge* 0.82 0.83
*Excluding impact of market dislocation and 2007 Finance Act.
10. Retirement benefit obligations
2007 2006
£m £m
Defined benefit pension schemes
Present value of scheme liabilities 16,795 17,378
Fair value of scheme assets (16,112) (15,279)
Net defined benefit scheme deficit 683 2,099
Unrecognised actuarial gains 1,350 263
Net recognised defined benefit scheme deficit 2,033 2,362
Other post-retirement benefit schemes 111 100
Net recognised liability 2,144 2,462
Deferred tax (600) (739)
Recognised liability after tax 1,544 1,723
The Group's defined benefit pension schemes' gross deficit at 31 December 2007
improved by £1,416 million to £683 million, comprising net recognised
liabilities of £2,033 million partly offset by unrecognised actuarial gains of
£1,350 million. This improvement largely reflects an increase in the real
discount rate used to value the schemes' liabilities and Group contributions to
the schemes, which exceeded the cost of accruing benefits.
Page 42 of 58
11. Capital ratios
Basel II Basel I Basel I
31 December 31 December 31 December
2007 2007 2006
£m £m £m
Tier 1
Share capital and reserves 12,663 12,141 11,155
Regulatory post-retirement benefit adjustments 704 704 1,041
Other items - - 39
Preference share capital 1,589 1,589 1,610
Innovative tier 1 capital instruments 1,474 1,474 1,372
Available-for-sale revaluation reserve and cash flow hedging 402 402 (12)
reserve
Goodwill (2,358) (2,358) (2,377)
Other deductions (929) - -
Total tier 1 capital 13,545 13,952 12,828
Tier 2
Undated loan capital 4,457 4,457 4,390
Dated loan capital 3,441 3,441 3,624
Collectively assessed provisions 12 2,150 1,951
Available-for-sale revaluation reserve in respect of equities 12 12 -
Other deductions (928) - -
Total tier 2 capital 6,994 10,060 9,965
20,539 24,012 22,793
Supervisory deductions
Life and pensions businesses (4,373) (4,373) (5,368)
Other deductions (491) (762) (790)
Total supervisory deductions (4,864) (5,135) (6,158)
Total capital 15,675 18,877 16,635
Risk-weighted assets £bn £bn £bn
Credit risk 127.2
Market risk 5.3
Operational risk 10.1
Total risk-weighted assets 142.6 172.0 156.0
Risk asset ratios
Tier 1 9.5% 8.1% 8.2%
Total capital 11.0% 11.0% 10.7%
Post-tax return on average risk-weighted assets 2.03% 1.89%
Post-tax return on average risk-weighted assets* 1.76% 1.72%
*Excluding volatility, profit on sale of businesses, settlement of overdraft
claims and, in 2006, pension schemes related credit.
Page 43 of 58
12. Total assets by division
31 December 31 December
2007 2006
£m £m
UK Retail Banking 115,012 108,381
Insurance and Investments 73,377 86,074
Wholesale and International Banking 163,294 147,836
Central group items 1,663 1,307
Total assets 353,346 343,598
13. Balance sheet information
31 December 31 December
2007 2006
£m £m
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 3,155 3,739
Interest bearing current accounts 42,858 40,906
Savings and investment accounts 70,003 64,380
Other customer deposits 24,671 19,134
Total sterling 140,687 128,159
Currency 15,868 11,183
Total deposits - customer accounts 156,555 139,342
Loans and advances to customers
Agriculture, forestry and fishing 3,226 2,905
Energy and water supply 2,102 2,024
Manufacturing 8,385 7,513
Construction 2,871 2,332
Transport, distribution and hotels 11,573 10,490
Postal and communications 946 831
Property companies 17,576 12,896
Financial, business and other services 29,707 22,999
Personal : mortgages 102,739 95,601
: other 22,988 23,025
Lease financing 4,686 4,802
Hire purchase 5,423 5,060
212,222 190,478
Allowance for impairment losses on loans and advances (2,408) (2,193)
Total loans and advances to customers 209,814 188,285
Total loans and advances to customers in our international businesses totalled
£6,291 million (31 December 2006: £5,589 million).
Page 44 of 58
14. Loans and advances to customers
Retail - Retail - Wholesale Total
Mortgages Other
31 December 2007 £m £m £m £m
Neither past due nor impaired 99,828 29,850 73,475 203,153
Past due but not impaired 2,153 966 639 3,758
Impaired - no provision required 415 100 293 808
- provision held 343 3,600 560 4,503
Gross 102,739 34,516 74,967 212,222
Allowance for impairment losses (37) (2,029) (342) (2,408)
Net 102,702 32,487 74,625 209,814
31 December 2006
Neither past due nor impaired 92,873 29,364 60,005 182,242
Past due but not impaired 1,943 1,005 374 3,322
Impaired - no provision required 658 92 158 908
- provision held 127 3,580 299 4,006
Gross 95,601 34,041 60,836 190,478
Allowance for impairment losses (42) (1,918) (233) (2,193)
Net 95,559 32,123 60,603 188,285
The analysis of lending between retail and wholesale has been prepared based
upon the type of exposure and not the business segment in which the exposure is
recorded. Included within retail are exposures to personal customers and small
businesses, whilst included within wholesale are exposures to corporate
customers and other large institutions.
Loans and advances to customers which are neither past due nor impaired
Retail - Retail - Wholesale Total
Mortgages Other
£m £m £m £m
31 December 2007
Good quality 99,407 18,157 46,240
Satisfactory quality 378 8,964 25,013
Lower quality 1 665 2,034
Below standard, but not impaired 42 2,064 188
Total 99,828 29,850 73,475 203,153
31 December 2006
Good quality 92,472 16,940 35,659
Satisfactory quality 359 9,667 21,797
Lower quality - 663 2,249
Below standard, but not impaired 42 2,094 300
Total 92,873 29,364 60,005 182,242
Page 45 of 58
14. Loans and advances to customers (continued)
The definitions of good quality, satisfactory quality, lower quality and below
standard but not impaired applying to retail and wholesale are not the same,
reflecting the different characteristics of these exposures and the way they are
managed internally, and consequently totals are not provided. Wholesale lending
has been classified using internal probability of default rating models mapped
so that they are comparable to external credit ratings. Good quality lending
comprises the lower assessed default probabilities, with other classifications
reflecting progressively higher default risk. Classifications of retail lending
incorporate expected recovery levels for mortgages, as well as probabilities of
default assessed using internal rating models. Good quality lending includes
the lower assessed default probabilities and all loans with low expected losses
in the event of default, with other categories reflecting progressively higher
risks and lower expected recoveries.
15. Credit market positions in Corporate Markets
Lloyds TSB's high quality business model means that the Group has relatively
limited exposure to assets affected by current capital markets uncertainties.
The following table shows credit market positions in Corporate Markets, on both
a gross and net basis.
Credit market positions - 31 December 2007 Net Gross
Exposure Exposure
£m £m
US sub-prime ABS-direct - -
ABS CDOs
- unhedged 130 130
- monoline hedged - 470
- major global bank cash collateralised - 1,861
Structured investment vehicles
- capital notes 78 78
- liquidity backup facilities 370 370
Trading portfolio
- ABS trading book 474 474
- secondary loan trading 665 863
- other assets* 3,895 3,895
*Primarily high quality senior bank and corporate assets; also includes £181 million of indirect exposure to
US sub-prime mortgages and ABS CDOs. This super senior exposure is protected by note subordination.
Page 46 of 58
15. Credit market positions in Corporate Markets (continued)
Available-for-sale assets 31 December
2007
£bn
Cancara 8.3
- US sub-prime - nil
- Alt-A - £619 million
- CMBS - £1,355 million (100% AAA/Aaa)
Student Loan ABS 3.2
- US Government guaranteed
Treasury assets 4.6
- Government bond and short-dated bank commercial paper
Other assets 4.1
- Major bank senior paper and high quality ABS
Total - Group 20.2
16. Profit on sale of businesses
During 2007, the Group disposed of its share registration business, Lloyds TSB
Registrars; Abbey Life, the UK life operation which was closed to new business
in 2000; and its medium-size car dealership, Dutton-Forshaw. In addition,
provision has been made for payments under an indemnity given in relation to a
business sold in an earlier year. A breakdown is provided below.
2007 2006
£m £m
Lloyds TSB Registrars 407 -
Abbey Life 272 -
Other (22) -
657 -
Page 47 of 58
17. Economic profit
2007 2006
£m £m
Statutory basis
Average shareholders' equity 11,681 10,531
Profit attributable to equity shareholders 3,289 2,803
Less: notional charge (1,051) (948)
Economic profit 2,238 1,855
Excluding volatility, profit on sale of businesses, settlement of overdraft claims
and, in 2006, pension schemes related credit
Average shareholders' equity 11,339 10,485
Profit attributable to equity shareholders 2,863 2,634
Less: notional charge (1,021) (944)
Economic profit 1,842 1,690
Economic profit represents the difference between the earnings on the equity
invested in a business and the cost of the equity. The notional charge has been
calculated by multiplying average shareholders' equity by the cost of equity
used by the Group of 9 per cent (2006: 9 per cent).
18. Earnings per share
2007 2006
Statutory basis
Basic
Profit attributable to equity shareholders £3,289m £2,803m
Weighted average number of ordinary shares in issue 5,637m 5,616m
Earnings per share 58.3p 49.9p
Fully diluted
Profit attributable to equity shareholders £3,289m £2,803m
Weighted average number of ordinary shares in issue 5,683m 5,667m
Earnings per share 57.9p 49.5p
Excluding volatility, profit on sale of businesses, settlement of overdraft claims
and, in 2006, pension schemes related credit
Profit attributable to equity shareholders £2,863m £2,634m
Weighted average number of ordinary shares in issue 5,637m 5,616m
Earnings per share 50.8p 46.9p
Page 48 of 58
19. Scottish Widows - realistic balance sheet information
Financial Services Authority (FSA) returns for large with-profits companies
include realistic balance sheet information. The information included in FSA
returns concentrates on the position of the With Profit Fund. However, under
the Scottish Widows demutualisation structure, which was court approved, the
fund is underpinned by certain assets outside the With Profit Fund and it is
more appropriate to consider the long-term fund position as a whole to measure
the realistic capital position of Scottish Widows. The estimated position at 31
December 2007, allowing for the proposed transfer of £300 million from the Long
Term Fund to the Shareholder Fund, is shown below, together with the actual
position at 31 December 2006.
31 December 2007 (estimated) With Profit Long Term
Fund Fund
£bn £bn
Available assets, including support arrangement assets 17.8 20.9
Realistic value of liabilities (16.8) (16.9)
Working capital for fund 1.0 4.0
Working capital ratio 5.4% 19.2%
31 December 2006 With Profit Long Term
Fund Fund
£bn £bn
Available assets, including support arrangement assets 19.4 22.3
Realistic value of liabilities (18.3) (18.3)
Working capital for fund 1.1 4.0
Working capital ratio 5.8% 17.9%
The Risk Capital Margin (RCM) is the capital buffer that the FSA requires to be
held to cover prescribed adverse shocks. At 31 December 2007, the RCM was
estimated to be £62 million for the With Profit Fund and £96 million for the
Long Term Fund (covered 15 times and 42 times respectively by the working
capital for the fund). At 31 December 2006, the RCM was £57 million for the
With Profit Fund and £84 million for the Long Term Fund (covered 20 times and 47
times respectively).
Page 49 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007
This section provides further details of the Scottish Widows EEV financial
information.
Composition of EEV balance sheet
2007 2006
£m £m
Value of in-force business (certainty 2,779 3,220
equivalent)
Value of financial options and guarantees (53) (56)
Cost of capital (178) (248)
Non-market risk (61) (75)
Total value of in-force business 2,487 2,841
Shareholders' net assets 2,878 3,572
Total EEV of covered business 5,365 6,413
Reconciliation of opening EEV balance sheet to closing EEV balance sheet on
covered business
Shareholders' Value of in-force
net assets business Total
£m £m £m
As at 1 January 2006 3,445 2,941 6,386
Total profit after tax 873 (100) 773
Dividends (746) - (746)
As at 31 December 2006 3,572 2,841 6,413
Total profit after tax 661 107 768
Profit on disposal of Abbey Life (EEV basis)
Sale proceeds 985 - 985
Assets disposed (474) (461) (935)
511 (461) 50
Dividends (1,866) - (1,866)
As at 31 December 2007 2,878 2,487 5,365
Analysis of shareholders' net assets on an EEV basis on covered business
Required Free Shareholders'
capital surplus net assets
£m £m £m
As at 1 January 2006 2,393 1,052 3,445
Total profit after tax (186) 1,059 873
Dividends - (746) (746)
As at 31 December 2006 2,207 1,365 3,572
Total (loss) profit after tax (238) 899 661
Disposal of Abbey Life (EEV basis) (232) 743 511
Dividends - (1,866) (1,866)
As at 31 December 2007 1,737 1,141 2,878
Page 50 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Summary income statement on an EEV basis
2007 2006
£m £m
New business profit 326 346
Existing business profit
- Expected return 337 403
- Experience variances 78 69
- Assumption changes (45) (133)
370 339
Expected return on shareholders' net assets 207 167
Profit before tax, excluding volatility and other items* 903 852
Volatility (271) 176
Other items* 58 76
Total profit before tax 690 1,104
Taxation (59) (331)
Impact of Corporation tax rate change 137 -
Total profit after tax, excluding profit on sale of Abbey Life 768 773
Profit on sale of Abbey Life (EEV basis) 50 -
Total profit after tax 818 773
*Other items represent amounts not considered attributable to the underlying
performance of the business.
Page 51 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Breakdown of income statement between life and pensions, and OEICs
2007 Life and pensions OEICS Total
£m £m £m
New business profit 270 56 326
Existing business
- Expected return 286 51 337
- Experience variances 35 43 78
- Assumption changes (105) 60 (45)
216 154 370
Expected return on shareholders' net assets 199 8 207
Profit before tax* 685 218 903
New business margin (PVNBP) 3.5% 2.0% 3.1%
Post-tax return on embedded value* 9.9%
2006 Life and pensions OEICS Total
£m £m £m
New business profit 287 59 346
Existing business
- Expected return 361 42 403
- Experience variances 35 34 69
- Assumption changes (129) (4) (133)
267 72 339
Expected return on shareholders' net assets 160 7 167
Profit before tax* 714 138 852
New business margin (PVNBP) 4.1% 2.2% 3.6%
Post-tax return on embedded value* 9.3%
*Excluding volatility and other items.
Page 52 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Economic assumptions
A bottom up approach is used to determine the economic assumptions for valuing
the business in order to determine a market consistent valuation.
The risk-free rate assumed in valuing in-force business is 10 basis points over
the 15 year gilt yield. In valuing financial options and guarantees the
risk-free rate is derived from gilt yields plus 10 basis points, in line with
Scottish Widows' FSA realistic balance sheet assumptions. The table below shows
the range of resulting yields and other key assumptions.
31 December 31 December
2007 2006
% %
Risk-free rate (value of in-force) 4.65 4.72
Risk-free rate (financial options and guarantees) 4.28 to 4.81 3.91 to 5.41
Retail price inflation 3.28 3.23
Expense inflation 4.18 4.13
Non-market risk
An allowance for non-market risk is made through the choice of best estimate
assumptions based upon experience, which generally will give the mean expected
financial outcome for shareholders and hence no further allowance for non-market
risk is required. However, in the case of operational risk and the With Profit
Fund these are asymmetric in the range of potential outcomes for which an
explicit allowance is made.
Non-economic assumptions
Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed
each year and are based on an analysis of past experience and on management's
view of future experience. These assumptions are intended to represent a best
estimate of future experience.
For OEIC business, the lapse assumption is based on recent experience which has
been collected over a period that has coincided with favourable investment
conditions. Management have used a best estimate of the long-term lapse
assumption which is higher than indicated by this experience. In management's
view, the approach and lapse assumption are both reasonable.
Page 53 of 58
20. European Embedded Value reporting - results for year ended 31 December
2007 (continued)
Sensitivity analysis
The table below shows the sensitivity of the EEV and the new business profit
before tax to movements in some of the key assumptions. The impact of a change
in the assumption has only been shown in one direction other than for risk free
rate. Where the impact has been shown only in one direction it can be assumed
to be reasonably symmetrical.
Impact on new
Impact business profit
on EEV before tax
£m £m
2007 EEV/new business profit before tax 5,365 326
(1a) 100 basis points reduction in risk-free rate 161 7
(1b) 100 basis points increase in risk-free rate (115) (7)
(2) 10 per cent reduction in market values of equity assets (178) n/a
(3) 10 per cent reduction in market values of property assets (32) n/a
(4) 10 per cent reduction in expenses 96 31
(5) 10 per cent reduction in lapses 88 19
(6) 5 per cent reduction in annuitant mortality (64) (5)
(7) 5 per cent reduction in mortality and morbidity (excluding annuitants) 22 3
(8) 100 basis points increase in equity and property returns nil nil
(9) 10 basis points increase in credit spreads (46) (6)
(1) In this sensitivity the impact takes into account the change in the value
of in-force business, financial options and guarantee costs, statutory reserves
and asset values.
(2) The reduction in market values is assumed to have no corresponding impact
on dividend yields.
(3) The reduction in market values is assumed to have no corresponding impact
on rental yields.
(4) This sensitivity shows the impact of reducing new business maintenance
expenses and investment expenses to 90 per cent of the expected rate.
(5) This sensitivity shows the impact of reducing lapse and surrender rates to
90 per cent of the expected rate.
(6) This sensitivity shows the impact on our annuity and deferred annuity
business of reducing mortality rates to 95 per cent of the expected rate.
(7) This sensitivity shows the impact of reducing mortality rates on
non-annuity business to 95 per cent of the expected rate.
(8) Under a market consistent valuation, changes in assumed equity and
property returns have no impact on the EEV.
(9) This sensitivity shows the impact of a 10 basis point increase in
corporate bond yields and the corresponding reduction in market values.
Government bond yields and the risk-free rate are assumed to be unchanged.
In sensitivities (4) to (7) assumptions have been flexed on the basis used to
calculate the value of in-force business and the realistic and the statutory
reserving bases. A change in risk discount rates is not relevant as the risk
discount rate is not an input to a market consistent valuation.
Page 54 of 58
21. Scottish Widows - weighted sales (Annual Premium Equivalent)
2007 2006
£m £m
Weighted sales (regular + 1/10 single)
Life and pensions:
Savings and investments 89 128
Protection 117 49
Individual pensions 273 270
Corporate and other pensions 352 322
Retirement income 101 98
Managed fund business 47 35
Life and pensions 979 902
OEICs 297 290
Life, pensions and OEICs 1,276 1,192
Bancassurance 458 403
Independent financial advisers 733 714
Direct 85 75
Life, pensions and OEICs 1,276 1,192
22. Legal and regulatory matters
During the ordinary course of business the Group is subject to threatened or
actual legal proceedings. All such material cases are periodically reassessed,
with the assistance of external professional advisers where appropriate, to
determine the likelihood of the Group incurring a liability. In those instances
where it is concluded that it is more likely than not that a payment will be
made, a provision is established to management's best estimate of the amount
required to settle the obligation at the relevant balance sheet date. In some
cases it will not be possible to form a view, either because the facts are
unclear or because further time is needed properly to assess the merits of the
case. No provisions are held against such cases; however the Group does not
currently expect the final outcome of these cases to have a material adverse
effect on its financial position.
In the UK and elsewhere, there is continuing political and regulatory scrutiny
of financial services. On 6 November 2007 the Competition Commission published
its emerging thinking into the Payments Protection Inquiry and is expected to
report by December 2008. The OFT is also carrying out a market study into
personal current account pricing alongside its investigation into certain
current account charges which are also subject to a legal test case (see below).
The OFT is also investigating interchange fees charged by some card networks in
parallel with the European Commission's own investigation into cross-border
interchange fees. At the same time regulators are considering the review of
retail distribution and UK financial stability and depositor protection
proposals. It is not presently possible to assess the cost or income impact of
these inquiries or any connected matters on the Group until the outcome is
known.
In addition, a number of EU directives, including the Unfair Commercial
Practices Directive and Payment Services Directive are currently being
implemented in the UK. The EU is also considering regulatory proposals for,
inter alia, a Consumer Credit, Mortgage Credit, Single European Payments Area,
Retail Financial Services Review and capital adequacy requirements for insurance
companies (Solvency II).
Page 55 of 58
22. Legal and regulatory matters (continued)
On 27 July 2007, following agreement between the UK Office of Fair Trading (OFT)
and a number of UK financial institutions, the OFT issued High Court legal
proceedings against those institutions, including Lloyds TSB Bank plc, to
determine the legal status and enforceability of certain of the charges applied
to their personal customers in relation to requests for unplanned overdrafts. A
preliminary issues hearing has now taken place and judgment is currently
awaited. It is likely that further hearings will be required and, if appeals
are pursued, the proceedings may take a number of years to conclude. Pending
resolution, the Financial Services Authority has agreed, subject to certain
conditions, that the handling of customer complaints on this issue can be
suspended until the proceedings are concluded unless in the light of prevailing
circumstances this would be inappropriate. The Group intends strongly to defend
its position. Accordingly, no provision in relation to the outcome of this
litigation has been made. Depending on the Court's determinations, a range of
outcomes is possible, some of which could have a significant financial impact on
the Group. The ultimate impact of the litigation on the Group can only be known
at its conclusion.
There has been increased scrutiny of the financial institutions sector,
especially in the US, with respect to combating money laundering and terrorist
financing and enforcing compliance with economic sanctions. The Office of
Foreign Assets Control (OFAC) administers US laws and regulations in relation to
US economic sanctions against designated foreign countries, nationals and others
and the Group has been conducting a review of its conduct with respect to
historic US dollar payments involving countries, persons or entities subject to
those sanctions. The Group has provided information relating to its review of
such historic payments to a number of authorities including OFAC, the US
Department of Justice and the New York County District Attorney's office which,
along with other authorities, have been reported to be conducting a broader
review of sanctions compliance by non-US financial institutions. The Group is
involved in ongoing discussions with these authorities with respect to agreeing
a resolution of their investigations. No provision has been made in respect of
this matter. The Group does not expect the final outcome to have a material
adverse effect on its financial position.
23. Taxation
The statutory effective tax rate in 2007 was 17.0 per cent, compared to 31.6 per
cent in 2006. Under IFRS the Group is required to include in income tax
expense the tax attributable to UK life insurance policyholder earnings and its
interests in Open-ended Investment Companies (OEICs). The effective rate of the
Group, excluding the gross policyholder and OEIC interests from profit before
tax and the tax charge and, in 2007, the profit on disposal of businesses from
profit before tax and the impact on the year end deferred tax position of the UK
corporation tax rate change (£110 million credit), was 28.3 per cent (2006: 28.0
per cent).
The 2007 Finance Act reduction in the corporation tax rate from 30 per cent to
28 per cent has resulted in a one-off impairment charge relating to a reduction
in future rental income within the Group's leasing business of £28 million, as a
result of the triggering of relevant tax variation clauses. In addition, the
Group's deferred tax liabilities have been remeasured resulting in a credit to
the Group's tax charge of £110 million. The net impact of these items has been
to increase shareholders' equity by £90 million. The future impact of the
reduction in capital allowances from 25 per cent to 20 per cent will not be
material for the Group.
Page 56 of 58
23. Taxation (continued)
A reconciliation of the charge that would result from applying the standard UK
corporation tax rate to profit before tax to the tax charge is given below:
2007 2006
£m £m
Profit before tax 4,000 4,248
Tax charge thereon at UK corporation tax rate of 30% 1,200 1,274
Factors affecting charge:
Disallowed and non-taxable items 2 (8)
Overseas tax rate differences (4) (2)
Gains exempted or covered by capital losses (274) (78)
Policyholder interests (173) 123
Corporation tax rate change (110) -
Other items 38 32
Tax charge 679 1,341
24. Dividend
A final dividend for 2007 of 24.7p (2006: 23.5p), representing an increase of 5
per cent, will be paid on 7 May 2008. The total amount of this dividend is
£1,394 million.
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Key dates for the
payment of the dividend are:
Shares quoted ex-dividend 5 March 2008
Record date 7 March 2008
Final date for joining or leaving the dividend reinvestment plan 9 April 2008
Final dividend paid 7 May 2008
Annual general meeting 8 May 2008
25. Other information
The financial information included in this news release does not constitute
statutory accounts within the meaning of section 240 of the Companies Act 1985.
Statutory accounts for the year ended 31 December 2007 were approved by
directors on 21 February 2008 and will be delivered to the Registrar of
Companies following publication on 29 March 2008. The auditors' report on these
accounts was unqualified and did not include a statement under sections 237(2)
(accounting records or returns inadequate or accounts not agreeing with records
and returns) or 237(3) (failure to obtain necessary information and
explanations) of the Companies Act 1985.
Page 57 of 58
CONTACTS
For further information please contact:-
Michael Oliver
Director of Investor Relations
Lloyds TSB Group plc
020 7356 2167
Email: michael.oliver@ltsb-finance.co.uk
Mary Walsh
Director of Corporate Relations
Lloyds TSB Group plc
020 7356 2121
Email: mary.walsh@lloydstsb.co.uk
Kirsty Clay
Senior Manager, Media Relations
Lloyds TSB Group plc
020 7356 1517
Email: kirsty.clay@lloydstsb.co.uk
Copies of this news release may be obtained from Investor Relations, Lloyds TSB
Group plc, 25 Gresham Street, London EC2V 7HN. The full news release can also
be found on the Group's website - www.lloydstsb.com.
A copy of the Group's corporate responsibility report may be obtained by writing
to Corporate Responsibility, Lloyds TSB Group plc, 25 Gresham Street, London
EC2V 7HN. This information together with the Group's code of business conduct
is also available on the Group's website.
Registered office: Lloyds TSB Group plc, Henry Duncan House, 120 George Street,
Edinburgh, EH2 4LH. Registered in Scotland no. 95000.
Page 58 of 58
This information is provided by RNS
The company news service from the London Stock Exchange
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