Interim Results
Lloyds TSB Group PLC
02 August 2002
LLOYDS TSB GROUP PLC - 2002 INTERIM RESULTS
PRESENTATION OF RESULTS
During the first half of 2002 the Group implemented a number of changes in
accounting policies following the issue of new accounting standards and
guidelines: Urgent Issues Task Force Abstract 33 - Obligations in Capital
Instruments, FRS 17 - Retirement Benefits, FRS 19 - Deferred Tax, and detailed
guidance from the Association of British Insurers (ABI) for best practice in the
preparation of results using the achieved profits method of accounting. In
accordance with the requirements of accounting standards, the Group has restated
comparative figures to reflect these changes (page 41, note 1).
In accordance with generally accepted accounting practice amongst listed
insurance companies in the UK, the results of the Group's life and pensions
business have been separately analysed between an operating profit, which
includes investment earnings calculated using longer-term investment rates of
return, and a profit before tax, separately identifying the short-term
fluctuations in investment returns (page 45, note 5).
CONTENTS
Page
Performance highlights and Chairman's comments 1
Group Chief Executive's statement 2
Summary of results 5
Review of financial performance 6
Consolidated profit and loss account 9
Consolidated balance sheet 10
Reconciliation of movements in shareholders' funds 11
Consolidated cash flow statement 12
Profit before tax by main businesses 13
Performance by sector 14
Income 28
Operating expenses 33
Number of employees 36
Credit quality 37
Capital ratios 39
Balance sheet information 40
Notes 41
Contacts for further information 48
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.
Lloyds TSB 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 of Lloyds TSB Group filed with the US Securities and Exchange Commission
for a discussion of such factors.
LLOYDS TSB GROUP 2002 INTERIM RESULTS
PERFORMANCE HIGHLIGHTS
Results - statutory basis
• Total income increased by 6 per cent to £4,597 million.
• Operating expenses increased by 1 per cent to £2,360 million.
• Trading surplus increased by 11 per cent to £2,237 million.
• Profit before tax increased by £1 million to £1,604 million.
• Profit attributable to shareholders decreased by 2 per cent to £1,113
million.
• Earnings per share decreased by 2 per cent to 20.0p.
• Economic profit increased by 8 per cent to £633 million.
• Post-tax return on average shareholders' equity 20.9 per cent.
• Total capital ratio 9.5 per cent, tier 1 capital ratio 7.8 per cent.
• Interim dividend increased by 5 per cent to 10.7p per share.
Results - excluding short-term fluctuations in investment returns, the impact of
investment returns on the Group's pension scheme assets and efficiency programme
related restructuring costs (page 46, note 7):
• Total income increased by 4 per cent to £4,911 million.
• Operating expenses fell by 1 per cent to £2,238 million.
Commenting on the results Lloyds TSB Group chairman, Maarten van den Bergh,
said: -
"In difficult market and economic circumstances the Group has performed
satisfactorily in the first half of 2002. This solid performance has enabled the
board to increase the interim dividend by 5 per cent.
Whilst our operating environment is likely to remain difficult throughout the
second half of the year, particularly for our equity market sensitive
businesses, we expect the Group to continue to make progress."
Page 1 of 48
LLOYDS TSB GROUP
GROUP CHIEF EXECUTIVE'S STATEMENT
In the first half of 2002 the Group's profit before tax increased by £1 million
to £1,604 million, and the trading surplus increased by 11 per cent to £2,237
million. This is a solid performance during such a period of economic and market
turbulence, particularly given the continuing impact on our business of fragile
stockmarket sentiment and weak equity markets, general concerns regarding the
future prospects of certain large corporates, and the impact of lower investment
returns on the Group's pension scheme assets, which are now reflected in Group
results following our recent implementation of Financial Reporting Standard 17.
The substantial turmoil surrounding the operating, regulatory and stockmarket
environment in which we operate has, in my experience, been unprecedented. High
profile corporate failures resulting from irregularities in accounting treatment
in the United States of America have increased the destabilisation of global
equity and bond markets. These issues have had a direct effect on the Group's
results in the first half of the year, and are likely to continue to have an
impact going forward until some stability returns to global stockmarkets, but
they do not impact our long-term strategic goals, the fundamental strength of
the Group or the way in which we run our business.
Our underlying revenue growth of 4 per cent, in conjunction with a reduction of
1 per cent in underlying expenses, is a creditable performance. Augmented by our
efficiency programmes, our control and focus on costs has, in particular, helped
the Group to deliver solid results at a time when market volatility has affected
our ability to achieve higher levels of quality income growth, without damaging
the risk profile of the Group. In a low growth, low inflation and low interest
rate macroeconomic environment, cost control remains critically important, and
the Group's key focus on the effective management of its cost base will support
its commitment to grow revenues at a materially higher rate than costs.
Within our businesses, the performance of retail banking is now benefiting from
the substantial investments we have made to reposition the business for strong
future profitable growth. Product sales in retail banking were at an all time
high in the first half of 2002 and recruitment of new customers remains buoyant
in the light of intense competition. Service quality has also been improving,
although more remains to be done.
Our life assurance business, in line with the rest of the industry, has
experienced a period of difficult trading conditions as a result of the
considerable fall in equity markets, which inevitably has had a marked effect on
consumer confidence in equity-based products. These difficult trading conditions
have affected, and will continue to affect, the short-term profitability of
Scottish Widows. However we believe the long-term growth prospects for this
sector of the market remain good. The long-term winners will be those with
extensive customer franchises and distribution reach, augmented by economies of
scale and strong brand power. We have these in abundance. This outlook is
underpinned by the recent Sandler report, which broadly we support, although we
remain firmly opposed to any form of price capping. Our general insurance
business has continued to deliver very strong profitable growth, with pre-tax
profits increasing by 17 per cent, compared with the first half of last year.
Page 2 of 48
LLOYDS TSB GROUP
In our Wholesale Markets and International Banking businesses good profitable
growth continues to be achieved by many of our specialist businesses. Our
cautious approach to large scale lending has served the Group well and overall
asset quality remains satisfactory. We have also acted prudently in providing an
incremental £70 million to cover the Group's exposure to two large US corporate
customers. The Group maintains a constant review of all large corporate and
sector exposures and remains satisfied that its prudent lending approach will
continue to ensure that the Group's high quality lending book remains well
positioned. Whilst we remain aware of the recent turbulence in equity and other
markets, we are not at this stage experiencing any material deterioration in the
overall quality of our assets. Elsewhere in our international businesses we saw
good profit growth in international private banking and offshore banking, and in
New Zealand.
Difficult economic circumstances in Argentina continue to have an impact on our
business. The Argentine government and the International Monetary Fund have yet
to agree a firm basis for the provision of financial support. Until this takes
place, the longer-term impact on our business in Argentina cannot be properly
evaluated. In the first half of 2002, however, the Group made a further
write-down of £30 million against its Argentine government debt to reflect
current bond secondary market prices. In addition, to take account of local
credit difficulties, the Group has increased the general provision relating to
Argentina by £20 million, bringing the total general provision raised for this
purpose to £75 million. Our outstanding exposure to Argentina remains relatively
modest, and has reduced over the last six months.
In the first half of the year the Group successfully continued to pursue its
three strategic aims: to be a leader in our chosen markets, to be first choice
for our customers and to drive down day-to-day operational costs to enable us to
further invest in the business. This is a clear strategy that is being well
implemented and delivered, and ensures that the Group continues to seek the
optimum balance between short-term profit growth and investment in the future of
the business to create sustainable long-term value for all our stakeholders. In
the pursuit of these strategic aims the Group's market share has increased in a
number of core markets during the first half of the year, particularly in
general insurance, personal lending and credit cards, and this enabled branch
network product sales to increase by some 15 per cent, compared to the first
half of 2001. As a result, average customer product holdings of 2.46 are well on
track to achieve the targeted 2.5 products per customer by the end of the year.
Day-to-day operating costs have remained under strict control as the Group
continues to capture the benefits of its extensive investment in efficiency over
recent years.
Much has been written about the capital position of life assurance companies and
groups like ours that own substantial life assurance businesses. Clearly the
substantial falls in equity markets have, during recent times, reduced the
Group's retained earnings, slowed the level of capital generation and affected
the level of solvency within our life business, Scottish Widows. However, at the
end of the half-year the Group's capital position remained satisfactory with the
Group's total capital ratio at 9.5 per cent and the free asset ratio of Scottish
Widows at an estimated 12.4 per cent, after the relaxation of the resilience
test announced recently by the Financial Services Authority. Scottish Widows
includes no implicit items such as future profits in the calculation of its free
asset ratio. Whilst the position remains volatile, and the proportion of
equities held is a key element, the FTSE 100 index could fall to below 3,500
before the Group would need to inject capital into its life operations.
Page 3 of 48
LLOYDS TSB GROUP
An interim dividend of 10.7p per share will be paid, an increase of 5 per cent.
Excluding short-term fluctuations in investment returns, this represents a
dividend cover over the last twelve months of 1.5 times. The increase reflects
the quality and quantity of the Group's earnings, its balance sheet strength and
the board's confidence in the Group's prospects at a time when there is great
uncertainty surrounding the outlook for global financial markets. Using the 653p
share price at 30 June 2002, this represents a historic net dividend yield of
5.2 per cent.
The business environment in which we operate is characterised by increasing
levels of competition, volatile equity markets and increasing government
intervention and regulation. Against this backdrop, Lloyds TSB will continue to
focus on its long-standing principles of prudent and sustainable revenue growth
from the creation of value for customers, tight management of its cost base and
strong credit risk management. With ongoing revenue benefits expected from our
customer relationship management and segmentation strategies and further cost
efficiencies planned from the Group's restructuring programmes we go forward
confidently. I believe we are well positioned for future organic growth and the
challenges ahead.
Peter Ellwood
Group Chief Executive
Page 4 of 48
LLOYDS TSB GROUP 2002 INTERIM RESULTS
SUMMARY OF RESULTS
Half-year to Increase Half-year to
30 June (Decrease) 31 December
2002 2001 2001
Results - statutory basis £m £m % £m
Total income 4,597 4,351 6 4,538
Operating expenses 2,360 2,337 1 2,439
Trading surplus 2,237 2,014 11 2,099
Provisions for bad and doubtful debts 479 323 48 424
Profit before tax 1,604 1,603 - 1,558
Profit attributable to shareholders 1,113 1,131 (2) 1,098
Economic profit (page 44, note 2) 633 585 8 534
Earnings per share (pence) 20.0 20.5 (2) 19.8
Post-tax return on average shareholders' equity (%) 20.9 18.7 17.5
Results - excluding short-term fluctuations in investment returns, the impact of investment returns
on the Group's pension scheme assets and efficiency programme related restructuring costs
Total income 4,911 4,700 4 4,741
Operating expenses 2,238 2,271 (1) 2,253
Shareholder value
Closing market price per share 653p 711p (8) 746p
Total market value of shareholders' equity £36.5bn £39.5bn (8) £41.5bn
Dividends per share 10.7p 10.2p 5 23.5p
Balance sheet £m £m £m
Shareholders' equity 10,976 12,601 (13) 10,356
Total assets 246,515 232,569 6 235,945
Net assets per share (pence) 194 224 (13) 184
Risk asset ratios % % %
Total capital 9.5 9.4 8.8
Tier 1 capital 7.8 8.4 7.8
Page 5 of 48
LLOYDS TSB GROUP
REVIEW OF FINANCIAL PERFORMANCE
In the first half of 2002 the Group's profit before tax increased by £1 million
to £1,604 million from £1,603 million in the first half of 2001. Total income
increased by £246 million, or 6 per cent, whilst operating expenses increased by
£23 million, or 1 per cent, notwithstanding an increase of £56 million in
restructuring costs relating to the Group's efficiency programmes. Excluding
short-term fluctuations in investment returns and investment returns on the
Group's pension scheme assets, total income increased by 4 per cent whilst total
costs, excluding efficiency programme related restructuring costs, reduced by 1
per cent. On a similar basis, the efficiency ratio improved to 45.6 per cent,
compared with 48.3 per cent in the first half of 2001.
Customer lending and deposits continue to grow well with further growth in
market share being achieved in a number of our core markets. Over the last
twelve months customer lending grew by 7 per cent to £128 billion and customer
deposits increased by 7 per cent to £114 billion. The Group net interest margin
was 3.27 per cent, compared with 3.41 per cent in the first half of 2001. This
reduction was more than compensated for by increased volumes.
Profit attributable to shareholders was 2 per cent lower at £1,113 million and
earnings per share decreased by 2 per cent to 20.0p. Shareholders' equity
increased by £620 million to £10,976 million in the first half of 2002 and the
post-tax return on average shareholders' equity was 20.9 per cent, compared to
18.7 per cent in the first half of 2001. Economic profit increased by 8 per cent
to £633 million. The post-tax return on average assets was 1.19 per cent, and
the post-tax return on average risk-weighted assets was 2.07 per cent.
Our bancassurance, customer relationship management and segmentation strategies
continue to deliver good results in a challenging marketplace. Profit before
tax, excluding short-term fluctuations in investment returns and efficiency
programme related restructuring costs, from UK Retail Financial Services, which
includes UK Retail Banking, Mortgages, and Insurance and Investments, increased
by £46 million to £1,459 million, from £1,413 million in the first half of 2001,
despite the substantial turmoil in equity markets and continuing competition in
the mortgage business. The trading surplus increased by £151 million, or 9 per
cent, to £1,844 million.
• Pre-tax profit from UK Retail Banking (page 15) increased by £25 million
to £243 million, compared with the first half of 2001. There was strong
growth in personal loans, up 19 per cent, and in credit card lending, up 24
per cent. Current account and savings and investment account balances
increased by 9 per cent. Overall retail banking product sales were 15 per
cent higher than in the first half of 2001. Costs remained tightly
controlled and asset quality remains good, notwithstanding the general
slowdown in economic activity within the UK. Provisions for bad and doubtful
debts increased by £76 million to £272 million. New specific provisions
increased by 24 per cent, largely as a result of volume related asset growth
in the personal loan and credit card portfolios, whilst releases and
recoveries increased by only 8 per cent.
Page 6 of 48
LLOYDS TSB GROUP
• Pre-tax profit from Mortgages (page 16) increased by £3 million, or 1 per
cent, to £431 million, from £428 million in the first half of 2001. Gross
new lending increased by 31 per cent to £8.0 billion, compared with £6.1
billion a year ago, however net new lending was £2.0 billion resulting in an
estimated market share of net new lending of 5.9 per cent. Whilst the Group
does not intend to chase market share growth at any price, its current
mortgage pipeline is at record levels and the Group expects its overall
share of net new lending to be higher by the end of the year.
• Operating profit from Insurance and Investments (page 17) increased by £18
million, or 2 per cent, to £785 million from £767 million. Overall weighted
sales in the Group's life, pensions and unit trust businesses were £372.7
million compared to £395.8 million in the first half of last year, a
decrease of 6 per cent, but against the second half of last year, a period
similarly characterised by stockmarket volatility and poor consumer
confidence in equity-based products, weighted sales increased by 4 per cent.
The 6 per cent reduction in weighted sales reflected a 12 per cent increase
in weighted sales from life and pensions, offset by a 36 per cent reduction
in weighted sales from unit trusts, largely caused by the continuing
stockmarket volatility which has significantly reduced customer demand for
equity-based ISA products. The reduction of £565 million in the Group's
gross sales of unit trusts and equity-based ISAs was, however, offset by an
increase in retail customer deposits of some £2 billion during the first
half of the year. There was further strong growth in operating profit from
the Group's general insurance operations. A 22 per cent growth in the
combined premium income from underwriting and commissions from insurance
broking led to an increase in operating profit of £55 million, or 17 per
cent, to £388 million.
Wholesale Markets (page 23) pre-tax profit decreased by £58 million, or 14 per
cent, to £355 million. Strong growth in customer lending, increased operating
lease assets and the impact of the acquisition of First National Vehicle
Holdings resulted in a £68 million, or 7 per cent, increase in total income.
Operating expenses increased by £40 million, again partly as a result of the
acquisition of First National Vehicle Holdings, and the provisions charge for
bad and doubtful debts increased by £83 million principally as a result of the
further provisions totalling £70 million against the Group's loans and advances
to two large US corporate customers. All businesses continued to demonstrate
satisfactory underlying performances during a period of considerable corporate
turmoil.
International Banking (page 25) pre-tax profit was £37 million, or 14 per cent,
higher at £309 million compared with the first half of 2001. Profits from New
Zealand increased by 25 per cent to £110 million as a result of good growth in
all core businesses, particularly small business banking. Our consumer finance
business in Brazil, Losango Consumer Finance, made a pre-tax profit of £16
million and the Group's international private banking and offshore banking
operations increased their pre-tax profit by £21 million, or 26 per cent, to
£101 million. The Emerging Markets Debt portfolio contributed £77 million
compared with a contribution of £65 million in the first half of 2001.
Page 7 of 48
LLOYDS TSB GROUP
The total Group charge for bad and doubtful debts was 48 per cent higher at £479
million, compared with £323 million in the first half of 2001 and £424 million
in the second half of last year (page 37). In UK Retail Banking the provisions
charge increased by £76 million, from £196 million to £272 million, largely as a
result of volume related asset growth in the personal loan and credit card
portfolios. In Wholesale Markets the provisions charge increased by £83 million
to £151 million from £68 million in the first half of 2001. There was an
increase in provisions within the corporate lending portfolio, reflecting the
slowdown in economic activity in the UK, and the Group has made further
provisions totalling £70 million against its exposure to two large US corporate
customers.
International Banking provisions increased to £58 million from £57 million, as
lower specific provisions in Latin America were offset by an increase of £20
million in the Group's general provision relating to its exposure to Argentina.
The Group's charge for bad and doubtful debts, expressed as a percentage of
average lending, was 0.75 per cent compared to 0.55 per cent in the first half
of 2001. Excluding the £70 million provisions relating to the two large US
customers and the £20 million general provision relating to Argentina, the Group
provisions charge as a percentage of average lending was 0.61 per cent. At the
end of the half-year provisions for bad and doubtful debts for the Group
totalled £1,566 million, representing over 120 per cent of non-performing loans
(2001 first half: 120 per cent) and the level of non-performing loans decreased
slightly to £1,216 million, compared with £1,222 million in December 2001.
Arrears levels, in general, remain stable.
The total capital ratio was 9.5 per cent and the tier 1 capital ratio was 7.8
per cent. Balance sheet assets increased by £11 billion, or 4 per cent, to £247
billion from £236 billion at the end of 2001. Over the last twelve months, loans
and advances to customers increased by £9 billion, or 7 per cent. Risk-weighted
assets increased by 8 per cent to £116 billion from £108 billion at the end of
2001. Capital generation remains strong and the FTSE 100 index could fall to
below 3,500 before the Group would need to inject additional capital into
Scottish Widows for solvency purposes. However, during the first half of the
year we did transfer surplus capital of £140 million from the closed life funds
of Lloyds TSB to Scottish Widows. At the end of June the Scottish Widows free
asset ratio was an estimated 12.4 per cent after the relaxation in the solvency
resilience test recently announced by the Financial Services Authority, compared
with 11.5 per cent at the end of 2001 (page 45, note 6).
Page 8 of 48
LLOYDS TSB GROUP
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Half-year Half-year to
to
30 June 31 December
2002 2001 2001
£m £m £m
Interest receivable:
Interest receivable and similar income arising from debt 278 202 328
securities
Other interest receivable and similar income 4,868 5,647 5,187
Interest payable 2,589 3,473 2,969
Net interest income 2,557 2,376 2,546
Other finance income 85 152 155
Other income
Fees and commissions receivable 1,523 1,469 1,453
Fees and commissions payable (306) (271) (331)
Dealing profits (before expenses) 88 106 127
Income from long-term assurance business 23 (79) 50
General insurance premium income 235 206 222
Other operating income 392 392 316
1,955 1,823 1,837
Total income 4,597 4,351 4,538
Operating expenses
Administrative expenses 1,918 1,993 1,981
Exceptional restructuring costs 122 66 186
Total administrative expenses 2,040 2,059 2,167
Depreciation 299 259 252
Amortisation of goodwill 21 19 20
Depreciation and amortisation 320 278 272
Total operating expenses 2,360 2,337 2,439
Trading surplus 2,237 2,014 2,099
General insurance claims 107 77 97
Provisions for bad and doubtful debts
Specific 451 327 409
General 28 (4) 15
479 323 424
Amounts written off fixed asset investments 39 6 54
Operating profit 1,612 1,608 1,524
Income from associated undertakings and joint ventures (8) (5) (5)
Profit on sale of businesses - - 39
Profit on ordinary activities before tax 1,604 1,603 1,558
Tax on profit on ordinary activities 462 445 430
Profit on ordinary activities after tax 1,142 1,158 1,128
Minority interests - equity 9 7 10
- non-equity 20 20 20
Profit for the period attributable to shareholders 1,113 1,131 1,098
Dividends 597 566 1,306
Retained profit 516 565 (208)
Earnings per share 20.0p 20.5p 19.8p
Diluted earnings per share 19.9p 20.3p 19.6p
Page 9 of 48
LLOYDS TSB GROUP
CONSOLIDATED BALANCE SHEET
30 June 30 June 31 December
2002 2001 2001
Assets £m £m £m
Cash and balances at central banks 717 688 1,240
Items in course of collection from banks 2,384 1,866 1,664
Treasury bills and other eligible bills 3,645 3,303 4,412
Loans and advances to banks 18,386 19,320 15,224
Loans and advances to customers 128,534 120,146 123,059
Non-returnable finance (56) (230) (124)
128,478 119,916 122,935
Debt securities 27,022 17,749 24,225
Equity shares 222 240 225
Interests in associated undertakings and joint ventures 33 8 39
Intangible assets 2,646 2,573 2,566
Tangible fixed assets 3,806 3,125 3,365
Own shares 38 50 23
Other assets 4,768 4,150 4,468
Prepayments and accrued income 2,587 2,220 2,296
Pension asset* 455 3,411 508
Long-term assurance business attributable
to the shareholder 6,506 6,414 6,366
201,693 185,033 189,556
Long-term assurance assets attributable to policyholders 44,822 47,536 46,389
Total assets 246,515 232,569 235,945
Liabilities
Deposits by banks 22,091 26,033 24,310
Customer accounts 113,787 105,883 109,116
Items in course of transmission to banks 960 403 534
Debt securities in issue 31,495 19,587 24,420
Other liabilities 7,320 5,393 6,673
Accruals and deferred income 3,339 3,824 3,563
Provisions for liabilities and charges:
Deferred tax 1,535 2,403 1,563
Other provisions for liabilities and charges 356 380 367
Subordinated liabilities:
Undated loan capital 4,622 3,875 4,102
Dated loan capital 4,655 4,113 4,006
Minority interests:
Equity 33 33 37
Non-equity 524 505 509
557 538 546
Called-up share capital 1,415 1,409 1,411
Share premium account 1,093 906 959
Merger reserve 343 343 343
Profit and loss account 8,125 9,943 7,643
Shareholders' funds (equity) 10,976 12,601 10,356
201,693 185,033 189,556
Long-term assurance liabilities to policyholders 44,822 47,536 46,389
Total liabilities 246,515 232,569 235,945
*30 June 2002 figure based on December 2001 valuation (page 41, note 1).
Page 10 of 48
LLOYDS TSB GROUP
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Half-year Year ended
to 30 June 31 December
2002 2001
£m £m
Profit attributable to shareholders 1,113 2,229
Dividends (597) (1,872)
Retained profit 516 357
Currency translation differences on foreign currency net investments 22 (86)
Actuarial losses recognised in pension schemes - (2,010)
Issue of shares 82 194
Net increase (decrease) in shareholders' funds 620 (1,545)
Shareholders' funds at beginning of period 10,356 10,024
Prior period adjustment (page 41, note 1) - 1,877
Shareholders' funds at end of period 10,976 10,356
Page 11 of 48
LLOYDS TSB GROUP
CONSOLIDATED CASH FLOW STATEMENT
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Net cash inflow from operating activities 4,235 5,261 4,666
Dividends received from associated undertakings 2 2 -
Returns on investments and servicing of finance:
Dividends paid to equity minority interests (13) (11) (6)
Payments made to non-equity minority interests (20) (20) (20)
Interest paid on subordinated liabilities (loan capital) (231) (262) (252)
Interest element of finance lease rental payments - (1) -
Net cash outflow from returns on investments and
servicing of finance (264) (294) (278)
Taxation:
UK corporation tax (329) (213) (469)
Overseas tax (90) (80) (67)
Total taxation (419) (293) (536)
Capital expenditure and financial investment:
Additions to fixed asset investments (23,866) (21,327) (25,722)
Disposals of fixed asset investments 23,740 19,465 21,065
Additions to tangible fixed assets (536) (380) (777)
Disposals of tangible fixed assets 114 53 232
Capital injection to life fund (140) - (100)
Net cash outflow from capital expenditure
and financial investment (688) (2,189) (5,302)
Acquisitions and disposals:
Additions to interests in joint ventures (6) (6) (38)
Acquisition of group undertakings (53) (111) (69)
Disposal of group undertakings and businesses - - 40
Net cash outflow from acquisitions and disposals (59) (117) (67)
Equity dividends paid (1,306) (1,172) (566)
Net cash inflow (outflow) before financing 1,501 1,198 (2,083)
Financing:
Issue of subordinated liabilities (loan capital) 1,145 485 257
Issue of ordinary share capital net of £56 million
(2001 first half: £152 million; second half: £33 million)
contribution to the QUEST 82 172 22
Repayments of subordinated liabilities (loan capital) (48) (26) (105)
Capital element of finance lease rental payments (3) (16) (4)
Net cash inflow from financing 1,176 615 170
Increase (decrease) in cash 2,677 1,813 (1,913)
Page 12 of 48
LLOYDS TSB GROUP
PROFIT BEFORE TAX BY MAIN BUSINESSES
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
UK Retail Banking 243 218 191
Mortgages 431 428 519
Insurance and Investments 785 767 718
UK Retail Financial Services 1,459 1,413 1,428
Wholesale Markets 355 413 465
International Banking 309 272 207
Central group items 2 72 2
Efficiency programme related restructuring costs (122) (66) (186)
Profit before tax, excluding short-term fluctuations in 2,003 2,104 1,916
investment returns
Short-term fluctuations in investment returns (399) (501) (358)
Profit before tax 1,604 1,603 1,558
Page 13 of 48
LLOYDS TSB GROUP
PERFORMANCE BY SECTOR
UK Retail Banking and Mortgages
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Net interest income 1,641 1,503 1,599
Other income 533 573 562
Total income 2,174 2,076 2,161
Operating expenses 1,222 1,227 1,229
Trading surplus 952 849 932
Provisions for bad and doubtful debts 270 198 217
Income from associated undertakings and joint ventures (8) (5) (5)
Profit before tax* 674 646 710
Profit before tax*
Retail Banking 243 218 191
Mortgages 431 428 519
674 646 710
Efficiency ratio 56.2% 59.1% 56.9%
Total assets (period-end) £81.3bn £74.3bn £78.0bn
Total risk-weighted assets (period-end) £51.2bn £45.8bn £48.3bn
*excluding efficiency programme related restructuring costs
Profit before tax from UK Retail Banking and Mortgages increased by £28 million,
or 4 per cent, to £674 million, compared with £646 million in the first half of
2001. The trading surplus increased by £103 million, or 12 per cent, to £952
million. Total income increased by £98 million, or 5 per cent, to £2,174
million. Net interest income increased by £138 million, or 9 per cent, to £1,641
million. Personal loans and credit card lending increased by 21 per cent and,
within Retail Banking, balances on current accounts and savings and investment
accounts grew by 9 per cent. Mortgage balances outstanding increased by 8 per
cent to £58.6 billion.
Other income decreased by £40 million to £533 million. There was a £25 million
improvement in income earned from credit and debit cards, and increased income
from added value current accounts, but this was offset by a £36 million
reduction in service charge income and a reduction of £33 million in profits
from the sale and leaseback of premises, as our strategy of converting much of
the Group's branch portfolio from freehold tenure to leasehold is almost
complete.
Operating expenses decreased by £5 million to £1,222 million during the first
half of 2002, compared to £1,227 million in the first half of 2001, as the
benefits of the Group's efficiency programmes start to be captured. Bad debt
provisions increased by £72 million, or 36 per cent, to £270 million, largely as
a result of volume related asset growth in the personal loan and credit card
portfolios.
Page 14 of 48
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
UK Retail Banking has the responsibility for managing the core relationship with
our current account customers and, therefore, acts as the principal gateway for
the cross-sale of our full range of bancassurance products and services. As such
it contributes significantly to the profitability of other businesses,
particularly in our life and pensions, and general insurance businesses.
Pre-tax profit from UK Retail Banking increased by £25 million, to £243 million,
from £218 million in the first half of 2001, as growth of 25 per cent in the
trading surplus, reflecting market share gains particularly in credit card and
personal lending and greater unit cost efficiencies, was offset by the higher
level of provisions for bad and doubtful debts. The Group is now starting to see
the benefit of the investments made over the last few years in the strategic
repositioning of the retail bank, which continues to be well positioned to
capture the benefits of future development and growth.
We continue to offer a comprehensive multichannel distribution service to our
customers. In addition to our network of over 2,100 branches, lloydstsb.com, our
internet banking system, continues to grow and remains one of the most visited
financial websites in Europe. Our telephone banking operation, comprising
PhoneBank and PhoneBank Express, is the largest in the UK with 2.75 million
registered customers. Our telephone banking contact centres handled some 14
million calls in the first half of 2002, making extensive use of interactive
voice recognition technology to improve efficiency and service.
Business Banking continued to grow its customer franchise with customer deposits
growing by 11 per cent and customer lending by 2 per cent during the first half
of the year. Following the launch of the Group's unique segmentation strategy
for the Business Banking market in 2001, roll-out to all existing customers is
substantially complete with most customers now migrated to their choice of
relationship offer. Underpinning these offers, and central to ensuring that our
customers continue to grow their businesses successfully, is RouteMap, a suite
of diagnostic tools to help and support customers. Use of success4business.com,
our small business portal, also continues to grow.
In March 2002, the Competition Commission's report following its investigation
into the supply of banking services to small and medium size enterprises (SMEs)
was published by the government. The Group is currently in discussions with the
Office of Fair Trading with regard to the detailed implementation of the
proposed remedies suggested by the Competition Commission. The implications for
Lloyds TSB and its SME customers have not yet therefore been fully assessed and,
at this stage, the Group is unable to quantify in detail the impact upon its SME
banking business. It is likely however that the annualised impact on profit
before tax will be a reduction of some £100 million, based on the current level
of interest rates.
Page 15 of 48
LLOYDS TSB GROUP
UK Retail Banking and Mortgages (continued)
Half-year to Half-year to
30 June 31 December
Mortgages 2002 2001 2001
Profit before tax* £431m £428m £519m
Efficiency ratio 22.7% 22.7% 19.7%
Gross new mortgage lending £8.0bn £6.1bn £7.9bn
Market share of gross new mortgage lending 8.3% 8.6% 8.8%
Net new mortgage lending £2.0bn £1.8bn £2.1bn
Market share of net new mortgage lending 5.9% 7.5% 6.9%
Mortgages outstanding (period-end) £58.6bn £54.5bn £56.6bn
Market share of mortgages outstanding 9.3% 9.6% 9.5%
*excluding efficiency programme related restructuring costs
Pre-tax profit from Mortgages increased by £3 million, or 1 per cent, to £431
million, from £428 million in the first half of 2001. Gross new lending
increased by 31 per cent to £8.0 billion, compared with £6.1 billion a year ago.
Net new lending increased to £2.0 billion resulting in an estimated market share
of net new lending of 5.9 per cent. The Group's current mortgage pipeline is
however at record levels and the Group expects its overall share of net new
lending to be higher by the end of the year. The Group has continued to avoid
exposure to the buy-to-let and sub-prime mortgage markets. Pre-tax profits in
the second half of 2001 were higher as result of a number of base rate changes
during that period and a release of £32 million of the Group's mortgage general
provision. In the first half of 2002 there were no base rate changes or general
provision releases, and a comparatively higher cost of retail funding.
During the first half of 2002 the Group's key objective in the mortgage business
has been to achieve an appropriate balance between market share growth and
profitability. At a time of rapid growth in the housing and mortgage markets we
have chosen not to chase market share growth at the expense of price and
quality. This has inevitably led to a reduction in our market share of net new
mortgage lending. Nevertheless, mortgages are a key recruitment vehicle in the
support of the Group's cross-sell targets and the £8.0 billion gross new
mortgage lending during the half-year was a record half-year performance for the
Group.
The efficiency ratio of the Group's total mortgage business was 22.7 per cent,
unchanged from the first half of 2001. The Group continues to be one of the most
efficient mortgage providers in the UK. C&G continues to benefit from mortgage
sales distribution through the Lloyds TSB branch network, the IFA market and
from the strength of the C&G brand. In addition C&G Teledirect, its internet and
telephone operation, continued to perform strongly. Business levels sourced from
intermediaries remain strong.
A relatively stable arrears position and the beneficial effect of house price
increases have meant that bad debt provisions remained at low levels. New
provisions were offset by releases and recoveries resulting in a release of
provisions of £2 million for the half-year, compared with a charge of £2 million
in the first half of 2001. The quality of our mortgage lending continues to be
very satisfactory.
Page 16 of 48
LLOYDS TSB GROUP
Insurance and Investments
(the life, pensions and unit trust businesses of Scottish Widows and Abbey Life;
general insurance underwriting and broking; and Scottish Widows Investment
Partnership)
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Life, pensions and unit trusts 390 420 392
General insurance 388 333 323
Operating profit from Insurance 778 753 715
Scottish Widows Investment Partnership 7 14 3
Total operating profit* 785 767 718
Short-term fluctuations in investment returns (399) (501) (358)
*excluding efficiency programme related restructuring costs
Operating profit from Insurance and Investments increased by 2 per cent to £785
million, from £767 million in the first half of 2001.
Operating profit from our life, pensions and unit trust businesses decreased by
£30 million, or 7 per cent, to £390 million, following a reduction of £41
million in the contribution from Abbey Life now that it is closed to new
business. Pre-tax profits from Scottish Widows increased by £11 million, or 3
per cent to £333 million. The market for medium and long-term investments
continued to be adversely affected in the first half of the year, as a direct
consequence of the continued volatility in global stockmarkets.
Total sales from the Group's life, pensions and unit trust businesses were
£2,138.7 million, compared with £2,501.1 million in the first half of 2001 and
£1,922.4 million in the second half of last year, a period similarly
characterised by stockmarket volatility and poor customer confidence in
equity-based products. Overall weighted sales were £372.7 million compared to
£395.8 million in the first half of last year, a decrease of 6 per cent, but
against the second half of the year weighted sales increased by 4 per cent. The
reduction in weighted sales, compared to the first half of last year, reflected
a 12 per cent increase in weighted sales from life and pensions, offset by a 36
per cent reduction in weighted sales from unit trusts and equity-based ISAs,
largely caused by the continuing volatility in global stockmarkets throughout
the first half of 2002.
By distribution channel, weighted sales from independent financial advisers rose
by 11 per cent as a result of strong life and pensions sales. In the branch
network weighted sales were 10 per cent lower as a result of the substantial
reduction in sales of unit trusts. Against the second half of 2001, however,
network sales increased by 9 per cent. Scottish Widows remains the leading
equity-based ISA provider in the UK as confirmed by the Investment Management
Association (IMA) and the Group remains well placed in this sector of the
market.
Page 17 of 48
LLOYDS TSB GROUP
Insurance and Investments (continued)
A major programme is underway to convert our unit trust range of some 80 funds
into a range of Open Ended Investment Companies (OEICs). This programme will be
completed by the end of 2002 and the resulting simpler range of mutual funds
will mean that the Group is well positioned to take advantage of the likely
changes in the market place, in particular the proposals outlined in the
recently published Sandler report.
During the first half of 2002 Scottish Widows has maintained its position as a
leading provider in the stakeholder pensions market. It became the nominated
stakeholder pensions provider for a number of associations and employers, which
gives access to more than 48,000 employers. Over 21,000 employers have now
designated Scottish Widows as their stakeholder pensions provider, resulting in
854,000 employees being offered stakeholder pensions. In the first half of 2002,
weighted sales of stakeholder pension products totalled £54 million.
Operating profit from general insurance operations, comprising underwriting and
broking, rose by £55 million, or 17 per cent, to a record £388 million, mainly
as a result of continued strong revenue growth from creditor and home insurance.
With some 8.7 million general insurance policies in force, we estimate that the
Group has market leadership positions in the distribution of home, creditor and
travel insurance.
The principal focus of Scottish Widows Investment Partnership (SWIP) is the
delivery of consistent superior investment performance. Pre-tax profits from
SWIP for the half-year were £7 million compared with £14 million in the first
half of 2001, the reduction in profitability being driven primarily by lower
stockmarket levels. At the end of the half-year SWIP had £76 billion of funds
under management out of Groupwide funds under management totalling £105 billion.
Having created a top class investment management team, SWIP is already
demonstrating a strong turnaround in performance. Overall fund management
performance in the first half of 2002 showed a significant improvement. SWIP's
largest UK equity fund, the UK growth fund, has achieved a top quartile
performance over six and twelve months. This improvement in performance is also
reflected in each of SWIP's mainstream, actively managed UK equity funds which
have all achieved top quartile performance over three, six, nine and twelve
month periods. A number of new products have been launched in the first half of
the year, most notably the SWIP Global Liquidity Fund, one of the largest
sterling Institutional Money Market Funds.
The Group is reviewing its complete offering ahead of the publication of the
final proposals regarding depolarisation, in order to ensure that we continue to
offer a level of choice appropriate to the needs of our customers. With Scottish
Widows continuing to be the best recognised brand in the medium to long-term
savings market and the actions already taken to improve choice by offering a
range of externally managed funds alongside those offered by Scottish Widows
Investment Partnership, the Group remains well placed to prosper in a
depolarised world. In particular, Scottish Widows' unique multi-manager
partnership with Frank Russell has been well received both in the IFA market and
by our own customers.
Page 18 of 48
LLOYDS TSB GROUP
Insurance and Investments (continued)
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Total new business premium income
Regular premiums:
Life - mortgage related 16.0 11.3 13.4
- non-mortgage related 14.0 8.8 11.1
Pensions 103.4 104.0 128.8
Health 2.9 2.4 2.2
Total regular premiums 136.3 126.5 155.5
Single premiums:
Life 816.6 721.0 963.2
Annuities 180.1 140.6 198.0
Pensions 440.5 383.0 335.2
Total single premiums 1,437.2 1,244.6 1,496.4
External unit trust sales:
Regular payments 40.2 35.4 29.6
Single amounts 525.0 1,094.6 240.9
Total external unit trust sales 565.2 1,130.0 270.5
Weighted sales (regular + 1/10 single)
Life and pensions 280.0 250.9 305.2
Unit trusts 92.7 144.9 53.7
Life, pensions and unit trusts 372.7 395.8 358.9
Weighted sales by distribution channel
Branch network 185.0 206.0 170.2
Independent financial advisers 155.3 140.2 139.6
Direct 32.4 49.6 49.1
Life, pensions and unit trusts 372.7 395.8 358.9
Group funds under management £bn £bn £bn
Scottish Widows Investment Partnership 76 84 78
UK Wealth Management 11 12 11
International 18 21 20
105 117 109
Page 19 of 48
LLOYDS TSB GROUP
Insurance and Investments (continued)
Life, pensions and unit trusts
Half-year Half-year to
to
30 June 31 December
2002 2001 2001
£m £m £m
New business income 182 153 205
Existing business
- expected return 146 174 185
- experience variances 26 5 32
- assumption changes and other items 54 54 41
- pension provision - - (70)
226 233 188
Investment earnings 113 123 124
Life and pensions distribution costs (136) (120) (135)
385 389 382
Unit trusts 51 95 46
Unit trust distribution costs (46) (64) (36)
5 31 10
Operating profit* 390 420 392
New business margin (life and pensions) 16.4 13.2 22.9
*excluding efficiency programme related restructuring costs
New business income increased by 19 per cent supported by a 12 per cent growth
in weighted sales from life and pensions products, and an improved performance
in the more profitable life products. Against the second half of last year new
business income fell by 11 per cent, broadly in line with the reduction in life
and pensions weighted sales. During the first half of the year the life and
pensions new business margin, defined as new business income less distribution
costs divided by weighted sales, increased to 16.4 per cent, from 13.2 per cent
in the first half of 2001. The improvement largely arose from an improved
product mix, particularly higher margin regular premium life products.
Profit before tax from existing business fell by 3 per cent from £233 million to
£226 million. The expected return from existing business, which reflects the
unwinding of the long-term discount rate applied to the expected cash flows from
the Group's portfolio of in-force business, decreased by £28 million, or 16 per
cent, to £146 million. This reduction reflects the lower value of in-force
business at the beginning of the year, caused by the effect of lower
stockmarkets on annual management charges.
Page 20 of 48
LLOYDS TSB GROUP
Insurance and Investments (continued)
Life, pensions and unit trusts (continued)
The adequacy of the provision for redress to past purchasers of pension policies
has been reviewed in the light of ongoing experience and, given that the review
and final settlement is now substantially complete, greater certainty as to the
number and size of compensation claims likely to be paid. The total provision
charged for this purpose at 30 June 2002 was £972 million, and most of this
provision has now been utilised. The Group anticipates that the review will be
completed within the second half of the year but, with lower stockmarket levels
increasing the anticipated cost of redress, it is possible that the total
provision charged to date may not be sufficient to cover the final cost of the
review. Any possible final provision is not, however, expected to be material in
Group terms.
The Group's Abbey Life subsidiary, in common with a number of companies in the
life assurance industry, is currently carrying out a review of the past sales of
certain endowment based products made by the Abbey Life salesforce prior to its
disposal by the Group in February 2000. This review is expected to be completed
over the course of the next few months, when the Group will be in a better
position to assess any financial implications more accurately.
Page 21 of 48
LLOYDS TSB GROUP
Insurance and Investments (continued)
General Insurance
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Premium income from underwriting
Creditor 54 56 54
Home 165 132 149
Health 22 22 23
Re-insurance premiums (6) (4) (4)
235 206 222
Commissions from insurance broking
Creditor 227 149 174
Home 19 18 23
Health 9 9 13
Other 78 84 58
333 260 268
Operating profit* 388 333 323
*excluding efficiency programme related restructuring costs
Operating profit from our general insurance operations, comprising both
underwriting and broking activities, rose by £55 million, or 17 per cent, to
£388 million.
Premium income from underwriting increased by £29 million, or 14 per cent,
largely as a result of higher home insurance sales which increased by 25 per
cent. Commissions from insurance broking increased by £73 million, or 28 per
cent, as a result of higher levels of creditor insurance and growth in all major
product lines.
New business sales of 1.5 million products were 13 per cent higher than last
year with home, creditor and motor business all growing strongly. Overall income
from creditor insurance increased by 37 per cent, reflecting higher personal
sector loan volumes and an improved penetration rate. Sales of home insurance
policies increased by 18 per cent to 617,000. Overall sales from the branch
network increased by 8 per cent and direct channels, comprising direct mail,
telephone, affinity and internet, increased by 23 per cent.
Claims were £30 million, or 39 per cent, higher at £107 million than in the
first half of 2001. The overall claims ratio of 44 per cent was higher than in
the first half of last year (37 per cent) largely as a result of increased
property claims which reflected rising volumes of new business, and higher
weather related insurance claims.
As a leading distributor of general insurance products, Lloyds TSB now has some
8.7 million policies in force and we estimate that the Group has a UK market
leadership position in the distribution of home, creditor and travel insurance.
Page 22 of 48
LLOYDS TSB GROUP
Wholesale Markets
(banking, treasury, large value lease finance, long-term agricultural finance,
share registration, venture capital, and other related services for major UK and
multinational companies, banks and financial institutions, and medium-sized UK
businesses; and Lloyds TSB Asset Finance)
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Net interest income 572 504 592
Other income 447 447 416
Total income 1,019 951 1,008
Operating expenses 504 464 447
Trading surplus 515 487 561
Provisions for bad and doubtful debts 151 68 87
Amounts written off fixed asset investments 9 6 9
Profit before tax* 355 413 465
Efficiency ratio 49.5% 48.8% 44.3%
Total assets (period-end) £87.5bn £76.4bn £79.4bn
Total risk-weighted assets (period-end) £49.6bn £41.9bn £45.4bn
*excluding efficiency programme related restructuring costs
Wholesale Markets pre-tax profit decreased by £58 million, or 14 per cent, to
£355 million.
Net interest income increased by £68 million resulting primarily from asset
growth and positive interest rate management. Other income was unchanged at £447
million as increased operating lease rentals of £42 million from Lloyds TSB
Leasing and Lloyds TSB Asset Finance, partly as a result of the acquisition of
First National Vehicle Holdings and Abbey National Vehicle Finance, were offset
by lower realisations of venture capital gains in Lloyds TSB Development
Capital. Operating expenses increased by £40 million of which £22 million
reflected the acquisition of First National Vehicle Holdings and Abbey National
Vehicle Finance.
The charge for provisions for bad and doubtful debts in Wholesale Markets
increased by £83 million. The charge relating to the Group's corporate lending
portfolio increased by £81 million largely as a result of the further provisions
totalling £70 million against the Group's loans and advances to two large US
corporate customers, but also new provisions required against a small number of
corporate exposures.
Assets grew by 15 per cent to £87.5 billion, an increase of £11.1 billion. Of
this increase, over £9 billion resulted from a growth in debt securities: £4
billion from an increase in the Group's portfolio of asset backed securities,
most of which were triple A rated, and a £5 billion increase in other investment
grade securities. It is not the Group's policy to hold high yield junk corporate
bonds.
Page 23 of 48
LLOYDS TSB GROUP
Wholesale Markets (continued)
Our Treasury operations achieved profitable growth, primarily from positive
interest rate management as interest rates remained low. The Group's risk-based
activity in the derivatives markets continues to remain largely focused on
straight cash based products in support of our customers' transactions.
Lloyds TSB Leasing maintained its position as the largest "big ticket" leasing
company in the UK and continued to consolidate its position as an established
provider of operating leases within its chosen market sectors. At the end of the
half-year, Lloyds TSB Registrars' registration market share of FTSE 100
companies was maintained at 61 per cent and its market leadership in employee
share administration services continued to strengthen. Lower transactional
activity, however, led to a reduction in pre-tax profits to £24 million, from
£29 million in the first half of 2001.
Lloyds TSB Development Capital had another good half-year achieving record
levels of venture capital investment however, in difficult market conditions,
realisations of venture capital gains were £35 million lower than in the first
half of 2001, which lead to a pre-tax loss of £8 million, compared with pre-tax
profits of £32 million in the first half of last year. In April 2002, Lloyds TSB
Development Capital was named Private Equity House of the Year for 2001.
Pre-tax profits in Lloyds TSB Asset Finance, which incorporates the Group's
asset finance and receivables finance businesses, increased to £37 million, from
£35 million in the first half of 2001. Lloyds TSB Commercial Finance and Alex
Lawrie Factors continued to expand their customer base, with some 50 per cent of
their income now being derived from outside the Lloyds TSB customer base. In
April 2002 Lloyds TSB Asset Finance acquired First National Vehicle Holdings and
Abbey National Vehicle Finance, both previously wholly owned subsidiaries of
Abbey National plc, for a provisional cash consideration of £46 million. Subject
to the finalisation of completion accounts, the premium on acquisition will be
approximately £82 million. The businesses have been combined with Lloyds TSB
autolease to create the leader in the UK contract hire and fleet management
markets. Our Motor Direct and Cars4Staff initiatives continue to expand rapidly
through a range of channels, supplying new and used cars to Group staff,
customers, and employees of our corporate customers. Some 2,300 cars were
supplied in the first half of 2002.
Page 24 of 48
LLOYDS TSB GROUP
International Banking
(banking and financial services overseas in four main areas: The Americas, New
Zealand, Europe and Offshore Banking; and Emerging Markets Debt)
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Net interest income 389 385 385
Other income 282 232 235
Total income 671 617 620
Operating expenses 274 288 287
Trading surplus 397 329 333
Provisions for bad and doubtful debts 58 57 120
Amounts written off fixed asset investments 30 - 45
309 272 168
Profit on sale of Lloyds TSB Asset Management S.A. - - 39
Profit before tax* 309 272 207
Efficiency ratio 40.8% 46.7% 46.3%
Total assets (period-end) £22.2bn £21.3bn £22.1bn
Total risk-weighted assets (period-end) £14.9bn £13.4bn £13.8bn
*excluding efficiency programme related restructuring costs
International Banking pre-tax profit was £37 million, or 14 per cent, higher at
£309 million compared with the first half of 2001. Pre-tax profit from
International Banking represented 19 per cent of Group pre-tax profit of which 7
per cent related to our New Zealand business, 7 per cent to our Europe and
offshore banking operations, and 5 per cent to the Group's combined Emerging
Markets Debt portfolio and Latin American businesses.
Net interest income improved slightly as volume growth in New Zealand and Brazil
was offset by the impact of adverse exchange rate movements. Other income
increased by £50 million, or 22 per cent, to £282 million, reflecting an
increase in Emerging Markets Debt asset sales and a £23 million profit on the
sale and leaseback of premises. Operating expenses reduced by £14 million.
Increased costs in New Zealand and Brazil, which supported higher business
volumes, were more than offset by lower costs in Argentina and our international
private banking businesses.
Pre-tax profits from The National Bank of New Zealand increased by 25 per cent
to £110 million as a result of asset growth across all business sectors,
particularly small business banking, growth in the number of personal customers
and higher retail deposits. Our consumer finance business in Brazil, Losango
Consumer Finance, made a pre-tax profit of £16 million, compared with £22
million in the first half of 2001.
Page 25 of 48
LLOYDS TSB GROUP
International Banking (continued)
The Emerging Markets Debt portfolio contributed £77 million compared with a
contribution of £65 million in the first half of 2001. During the first half of
the year the Group accelerated some disposals from its investment portfolio as a
result of concerns over ongoing credit and liquidity risks, particularly in
Latin America. Based on secondary market prices at 30 June 2002, there was a
surplus of market value over the net book value of the Emerging Markets Debt
investment portfolio of £15 million (December 2001: £200 million). With the
historic surplus of market value over the net book value of the portfolio now
largely having been eroded, as a result of lower secondary market prices, the
Group does not expect to achieve similar levels of Emerging Markets Debt
portfolio contributions in the second half of 2002 and beyond.
The Argentine government and the International Monetary Fund have yet to agree a
firm basis for the provision of financial support to Argentina. Until this takes
place, the longer term impact on our business in Argentina cannot be accurately
evaluated. In the first half of 2002, however, the Group made a further
write-down of £30 million against its Argentine government debt to reflect
current bond secondary market prices. In addition, to take account of ongoing
credit difficulties in Argentina, the Group has, as a measure of its prudent
approach to provisioning, increased the general provision relating to Argentina
by £20 million bringing the total general provision raised for this purpose to
£75 million. On 30 June 2002 the Group's total exposure to Argentina was some
£420 million. The Group's local balance sheet in Argentina had assets totalling
£180 million and, in addition, the Group has offshore loans of some £140 million
to affiliates of major multinational companies with Argentine operations and
some £100 million in Argentine government bonds within the Emerging Markets Debt
portfolio. These bonds have now been substantially written down.
While the circumstances of Argentina are unique, they are having an increasingly
unsettling effect on the rest of the Latin American region, most particularly
Brazil where uncertainty surrounding the outcome of the October Presidential
election has had a sharp effect on the Brazilian economy. The exchange rate has
fallen and interest rates have risen, both significantly, resulting in
substantial volatility in stockmarket and government bond values. However, the
underlying economy in Brazil, while certainly growing more slowly than in recent
years, continues to enjoy modest growth and low inflation, and our businesses in
the country remain profitable. On 30 June 2002, the Group's total exposure to
Brazil, net of provisions, was £2.8 billion, compared to £3.3 billion at the end
of December 2001, largely reflecting the Group's local balance sheet which
incorporates retail and business customer lending, government bonds, cash and
liquidity. Within this total exposure is some £450 million of legacy Emerging
Markets Debt investments.
In October 2001, the Group sold its Brazilian fund management and private
banking business, including its subsidiary Lloyds TSB Asset Management S.A. to
Banco Itau S.A. resulting in a profit on sale of £39 million.
Page 26 of 48
LLOYDS TSB GROUP
Central group items
(earnings on surplus capital, central costs and other unallocated items)
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Accrual for payment to Lloyds TSB Foundations (19) (19) (17)
Other finance income 85 152 155
Pension scheme benefit augmentations - (25) (57)
Earnings on surplus capital, central costs
and other unallocated items (64) (36) (79)
2 72 2
The four independent Lloyds TSB Foundations support registered charities
throughout the UK that enable people, particularly disabled and disadvantaged
people, to play a fuller role in society. The Foundations receive 1 per cent of
the Group's pre-tax profit, averaged over three years, instead of the dividend
on their shareholdings, making them in aggregate the largest independent grant
giving body in the UK. In the first half of 2002, the Group accrued £19 million
for payment to the Lloyds TSB Foundations.
Other finance income represents income from the expected return on the Group's
pension fund assets less the charge for unwinding the discount on the pension
fund liabilities. The significant reduction in income in the first half of 2002
reflects the combined impact of a reduction in the expected return on lower
pension scheme assets as a result of the continuing weakness in global equity
markets, and increased pension fund liabilities caused by the expected greater
lifespan of pension scheme members.
Page 27 of 48
LLOYDS TSB GROUP
INCOME
Group net interest income
Group net interest income increased by £181 million, or 8 per cent, to £2,557
million, despite a reduction of £98 million caused by a 14 basis point reduction
in the net interest margin. Average interest-earning assets increased by 12 per
cent to £158 billion. The overall net interest margin decreased by 14 basis
points to 3.27 per cent, reflecting a lower contribution from interest-free
liabilities, caused by lower average interest rates, the continuing shift in the
mix of average interest-earning assets towards high quality but finer margin
corporate and wholesale lending, and the impact of adverse exchange rate
movements on our higher margin Latin American businesses.
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Net interest income 2,557 2,376 2,546
Average balances
Short-term liquid assets 4,079 3,066 3,925
Loans and advances 139,722 130,681 134,597
Debt securities 13,859 6,939 10,613
Total interest-earning assets 157,660 140,686 149,135
Financed by:
Interest-bearing liabilities 145,667 128,715 137,350
Interest-free liabilities 11,993 11,971 11,785
Average rates % % %
Gross yield on interest-earning assets 6.58 8.38 7.34
Cost of interest-bearing liabilities 3.58 5.44 4.29
Interest spread 3.00 2.94 3.05
Contribution of interest-free liabilities 0.27 0.47 0.34
Net interest margin 3.27 3.41 3.39
Note: Payments made under cash gift and discount mortgage schemes are amortised
over the early redemption charge period, being a maximum of five years. If these
incentives had been fully written off as incurred, group and domestic net
interest income would have been £23 million higher in the first half of 2002
(2001 first half: £13 million lower; second half: £1 million lower). The
deferred element of the expenditure amounting to £233 million at 30 June 2002
(30 June 2001: £255 million; 31 December 2001: £256 million) is included within
prepayments and accrued income in the balance sheet.
Page 28 of 48
LLOYDS TSB GROUP
Domestic net interest income
Domestic net interest income increased by £152 million, or 8 per cent, to £2,177
million, notwithstanding a reduction of £65 million caused by a 10 basis point
reduction in the net interest margin. This represents 85 per cent of total group
net interest income.
Average interest-earning assets increased by 11 per cent to £131 billion.
Personal lending and mortgage balances grew by £5 billion and wholesale balances
increased by £7 billion.
The net interest margin decreased by 10 basis points reflecting a reduction in
the contribution of interest-free liabilities and the continuing shift in the
mix of average interest-earning assets towards high quality but finer margin
corporate and wholesale lending. In UK Retail Banking and Mortgages there was a
5 basis point increase in the net interest margin as continued gradual erosion
of product margins was more than offset by a shift in the mix of retail business
growth towards personal lending and credit cards. In Wholesale Markets there was
a 1 basis point reduction caused by further growth in finer margin corporate
lending.
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Net interest income 2,177 2,025 2,177
Average balances
Short-term liquid assets 2,830 1,597 2,115
Loans and advances 119,950 113,394 116,564
Debt securities 7,889 3,113 5,654
Total interest-earning assets 130,669 118,104 124,333
Financed by:
Interest-bearing liabilities 121,305 107,802 114,608
Interest-free liabilities 9,364 10,302 9,725
Average rates % % %
Gross yield on interest-earning assets 6.14 7.86 6.93
Cost of interest-bearing liabilities 3.00 4.83 3.75
Interest spread 3.14 3.03 3.18
Contribution of interest-free liabilities 0.22 0.43 0.29
Net interest margin 3.36 3.46 3.47
Page 29 of 48
LLOYDS TSB GROUP
International net interest income
Net interest income from international operations increased by £29 million, or 8
per cent, to £380 million. This represents 15 per cent of total group net
interest income. Strong volume growth, particularly in New Zealand, was offset
by the effect of exchange rate movements.
Average interest-earning assets on a local currency basis increased by 22 per
cent but again this increase was partly offset by the effect of exchange rate
movements. The net interest margin reduced by 29 basis points as a result of
lower margins in our Latin American businesses. In particular, the effect of
adverse exchange rate movements had a significant impact on the reduction of 74
basis points in the net interest margin from our higher margin businesses in
Brazil.
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Net interest income 380 351 369
Average balances
Short-term liquid assets 1,249 1,469 1,810
Loans and advances 19,772 17,287 18,033
Debt securities 5,970 3,826 4,959
Total interest-earning assets 26,991 22,582 24,802
Financed by:
Interest-bearing liabilities 24,362 20,913 22,742
Interest-free liabilities 2,629 1,669 2,060
Average rates % % %
Gross yield on interest-earning assets 8.71 11.10 9.37
Cost of interest-bearing liabilities 6.51 8.60 7.00
Interest spread 2.20 2.50 2.37
Contribution of interest-free liabilities 0.64 0.63 0.58
Net interest margin 2.84 3.13 2.95
Page 30 of 48
LLOYDS TSB GROUP
Other income
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Fees and commissions receivable:
UK current account fees 282 300 273
Other UK fees and commissions 583 613 607
Insurance broking 333 260 268
Card services 198 166 166
International fees and commissions 127 130 139
1,523 1,469 1,453
Fees and commissions payable (306) (271) (331)
Dealing profits (before expenses):
Foreign exchange trading income 82 73 85
Securities and other gains 6 33 42
88 106 127
Income from long-term assurance business 23 (79) 50
General insurance premium income 235 206 222
Other operating income 392 392 316
Total other income 1,955 1,823 1,837
Other income increased by £132 million or 7 per cent, to £1,955 million. This
represented 43 per cent of total income. Excluding short-term fluctuations in
investment returns, other income increased by £30 million, or 1 per cent, to
£2,354 million, representing 47 per cent of total income.
Fees and commissions receivable increased by 4 per cent to £1,523 million,
largely reflecting strong growth in income from insurance broking and card
services. Other UK fees and commissions decreased by £30 million, or 5 per cent,
from £613 million to £583 million as a result of a £53 million reduction in unit
trust and asset management fees, which reflected the continued fall in the level
of stockmarkets during the first half of 2002. There was also a £10 million
increase in fees from large corporate and factoring activity reflecting
increased transaction volumes.
Insurance broking commission income increased by £73 million compared with the
first half of 2001 with continued strong growth in creditor insurance products.
Income from credit and debit cards increased by £32 million, mainly as a result
of higher merchant service charges and fees. However, UK current account fee
income fell by £18 million; a £17 million increase in fee income from added
value current accounts was more than offset by a £36 million reduction in
service charges and a £5 million fall in unauthorised borrowing fees.
Page 31 of 48
LLOYDS TSB GROUP
Other income (continued)
Fees and commissions payable increased by £35 million against last year as a
result of higher reciprocity fees and an increase in package costs relating to a
number of products.
Dealing profits decreased by £18 million compared with the first half of 2001 as
a result of lower gains from securities trading. Income from long-term assurance
business increased by £102 million, however, excluding short-term fluctuations
in investment returns it was unchanged. Other operating income was broadly
unchanged at £392 million. Increases of £23 million in earnings on the sale and
restructuring of Emerging Markets Debt investments and £42 million in operating
lease rentals, largely as a result of the acquisition of First National Vehicle
Holdings and Abbey National Vehicle Finance, were broadly offset by a £35
million reduction in the realisation of venture capital gains within Lloyds TSB
Development Capital and a reduction of £10 million in profits on the sale and
leaseback of premises.
Page 32 of 48
LLOYDS TSB GROUP
OPERATING EXPENSES
Operating expenses
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Administrative expenses:
Staff:
Salaries and profit sharing 876 858 896
National insurance 71 71 69
Pensions 131 137 172
Other staff costs 79 99 100
1,157 1,165 1,237
Premises and equipment:
Rent and rates 137 129 132
Hire of equipment 10 9 9
Repairs and maintenance 59 58 52
Other 53 55 62
259 251 255
Other expenses:
Communications and external data processing 204 231 202
Advertising and promotion 80 89 63
Professional fees 27 67 38
Other 191 190 186
502 577 489
Administrative expenses 1,918 1,993 1,981
Exceptional restructuring costs 122 66 186
Total administrative expenses 2,040 2,059 2,167
Depreciation 299 259 252
Amortisation of goodwill 21 19 20
Total operating expenses 2,360 2,337 2,439
Efficiency ratio 51.3% 53.7% 53.7%
Efficiency ratio - excluding short-term fluctuations in
investment returns, investment returns on the Group's
pension scheme assets and efficiency programme related
restructuring costs 45.6% 48.3% 47.5%
Total operating expenses increased by £23 million, or 1 per cent, compared with
the first half of 2001. Excluding efficiency programme related restructuring
costs, operating expenses decreased by £33 million or 1 per cent. The efficiency
ratio, excluding short-term fluctuations in investment returns, investment
returns on the Group's pension scheme assets and efficiency programme related
restructuring costs, improved to 45.6 per cent, from 48.3 per cent in the first
half of 2001.
Page 33 of 48
LLOYDS TSB GROUP
Operating expenses (continued)
Administrative expenses, excluding efficiency programme related restructuring
costs, decreased by £75 million, or 4 per cent, to £1,918 million. Staff costs
decreased by £8 million to £1,157 million whilst other expenses were reduced by
£75 million to £502 million largely as a result of significant reductions in
communications and external data processing costs and professional fees.
Depreciation increased by £40 million and goodwill amortisation increased by £2
million.
Efficiency programme related restructuring costs
As part of our drive to maximise shareholder value, we are committed to
achieving first quartile total shareholder return performance in comparison with
a peer group of 16 national and international financial services groups. We have
made good progress in this respect over the last twelve months but more needs to
be done to ensure that our bottom line earnings continue to grow as robustly as
possible to help achieve this goal. It is also essential that we improve our
flexibility to ensure that the Group remains in a very strong position to combat
the current volatile trading environment and continuing pressure on margins.
In February 2000 the Group announced a significant efficiency programme designed
to support the Group's strategic aim of driving down day-to-day operating costs
to improve overall efficiency and finance ongoing high levels of investment in
growth businesses.
In February 2002 the Group undertook a further review to identify all
opportunities to extend the efficiency programme to deliver further productivity
gains. Annual benefits from the combined programme are expected to be some £600
million in 2004. As a result of the implementation of FRS 17, which has
increased expected restructuring costs in 2002 by £50 million, the combined
efficiency programme will now require total efficiency programme related
restructuring costs of approximately £350 million in 2002 and £100 million in
2003, largely to fund severance and infrastructure costs. In 2004 and beyond no
further restructuring costs are anticipated as a result of this efficiency
programme.
Efficiency programme related 2000 2001 2002 2003 2004
restructuring costs £m £m £m £m £m
Initial efficiency programme 188 252 130 60 -
Further initiatives - - 220 40 -
Total 188 252 350 100 -
Expected annual benefits 2000 2001 2002 2003 2004
£m £m £m £m £m
Initial efficiency programme (cumulative) - 75 145 320 410
Further initiatives (cumulative) - - 155 180 190
Total - 75 300 500 600
Page 34 of 48
LLOYDS TSB GROUP
Efficiency programme related restructuring costs (continued)
The Group is committed to growing normalised revenues at a materially higher
rate than costs. In the first half of 2002 the Group has continued to benefit
from the investments made in our customer relationship management and
segmentation programmes, as we sold more products to more customers than ever
before. We expect this positive performance to continue into the second half of
2002 and beyond, as we continue to invest for growth. The Group will continue to
re-invest some of the efficiency gains achieved in the creation of new jobs to
support increasing sales, enhanced customer service, and new and improved
products. In the first half of 2002 efficiency programme related restructuring
costs totalling £122 million were charged to the Group's profit and loss account
and cumulative annual benefits from the Group's efficiency programmes totalling
some £130 million have now been captured. The enhanced efficiency programme will
result in a reduction of approximately 5,000 staff in 2002, primarily from
central and support areas, whilst staff numbers in customer facing sales and
service areas will increase by approximately 2,000, creating a net reduction in
headcount of 3,000. During the first half of 2002 staff numbers throughout the
Group fell by 93 notwithstanding the addition of 425 as a result of the
acquisition of First National Vehicle Holdings and Abbey National Vehicle
Finance. Underlying staff numbers fell by 518 and the Group's plans to reduce
underlying headcount by 3,000 by the end of 2002 remain on track.
As a result of these various initiatives we expect that our operating expenses,
excluding efficiency programme related restructuring costs, in 2002 will grow by
no more than the rate of inflation, resulting in a further improvement in the
Group's efficiency ratio and competitive position.
We will continue our clear focus on all areas of our cost base to ensure that we
improve productivity wherever possible at a time when the global economic
outlook is undoubtedly more uncertain than it has been for some years. These
programmes will help us with our objective to deliver the level of earnings
growth required each year to achieve our first quartile objective in terms of
total shareholder return.
Page 35 of 48
LLOYDS TSB GROUP
Number of employees (full-time equivalent)
Staff numbers decreased by 93 to 81,307 during the half-year. Within UK Retail
Banking staff numbers decreased by 1,107 as increases from planned improvements
to customer service and a substantial increase in our branch sales activities
have been offset by reductions of staff numbers in back office operations as
part of the Group's efficiency programmes. In Wholesale Markets staff numbers
increased by 695, as a result of increasing staff numbers to support higher
levels of business, the conversion of 105 staff in Lloyds TSB Registrars from
temporary status to permanent staff, and 425 from the acquisition of First
National Vehicle Holdings and Abbey National Vehicle Finance in April 2002. In
International Banking staff numbers decreased by 135.
The Group's efficiency programme is targeting a net reduction of 3,000 staff
during 2002 and these plans remain on track with an underlying net headcount
reduction of 518 in the first half of the year and a further approximately 2,500
expected during the second half of the year.
30 June 31 December
2002 2001
UK Retail Banking* 46,613 47,720
Mortgages 3,682 3,528
Insurance and Investments 6,661 6,313
Wholesale Markets 9,929 9,234
International Banking 12,103 12,238
Other 2,319 2,367
Total number of employees (full-time equivalent) 81,307 81,400
*Although the costs of distributing mortgages and insurance through the Lloyds
TSB network are allocated to the mortgage and insurance businesses, the number
of employees involved in these activities in the network is included under UK
Retail Banking.
Page 36 of 48
LLOYDS TSB GROUP
CREDIT QUALITY
Charge for bad and doubtful debts
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
UK Retail Banking 272 196 243
Mortgages (2) 2 (26)
Wholesale Markets 151 68 87
International Banking 58 57 120
Total charge 479 323 424
Specific provisions 451 327 409
General provisions 28 (4) 15
Total charge 479 323 424
Charge as % of average lending: % % %
Domestic 0.67 0.52 0.56
International 1.22 0.74 1.44
Total charge 0.75 0.55 0.68
The total charge for bad and doubtful debts increased to £479 million from £323
million. In UK Retail Banking the provisions charge increased by £76 million,
from £196 million to £272 million. New specific provisions increased by 24 per
cent, largely as a result of volume related asset growth in the personal loan
and credit card portfolios, whilst releases and recoveries increased by only 8
per cent. In Wholesale Markets the provisions charge increased by £83 million to
£151 million from £68 million in the first half of 2001. There was an increase
in provisions within the corporate lending portfolio, reflecting the slowdown in
economic activity in the UK, and the Group has made further provisions totalling
£70 million against its exposure to two large US corporate customers. Excluding
the £70 million additional specific corporate provisions and the £20 million
general provision relating to Argentina, the Group provisions charge as a
percentage of average lending was 0.61 per cent.
Notwithstanding the general slowdown in global economic growth, non-performing
loans reduced to £1,216 million compared with £1,222 million in December 2001
and represented 0.9 per cent of total lending, compared with 1.0 per cent in
December 2001. Our high quality lending portfolio remains heavily influenced by
our mortgage business and we remain well positioned for any continued economic
slowdown. In addition the Group maintains a constant review of all large
corporate and sector exposures and is satisfied that its prudent lending
approach will continue to ensure that the Group's high quality lending book
remains well positioned.
Page 37 of 48
LLOYDS TSB GROUP
Movements in provisions for bad and doubtful debts
Half-year to Half-year to Half-year to
30 June 2002 30 June 2001 31 December 2001
Specific General Specific General Specific General
£m £m £m £m £m £m
At 1 January 1,099 369 1,069 357 1,116 354
Exchange and other adjustments (38) (1) 18 1 (33) -
Adjustments on acquisition - 3 - - - -
Advances written off (444) - (399) - (486) -
Recoveries of advances written 99 - 101 - 93 -
off in previous years
Charge (release) to profit and
loss account:
New and additional provisions 756 28 610 4 700 60
Releases and recoveries (305) - (283) (8) (291) (45)
451 28 327 (4) 409 15
1,167 399 1,116 354 1,099 369
1,566 1,470 1,468
Closing provisions as % of
lending (excluding unapplied
interest)
Specific:
Domestic 899 (0.8%) 817 (0.8%) 848 (0.8%)
International 268 (1.5%) 299 (1.8%) 251 (1.5%)
1,167 (0.9%) 1,116 (0.9%) 1,099 (0.9%)
General 399 (0.3%) 354 (0.3%) 369 (0.3%)
Total 1,566 (1.2%) 1,470 (1.2%) 1,468 (1.2%)
At the end of June 2002 provisions for bad and doubtful debts totalled £1,566
million. This represented 1.2 per cent of total lending. Non-performing lending
decreased to £1,216 million from £1,222 million in December 2001. At the end of
the half-year, total provisions represented over 120 per cent of non-performing
loans. Arrears levels, in general, remain stable.
Page 38 of 48
LLOYDS TSB GROUP
CAPITAL RATIOS
Risk asset ratios
30 June 31 December
2002 2001
£m £m
Capital
Tier 1 (page 47, note 9) 9,107 8,408
Tier 2 8,858 7,831
17,965 16,239
Supervisory deductions (6,874) (6,752)
Total capital 11,091 9,487
Risk-weighted assets £bn £bn
UK Retail Banking 21.6 19.6
Mortgages 29.6 28.7
Insurance and Investments 0.2 0.2
UK Retail Financial Services 51.4 48.5
Wholesale Markets 49.6 45.4
International Banking 14.9 13.8
Central group items 0.3 0.2
Total risk-weighted assets 116.2 107.9
Risk asset ratios
Total capital 9.5% 8.8%
Tier 1 7.8% 7.8%
Half-year Half-year to
to 30 June 31 December
2002 2001
Post-tax return on average risk-weighted assets 2.07% 2.14%
At the end of June 2002 the risk asset ratios were 9.5 per cent for total
capital and 7.8 per cent for tier 1 capital.
During the first half of 2002, total capital for regulatory purposes increased
by £1,604 million to £11,091 million. Tier 1 capital increased by £699 million,
mainly from retained profits. The total amount of embedded value earnings
contained within the Group's tier 1 capital is now some £2.5 billion. Tier 2
capital increased by £1,027 million and supervisory deductions increased by £122
million. Notwithstanding its strong capital position, the Group intends to
raise additional non-equity tier 1 capital during the next few months in order
to strengthen its capital ratios. We see this as a prudent measure for the
Group, given the uncertainties surrounding current economic and stockmarket
conditions.
Risk-weighted assets increased to £116 billion and the post-tax return on
average risk-weighted assets decreased slightly to 2.07 per cent.
Page 39 of 48
LLOYDS TSB GROUP
BALANCE SHEET INFORMATION
Total assets
Total assets increased by £14 billion, or 6 per cent, to £247 billion. Loans and
advances to customers increased by £9 billion, or 7 per cent, to £128 billion.
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 5,904 5,774 6,008
Interest bearing current accounts 21,673 19,449 18,852
Savings and investment accounts 50,975 47,844 48,969
Other customer deposits 17,395 17,445 17,682
Total sterling 95,947 90,512 91,511
Currency 17,840 15,371 17,605
Total deposits - customer accounts 113,787 105,883 109,116
Loans and advances to customers
Domestic:
Agriculture, forestry and fishing 2,096 2,097 2,074
Manufacturing 3,626 3,444 3,321
Construction 1,376 1,257 1,309
Transport, distribution and hotels 4,574 4,465 4,440
Property companies 3,277 2,680 2,907
Financial, business and other services 8,480 9,962 8,736
Personal : mortgages 58,614 54,477 56,578
: other 14,093 11,908 12,784
Lease financing 7,372 7,681 7,552
Hire purchase 5,708 5,326 5,345
Other 3,092 2,625 2,992
Total domestic 112,308 105,922 108,038
International:
Latin America 1,914 2,410 2,347
New Zealand 9,866 7,730 8,435
Rest of the world 6,009 5,399 5,651
Total international 17,789 15,539 16,433
130,097 121,461 124,471
Provisions for bad and doubtful debts* (1,565) (1,465) (1,466)
Interest held in suspense* (54) (80) (70)
Total loans and advances to customers 128,478 119,916 122,935
*figures exclude provisions and interest held in suspense relating to loans and advances to banks
Page 40 of 48
LLOYDS TSB GROUP
NOTES
1. Accounting policies and presentation
During the first half of 2002 the Group has made a number of changes in
accounting policy to implement the requirements of new accounting
standards and guidelines. Comparative figures have been restated. The
effect of these changes in policy on the results for the first half of
the year and comparative periods is set out below.
Urgent Issues Task Force Abstract 33 (UITF 33)
UITF 33 was issued in February 2002 and is effective for accounting
periods ending on or after 23 March 2002. Following its implementation
the Group has reclassified €750 million (£500 million) of Perpetual
Capital Securities as undated loan capital and the related cost is
included within interest expense. Previously these securities were
included within minority interests in the balance sheet and the cost was
treated as a minority interest deduction.
Financial Reporting Standard 19 (FRS 19) - Deferred Tax
FRS 19 was issued in December 2000 and is effective for accounting
periods ending on or after 23 January 2002. Following its
implementation, the Group makes full provision for deferred tax assets
and liabilities arising from timing differences between the recognition
of gains and losses in the financial statements and their recognition in
a tax computation. Previously provision was only made where it was
considered that there was a reasonable probability that a liability or
asset would crystallise in the foreseeable future. An adjustment has
been made increasing shareholders' equity at 31 December 2001 by £40
million to reflect the revised policy.
Financial Reporting Standard 17 (FRS 17) - Retirement Benefits
FRS 17 replaces SSAP 24 and UITF 6 as the accounting standard dealing
with post-retirement benefits in the accounts of UK companies. The Group
has decided to implement the requirements of FRS 17 in 2002 to coincide
with the triennial full actuarial valuations of the Group's pension
schemes and because of the significant impact that implementation has on
the Group's reported results.
The new standard requires the Group to include the assets of its defined
benefit schemes on its balance sheet together with the related liability
to make benefit payments. The profit and loss account includes a charge
in respect of the cost of accruing benefits for active employees and any
benefit improvements; the expected return on the schemes' assets is
included within other income less a charge in respect of the unwinding
of the discount applied to the schemes' liabilities. The cost of
severance borne by the pension schemes for employees leaving early as a
result of initiatives related to the Group's efficiency programme is
included within exceptional restructuring costs. Under SSAP 24 the
profit and loss account included a charge in respect of the cost of
accruing benefits for active employees offset by a credit representing
the amortisation of the surplus in the Group's defined benefit schemes;
a pension prepayment was included in the Group's balance sheet. An
adjustment has been made reducing shareholders' equity at 31 December
2001 by £236 million to reflect the revised policy.
Page 41 of 48
LLOYDS TSB GROUP
1. Accounting policies and presentation (continued)
Financial Reporting Standard 17 (FRS 17) - Retirement Benefits
(continued)
At 30 June 2002 a net pension asset of £455 million was included in the
Group's balance sheet, based upon actuarial valuations carried out in
December 2001. If the results of these valuations were updated to
reflect market movements to 30 June 2002 it is estimated that there
would have been a net pension deficit of some £600 million at that date.
This reduction reflects a fall in the value of the schemes' assets
caused by the significant reduction in equity market values. In
accordance with FRS 17, the actuarial valuations will be formally
updated at the year-end.
Short-term fluctuations in investment returns
In December 2001, the Association of British Insurers published detailed
guidance for the preparation of figures using the achieved profits
method of accounting which are published as supplementary financial
information accompanying the accounts of most listed insurance
companies. The ABI guidance recommends the use of unsmoothed fund values
to calculate the value of in-force business. To ensure that the results
of the Group's insurance operations are comparable with the
supplementary financial information published by listed insurers the
Group has changed the basis of its embedded value calculations to use
unsmoothed fund values; previously the Group had used fund values
smoothed over a two-year period. An adjustment has been made reducing
shareholders' equity at 31 December 2001 by £208 million, to reflect the
revised policy.
The following tables show the impact of the changes in accounting
policies:
Half-year to 30 June 2002
Short-term Total
UITF 33 FRS 19 FRS 17 Fluctuations Adjustment
£m £m £m £m £m
Net interest income (15) (15)
Other finance income 85 85
Other income (103) (103)
Total income (15) 85 (103) (33)
Operating expenses 201 201
Trading surplus (15) (116) (103) (234)
Provisions/claims -
Associates -
Profit before tax (15) (116) (103) (234)
Tax (6) (35) (31) (72)
Profit after tax (15) 6 (81) (72) (162)
Minority interests (15) (15)
Attributable profit - 6 (81) (72) (147)
Page 42 of 48
LLOYDS TSB GROUP
1. Accounting policies and presentation (continued)
Half-year to 30 June 2001
Original Short-term Restated
Results UITF 33 FRS 19 FRS 17 Fluctuations Results
£m £m £m £m £m £m
Net interest income 2,382 (6) 2,376
Other finance income 152 152
Other income 2,000 (177) 1,823
Total income 4,382 (6) 152 (177) 4,351
Operating expenses 2,133 204 2,337
Trading surplus 2,249 (6) (52) (177) 2,014
Provisions/claims 406 406
Associates (5) (5)
Profit before tax 1,838 (6) (52) (177) 1,603
Tax 513 1 (16) (53) 445
Profit after tax 1,325 (6) (1) (36) (124) 1,158
Minority interests 33 (6) 27
Attributable profit 1,292 - (1) (36) (124) 1,131
Half-year to 31 December 2001
Original Short-term Restated
Results UITF 33 FRS 19 FRS 17 Fluctuations Results
£m £m £m £m £m £m
Net interest income 2,562 (16) 2,546
Other finance income 155 155
Other income 1,882 (45) 1,837
Total income 4,444 (16) 155 (45) 4,538
Operating expenses 2,191 248 2,439
Trading surplus 2,253 (16) (93) (45) 2,099
Provisions/claims 575 575
Associates (5) (5)
Profit on sale of 39 39
business
Profit before tax 1,712 (16) (93) (45) 1,558
Tax 458 13 (27) (14) 430
Profit after tax 1,254 (16) (13) (66) (31) 1,128
Minority interests 46 (16) 30
Attributable profit 1,208 - (13) (66) (31) 1,098
Consequential adjustments have been made to the balance sheet to reflect
these changes in accounting policy and other minor reclassifications.
Page 43 of 48
LLOYDS TSB GROUP
2. Economic profit
In pursuit of our aim to maximise shareholder value, we use a system of
value based management as a framework to identify and measure value in
order to help us make better business decisions. Accounting profit is of
limited use as a measure of value creation and performance as it ignores
the cost of the equity capital that has to be invested to generate the
profit. We choose economic profit as a measure of performance because it
captures both growth in investment and return. Economic profit
represents the difference between the earnings on the equity invested in
a business and the cost of the equity. Our calculation of economic
profit uses average equity for the half-year and is based on a cost of
equity of 9 per cent (2001: 9 per cent).
Economic profit instils a rigorous financial discipline in determining
investment decisions throughout the Group. It enables us to evaluate
alternative strategies objectively, with a clear understanding of the
value created by each strategy, and then to select the strategy which
creates the greatest value.
3. Earnings per share
Half-year to Half-year to
30 June 31 December
2002 2001 2001
Basic
Profit attributable to shareholders £1,113m £1,131m £1,098m
Weighted average number of ordinary shares in issue 5,562m 5,517m 5,549m
Earnings per share 20.0p 20.5p 19.8p
Fully diluted
Profit attributable to shareholders £1,113m £1,131m £1,098m
Weighted average number of ordinary shares in issue 5,601m 5,574m 5,592m
Earnings per share 19.9p 20.3p 19.6p
4. Tax
The effective rate of tax was 28.8 per cent (2001 first half: 27.8 per
cent). The lower effective rate of tax, compared with the standard tax
rate of 30 per cent, is largely due to tax relief on payments to the
QUEST to satisfy Save As You Earn options, and gains on disposals of
properties sheltered by capital losses.
Page 44 of 48
LLOYDS TSB GROUP
5. Short-term fluctuations in investment returns
In accordance with generally accepted accounting practice in the UK, it
is the Group's accounting policy to carry the investments comprising the
reserves held by its life companies at market value. The reserves held
to support the with-profits business of Scottish Widows are substantial
and changes in market values will result in significant volatility in
the Group's embedded value earnings. In addition, the movement in the
embedded value in the balance sheet includes experience variances
related to movements in the market value of the funds. Consequently, in
order to provide a clearer representation of the underlying performance,
the results of the life and pensions business are analysed between an
operating profit, including investment earnings calculated using
longer-term investment rates of return, and a profit before tax,
separately identifying the effect of short-term fluctuations in
investment returns.
The longer-term rates of return for the period are consistent with those
used by the Group in the calculation of the embedded value at the
beginning of the period, which were 8.00 per cent for equities and 5.25
per cent for gilts. These are based upon a long-term view of economic
activity and are therefore not adjusted for market movements which are
considered to be short term. This approach is considered the most
appropriate given the long-term nature of the portfolio of products and
achieves consistency in reporting from one period to the next.
Lloyds TSB General Insurance also holds investments to support its
underwriting business; these are carried at market value and gains and
losses included within dealing profits. Consistent with the approach
adopted for the life and pensions business, an operating profit for the
general insurance business is calculated including investment earnings
normalised using the same long-term rates of return.
During the first half of 2002 the FTSE All-Share index fell by 10.3 per
cent and this created adverse short-term fluctuations in investment
returns totalling £399 million. These adverse short-term fluctuations
should not represent a permanent impairment to the value of the Group's
reserves which fluctuate as stockmarket values fluctuate.
6. Free Asset Ratio
The free asset ratio is a common measure of financial strength in the UK
for long-term insurance business. It is the ratio of assets less
liabilities (including actuarial reserves but before the required
regulatory minimum solvency margin) expressed as a percentage of the
liabilities. At 30 June 2002, the free asset ratio for Scottish Widows
plc was an estimated 12.4 per cent, compared with 11.5 per cent at 31
December 2001. For reference purposes, this ratio has been calculated
based on Form 9 Line 25 divided by the total sum of Form 9 Line 23 and
Form 9 Line 24 of the FSA Returns, using figures at 30 June 2002. After
adjusting for the required regulatory minimum solvency margin, the
Scottish Widows plc ratio, expressed as a percentage of total assets,
was an estimated 7.4 per cent at 30 June 2002, compared with 6.6 per
cent at 31 December 2001. For reference purposes, this has been
calculated based on Form 9 Line 44 divided by the sum of Form 9 Line 21
and Form 9 Line 22 of the FSA returns, using figures at 30 June 2002.
Page 45 of 48
LLOYDS TSB GROUP
7. Income and expenses reconciliations
To facilitate comparison of results, certain key financial information
and commentaries have been considered excluding short-term fluctuations
in investment returns, the impact of investment returns on the Group's
pension scheme assets and efficiency programme related restructuring
costs. Reconciliations are detailed below.
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Income, excluding short-term fluctuations in investment returns and 4,911 4,700 4,741
the impact of investment returns on the Group's pension scheme
assets
Short-term fluctuations in investment returns (399) (501) (358)
Other finance income 85 152 155
Total income 4,597 4,351 4,538
Half-year to Half-year to
30 June 31 December
2002 2001 2001
£m £m £m
Expenses, excluding efficiency programme related restructuring 2,238 2,271 2,253
costs
Efficiency programme related restructuring costs 122 66 186
Total operating expenses 2,360 2,337 2,439
Page 46 of 48
LLOYDS TSB GROUP
8. Dividend
The interim dividend for 2002 of 10.7p per share (2001: 10.2p), an
increase of 5 per cent, will be paid on 9 October 2002.
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Shareholders
who have not joined the plan and wish to do so may obtain an application
form from Lloyds TSB Registrars, The Causeway, Worthing, West Sussex,
BN99 6DA (telephone 0870 6003990). Key dates for the payment of the
interim dividend are:
Shares quoted ex-dividend. Shares purchased before this date 14 August
qualify for the dividend
Record date. Shareholders on the register on this date 16 August
are entitled to the dividend
Final date for joining or leaving the dividend reinvestment plan 11 September
Interim dividend paid 9 October
9. Review of interim profits
The interim profits in 2002 were reviewed and reported upon, without
qualification, by the Company's auditors PricewaterhouseCoopers, in
accordance with the conditions set out in the Financial Services
Authority's Interim Prudential Sourcebook: Banks (chapter CA Definition
of Capital, section 5) thereby enabling the retained profit to be
included in tier 1 capital shown on page 39.
10. Other information
The results for the half-year ended 30 June were approved by the
directors on 1 August 2002.
Statutory accounts for the year ended 31 December 2001 were delivered to
the registrar of companies. 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.
Results for the year ending 31 December 2002 will be announced on 14
February 2003.
Page 47 of 48
LLOYDS TSB GROUP
CONTACTS
For further information please contact:-
Philip Hampton
Group Finance Director
Lloyds TSB Group plc
020 7356 1436
E-mail: philip.hampton@ltsb-finance.co.uk
Michael Oliver
Director of Investor Relations
020 7356 2167
E-mail: michael.oliver@ltsb-finance.co.uk
Terrence Collis
Director of Group Corporate Communications
Lloyds TSB Group plc
020 7356 2078
E-mail: terrence.collis@lloydstsb.co.uk
Copies of this news release may be obtained from Investor Relations, Lloyds TSB
Group plc, 71 Lombard Street, London EC3P 3BS (telephone 020 7356 1273). The
full news release can also be found on the Group's website - www.lloydstsb.com.
Information about the Group's role in the community and copies of the Group's
code of business conduct and its environmental report may be obtained by writing
to Public Affairs, Lloyds TSB Group plc, 71 Lombard Street, London EC3P 3BS.
This information is also available on the Group's website.
Page 48 of 48
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