Final Results

Lloyds TSB Group PLC 24 February 2006 Lloyds TSB Group plc 2005 Results PRESENTATION OF RESULTS Up to 31 December 2004 the Group prepared its financial statements in accordance with UK Generally Accepted Accounting Principles (UK GAAP). With effect from 1 January 2005 the Group implemented International Financial Reporting Standards (IFRS). In this document the 2004 comparative financial information has been restated to reflect the adoption of those IFRS standards which are required to be applied retrospectively, but does not include the additional impacts arising from first time application of IAS 32 'Financial Instruments: Disclosure and Presentation', IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 4 'Insurance Contracts' (including UK Financial Reporting Standard 27 'Life Assurance'), which have been implemented with effect from 1 January 2005, with the opening balance sheet at that date adjusted accordingly. Further information on the impact of implementing IFRS on comparative information was published in the Group's 'Transition to IFRS' announcement on 27 May 2005. The impact of IFRS, and in particular the increased use of fair values, has resulted in greater earnings volatility. In order to provide a more comparable representation of business performance this volatility has been separately analysed for the Group's insurance and banking businesses (page 31, note 4). In addition, other IFRS related adjustments applied with effect from 1 January 2005, for which comparatives are not required to be restated (page 31, note 3), and the impact on the Group's results of businesses sold in 2004, have been separately analysed in the Group's results. A reconciliation of this ' comparable' basis of presentation to the statutory profit before tax is shown on page 1. FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to the business, strategy and plans of the Lloyds TSB Group, its current goals and expectations relating to its future financial condition and performance. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. The Group's actual future results may differ materially from the results expressed or implied in these forward looking statements as a result of a variety of factors, including UK domestic and global economic and business conditions, risks concerning borrower credit quality, market related risks such as interest rate risk and exchange rate risk in its banking business and equity risk in its insurance businesses, changing demographic trends, unexpected changes to regulation or regulatory actions, changes in customer preferences, competition and other factors. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of such factors. CONTENTS Page Profit before tax by division 1 Assets by division 1 Performance highlights 2 Summary of results 3 Group Chief Executive's statement 4 Group Finance Director's review of financial performance 8 Segmental analysis 11 Divisional performance - UK Retail Banking 12 - Insurance and Investments 15 - Wholesale and International Banking 19 Consolidated income statement - statutory 22 Consolidated balance sheet - statutory 23 Condensed consolidated cash flow statement - statutory 24 Consolidated statement of changes in equity - statutory 25 Summarised segmental analysis - statutory 26 Notes 27 Contacts for further information 44 PROFIT BEFORE TAX BY Division 2005 2004 Change Â£m Â£m % UK Retail Banking Before provisions for customer redress 1,681 1,739 (3) Provisions for customer redress (150) (100) 1,531 1,639 (7) Insurance and Investments Before provisions for customer redress and strengthening of 908 790 15 reserves for mortality Provisions for customer redress - (12) Strengthening of reserves for mortality (page 10) (110) - 798 778 3 Wholesale and International Banking 1,504 1,253 20 Central group items (page 34 note 7) (367) (350) Profit before tax - comparable basis 3,466 3,320 4 Volatility (page 31, note 4) - Banking (124) - - Insurance 438 168 - Policyholder interests 311 (30) Other IFRS adjustments applied from 1 January 2005 (page 31, note 3) - Before strengthening of reserves for mortality (276) - - Strengthening of reserves for mortality (45) - (321) - Profit (loss) on sale of businesses (page 41, note 20) 50 (21) Trading results of discontinued operations in 2004 - 40 Profit before tax 3,820 3,477 10 A more detailed reconciliation of comparable profit before tax to the Group's profit before tax for the year is shown in note 2 on page 29. ASSETS BY DIVISION 31 December 1 January 2005 2005 Change Â£m Â£m % UK Retail Banking 103,930 96,472 8 Insurance and Investments 80,148 70,734 13 Wholesale and International Banking 124,044 123,826 - Central group items 1,632 1,822 (10) Total assets 309,754 292,854 6 Page 1 of 44 PERFORMANCE HIGHLIGHTS Results - statutory â€¢ Profit before tax increased by Â£343 million, or 10 per cent, to Â£3,820 million. â€¢ Profit attributable to equity shareholders increased by 4 per cent to Â£2,493 million. â€¢ Earnings per share increased by 4 per cent to 44.6p. â€¢ Post-tax return on average shareholders' equity increased to 25.6 per cent, from 22.8 per cent. â€¢ Total capital ratio 10.9 per cent, tier 1 capital ratio 7.9 per cent. â€¢ Dividend maintained. Final dividend of 23.5p per share, making a total of 34.2p for the year. Dividend cover increased to 1.3 times. Results - comparable basis â€¢ Profit before tax increased by Â£146 million, or 4 per cent, to Â£3,466 million. Excluding customer redress provisions and the strengthening of reserves for mortality: â€¢ Profit before tax increased by Â£294 million, or 9 per cent, to Â£3,726 million. â€¢ Income growth of 7 per cent exceeded cost growth of 4 per cent. â€¢ Earnings per share increased by 11 per cent to 47.2p. â€¢ Economic profit increased by 14 per cent to Â£1,620 million. â€¢ Post-tax return on average shareholders' equity increased to 23.3 per cent, from 22.2 per cent. Key achievements â€¢ Continued good levels of earnings momentum. Improved levels of revenue growth. â€¢ Costs remain firmly under control. Income growth of 7 per cent exceeded cost growth of 4 per cent. Enhanced cost management programme announced. â€¢ Good franchise growth with customer lending up by 9 per cent to Â£175 billion and customer deposits up by 4 per cent to Â£131 billion. â€¢ Increasing signs of net interest margin stability. 5 basis points increase in the banking net interest margin in the second half of 2005, compared to the first half of 2005. â€¢ 28 per cent increase in retail banking target customer recruitment. Good levels of customer balance growth in many product areas. â€¢ 21 per cent increase in life assurance new business weighted sales (bancassurance up 13 per cent; IFA sales up 30 per cent). Significant improvement in market share to an estimated 6.2 per cent, from 5.7 per cent. 19 per cent increase in new business contribution, and higher new business margin. â€¢ Excellent progress in delivering the strategy to build an integrated Wholesale bank. 31 per cent increase in Corporate Markets profit before tax, and 35 per cent increase in Business Banking profit before tax. â€¢ Overall credit quality remains satisfactory. â€¢ Capital ratios remain robust, continued improvement in balance sheet management. Page 2 of 44 SUMMARY OF RESULTS 2005 2004 Change Results - statutory Â£m Â£m % Total income, net of insurance claims 10,540 9,661 9 Operating expenses 5,471 5,297 3 Trading surplus 5,069 4,364 16 Impairment losses on loans and advances 1,299 866 50 Profit before tax 3,820 3,477 10 Profit attributable to equity shareholders 2,493 2,392 4 Economic profit (page 40, note 17) 1,616 1,448 12 Earnings per share (page 40, note 18) 44.6p 42.8p 4 Post-tax return on average shareholders' equity 25.6% 22.8% Results - comparable basis (page 29, note 2) Total income, net of insurance claims 10,062 9,489 6 Operating expenses 5,506 5,266 5 Trading surplus 4,556 4,223 8 Impairment losses on loans and advances 1,090 903 21 Profit before tax 3,466 3,320 4 Excluding customer redress provisions and strengthening of reserves for mortality Total income, net of insurance claims 10,172 9,489 7 Operating expenses 5,356 5,154 4 Profit before tax 3,726 3,432 9 Economic profit 1,620 1,417 14 Earnings per share 47.2p 42.6p 11 Post-tax return on average shareholders' equity 23.3% 22.2% Post-tax return on average risk-weighted assets 1.92% 1.98% Shareholder value Closing market price per share (year end) 488.5p 473p 3 Total shareholder return 10.9% 15.1% Total market value of shareholders' equity Â£27.4bn Â£26.5bn 3 Proposed dividend per share (page 43, note 22) 34.2p 34.2p 31 December 1 January 2005 2005 Â£m Â£m Balance sheet - statutory Shareholders' equity 10,195 9,489 7 Net assets per share (pence) 180 167 8 Total assets 309,754 292,854 6 Loans and advances to customers 174,944 161,162 9 Customer deposits 131,070 126,349 4 Risk asset ratios Total capital 10.9% 10.1% Tier 1 capital 7.9% 8.2% Page 3 of 44 GROUP CHIEF EXECUTIVE'S STATEMENT 2005 was a good year for the Group, both in terms of our financial performance and, as importantly, in making further progress in the development of our organic growth strategy. On the financial side, we increased our already high return on equity and we delivered a total return of 10.9 per cent to our shareholders. We grew the trading surplus in each division as the rate of growth in income exceeded that of costs and we achieved good overall earnings growth in the face of a slower economic environment. In terms of delivering the Group strategy, we have established better sales momentum and stronger levels of customer acquisition in our banking businesses and delivered good sales growth in our life assurance business over the course of the year. Our market shares are either stable, or growing, in most of our key product lines. Most importantly, our customer relationship programmes are being effectively implemented and we are delivering higher revenues per customer in our retail and corporate banking businesses. We have significantly enhanced our productivity, as the quality programmes that we commenced in 2003 continue to show improving results. This is reflected in our cost:income ratio which, on a comparable basis and excluding customer redress provisions and the strengthening of reserves for mortality, improved to 52.7 per cent, from 54.3 per cent in 2004, and I am pleased that we have achieved this whilst continuing to invest substantially in the business. Our customer satisfaction scores hit record highs in 2005, again reflecting the improvement programmes established over the last couple of years, and we will continue to drive further improvements as we seek to differentiate our service performance against that of our competitors. The risk environment remains satisfactory overall, although we have seen a deterioration in the unsecured consumer lending portfolios as a result of an increase in the number of customers facing repayment difficulties, which has been offset by a strong performance in the Corporate lending portfolios. Over time, we expect the consumer position to stabilise in an improving economy, and for the trend in corporate impairments to move away from the unusually benign recent experience. Our employee engagement scores have also improved significantly during the year, indicating that our people understand and are committed to our strategy, and we have improved our performance management processes in support of the Group strategy. We also strengthened our senior management team, with the addition of key hires in the Retail Bank. Overall, I am pleased with the progress of the Group during 2005. We delivered on our financial plans and we also used the time to develop the franchise successfully in line with our growth strategy. We have continued to make good progress in each of the divisions, the highlights of which are summarised below. In the Retail Bank, income grew 4 per cent whilst costs rose by just 1 per cent, on a comparable basis and excluding customer redress provisions. This led to 7 per cent growth in the trading surplus which was offset by an increase in the charge for impaired lending, reflecting an increase in customers experiencing repayment difficulties. Profit before tax reduced by 3 per cent. To reflect the general slowdown in the consumer credit markets, a number of actions were taken over the course of the year to tighten credit underwriting. Page 4 of 44 It is not in the interests of the individual customer or the Group to lend money to a customer who cannot afford to repay. The Group takes its responsibilities in this regard very seriously and has a responsible lending programme, to ensure we help our customers clearly understand the nature of the agreements they are entering into and we confirm affordability before agreeing to any borrowing requests. Where customers do experience repayment difficulties, our staff are trained to offer the necessary advice and support to manage their finances and we have a Customer Support Unit, whose role it is to identify customers who are showing early signs of financial difficulty so that we can provide early advice and support to them. The Retail Bank is committed to achieving top performance in both effectiveness and efficiency. Effectiveness is the ability to recruit, develop and retain loyal customers who think of us first for their next financial services need. Efficiency is the ability to provide service and sales at a lower cost so that we can give our customers better value. We believe that in order to achieve our goal we must be customer rather than product centric. We continue to focus our efforts on our existing customers where we have an information advantage that allows us to be more effective and efficient in providing sales and service that meet our customers' financial needs. We have also stepped up our new customer recruitment efforts, which have helped drive good target customer recruitment, particularly in the second half of the year, to give a 28 per cent increase over last year. We have committed ourselves to earning the right to meet 100 per cent of our customers' financial services needs and helping them succeed financially. In 2005, we recorded our highest ever customer satisfaction scores across all our channels - branch, telephone and internet banking. The improvement in customer satisfaction and the renewed focus on meeting all our customers' financial services needs has helped to drive an improving sales performance during 2005, and has been accompanied by good balance growth in our key product lines with mortgages up 10 per cent, credit cards (excluding Goldfish) up 9 per cent and customer deposits 7 per cent higher. Sales through our internet and telephone channels grew strongly by 28 per cent and 39 per cent respectively. In Insurance and Investments, profits showed significant growth, reflecting further success in delivering our strategies. Profit before tax, on a comparable basis and excluding the 2004 customer redress provision and the strengthening of reserves for mortality, increased by 15 per cent, underpinned by strong growth in both the bancassurance and IFA channels and continued control of costs. Profits grew strongly in both our life assurance and general insurance businesses. Scottish Widows delivered a significant increase in sales as we focused on more profitable and more capital efficient business lines. This led to a 19 per cent increase in new business contribution. Bancassurance sales grew by 13 per cent despite a slowdown seen in the levels of mortgage related protection business. The sales of OEICs increased by 72 per cent, building on the launch of the simplified product suite that was introduced at the end of 2004. IFA sales grew strongly with a 30 per cent improvement in weighted sales, underpinned by product and service improvements in pensions and investments. This improved performance led to an estimated market share of 6.8 per cent in 2005, compared to 5.9 per cent last year. We have also invested in the development of new pensions and life platforms, and continue to develop our distribution capabilities. We remain well placed to benefit from the anticipated growth in savings and investment product sales over the coming years. The new life platform has already supported the launch of the new partnership with Virgin Money. Page 5 of 44 Scottish Widows remains strongly capitalised. In addition to the payment of a Â£200 million dividend to the Group in March 2005, Scottish Widows made a further Â£800 million distribution to the Group in December 2005 as part of our plans to improve capital efficiency. A second annual dividend will be paid in March 2006. Our General Insurance business continued its successful development, delivering a 22 per cent growth in profits, supported by improvements to both the claims and combined ratios. The results reflect continued successful cross sales to franchise customers in both retail and business banking as well as continued investment in our service performance, direct channel business and claims processing. In Wholesale and International Banking, our results show excellent progress in our core businesses and the division delivered a 20 per cent improvement in profit before tax, on a comparable basis, at the same time as improving returns. The good results were achieved by the successful implementation of our strategies in Business Banking and Corporate Markets and these businesses will continue to provide the platform for profitable growth in the division. We again maintained our management discipline of positive jaws, with the rate of growth in income increasing by 10 per cent whilst costs grew by 7 per cent, partly reflecting the increase in investment costs necessary to fund the ongoing development of the division. In Business Banking, we have again reported strong franchise growth winning increasing numbers of new customers both through attracting profitable ' switchers' from other banks and by cementing our position as the leader in the business start-ups market with a share of 22 per cent. We have continued to build stronger relationships with our customers, as we satisfy more of their needs, and this has been reflected in good balance growth in both customer lending and deposits, as well as fee income. Corporate Markets has delivered another strong performance with a 31 per cent improvement in profits supported by a 27 per cent growth in income from the cross-sale of products. The results reflect our strategy of managing these businesses in an integrated manner in support of our customers' success. We were pleased to receive external recognition of our efforts as we won a range of awards including the CBI Bank of the Year Award 2005. Across the businesses, our asset quality remains very strong with impairment losses declining year on year. We are continuing to invest within Corporate Markets, in terms of our relationship offers, our product range and our infrastructure, to ensure we can meet even more of our customers' needs in a highly competitive market. Turning to 2006, our objective across each of the divisions is to continue to improve sales performance and deepen our customer relationships, which will result in market share growth. To support our efficiency and productivity objectives, we will continue to focus on the centralisation and industrialisation of our manufacturing capabilities, take the next steps in our procurement programme and further embed our quality approach throughout the Group. In support of our customer objectives, we have set stretching customer satisfaction targets and will continue to develop our products, policies and procedures in line with those targets. Our strong risk and control infrastructure remains an important element of our growth strategy and will be further enhanced as we seek to develop risk into a differentiating competency. We will also continue to focus on the development of our staff, whilst aiming for even stronger engagement scores. Page 6 of 44 In summary, 2005 was a good year for the Group. We delivered on our short-term financial goals whilst also investing in the long-term health of the business, which is necessary to drive sustainable future earnings growth. This is our last set of results under the chairmanship of Maarten van den Bergh and I would like to take this opportunity to record my appreciation for his major contribution to the Group over the past five and a half years. We are delighted that Sir Victor Blank will succeed him and we look forward to welcoming him to the Group shortly. Continuing to grow a successful business is the best way for Lloyds TSB to create value for all our stakeholders and to contribute to the wider economy. We maintain one of the largest community investment programmes in the UK, supporting our customers and staff and making a significant contribution to the local communities in which we operate. Since 1997, the Lloyds TSB Foundations have received over Â£250 million from the Group's pre-tax profits to distribute to community groups and in 2006 they will receive in excess of Â£30 million. Finally, I would like to express my continued thanks to all of the staff who work for the Lloyds TSB Group. They remain committed to serving the needs of our customers and their wonderful efforts are the key element to our continued success. J Eric Daniels Group Chief Executive Page 7 of 44 GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE With effect from 1 January 2005, the Group has been using IFRS for financial reporting. Although IFRS significantly changes the timing of earnings recognition in financial results it has no impact on our business fundamentals and cash flows, the development of our organic growth strategies, or our capital management policies. Details of the retrospective impact of the Group's implementation of IFRS were published in our 'Transition to IFRS' announcement on 27 May 2005. The increased use in IFRS of fair values has, however, led to greater volatility in the earnings of the Group. In order to provide a more comparable representation of our business performance this earnings volatility, together with other IFRS related adjustments applied with effect from 1 January 2005 and the impact on the Group's results of businesses sold in 2004, have been separately analysed to provide a comparable basis of presentation. In 2005 statutory profit before tax was Â£3,820 million, an increase of Â£343 million, or 10 per cent (2004: Â£3,477 million). Profit attributable to equity shareholders increased by Â£101 million, or 4 per cent, to Â£2,493 million and earnings per share increased by 4 per cent to 44.6p. Economic profit increased by 12 per cent to Â£1,616 million. On a comparable basis, profit before tax increased by Â£146 million, or 4 per cent, to Â£3,466 million (2004: Â£3,320 million). Excluding the impact of customer redress provisions and the strengthening of reserves for mortality, profit before tax increased by 9 per cent to Â£3,726 million. Income increased by 7 per cent whilst costs grew by only 4 per cent. Earnings per share increased by 11 per cent to 47.2p. The post-tax return on shareholders' equity increased to 23.3 per cent (2004: 22.2 per cent) and economic profit rose by 14 per cent to Â£1,620 million. Our strategy to deepen customer relationships has led to an increase in customer advances, particularly in mortgages, credit cards and corporate lending, and is reflected in a 9 per cent increase in loans and advances to customers to Â£175 billion. Customer deposits increased by Â£5 billion, or 4 per cent, to Â£131 billion, largely as a result of good growth in customer savings accounts in the retail business. Group net interest income, on a comparable basis, increased by Â£423 million, or 8 per cent, compared with last year. Good levels of consumer lending growth increased average personal lending and credit card balances by Â£1.7 billion and average mortgage balances by Â£7.8 billion. Customer lending growth in our Business Banking and Corporate Markets franchises increased average interest-earning assets by Â£4.4 billion. The banking net interest margin (page 34, note 8) decreased by 6 basis points to 2.78 per cent. Much of this margin decline has been caused by the impact of lower earnings on the Group's capital and other interest-free liabilities and, excluding this funding impact, the margin was broadly stable year-on-year. The banking net interest margin in the second half of 2005 actually increased by 5 basis points to 2.80 per cent, compared with 2.75 per cent in the first half of 2005. Other income, net of insurance claims, on a comparable basis and excluding the strengthening of reserves for mortality, increased by Â£260 million, or 6 per cent, to Â£4,659 million. Fees and commissions receivable increased by 9 per cent to Â£3,315 million as a result of higher income from the strong volume growth in current account fees and an increase in fees from large corporate business and asset based lending, as a result of growing customer transaction volumes. Page 8 of 44 Operating expenses continued to be tightly controlled and on a comparable basis increased by 5 per cent to Â£5,506 million (page 36, note 11). Excluding the impact of customer redress provisions, operating expenses increased by only 4 per cent. Significant improvements continue to be made in processing and operational efficiency and we have continued to expand our programme of offshoring a number of our processing and back office operations to India. Staff numbers reduced by 3,652 to 69,778 during the year, improving Group productivity. As a result of this constant focus on day-to-day operating cost control, the cost:income ratio, excluding customer redress provisions and the strengthening of reserves for mortality, improved to 52.7 per cent, from 54.3 per cent in 2004. Whilst the Group has demonstrated strong cost control during 2005, we have also identified a number of key initiatives which collectively have the potential to significantly improve our cost:income ratio over the next few years whilst also improving operational efficiency and speed of execution. These self-funding initiatives will capture significant groupwide synergies and fall broadly into three categories:- â€¢ improve our operational efficiency and management accountabilities through organisational redesign and process re-engineering; â€¢ consolidating similar back-office operations and achieving cost reductions through standardising the way we operate and manage back-office processes across the Group; and â€¢ transforming groupwide procurement to enhance the way we manage suppliers and achieve the most efficient pricing available. This programme of efficiency improvement initiatives is expected to deliver gross benefits of Â£275 million per annum for an initial investment of less than Â£200 million, of which Â£40 million was charged in 2005. This will continue to improve the Group's cost:income ratio whilst allowing substantial scope to re-invest in the business. From 2007 onwards we expect the Group's profit before tax to be increased by approximately Â£100-Â£150 million per annum as a result of this programme of cost saving initiatives. Overall asset quality remains satisfactory. On a comparable basis, impairment losses on loans and advances increased by 21 per cent to Â£1,090 million. A substantial reduction in impairment losses in the corporate franchise was more than offset by higher retail impairments, resulting from a combination of volume related asset growth in personal loan and credit card lending, the absence of a provision release in the mortgage business which totalled Â£39 million in 2004 and more customers, with higher levels of indebtedness and therefore lower levels of recovery, experiencing repayment difficulties. As a result of tightening our credit underwriting criteria during 2005, the quality of new business written during 2005 is good. Our impairment charge expressed as a percentage of average lending increased to 0.66 per cent, compared to 0.61 per cent in 2004 (page 37, note 13). On a statutory basis, impaired assets totalled Â£4,122 million, compared with Â£3,515 million at 1 January 2005, representing 2.3 per cent of total lending, up from 2.1 per cent at 1 January 2005, but unchanged from 30 June 2005. We expect a further deterioration in the retail credit environment in the first half of 2006 however, as a result of the improved quality of new business written in the last 12 months, we expect greater stability in the second half of 2006. In Wholesale Markets, impairment levels have remained low throughout 2005 and the outlook for corporate lending remains good, although we expect a return to more normal levels of impairment over time. Page 9 of 44 Following the publication of revised annuitant mortality tables and consultation on future mortality projections by the actuarial profession's Mortality Committee, the Group has reviewed the annuitant mortality assumptions used in its life assurance businesses. While the actuarial profession is still consulting on the adoption of the new projections, the Group has decided to strengthen its mortality related reserves by Â£155 million (Â£110 million on a comparable basis). Following the introduction of time-barring, and the consequent increase in claims, the Group has also reviewed the estimated cost of redress payments to customers, principally relating to past sales of mortgage endowment policies through the branch network. This has led to an increased provision for customer redress of Â£150 million. Our capital position remains robust. At the end of December 2005, the total capital ratio was 10.9 per cent and the tier 1 capital ratio was 7.9 per cent. During the year, risk-weighted assets increased by 10 per cent to Â£144.9 billion, reflecting good levels of growth in consumer lending and mortgages and strong growth in our Corporate Markets businesses. We continue to plan for risk-weighted asset growth of mid-to-high single digits over the next few years, and expected profit retentions remain sufficient to support this level of risk-weighted asset growth. We are also significantly improving our balance sheet management and capital efficiency, moving from a 'buy and hold' model towards an 'origination and distribution' framework. In this context we are planning to initiate a rolling residential mortgage securitisation programme in the second half of 2006. Scottish Widows continues to be one of the most strongly capitalised life assurance companies in the UK. The working capital ratio of the Scottish Widows Long-Term Fund remained strong at an estimated 17.8 per cent at the end of December 2005. The required risk capital margin was covered over 11 times. In March 2005, Scottish Widows paid a 2004 dividend of Â£200 million to Lloyds TSB reflecting the start of an expected regular dividend stream, and in December 2005 a further Â£800 million of surplus capital was repatriated to the Group. In March 2006, a second annual dividend will be paid to the Group. We are continuing to examine opportunities to improve our capital efficiency and have work in progress that we believe will allow Scottish Widows to repatriate further surplus capital to the Group. The Group's pension schemes accounting deficit totalled Â£2,910 million at the end of December 2005 (Â£2,037 million net of deferred tax). During 2005 the Group made additional voluntary contributions of Â£220 million to these schemes to be applied in reduction of the schemes' deficit. The Group is currently in the process of finalising its triennial actuarial valuation of the schemes and, as part of this process, is also considering other methods of addressing the schemes' deficit. The board has decided to maintain the final dividend at 23.5p per share, to make a total for the year of 34.2p. This represents a dividend yield for shareholders of 7 per cent, calculated using the 31 December 2005 share price of 488.5p. Helen A Weir Group Finance Director Page 10 of 44 SEGMENTAL ANALYSIS Year ended 31 December 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total Comparable basis Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 3,307 41 370 411 2,165 (370) 5,513 Other income 1,811 525 15,295 15,820 1,710 2 19,343 Total income 5,118 566 15,665 16,231 3,875 (368) 24,856 Insurance claims - (197) (14,597) (14,794) - - (14,794) Total income, net of 5,118 369 1,068 1,437 3,875 (368) 10,062 insurance claims Operating expenses (2,682) (160) (479) (639) (2,186) 1 (5,506) Trading surplus (deficit) 2,436 209 589 798 1,689 (367) 4,556 Impairment losses on loans (905) - - - (185) - (1,090) and advances Profit (loss) before tax* 1,531 209 589 798 1,504 (367) 3,466 Volatility - Banking - - - - - (124) (124) - Insurance - 28 410 438 - - 438 - Policyholder interests - - 311 311 - - 311 Other IFRS adjustments (213) - (73) (73) 20 (55) (321) applied from 1 January 2005 Profit (loss) on sale and 76 - - - (6) (20) 50 closure of businesses Profit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820 Year ended 31 December 2004 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total Comparable basis Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 3,228 44 239 283 1,986 (407) 5,090 Other income 1,696 496 10,240 10,736 1,544 45 14,021 Total income 4,924 540 10,479 11,019 3,530 (362) 19,111 Insurance claims - (214) (9,408) (9,622) - - (9,622) Total income, net of 4,924 326 1,071 1,397 3,530 (362) 9,489 insurance claims Operating expenses (2,609) (154) (468) (622) (2,047) 12 (5,266) Trading surplus (deficit) 2,315 172 603 775 1,483 (350) 4,223 Impairment losses on loans (676) - 3 3 (230) - (903) and advances Profit (loss) before tax* 1,639 172 606 778 1,253 (350) 3,320 Volatility - Insurance - 8 160 168 - - 168 - Policyholder interests - - (30) (30) - - (30) Loss on sale of businesses - - - - (21) - (21) Trading results of - - - - 40 - 40 discontinued operations Profit (loss) before tax 1,639 180 736 916 1,272 (350) 3,477 *comparable basis Page11 of 44 DIVISIONAL PERFORMANCE UK RETAIL BANKING Comparable basis 2005 2004 Change Â£m Â£m % Net interest income 3,307 3,228 2 Other income 1,811 1,696 7 Total income 5,118 4,924 4 Operating expenses (2,532) (2,509) 1 Trading surplus 2,586 2,415 7 Impairment losses on loans and advances (905) (676) 34 Profit before tax, before provisions for customer redress 1,681 1,739 (3) Provisions for customer redress (150) (100) Profit before tax 1,531 1,639 (7) Cost:income ratio, before provisions for customer redress 49.5% 51.0% 31 December 1 January 2005 2005 Total assets Â£103.9bn Â£96.5bn 8 Total risk-weighted assets Â£60.6bn Â£57.2bn 6 Key achievements â€¢ Satisfactory income growth in a more challenging consumer environment, with good growth in income per customer and a 28 per cent increase in target customer current account recruitment. â€¢ Tight cost control, with a clear focus on improving efficiency. Staff reductions of 2,713 during the year resulted in lower costs in the second half of the year. â€¢ Positive jaws with income growth of 4 per cent exceeding cost growth, excluding customer redress provisions, of 1 per cent. â€¢ Good and broad customer balance growth: - Group mortgage balances increased by 10 per cent to Â£88.4 billion. - Credit card balances, adjusted to exclude the effect of the Goldfish disposal, increased by 9 per cent to Â£7.2 billion. - Personal loan balances increased by 3 per cent to Â£11.0 billion. - Customer deposit balances increased by 7 per cent to Â£71.0 billion. â€¢ Customer satisfaction levels reached their highest level in recent years during 2005. â€¢ Higher impairment charge reflecting marketwide deterioration in retail credit quality as a result of more customers, with higher levels of indebtedness, experiencing repayment difficulties. Page 12 of 44 UK RETAIL BANKING (continued) Profit before tax, on a comparable basis, from UK Retail Banking decreased by Â£108 million, or 7 per cent, to Â£1,531 million, reflecting good levels of business growth offset by higher impairment losses and customer redress provisions. Increased income from continued growth in the Group's consumer lending and customer deposit portfolios and improved current account fee income was offset by a higher level of impairment losses in the Group's unsecured lending portfolios. Total income increased by 4 per cent, notwithstanding a decrease in commissions from creditor insurance, whilst cost growth, excluding customer redress provisions, was 1 per cent. Other income increased by 7 per cent, and now represents 35 per cent of total income. During 2005, good levels of growth were achieved in all key product areas. Gross new mortgage lending for the Group totalled Â£26.0 billion (2004: Â£26.3 billion). Net new lending totalled Â£8.3 billion resulting in a market share of net new lending of 9.1 per cent, and mortgage balances outstanding increased by 10 per cent to Â£88.4 billion. Personal loan balances outstanding at the year-end were Â£11.0 billion, an increase of 3 per cent and credit card balances totalled Â£7.2 billion, an increase of 9 per cent, adjusting to exclude the effect of the Goldfish disposal. Credit balances on current accounts and savings and investment accounts increased by 7 per cent. Income per customer continued to improve during the year. Customers are increasingly choosing to buy through direct channels as well as through our branches. Towards the end of 2005 we saw improved levels of growth in branch based sales, particularly current and savings accounts, whilst continued investment in our direct channel capabilities has supported good levels of business growth. Sales through direct channels represent half of total sales and, during 2005, internet product sales increased by 28 per cent and product sales via the telephone increased by 39 per cent. Our internet bank now has 3.7 million registered users and over 470 million transactions were processed through internet banking, an increase of 40 per cent. Lloyds TSB remains a leader in the added value current account market, with over 4 million customers. Target customer current account recruitment increased by 28 per cent, compared with 2004. Operating expenses remained well controlled and, excluding customer redress provisions, increased by only Â£23 million, or 1 per cent. This included higher levels of restructuring costs as we continue to rationalise back office operations to improve efficiency. Levels of customer service and satisfaction have also continued to improve. Impairment losses on loans and advances increased by Â£229 million, or 34 per cent, to Â£905 million, reflecting a combination of volume related asset growth in personal loan and credit card lending, the absence of a mortgage provision release which in 2004 totalled Â£39 million, and the impact of more customers, with higher levels of indebtedness, experiencing repayment difficulties. The impairment charge as a percentage of average lending for personal loans and overdrafts increased to 4.76 per cent, from 4.20 per cent in 2004, while the charge in the credit card portfolio increased to 4.01 per cent, from 3.42 per cent in 2004. In the mortgage business the Group continued to experience a low level of losses and as a result the mortgage impairment charge was Â£13 million. Overall, the provisions charge as a percentage of average lending, on a comparable basis, was 0.92 per cent, compared to 0.75 per cent in 2004. Page 13 of 44 UK RETAIL BANKING (continued) Within personal loans, key initiatives have been the increased use of behavioural and risk-based pricing, and leveraging our customer insight capabilities to enable the Group to deliver more competitive pricing to better quality customers within our existing customer base. Over 99 per cent of new personal loans and 77 per cent of new credit cards sold during 2005 were to existing customers, where the Group has a better understanding of an individual customer's total financial position. Dynamic delinquency measures remain in line with our expectations given the slowdown in consumer spending. Cheltenham & Gloucester (C&G) continued to focus on prime lending market segments during 2005. The average indexed loan-to-value ratio on the C&G mortgage portfolio was 43 per cent (31 December 2004: 41 per cent), and the average loan-to-value ratio for C&G new mortgages and further advances written during 2005 was 64 per cent (2004: 62 per cent). At 31 December 2005, 95 per cent of C&G mortgage balances had an indexed loan-to-value ratio of less than 85 per cent (31 December 2004: 94 per cent) and only 0.6 per cent of balances had an indexed loan-to-value ratio in excess of 95 per cent (31 December 2004: 0.3 per cent). Page 14 of 44 INSURANCE AND INVESTMENTS 2005 2004 Change Comparable basis Â£m Â£m % Net interest income 411 283 Other income 15,820 10,736 Total income 16,231 11,019 Insurance claims (14,684) (9,622) Total income, net of insurance claims 1,547 1,397 11 Operating expenses (639) (610) 5 Trading surplus 908 787 15 Impairment losses on loans and advances - 3 Profit before tax, excluding customer redress provisions and 908 790 15 strengthening of reserves for mortality Provisions for customer redress - (12) Strengthening of reserves for mortality (110) - Profit before tax 798 778 3 Profit before tax analysis Life, pensions and OEICs* 683 610 12 General insurance 209 172 22 Scottish Widows Investment Partnership 16 8 100 Profit before tax* 908 790 15 *excluding customer redress provisions and strengthening of reserves for mortality Key achievements â€¢ Significantly improved profit performance. Profit before tax, on a comparable basis and excluding customer redress provisions and a significant strengthening of reserves for mortality, increased by 15 per cent to Â£908 million. â€¢ Strong, and improving, sales performance. 21 per cent increase in Scottish Widows' new business weighted sales, increasing the Group's market share of life, pensions and long-term savings to an estimated 6.2 per cent, from 5.7 per cent. â€¢ Excellent progress in increasing bancassurance sales, particularly in the second half of 2005 when sales grew by 23 per cent, compared with the second half of 2004. â€¢ Improved profitability. New business contribution in Scottish Widows increased by 19 per cent. Life and pensions new business margin increased to 29.7 per cent. â€¢ Good progress with General Insurance's strategy to develop its manufacturing business and increase focus on direct channels. Strong focus on improving underwriting capability, supply chain efficiency and claims management led to profit before tax, on a comparable basis, increasing by 22 per cent. â€¢ Strong capital position maintained. During 2005, Scottish Widows Group repatriated Â£1 billion surplus capital to the Group. Page 15 of 44 INSURANCE AND INVESTMENTS (continued) Profit before tax, on a comparable basis, increased by Â£20 million, or 3 per cent to Â£798 million despite a significant strengthening of reserves for mortality which, on a comparable basis, totalled Â£110 million. 2005 2004 Change Scottish Widows - profit before tax analysis* Â£m Â£m % Life and pensions New business contribution 224 188 19 Existing business 181 181 - Investment earnings - normalised 196 167 17 Profit before tax 601 536 12 OEICs Profit before tax 82 74 11 Profit before tax (life, pensions and OEICs) 683 610 12 New business margin (life and pensions) 29.7% 28.6% *comparable basis, excluding customer redress provisions and the strengthening of reserves for mortality Profit before tax, excluding customer redress provisions and the strengthening of reserves for mortality, from the Group's life, pensions and OEICs business increased by 12 per cent to Â£683 million. The Group's strategy to improve its returns by focusing on more profitable, less capital intensive, business whilst constantly seeking to improve process and distribution efficiency has led to a 19 per cent increase in new business contribution to Â£224 million. As a result of this improved capital efficiency and strong sales of pensions and single premium investments, the life and pensions new business margin increased to 29.7 per cent (2004: 28.6 per cent). Page 16 of 44 INSURANCE AND INVESTMENTS (continued) 2005 2004 Change Weighted sales (regular + 1/10 single) Â£m Â£m % Life and pensions 754 657 15 OEICs 148 86 72 Life, pensions and OEICs 902 743 21 Bancassurance 274 242 13 Independent financial advisers 562 432 30 Direct 66 69 (4) Life, pensions and OEICs 902 743 21 Overall, weighted sales in 2005 increased by 21 per cent to Â£902 million and as a result the Group's life, pensions and investments market share increased significantly to an estimated 6.2 per cent, compared with 5.7 per cent in 2004. During 2005 the Group launched a new group pensions platform which supported the strong growth in sales during the year. Scottish Widows is now also one of the largest UK providers of individual pensions. IFA sales grew 30 per cent to Â£562 million, supported by significant product and service enhancements in pensions and investments, and our estimated market share of the IFA market improved to 6.8 per cent, from 5.9 per cent in 2004. Bancassurance sales were 13 per cent higher at Â£274 million. Weighted sales of OEICs were 72 per cent higher, largely through the branch network and to Lloyds TSB private banking clients. Our estimated market share through the bancassurance and direct channels increased to an estimated 5.5 per cent, from 5.4 per cent in 2004. In January 2006, Scottish Widows announced a new partnership with Virgin to market life assurance and a new cancer insurance product under the Virgin Money brand. This supports Scottish Widows' long-term strategy to secure a greater breadth of distribution for its products. Scottish Widows Investment Partnership Pre-tax profit, on a comparable basis, from Scottish Widows Investment Partnership (SWIP) increased to Â£16 million, compared with Â£8 million in 2004, reflecting improved market performance and increased revenues from new business. SWIP won Â£4.4 billion of gross new business in 2005, an increase of 110 per cent on 2004, and its assets under management increased by 16 per cent to Â£95 billion. Overall investment performance during 2005 has continued to improve. Groupwide funds under management increased by 12 per cent to Â£121 billion. Page 17 of 44 Insurance and Investments (continued) General insurance 2005 2004 Change Comparable basis Â£m Â£m % Commission receivable 681 672 1 Commission payable (695) (750) (7) Underwriting income (net of reinsurance) 562 554 1 Other income 18 64 Net operating income 566 540 5 Claims paid on insurance contracts (net of reinsurance) (197) (214) (8) Operating income, net of claims 369 326 13 Operating expenses (160) (154) 4 Profit before tax 209 172 22 Claims ratio 34% 37% Combined ratio 80.8% 83.2% Profit before tax, on a comparable basis, from our general insurance operations increased by Â£37 million, or 22 per cent, to Â£209 million. Operating income, net of claims, increased by 13 per cent compared with cost growth of 4 per cent. Good progress continues to be made in implementing new platforms for underwriting and claims processes. Net operating income improved by Â£26 million as growth in income from home and motor business was partly offset by reduced broking commission from loan protection insurance, reflecting the slowdown in unsecured consumer lending growth during 2005 (page 35, note 10) and lower health premiums following the transfer of the Group's medical insurance business to BUPA during 2004. Good progress has also been made in building the Group's corporate partnering capability with a new distribution agreement secured with MORE TH>N during 2005. Our strategy to increase investment in more cost efficient distribution through direct channels continues to generate earnings momentum with gross written premiums from new policies sold through direct channels increasing by 9 per cent in 2005. This reflected strong growth in levels of new business through the internet, where home insurance sales increased by 39 per cent and motor insurance sales by 12 per cent. New motor insurance sales by telephone increased by 15 per cent. The business has also delivered substantial improvements in business retention reflecting higher levels of customer satisfaction and improvements in operational efficiency. Claims fell by Â£17 million to Â£197 million, and the claims ratio improved to 34 per cent (2004: 37 per cent), reflecting good progress in re-engineering the claims process and improvements in the cost effectiveness of the claims supply chain, as well as lower health claims as a result of the transfer of the Group's private medical insurance business to BUPA. As a result, the combined ratio relating to the underwriting business improved to 80.8 per cent in 2005 (2004: 83.2 per cent). Page 18 of 44 WHOLESALE AND INTERNATIONAL BANKING 2005 2004 Change Comparable basis Â£m Â£m % Net interest income 2,165 1,986 9 Other income 1,710 1,544 11 Total income 3,875 3,530 10 Operating expenses (2,186) (2,047) 7 Trading surplus 1,689 1,483 14 Impairment losses on loans and advances (185) (230) (20) Profit before tax 1,504 1,253 20 Cost:income ratio 56.4% 58.0% 31 December 1 January 2005 2005 Total assets Â£124.0bn Â£123.8bn - Total risk-weighted assets Â£80.1bn Â£71.0bn 13 2005 2004 Profit before tax by business unit Â£m Â£m Corporate Markets 958 732 31 Business Banking 206 153 35 Asset Finance 219 240 (9) International Banking 133 120 11 Other (12) 8 1,504 1,253 20 Key achievements â€¢ Excellent profit growth. Profit before tax, on a comparable basis, increased by 20 per cent to Â£1,504 million. â€¢ Strong income growth, up 10 per cent, as Corporate Markets strategy begins to deliver results. Income momentum improved during the year. â€¢ Positive jaws. Income growth of 10 per cent exceeded cost growth of 7 per cent. Continued investment in people and systems to support new product capabilities. â€¢ Low levels of impairment as a result of high corporate liquidity and a continued strong level of recoveries. Impairment charge reduced by 20 per cent. â€¢ Good progress in delivering the strategy to build an integrated wholesale bank for corporate markets. 17 per cent increase in Corporate Markets trading surplus, and 31 per cent increase in profit before tax. â€¢ Good levels of franchise growth in Business Banking. 24 per cent growth in trading surplus, and 35 per cent growth in profit before tax. â€¢ Good new business growth in Asset Finance with trading surplus up 12 per cent. However, higher levels of retail impairment resulted in a fall of 9 per cent in profit before tax. â€¢ Improved post-tax return on risk-weighted assets from 1.41 per cent to 1.50 per cent. Page 19 of 44 WHOLESALE AND INTERNATIONAL BANKING (continued) Wholesale and International Banking profit before tax, on a comparable basis, increased by Â£251 million, or 20 per cent, to Â£1,504 million. Income growth of 10 per cent exceeded cost growth of 7 per cent, leading to a reduction in the cost:income ratio to 56.4 per cent. Trading surplus increased by Â£206 million or 14 per cent, to Â£1,689 million. There was strong profit growth in Corporate Markets, Business Banking and International Banking while Asset Finance saw strong trading surplus growth before higher impairment losses. Overall growth in profit was ahead of growth in risk-weighted assets and has led to an increase in the post-tax return on average risk weighted assets to 1.50 per cent, compared to 1.41 per cent in 2004. Net interest income increased by Â£179 million, or 9 per cent, reflecting higher income from strong growth in customer lending in Corporate Markets, Business Banking and Asset Finance. Other income increased by Â£166 million, or 11 per cent. Strong growth in structured finance transactions, increased fee income from relationship business products and higher levels of cross-selling activity led to an increase of 18 per cent in other income from Corporate Markets. In addition, other income benefited from the impact of motor dealership acquisitions in Asset Finance and sustained customer growth in Business Banking. Costs were 7 per cent higher at Â£2,186 million, reflecting higher staff costs as a result of our increased investment in people, as we continue to build up our Corporate Markets product capability and expertise, and the impact of the motor dealership acquisitions within Asset Finance. The charge for impairment losses on loans and advances decreased by Â£45 million, or 20 per cent, to Â£185 million, as a result of lower provisions and a good level of recoveries from the corporate lending portfolio, partially offset by higher charges in the Asset Finance business. In Corporate Markets, profit before tax grew by 31 per cent, from Â£732 million in 2004, to Â£958 million, driven by a combination of higher income and a reduction in impairment losses. Income increased by 15 per cent, including higher levels of cross-selling income which increased by 27 per cent reflecting our increased customer focus and integration across the business. Income growth was strong in both relationship and transactional business. Customer relationships continue to be deepened, and there has been considerable investment in the business to broaden origination, distribution and portfolio management capabilities. This has included the build up of new credit structuring and loan trading teams and the launch of a variety of new products. Profit before tax in Business Banking grew by Â£53 million, or 35 per cent, to Â£206 million reflecting our strategy to move relationship managers back into branches and closer to our customers. There was good growth in customer income, tight control of costs and service and operational improvements. This supported a 4 percentage point reduction in the cost:income ratio for the business. Customer deposits rose by 4 per cent to Â£10.7 billion and customer lending increased by 11 per cent to Â£8.0 billion. Business Banking continued to develop and grow its customer franchise, with net customer recruitment of some 13,350 during 2005, reflecting a market leading position in both the overall and start-up markets. Over 18,000 customers transferred their banking arrangements to the Group from other banking providers. Page 20 of 44 WHOLESALE AND INTERNATIONAL BANKING (continued) Profit before tax in Asset Finance decreased by 9 per cent to Â£219 million, reflecting higher impairment losses, which offset the continued development of the motor and leisure, and contract hire businesses. Income increased by Â£71 million, or 8 per cent, leading to a 12 per cent growth in the trading surplus. New business has increased by 7 per cent in the personal and retail finance business. Lloyds TSB Commercial Finance has continued to grow strongly with a 19 per cent market share, measured by client numbers, and the motor and leisure business continues to be the largest independent lender in the UK motor and leisure point of sale market with a market share of 18 per cent. In International Banking, profit before tax increased by Â£13 million, or 11 per cent, to Â£133 million. This reflects a reduction in costs and lower impairment provisions which offset a Â£12 million, or 3 per cent, reduction in income as a result of lower earnings on retained capital following the repatriation of offshore capital to the Group. Page 21 of 44 CONSOLIDATED INCOME STATEMENT - STATUTORY 2005 2004 Â£m Â£m Interest and similar income 12,589 10,707 Interest and similar expense (6,918) (5,597) Net interest income 5,671 5,110 Fees and commissions income 2,990 3,054 Fees and commissions expense (842) (844) Net fees and commissions income 2,148 2,210 Net trading income 9,298 5,036 Insurance premium income 4,469 6,070 Other operating income 1,140 857 Other income 17,055 14,173 Total income 22,726 19,283 Insurance claims (12,186) (9,622) Total income, net of insurance claims 10,540 9,661 Operating expenses (5,471) (5,297) Trading surplus 5,069 4,364 Impairment losses on loans and advances (1,299) (866) Profit (loss) on sale and closure of businesses 50 (21) Profit before tax 3,820 3,477 Taxation (1,265) (1,018) Profit for the year 2,555 2,459 Profit attributable to minority interests 62 67 Profit attributable to equity shareholders 2,493 2,392 Profit for the year 2,555 2,459 Basic earnings per share 44.6p 42.8p Diluted earnings per share 44.2p 42.5p Total dividend per share for the year* 34.2p 34.2p Total dividend for the year* Â£1,915m Â£1,914m *total dividend for the year represents the interim dividend paid in October 2005 and the final dividend which will be paid and accounted for in May 2006. Page 22 of 44 CONSOLIDATED BALANCE SHEET - STATUTORY 31 December 1 January 2005 2005 31 December 2004 Assets Â£m Â£m Â£m Cash and balances at central banks 1,156 1,078 1,078 Items in course of collection from banks 1,310 1,462 1,462 Treasury bills and other eligible bills 92 Trading securities and other financial assets at fair value through profit or loss 60,374 56,840 Derivative financial instruments 5,878 9,263 Loans and advances to banks 31,655 31,851 31,848 Loans and advances to customers 174,944 161,162 155,318 Debt securities 43,485 Equity shares 27,310 Available-for-sale financial assets 14,940 14,593 Investment property 4,260 3,776 3,776 Goodwill 2,373 2,469 2,469 Value of in-force business 2,922 2,760 4,363 Other intangible assets 50 28 28 Tangible fixed assets 4,291 4,180 4,180 Other assets 5,601 3,392 9,013 Total assets 309,754 292,854 284,422 Equity and liabilities Deposits from banks 31,527 39,723 39,723 Customer accounts 131,070 126,349 119,811 Items in course of transmission to banks 658 631 631 Derivative financial instruments and other trading liabilities 6,396 10,334 Debt securities in issue 39,346 28,728 28,770 Liabilities arising from insurance contracts and 40,550 36,725 52,289 participating investment contracts Liabilities arising from non-participating investment contracts 21,839 16,361 Unallocated surplus within insurance businesses 518 426 1,362 Other liabilities 10,395 8,526 14,916 Retirement benefit obligations 2,910 3,075 3,075 Deferred tax liabilities 1,145 925 1,704 Other provisions 368 270 211 Subordinated liabilities 12,402 11,211 10,252 Total liabilities 299,124 283,284 272,744 Equity Share capital 1,420 1,419 1,419 Share premium account 1,170 1,145 1,145 Other reserves 383 371 343 Retained profits 7,222 6,554 8,140 Shareholders' equity 10,195 9,489 11,047 Minority interests 435 81 631 Total equity 10,630 9,570 11,678 Total equity and liabilities 309,754 292,854 284,422 Page 23 of 44 CONDENSED CONSOLIDATED CASH FLOW STATEMENT - STATUTORY 2005 2004 Â£m Â£m Net cash (used in) provided by operations (331) 12,214 Cash flows from investing activities Purchase of fixed asset investments (10,088) Proceeds from sale and maturity of fixed asset investments 9,732 Purchase of available-for-sale investments (10,108) Proceeds from sale and maturity of available-for-sale investments 10,266 Purchase of fixed assets (1,843) (1,565) Proceeds from sale of fixed assets 1,073 698 Acquisition of businesses, net of cash acquired (27) (16) Disposal of businesses, net of cash disposed (4) (25) Net cash used in investing activities (643) (1,264) Cash flows from financing activities Dividends paid to equity shareholders (1,914) (1,913) Dividends paid to minority interests (37) (68) Proceeds from issue of subordinated liabilities 1,361 699 Proceeds from issue of ordinary shares and transactions in own shares held in 26 11 respect of employee share schemes Repayment of subordinated liabilities (loan capital) (232) (764) Capital element of finance lease rental payments (2) (1) Change in minority investment in subsidiaries 329 (151) Net cash used in financing activities (469) (2,187) Change in cash and cash equivalents (1,443) 8,763 Cash and cash equivalents at beginning of year 28,196 19,433 Cash and cash equivalents at end of year 26,753 28,196 Cash and cash equivalents comprise cash and balances at central banks (excluding mandatory deposits) and amounts due from banks with a maturity of less than three months. Page 24 of 44 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - STATUTORY Attributable to equity shareholders Share capital Other Retained Minority and premium reserves profits interests Total Â£m Â£m Â£m Â£m Â£m Balance at 1 January 2004 2,554 343 7,646 782 11,325 Currency translation differences - - (12) 1 (11) Profit for the period - - 2,392 67 2,459 Total recognised income for the period - - 2,380 68 2,448 Dividends - - (1,913) (68) (1,981) Purchase/sale of treasury shares - - 8 - 8 Employee share option schemes: - value of employee services - - 19 - 19 - proceeds from shares issued 10 - - - 10 Changes in minority interests - - - (151) (151) Balance at 31 December 2004 2,564 343 8,140 631 11,678 Adjustments on transition to IAS 32, - 28 (1,586) (550) (2,108) IAS 39 and IFRS 4 Restated balance at 2,564 371 6,554 81 9,570 1 January 2005 Movement in available-for-sale - 8 - - 8 investments, net of tax Movement in cash flow hedges, net of - 11 - - 11 tax Currency translation differences - (7) 24 - 17 Net income recognised directly in - 12 24 - 36 equity Profit for the period - - 2,493 62 2,555 Total recognised income for the period - 12 2,517 62 2,591 Dividends - - (1,914) (37) (1,951) Purchase/sale of treasury shares - - 18 - 18 Employee share option schemes: - value of employee services - - 47 - 47 - proceeds from shares issued 26 - - - 26 Changes in minority interests - - - 329 329 Balance at 31 December 2005 2,590 383 7,222 435 10,630 Page 25 of 44 SUMMARISED SEGMENTAL ANALYSIS - STATUTORY Year ended 31 December 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 3,521 23 372 395 2,265 (510) 5,671 Other income 1,605 571 13,288 13,859 1,628 (37) 17,055 Total income 5,126 594 13,660 14,254 3,893 (547) 22,726 Insurance claims - (197) (11,989) (12,186) - - (12,186) Total income, net of 5,126 397 1,671 2,068 3,893 (547) 10,540 insurance claims Operating expenses (2,697) (160) (434) (594) (2,181) 1 (5,471) Trading surplus (deficit) 2,429 237 1,237 1,474 1,712 (546) 5,069 Impairment losses on loans (1,111) - - - (188) - (1,299) and advances Profit (loss) on sale and 76 - - - (6) (20) 50 closure of businesses Profit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820 Year ended 31 December 2004 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 3,228 44 239 283 2,006 (407) 5,110 Other income 1,696 504 10,370 10,874 1,558 45 14,173 Total income 4,924 548 10,609 11,157 3,564 (362) 19,283 Insurance claims - (214) (9,408) (9,622) - - (9,622) Total income, net of 4,924 334 1,201 1,535 3,564 (362) 9,661 insurance claims Operating expenses (2,609) (154) (468) (622) (2,078) 12 (5,297) Trading surplus (deficit) 2,315 180 733 913 1,486 (350) 4,364 Impairment losses on loans (676) - 3 3 (193) - (866) and advances Loss on sale of businesses - - - - (21) - (21) Profit (loss) before tax 1,639 180 736 916 1,272 (350) 3,477 Page 26 of 44 NOTES 1. Accounting policies and presentation Except as noted below, the accounting policies adopted in the preparation of the 2005 results are unchanged from those disclosed in the Group's announcement setting out the effects of the implementation of International Financial Reporting Standards ('IFRS') and Financial Reporting Standard 27 ('FRS 27'), published on 27 May 2005. Copies of this announcement are available on the Group's website at www.lloydstsb.com/investorrelations. The Group recognises as an asset the value of in-force life assurance business in respect of life assurance contracts and participating investment contracts, representing the net present value of future profits expected to accrue to the shareholder from these contracts. In the Group's first IFRS results for the six months ended 30 June 2005, the asset in the consolidated balance sheet and movements in the asset recognised in the income statement were calculated and disclosed on a net of tax basis. Since that time accounting practice has continued to evolve and a consensus has emerged that the value of in-force business should be presented gross of tax. The Group has therefore changed its accounting policy to present movements in the value of in-force business gross of attributable tax with a consequential adjustment to the tax charge; there is no effect upon the Group's earnings or shareholders' equity. Comparative figures have been restated accordingly. Comparative figures have also been restated to allow for deferred tax on properties acquired as part of a business combination and for the reclassification of certain balance sheet items following revised interpretations of the requirements of IFRS. This has resulted in a reduction in shareholders' equity although there is no significant impact upon the Group's income statement. The effect of these changes is set out below. Year ended 31 December 2004 Value of Previous in-force Other basis business adjustments Restated Â£m Â£m Â£m Â£m Profit before volatility 3,348 (9) - 3,339 Volatility 147 (9) - 138 Profit before tax 3,495 (18) - 3,477 Taxation (1,036) 18 - (1,018) Profit for the year 2,459 - - 2,459 At 1 January 2005 Total assets 291,997 870 (13) 292,854 Shareholders' equity 9,572 - (83) 9,489 Page 27 of 44 1. Accounting policies and presentation (continued) Half-year ended 30 June 2005 Value of Previous in-force Other basis business adjustments Restated Â£m Â£m Â£m Â£m Profit before volatility 1,723 45 - 1,768 and other IFRS adjustments Volatility 77 10 - 87 Other IFRS adjustments (124) (18) - (142) Profit before tax 1,676 37 - 1,713 Taxation (472) (37) - (509) Profit for the period 1,204 - - 1,204 At 30 June 2005 Total assets 305,212 907 (13) 306,106 Shareholders' equity 9,475 - (83) 9,392 Year ended 31 December 2005 Value of Previous in-force Other basis business adjustments Restated Â£m Â£m Â£m Â£m Profit before volatility 3,492 24 - 3,516 and other IFRS adjustments Volatility 548 77 - 625 Other IFRS adjustments (284) (37) - (321) Profit before tax 3,756 64 - 3,820 Taxation (1,201) (64) - (1,265) Profit for the year 2,555 - - 2,555 At 31 December 2005 Total assets 308,820 934 - 309,754 Shareholders' equity 10,259 - (64) 10,195 Comparative information for 2004 has been restated to take into account the requirements of all the standards except for IAS 32, IAS 39 and IFRS 4 (including FRS 27). As permitted by IFRS, these standards have been implemented with effect from 1 January 2005 and the opening balance sheet at this date has been adjusted accordingly. Page 28 of 44 2. Basis of presentation The Group implemented the requirements of IAS 32, IAS 39 and IFRS 4 (including FRS 27) with effect from 1 January 2005 without restating 2004 comparative figures and as a consequence the 2005 results are not directly comparable with those of 2004. Therefore, in order to provide a clearer representation of the underlying performance of the business the impact of those standards for which comparatives have not been restated has been separately analysed. In addition, to facilitate comparisons, volatility arising from the use of fair values in the Group's banking and insurance businesses (page 31, note 4) together with the profit on sale or closure of businesses have also been separately identified. A reconciliation of this 'comparable' basis of presentation to the Group's profit before tax for the year ended 31 December 2005 is shown below. Other IFRS related adjustments Profit on applied from sale and Comparable 1 January closure of Statutory basis Volatility 2005 businesses basis Â£m Â£m Â£m Â£m Â£m Net interest income 5,513 (73) 231 - 5,671 Other income 19,343 698 (2,986) - 17,055 Total income 24,856 625 (2,755) - 22,726 Insurance claims (14,794) - 2,608 - (12,186) Total income, net of insurance 10,062 625 (147) - 10,540 claims Operating expenses (5,506) - 35 - (5,471) Trading surplus (deficit) 4,556 625 (112) - 5,069 Impairment losses on loans and (1,090) - (209) - (1,299) advances Profit on sale and closure of - - - 50 50 businesses Profit (loss) before tax 3,466 625 (321) 50 3,820 Taxation (941) (392) 84 (16) (1,265) Profit (loss) for the year 2,525 233 (237) 34 2,555 Profit (loss) attributable to 67 36 (41) - 62 minority interests Profit (loss) attributable to 2,458 197 (196) 34 2,493 equity shareholders Profit (loss) for the year 2,525 233 (237) 34 2,555 Earnings per share 43.9p 3.6p (3.5)p 0.6p 44.6p In the reconciliation above, no adjustment has been made to show the volatility element of policyholder income and insurance claims as, with the exception of policyholder interests, which is included in volatility, these offset each other. Page 29 of 44 2. Basis of presentation (continued) In 2006, the Group plans to report its results on a full IFRS basis, separately analysing volatility and the profit (loss) on sale and closure of businesses. The Group's 2005 results on this basis are shown below. Half-year ended 30 June 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 1,730 10 184 194 1,084 (219) 2,789 Other income 815 270 5,403 5,673 759 7 7,254 Total income 2,545 280 5,587 5,867 1,843 (212) 10,043 Insurance claims - (108) (5,060) (5,168) - - (5,168) Total income, net of 2,545 172 527 699 1,843 (212) 4,875 insurance claims Operating expenses (1,281) (78) (196) (274) (1,046) 22 (2,579) Trading surplus (deficit) 1,264 94 331 425 797 (190) 2,296 Impairment losses on loans (568) - - - (102) - (670) and advances Profit (loss) before tax* 696 94 331 425 695 (190) 1,626 Volatility - Banking - - - - - (73) (73) - Insurance - 7 124 131 - - 131 - Policyholder interests - - 29 29 - - 29 Profit (loss) before tax 696 101 484 585 695 (263) 1,713 Year ended 31 December 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 3,521 23 366 389 2,265 (431) 5,744 Other income 1,605 543 12,573 13,116 1,628 8 16,357 Total income 5,126 566 12,939 13,505 3,893 (423) 22,101 Insurance claims - (197) (11,989) (12,186) - - (12,186) Total income, net of 5,126 369 950 1,319 3,893 (423) 9,915 insurance claims Operating expenses (2,697) (160) (434) (594) (2,181) 1 (5,471) Trading surplus (deficit) 2,429 209 516 725 1,712 (422) 4,444 Impairment losses on loans (1,111) - - - (188) - (1,299) and advances Profit (loss) before tax* 1,318 209 516 725 1,524 (422) 3,145 Volatility - Banking - - - - - (124) (124) - Insurance - 28 410 438 - - 438 - Policyholder interests - - 311 311 - - 311 Profit (loss) on sale and 76 - - - (6) (20) 50 closure of businesses Profit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820 *comparable basis Page 30 of 44 3. Impact of the adoption of IFRS Information on the effect of implementing IFRS upon the Group's 2004 results and balance sheet at 1 January 2005 was set out in the Group's announcement published on 27 May 2005. Excluding volatility, the impact of those standards applied with effect from 1 January 2005 has been to reduce earnings largely reflecting the application of effective interest rates, the reclassification of certain securities from equity to debt, and the impact of discounting on levels of loan loss impairment. There has also been a significant reduction in other income, with a corresponding decrease in insurance claims, as a result of the impact of IFRS 4 on the accounting treatment of certain insurance products. An analysis of the reduction in profit before tax by division is provided below. Other IFRS adjustments applied from 1 January 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 214 (18) (4) (22) 100 (61) 231 Other income (206) 18 (2,722) (2,704) (82) 6 (2,986) Total income 8 - (2,726) (2,726) 18 (55) (2,755) Insurance claims - - 2,608 2,608 - - 2,608 Total income, net of 8 - (118) (118) 18 (55) (147) insurance claims Operating expenses (15) - 45 45 5 - 35 Trading surplus (7) - (73) (73) 23 (55) (112) Impairment losses on loans (206) - - - (3) - (209) and advances Profit (loss) before tax (213) - (73) (73) 20 (55) (321) 4. Volatility Banking volatility In accordance with IFRS, it is the Group's policy to recognise all derivatives at fair value. The banking businesses manage their interest rate and other market risks primarily through the use of intra-Group derivatives, with the resulting net positions managed centrally using external derivatives. IFRS does not, however, permit the intra-Group derivatives to be used in a hedge relationship for reporting purposes. Although fair value accounting can have a significant impact on reported earnings, it does not impact on the business fundamentals or cash flows of the businesses. The Group has, therefore, implemented an internal pricing structure that allows divisions to transfer to central group items the volatility associated with marking to market derivatives held for risk management purposes. 'Banking volatility' is principally comprised of the difference between the result that would be recognised on an accrual accounting basis for derivatives held for risk management purposes and their mark to market value. The Group has set up a central hedging function to reduce the impact of this volatility by establishing, where possible, accounting hedge relationships for the external derivatives. During 2005, profit before tax included a negative banking volatility of Â£124 million. Page 31 of 44 4. Volatility (continued) Insurance volatility Changes in market variables such as the performance of equity markets and the level of interest rates, which are beyond the control of management, can result in significant volatility in the profitability of the Group's insurance businesses. As in previous years, in order to provide a clearer representation of the underlying performance of the life and pensions and general insurance businesses, the effect of these changes is separately analysed within insurance volatility. Following the implementation of the requirements of IFRS and FRS 27, insurance volatility is principally comprised of the elements described below. The Group's insurance businesses have substantial holdings of investments which are accounted for at fair value with changes being reflected within the income statement. The difference between the actual return on these investments attributable to shareholders and the expected return based upon economic assumptions made at the beginning of the year is included within insurance volatility. In addition, the calculation of the value of in-force business makes assumptions about future investment returns; to the extent that actual experience is different the effect is also included within insurance volatility. The main assumptions used in the calculation of the value of in-force business at 31 December 2005 were as follows: 31 December 31 December 2005 2004 % % Risk-adjusted discount rate (net of tax) 7.02 7.40 Return on equities (gross of tax) 6.72 7.17 Return on fixed interest securities (gross of tax) 4.12 4.57 Expenses inflation 3.79 3.76 Changes in stock market performance also affect the realistic valuation of the guarantees and options embedded within products written in the Scottish Widows With-Profits Fund, which following the implementation of FRS 27 is now reflected in the Group's balance sheet. Fluctuations in this valuation caused by market-related movements are also included within insurance volatility. During 2005, profit before tax included positive insurance volatility of Â£438 million. Policyholder interests volatility As a result of the requirement contained in 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. Under IFRS, tax on policyholder investment returns is included in the Group's tax charge rather than being offset against the related income, either increasing or decreasing profit before tax with a corresponding change in the tax charge. In order to provide a clearer representation of the underlying performance of the Group's life and pensions businesses the impact of these items upon pre-tax profit has been separately identified within volatility. During 2005, profit before tax included positive policyholder interests volatility of Â£311 million. Page 32 of 44 5. Insurance grossing adjustments IFRS requires line-by-line consolidation for all items of income and expenditure and, as a result, the Group can no longer report the results of its life assurance businesses as a single line item; in addition certain investment vehicles which were previously off-balance sheet are now consolidated. The income statement therefore now includes premiums receivable from policyholders and the returns on investments held within the life funds and OEICs which are shown within total income, and related deductions within interest expense and insurance claims. Whilst this represents a significant presentational change, there is no material impact upon the Group's profitability. The following tables show the impact on the comparable income statement of these grossing adjustments: Insurance and Investments Year ended 31 December 2005 Comparable Insurance Comparable basis gross-up basis* Â£m Â£m Â£m Net interest income 411 310 101 Other income 15,820 14,337 1,483 Insurance claims (14,794) (14,597) (197) Total income, net of insurance claims 1,437 50 1,387 Operating expenses (639) (32) (607) Profit before tax 798 18 780 *comparable basis, excluding insurance grossing adjustment Year ended 31 December 2004 Comparable Insurance Comparable basis gross-up basis* Â£m Â£m Â£m Net interest income 283 189 94 Other income 10,736 9,270 1,466 Insurance claims (9,622) (9,408) (214) Total income, net of insurance claims 1,397 51 1,346 Operating expenses (622) (37) (585) Impairment losses 3 - 3 Profit before tax 778 14 764 *comparable basis, excluding insurance grossing adjustment Page 33 of 44 6. Mortgage lending 2005 2004 Gross new mortgage lending Â£26.0bn Â£26.3bn Market share of gross new mortgage lending 9.0% 9.0% Net new mortgage lending Â£8.3bn Â£9.3bn Market share of net new mortgage lending 9.1% 9.2% Mortgages outstanding (year-end)* Â£88.4bn Â£80.1bn Market share of mortgages outstanding 9.1% 9.1% *excluding the effect of IFRS related adjustments 7. Central group items* 2005 2004 Â£m Â£m Lloyds TSB Foundations (34) (31) Funding cost of acquisitions less earnings on capital (325) (317) Central costs and other unallocated items (8) (2) (367) (350) *comparable basis The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly disabled and disadvantaged, to play a fuller role in society. The Foundations receive 1 per cent of the Lloyds TSB Group's pre-tax profit after adjusting for gains and losses on the disposal of businesses and pre-tax minority interests, averaged over three years, instead of a dividend on their shareholdings. In 2005, Â£34 million was accrued for payment to registered charities. 8. Group net interest income 2005 2004 Statutory basis Â£m Â£m Net interest income 5,671 5,110 Average interest-earning assets, excluding reverse repos 201,813 178,887 Net interest margin 2.81% 2.86% Banking margin - comparable basis* Net interest income 5,149 4,847 Average interest-earning assets, excluding reverse repos 185,468 170,438 Net interest margin 2.78% 2.84% *As a result of the implementation of IFRS, 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 order to maintain the comparability of the Group's banking net interest margin these amounts, together with the related average interest-earning assets, have been excluded from the comparable basis calculation. Page 34 of 44 9. Other income 2005 2004 Comparable basis Â£m Â£m Fees and commissions receivable: UK current account fees 754 637 Other UK fees and commissions 1,201 1,087 Insurance broking 681 672 Card services 545 515 International fees and commissions 134 131 3,315 3,042 Fees and commissions payable (918) (842) Net fees and commissions income 2,397 2,200 Net trading income 8,749 4,886 Insurance premium income 7,201 6,070 Other operating income 996 865 Total other income* 19,343 14,021 Insurance claims (14,794) (9,622) Total other income, net of insurance claims* 4,549 4,399 Volatility - Banking (45) - - Insurance 432 168 - Policyholder interests 311 (30) Other IFRS adjustments applied from 1 January 2005 (378) - Discontinued operations - 14 Total other income, net of insurance claims 4,869 4,551 *comparable basis 10. General insurance income 2005 2004 Â£m Â£m Premium income from underwriting Creditor 127 114 Home 441 442 Health 16 27 Reinsurance premiums (22) (29) 562 554 Commissions from insurance broking Creditor 396 442 Home 49 45 Health 15 20 Other 221 165 681 672 Page 35 of 44 11. Operating expenses 2005 2004 Comparable basis Â£m Â£m Administrative expenses: Staff: Salaries 2,068 1,961 National insurance 154 142 Pensions 308 307 Other staff costs 325 280 2,855 2,690 Premises and equipment: Rent and rates 305 293 Hire of equipment 13 16 Repairs and maintenance 136 128 Other 152 130 606 567 Other expenses: Communications and external data processing 452 446 Advertising and promotion 207 205 Professional fees 216 222 Provisions for customer redress 150 112 Other 375 387 1,400 1,372 Administrative expenses 4,861 4,629 Depreciation 639 637 Impairment of goodwill 6 - Total operating expenses - comparable basis 5,506 5,266 Discontinued operations - 31 Other IFRS adjustments applied from 1 January 2005 (35) - Total operating expenses 5,471 5,297 Cost:income ratio - comparable basis* 52.7% 54.3% Cost:income ratio - statutory basis* 51.9% 54.8% *total operating expenses divided by total income, net of insurance claims. The cost:income ratio on a comparable basis also excludes provisions for customer redress and the strengthening of reserves for mortality. Page 36 of 44 12. Number of employees (full-time equivalent) 31 December 31 December 2005 2004 UK Retail Banking 33,593 36,306 Insurance and Investments 6,283 5,944 Wholesale and International Banking 19,763 19,554 Other, largely IT and Operations 10,139 11,626 69,778 73,430 Agency staff (FTE) (2,981) (3,445) Total number of employees (full-time equivalent) 66,797 69,985 13. Impairment losses on loans and advances 2005 2004 Â£m Â£m Impairment losses on loans and advances (see below) 1,302 866 Other credit risk provisions (3) - 1,299 866 Impairment losses and loans and advances - comparable basis UK Retail Banking Personal loans/overdrafts 585 473 Credit cards 307 242 Mortgages 13 (39) 905 676 Insurance and Investments - (3) Wholesale and International Banking 188 230 Total charge - comparable basis 1,093 903 Discontinued operations - (37) Other IFRS adjustments applied from 1 January 2005 209 - Total charge 1,302 866 % % Charge as % of average lending: Personal loans/overdrafts 4.76 4.20 Credit cards 4.01 3.42 Mortgages 0.02 (0.05) UK Retail Banking 0.92 0.75 Insurance and Investments - (0.10) Wholesale and International Banking 0.31 0.43 Total charge - comparable basis 0.66 0.61 Discontinued operations - (13.11) Other IFRS adjustments applied from 1 January 2005 n/a - Total charge 0.76 0.59 Page 37 of 44 14. Capital ratios 31 December 1 January 2005 2005 Â£m Â£m Capital Tier 1 11,478 10,753 Tier 2 10,447 8,767 21,925 19,520 Supervisory deductions (6,160) (6,219) Total capital 15,765 13,301 Risk-weighted assets Â£bn Â£bn UK Retail Banking 60.6 57.2 Insurance and Investments 2.6 1.9 Wholesale and International Banking 80.1 71.0 Central group items 1.6 1.7 Total risk-weighted assets 144.9 131.8 Risk asset ratios Total capital 10.9% 10.1% Tier 1 7.9% 8.2% 2005 2004 Post-tax return on average risk-weighted assets 1.81% 1.99% Post-tax return on average risk-weighted assets* 1.92% 1.98% *comparable basis, excluding customer redress provisions and strengthening of reserves for mortality 15. Retirement benefit obligations The amounts recognised in the balance sheet are as follows: 31 December 31 December 2005 2004 Defined benefit schemes Â£m Â£m Present value of scheme liabilities 17,320 14,866 Fair value of scheme assets (14,026) (11,648) Net defined benefit scheme deficit 3,294 3,218 Unrecognised actuarial losses (485) (237) Net recognised defined benefit scheme deficit 2,809 2,981 Other retirement benefit schemes 101 94 Net recognised liability 2,910 3,075 Page 38 of 44 15. Retirement benefit obligations (continued) The net recognised liability has reduced by Â£165 million from Â£3,075 million to Â£2,910 million at 31 December 2005, as cash contributions to the Group's defined benefit schemes exceeded the regular cost, partly reflecting the additional voluntary contributions of Â£220 million made during the year. However, unrecognised actuarial losses increased by Â£248 million to Â£485 million; a reduction in the discount rate used to value the schemes' liabilities, as a result of the fall in corporate bond yield (Â£1.6bn), and an increased allowance for mortality (Â£0.2bn) more than offset the effect of a stronger than expected return from the schemes' assets (Â£1.4bn). Overall, therefore, the net defined benefit scheme deficit is little changed from 2004 at Â£3,294 million before tax (Â£2,306 million net of tax). 16. Balance sheet information 31 December 1 January 2005 2005 Deposits - customer accounts Â£m Â£m Sterling: Non-interest bearing current accounts 3,604 3,300 Interest bearing current accounts 37,976 35,863 Savings and investment accounts 60,522 57,255 Other customer deposits 16,809 17,058 Total sterling 118,911 113,476 Currency 12,159 12,873 Total deposits - customer accounts 131,070 126,349 Loans and advances to customers Domestic: Agriculture, forestry and fishing 2,299 2,083 Manufacturing 5,983 4,622 Construction 2,059 2,147 Transport, distribution and hotels 7,649 7,063 Property companies 8,267 5,943 Financial, business and other services 16,272 16,862 Personal : mortgages 88,528 80,282 : other 22,776 22,841 Lease financing 5,815 6,227 Hire purchase 4,853 4,828 Other 7,696 5,930 Total domestic 172,197 158,828 International: Latin America 173 125 United States of America 1,984 2,028 Europe 1,927 1,583 Rest of the world 735 516 Total international 4,819 4,252 177,016 163,080 Impairment provisions for loans and advances (2,072) (1,918) Total loans and advances to customers 174,944 161,162 Page 39 of 44 17. Economic profit 2005 2004 Comparable basis, excluding customer redress provisions and Â£m Â£m strengthening of reserves for mortality Average shareholders' equity 11,331 10,735 Profit attributable to equity shareholders 2,640 2,383 Less: notional charge (1,020) (966) Economic profit 1,620 1,417 Statutory basis Average shareholders' equity 9,747 10,493 Profit attributable to equity shareholders 2,493 2,392 Less: notional charge (877) (944) Economic profit 1,616 1,448 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 (2004: 9 per cent). 18. Earnings per share 2005 2004 Comparable basis, excluding customer redress provisions and strengthening of reserves for mortality Profit attributable to equity shareholders Â£2,640m Â£2,383m Weighted average number of ordinary shares in issue 5,595m 5,590m Earnings per share 47.2p 42.6p Statutory basis Basic Profit attributable to equity shareholders Â£2,493m Â£2,392m Weighted average number of ordinary shares in issue 5,595m 5,590m Earnings per share 44.6p 42.8p Fully diluted Profit attributable to equity shareholders Â£2,493m Â£2,392m Weighted average number of ordinary shares in issue 5,639m 5,625m Earnings per share 44.2p 42.5p Page 40 of 44 19. Tax 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 tax rate of the Group, excluding gross policyholder tax charge and OEIC interests from profit before tax and the tax charge, was 27.0 per cent (2004: 28.3 per cent) compared to the standard UK corporation tax rate of 30 per cent. The effective tax rate including policyholder tax and OEIC interests was 33.1 per cent, compared to 29.3 per cent in 2004. A reconciliation of the charge that would result from applying the standard UK corporation tax rate to profit before tax to the tax charge, including policyholder tax and OEIC interests, is given below: 2005 2004 Â£m Â£m Profit before tax 3,820 3,477 Tax charge thereon at UK corporation tax rate of 30% 1,146 1,043 Factors affecting charge: Disallowed and non-taxable items (47) (32) Overseas tax rate differences (1) (14) Net tax effect of disposals and unrealised gains (59) (2) Tax deductible coupons on non-equity minority interests - (12) Policyholder tax and OEIC interests 223 33 Other items 3 2 Tax charge 1,265 1,018 20. Profit/loss on sale of businesses In December 2005, the Group announced the disposal of its Goldfish credit card business and this, together with additional costs incurred in relation to business closures or previous disposals, has led to a net profit of Â£50 million being recognised in the income statment. During 2004, the Group disposed of a number of its businesses in Latin America and a net loss of Â£21 million was recognised in the income statement. Page 41 of 44 21. Scottish Widows - realistic balance sheet information Financial Services Authority (FSA) returns for large with-profits companies now include realistic balance sheet information. The information included in FSA returns concentrates on the position of the with-profits fund. However, under the Scottish Widows demutualisation structure, which was court approved, the fund is underpinned by certain assets outside the with-profits 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. Estimated positions at 31 December 2005 are shown below, together with the actual position at 31 December 2004. 31 December 2005 (estimated) With-profits Long-term fund fund Â£bn Â£bn Available assets, including support account 20.1 23.2 Realistic value of liabilities (19.2) (19.1) Working capital for fund 0.9 4.1 Working capital ratio 4.4% 17.8% Risk capital margin cover 2.7 times 11.5 times 31 December 2004 With-profits Long-term fund fund Â£bn Â£bn Available assets, including support account 19.1 22.0 Realistic value of liabilities (18.1) (17.8) Working capital for fund 1.0 4.2 Working capital ratio 5.1% 19.0% Risk capital margin cover 2.4 times 9.3 times Page 42 of 44 22. Dividend A final dividend for 2005 of 23.5p per share (2004: 23.5p) will be paid on 3 May 2006, making a total for the year of 34.2p (2004: 34.2p). 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 8 March Record date 10 March Final date for joining or leaving the dividend reinvestment plan 5 April Final dividend paid 3 May Annual general meeting 11 May 23. 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 2005 were approved by the directors on 23 February 2006 and will be delivered to the registrar of companies following publication on 1 April 2006. 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. A report on Form 20-F will be filed with the Securities and Exchange Commission in the United States. Page 43 of 44 CONTACTS For further information please contact:- Michael Oliver Director of Investor Relations Lloyds TSB Group plc 020 7356 2167 E-mail: michael.oliver@ltsb-finance.co.uk Mary Walsh Director of Corporate Relations Lloyds TSB Group plc 020 7356 2121 E-mail: mary.walsh@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. Page 44 of 44 This information is provided by RNS The company news service from the London Stock Exchange

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