Interim Results

Lloyds TSB Group PLC 01 August 2003 Lloyds TSB Group plc Results for the half-year to 30 June 2003 PRESENTATION OF RESULTS In order to provide a clearer representation of the underlying performance of the Group, the results of the Group's life and pensions business include investment earnings calculated using longer-term investment rates of return and annual management charges based on unsmoothed fund values (page 45, note 5). The difference between the normalised investment earnings and the actual return ("the investment variance") together with the impact of changes in the economic assumptions used in the embedded value calculation (page 45, note 6) have been separately analysed and a reconciliation to the Group's profit before tax is given on page 1. CONTENTS Page Profit before tax by main businesses 1 Performance highlights and Chairman's comments 2 Group Chief Executive's statement 3 Summary of results 6 Review of financial performance 7 Consolidated profit and loss account 11 Consolidated balance sheet 12 Consolidated cash flow statement 13 Segmental analysis 14 Performance by sector 16 Income 30 Operating expenses 35 Number of employees 36 Credit quality 37 Capital ratios 39 Overview of consolidated balance sheet 40 Notes 43 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 2003 INTERIM RESULTS PROFIT BEFORE TAX BY MAIN BUSINESSES Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m UK Retail Banking and Mortgages Before provisions for customer redress 631 622 619 Provisions for customer redress (200) - - 431 622 619 Insurance and Investments Before provisions for customer redress 589 757 676 Provisions for customer redress (100) - (205) 489 757 471 Wholesale Markets 368 354 296 International Banking 235 231 150 Central group items 120 39 (35) Profit before tax, excluding changes in economic assumptions and investment variance 1,643 2,003 1,501 Changes in economic assumptions (page 45, note 6) (8) - 55 Investment variance (page 45, note 5) 42 (399) (553) Profit before tax 1,677 1,604 1,003 2002 figures have been restated to incorporate efficiency programme related restructuring costs within business units, the reclassification of emerging markets debt earnings from International Banking to Central group items, and changes in internal transfer pricing arrangements. Page 1 of 48 LLOYDS TSB GROUP 2003 INTERIM RESULTS PERFORMANCE HIGHLIGHTS Results â€¢ Profit before tax increased by Â£73 million, or 5 per cent, to Â£1,677 million. â€¢ Profit attributable to shareholders increased by 4 per cent to Â£1,155 million. â€¢ Earnings per share increased by 4 per cent to 20.7p. â€¢ Post-tax return on average shareholders' equity 28.1 per cent. â€¢ Total capital ratio 10.1 per cent, tier 1 capital ratio 8.1 per cent. â€¢ Interim dividend of 10.7p per share (2002: 10.7p). â€¢ Over the last twelve months, customer lending grew by 11 per cent to Â£142 billion and customer deposits increased by 7 per cent to Â£121 billion. â€¢ The Group has improved its market share in many key product areas, including mortgages, credit cards, bank savings, and life, pensions and long-term savings. Results, excluding changes in economic assumptions and investment variance â€¢ Profit before tax decreased by Â£360 million, or 18 per cent, to Â£1,643 million. â€¢ Excluding a number of other significant items, pre-tax profits are broadly unchanged. â€¢ Profit attributable to shareholders decreased by 20 per cent to Â£1,128 million. â€¢ Earnings per share decreased by 20 per cent to 20.2p. â€¢ Economic profit decreased by 19 per cent to Â£758 million. â€¢ Post-tax return on average shareholders' equity 27.4 per cent. Commenting on the results Lloyds TSB Group chairman, Maarten van den Bergh, said:- "Lloyds TSB has reported a 5 per cent growth in pre-tax profits during the first half of 2003, reflecting a solid underlying performance and, in particular, the absence of a significant negative investment variance arising from the weakness in global stock markets, which affected the Group's results in 2002. The Group has continued to grow its share of key markets, costs have remained tightly controlled, and capital ratios remain satisfactory. The Board is maintaining the interim dividend at 10.7p per share. The Board recognises the importance attached by shareholders to the Group's dividend and will continue to take each dividend decision on its merits at the time, taking into account the Group's capital position and the Board's view of current earnings and future prospects. The Group continues to operate in a challenging economic environment. However further progress is expected in the second half of the year." Page 2 of 48 LLOYDS TSB GROUP GROUP CHIEF EXECUTIVE'S STATEMENT In the first half of 2003, Lloyds TSB's headline profit before tax increased by 5 per cent, compared with the first half of 2002. However, a number of significant items, both favourable and unfavourable, affected this half-year's profits which, on a like-for-like basis, were broadly unchanged. On the same basis, revenues increased by 2 per cent, and costs were held flat. The economic and regulatory environment in which the Group operates continues to be challenging but, despite this, Lloyds TSB has improved its market share performance in a number of key products and delivered good growth in both customer lending and deposits. Margin erosion remains a concern, as does the likely slowdown in UK consumer credit growth and continuing uncertainty in global stock markets. Over the past several periods, Lloyds TSB's results and financial performance have been characterised by a high return on equity, an increased volatility in earnings and modest growth in like-for-like profits. The Group's results for the first half of 2003 are not dissimilar, as higher earnings from the sale of the Group's emerging markets debt portfolio and the absence of a negative investment variance offset by a Â£300 million provision for customer redress, led to the 5 per cent growth in headline earnings. As a result of this view on performance, we have set a number of priorities to manage the Group. Firstly, to manage the business portfolio and reduce earnings volatility. Secondly, to maintain and build profitability and, thirdly, to position the Group to deliver growth from within our retail, and corporate and commercial customer franchises. Managing the business portfolio We are managing the Group around our core business units, for which we have set criteria. Accordingly, the Group has announced a review of its strategic options for The National Bank of New Zealand, and disposed of its French fund management and private banking businesses. Our emerging markets debt portfolio, which totalled Â£1.1 billion at the end of 2002, has now been sold, at a significant profit, as we accelerated the disposal programme to take full advantage of improving secondary bond market trading conditions. The Group's exposure in Latin America has continued to be reduced. In the Group's life assurance businesses, we have reviewed profitability, design and risk profile by individual product line to seek to improve the capital efficiency and near-term cash profile. We are implementing a plan to focus new business development on the more profitable, and capital efficient, areas. Our objectives are to ensure no capital demands, for either solvency or business growth purposes, are made to the Group for FTSE 100 levels above 3000; to run the business to generate free cash flow; and ensure that new business exceeds our minimum cost of equity hurdle rate. Page 3 of 48 LLOYDS TSB GROUP The equity content in both Scottish Widows' with-profits fund and shareholder owned estate has been reduced, and the Group has improved its protection against short-term volatility in UK equity markets by hedging part of its equity portfolio into 2004. Scottish Widows remains one of the most strongly capitalised life assurance companies in the UK. In recent times, considerable changes in regulatory and public attitudes to both the sale and performance of financial products, have had a major impact on the financial services industry. We have been subject to these same factors and we have experienced some lapses in our own sales processes. This has led to unacceptable levels of customer dissatisfaction and the need for redress. We have now put in place new sales management processes and incentive plans designed to guide the organisation to build deep, long-term customer relationships. Maintaining and building profitability We have undertaken a review of capital usage within the Group and we are introducing an enhanced focus on economic capital management, supported by the introduction of a more rigorous equity attribution model. The key financial measures of performance will be economic profit growth and return on economic equity. Our balance sheet is starting to reflect the impact of this renewed focus on capital efficiency with the redeployment of capital resources to higher return relationship businesses, for example in consumer lending. We have also improved the capital efficiency in our life business, and reduced the Group's portfolio of debt securities by 2 per cent. The Group operates in a very competitive environment. Margins continue to decline, albeit at a slower underlying rate as we focus on improving volumes and the mix of our business, and we continue to expect further gradual product margin erosion. To help offset this effect on our profitability, we aim to deliver good levels of quality balance sheet growth, whilst keeping costs firmly under control. Whilst ensuring that we commit investment to growth businesses, cost control will continue to have high priority throughout the Group. The increasing use of straight through processing, and our introduction of a 6 sigma approach to excellence in our key operational processes has started to improve our cost effectiveness and customer service levels. The Group is also piloting, with some initial success, limited outsourcing of processing and back office operations. Positioning the Group for growth Today, all major business lines within the Group deliver satisfactory returns on capital and no further large in-market acquisitions are currently anticipated within the UK banking environment. The Group's fundamental challenge is therefore to deliver organic growth. Page 4 of 48 LLOYDS TSB GROUP The Group has identified broad areas from which to deliver growth. We are a significant player, with 20 per cent, or greater, shares in the UK personal and small business markets combined with the largest multi-channel distribution network in the UK. However, we still account for only 10 per cent of the total economic profits of the UK financial services market. The opportunity is therefore considerable, but realising it will require the Group to deliver a consistently high performance, improve the use of its existing assets, and ensure our resources are committed to growth businesses. We aim to capture market share by leveraging our retail, and corporate and commercial customer franchises, our distribution strength and our knowledge of our customers' financial activity and requirements. On average, for example, our retail customers spend twice as much on our competitors' products and services, as they do on our own. This story is similar for our corporate and commercial customers where, despite a strong blue-chip corporate franchise, we are currently under-represented in the product purchases of these customers in a number of profitable areas. In the retail business, our focus on the opportunity within the core franchise has already resulted in an increased market share of credit cards, bank savings and mortgages, in some cases reversing the declining trends of recent years. Lloyds TSB is a high performing business, with significant strengths in distribution, brand management and its customer base, but our growth has slowed in recent years. We are reviewing and actively managing the Group's portfolio of businesses to focus on our core assets, whilst seeking to reduce earnings volatility, and much has already been achieved in the first half of the year. We aim to maintain our levels of profitability and a high return on economic equity. We have identified a number of significant opportunities for growth within our core businesses and, over the next few months, will be developing detailed implementation plans. We already have evidence of the success of this approach in our retail banking business, where like-for-like profits increased by 12 per cent in the first half of 2003. Whilst recognising the substantial economic, regulatory and competitive pressures we face, our key focus going forward will be to build on these growth opportunities. J. Eric Daniels Group Chief Executive Page 5 of 48 LLOYDS TSB GROUP 2003 INTERIM RESULTS SUMMARY OF RESULTS Half-year to Increase Half-year to 30 June (Decrease) 31 December 2003 2002 2002 Results Â£m Â£m % Â£m Total income 4,934 4,597 7 4,281 Operating expenses 2,629 2,360 11 2,555 Trading surplus 2,305 2,237 3 1,726 Provisions for bad and doubtful debts 470 479 (2) 550 Profit before tax 1,677 1,604 5 1,003 Profit attributable to shareholders 1,155 1,113 4 668 Economic profit (page 43, note 2) 785 633 24 188 Earnings per share (pence) 20.7 20.0 4 12.0 Post-tax return on average shareholders' equity (%) 28.1 20.9 12.5 Results, excluding changes in economic assumptions and investment variance Profit before tax 1,643 2,003 (18) 1,501 Earnings per share (pence) 20.2 25.4 (20) 18.7 Post-tax return on average shareholders' equity (%) 27.4 26.5 19.6 Shareholder value Closing market price per share (period-end) 430p 653p 446p Total market value of shareholders' equity Â£24.0bn Â£36.5bn Â£24.8bn Dividends per share 10.7p 10.7p - 23.5p Balance sheet Â£m Â£m Â£m Shareholders' equity 8,656 10,976 (21) 7,972 Net assets per share (pence) 153 194 (21) 141 Total assets 264,679 246,379 7 252,758 Loans and advances to customers 141,990 128,478 11 134,474 Customer deposits 121,433 113,787 7 116,334 Risk asset ratios % % % Total capital 10.1 9.5 9.6 Tier 1 capital 8.1 7.8 7.8 Page 6 of 48 LLOYDS TSB GROUP REVIEW OF FINANCIAL PERFORMANCE In the first half of 2003 the Group's profit before tax increased by Â£73 million, or 5 per cent, to Â£1,677 million, from Â£1,604 million in the first half of 2002. Total income increased by Â£337 million, or 7 per cent, to Â£4,934 million whilst operating expenses increased by Â£269 million, or 11 per cent. The Group's results comparisons are however heavily influenced by the impact of the Â£399 million negative investment variance in the first half of 2002 and, excluding investment variance and changes in economic assumptions, profit before tax fell by 18 per cent, or Â£360 million, to Â£1,643 million, compared with the first half of last year. A number of other significant items affected the Group's results in the first half of 2003 including, particularly, exceptional gains from the sale of the Group's emerging markets debt portfolio and a Â£300 million provision for customer redress relating to past sales of certain stock market investment and long-term savings products. Overall, excluding special items, Group profits were broadly flat, compared with the two previous half-years, as good growth in customer lending and deposits was offset by further margin erosion, the impact of continuing stock market uncertainty on revenues in the Group's life assurance and wealth management businesses, and lower creditor insurance income in our general insurance business as a result of the slowdown in the rate of growth in UK consumer credit. Excluding the impact of acquisitions, operating lease depreciation and provisions for customer redress, operating expenses were held flat. In many of its key product areas the Group continued to grow its market share and, as a result, customer lending and deposits continued to grow strongly. Over the last 12 months, customer lending grew by 11 per cent to Â£142 billion and customer deposits increased by 7 per cent to Â£121 billion. The Group net interest margin was 3.01 per cent, compared with 3.27 per cent in the first half of 2002. The implementation of the remedies proposed in March 2002 by the Competition Commission's report, following its investigation into the supply of banking services to small and medium size enterprises (SMEs), reduced the Group's net interest margin in the first half of 2003 by some 10 basis points. The strong growth in lending and deposit volumes, however, ensured that this reduction in the Group net interest margin was more than compensated for by volume growth, resulting in overall growth in net interest income of 1 per cent compared with the first half of 2002. Profit attributable to shareholders was 4 per cent higher at Â£1,155 million and earnings per share increased by 4 per cent to 20.7p. Shareholders' equity decreased by Â£2,320 million to Â£8,656 million, compared with Â£10,976 million at the end of the first half of 2002, following the reduction of Â£2,331 million in the value of the Group's pension schemes during 2002. Compared with the shareholders' equity of Â£7,972 million at the end of December 2002 there has been an increase of Â£684 million, or 9 per cent, during the first half of 2003. The post-tax return on average shareholders' equity was 28.1 per cent, compared to 20.9 per cent in the first half of 2002, and 12.5 per cent in the second half of 2002, and economic profit increased by 24 per cent to Â£785 million. These increases, compared with 2002, largely reflect the reduction in shareholders' equity at the end of 2002 and also the absence in the first half of 2003 of a negative investment variance. The post-tax return on average assets was 1.14 per cent, and the post-tax return on average risk-weighted assets was 1.91 per cent. Page 7 of 48 LLOYDS TSB GROUP Pre-tax profit from UK Retail Banking and Mortgages, excluding a Â£200 million provision for customer redress, increased by Â£9 million, or 1 per cent, to Â£631 million, compared with the first half of 2002. On the same basis, and excluding the impact of the implementation of the Competition Commission's SME remedies which reduced profits in the Group's business banking portfolio by some Â£65 million, pre-tax profit from UK Retail Banking and Mortgages increased by some Â£74 million, or 12 per cent, to Â£696 million. Notwithstanding the general slowdown in growth in UK consumer credit lending there was strong growth in credit card lending, up 26 per cent, and in personal loan balances outstanding, up 8 per cent. Current account and savings and investment account balances, within Retail Banking, increased by 9 per cent. Costs remained tightly controlled and asset quality generally remains satisfactory. Provisions for bad and doubtful debts increased by Â£65 million to Â£335 million, largely as a result of volume related asset growth in the personal loan and credit card portfolios, and a higher charge for fraud in the personal lending portfolios. Overall, the arrears position was stable. In the Mortgages business, gross new lending increased by 50 per cent to a record Â£12.0 billion, compared with Â£8.0 billion in the first half of 2002. Net new lending was Â£4.8 billion, compared with Â£2.0 billion in the first half of 2002, resulting in an estimated market share of net new lending of 11.4 per cent. As a result of this strong growth in both gross and net new lending, mortgage balances outstanding increased by 8 per cent to Â£67.3 billion, during the first half of 2003. Profit before tax, excluding changes in economic assumptions, investment variance and a Â£100 million provision for customer redress, from Insurance and Investments decreased by Â£168 million, or 22 per cent, to Â£589 million, partly as a result of a reduction of Â£101 million in benefits from experience variances and assumption changes, and lower normalised investment earnings. Overall weighted sales in the Group's life, pensions and unit trust businesses in the first half of 2003 were Â£366.6 million, compared to Â£372.7 million in the first half of last year, a decrease of 2 per cent. This decrease in weighted sales reflected a 5 per cent increase in weighted sales from life and pensions, more than offset by a 22 per cent reduction in weighted sales from unit trusts, largely caused by ongoing stock market uncertainty which continues to significantly reduce customer demand for unit trust and equity-based ISA products. Weighted sales from independent financial advisors rose by 36 per cent, whilst sales through the branch network remained subdued and were 25 per cent lower. In the Group's general insurance operations, continued growth in household insurance income was offset by a 14 per cent reduction in creditor insurance income, as a result of the general slowdown in growth in personal lending. Wholesale Markets pre-tax profit increased by Â£14 million, or 4 per cent, to Â£368 million, as strong profit growth in Lloyds TSB Asset Finance and a reduction in provisions for bad and doubtful debts more than offset the impact of the introduction of the Competition Commission's SME report remedies, and lower income from Treasury. Growth in customer lending and the impact of acquisitions in the asset finance business resulted in a Â£66 million, or 6 per cent, increase in total income. Operating expenses increased by Â£81 million, again largely as a result of the asset finance acquisitions. The provisions charge for bad and doubtful debts decreased by Â£43 million, despite a small increase in provisions within the asset finance businesses reflecting portfolio growth. In the first half of 2002, provisions against Group loans and advances to certain large US corporate customers totalled some Â£70 million. Page 8 of 48 LLOYDS TSB GROUP International Banking pre-tax profit increased by Â£4 million, or 2 per cent, to Â£235 million, notwithstanding a Â£15 million loss on the sale of the Group's French wealth management businesses, and a Â£23 million profit on the sale and leaseback of premises in the first half of 2002. Profits from The National Bank of New Zealand increased by 34 per cent to Â£147 million as a result of good growth in all core businesses, particularly mortgages and small business banking. Pre-tax profits from the Group's Offshore and European Private Banking operations, however, decreased as a result of lower volumes and stock market related fee income. In a market affected by high interest rates, our consumer finance business in Brazil, Losango, increased lending volumes and, with the benefit of more favourable bond market conditions, the Group's businesses in Brazil made a pre-tax profit of Â£46 million, compared with Â£32 million in the first half of 2002. The total Group charge for bad and doubtful debts was 2 per cent lower at Â£470 million, compared with Â£479 million in the first half of 2002, and 15 per cent lower than the Â£550 million charge in the second half of 2002. In UK Retail Banking, the provisions charge increased by Â£68 million, or 25 per cent, to Â£340 million, partly as a result of volume related asset growth in the personal loan and credit card portfolios, which grew by 8 per cent and 26 per cent respectively, but also as a result of a higher charge for fraud in the personal lending portfolios. In Mortgages, an improved arrears position and the beneficial effect of house price increases resulted in a Â£5 million provisions release for the half-year. In Wholesale Markets, the provisions charge decreased by Â£43 million to Â£108 million. International Banking provisions decreased to Â£40 million, from Â£63 million in the first half of 2002, as a result of the absence of an increase in general provisions relating to the Group's exposure to Argentina. The Group's charge for bad and doubtful debts, expressed as a percentage of average lending, was 0.66 per cent, compared to 0.75 per cent in the first half of 2002. During the first half of 2003 the Group accelerated the sale of its portfolio of emerging markets debt investments to take full advantage of improving secondary bond market conditions. Profits on bond sales, and certain closed foreign exchange positions, in the first half of 2003 totalled some Â£295 million. The Group does not expect to achieve any further contribution from the emerging markets debt portfolio in the second half of 2003 and beyond. The Group has carried out, in conjunction with the regulator, an investigation into the appropriateness of certain sales of the Extra Income & Growth Plan, a stock market related investment product sold in 2000 and 2001. This investigation is now largely complete and the Group is in a better position to quantify the financial effect. During the first half of 2003 there has also been an increase in the level of complaints relating to Group sales and performance of certain endowment based and long-term savings products. Whilst the Group maintains provisions for customer redress in respect of past product sales, the adequacy of these provisions has been reviewed in the light of ongoing experience and the drawing to a conclusion of the Extra Income & Growth Plan investigation. As a result, the estimated total cost of redress is forecast to increase by some Â£300 million, largely reflecting sales of endowment based and long-term savings products, and an additional provision of this amount has been made. The adequacy of this provision will be kept under review. Page 9 of 48 LLOYDS TSB GROUP The total capital ratio was 10.1 per cent and the tier 1 capital ratio was 8.1 per cent. Risk-weighted assets increased by 4 per cent to Â£127.5 billion, from Â£122.4 billion at the end of 2002. At the end of June 2003, the Scottish Widows free asset ratio was an estimated 12.7 per cent, compared to 12.2 per cent at the end of 2002 (page 46, note 7). The equity backing ratio for traditional with-profits policies at 30 June 2003 was 48 per cent (equities 35 per cent; property 13 per cent). Scottish Widows remains one of the most strongly capitalised life assurance companies in the UK; able to withstand significant stock market falls without an injection of capital. The Group has not injected additional capital from outside the Group's insurance businesses into Scottish Widows, and does not expect to inject capital into Scottish Widows unless the level of the FTSE 100 index falls to, and remains, below 3000. The Group continues to generate strong profits from its operations and, excluding investment variance and changes in economic assumptions, the profit attributable to shareholders in the first half of 2003 was Â£1,128 million. The Board has decided to maintain the interim dividend at 10.7p per share. Page 10 of 48 LLOYDS TSB GROUP CONSOLIDATED PROFIT AND LOSS ACCOUNT (unaudited) Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Interest receivable: Interest receivable and similar income arising from debt securities 245 278 289 Other interest receivable and similar income 4,764 4,868 5,114 Interest payable 2,438 2,589 2,789 Net interest income 2,571 2,557 2,614 Other finance income 17 85 80 Other income Fees and commissions receivable 1,509 1,523 1,530 Fees and commissions payable (346) (306) (339) Dealing profits (before expenses) 427 88 100 Income from long-term assurance business 175 23 (326) General insurance premium income 261 235 251 Other operating income 320 392 371 2,346 1,955 1,587 Total income 4,934 4,597 4,281 Operating expenses Administrative expenses 2,287 2,040 2,174 Depreciation 318 299 343 Amortisation of goodwill 24 21 38 Depreciation and amortisation 342 320 381 Total operating expenses 2,629 2,360 2,555 Trading surplus 2,305 2,237 1,726 General insurance claims 108 107 122 Provisions for bad and doubtful debts Specific 466 451 514 General 4 28 36 470 479 550 Amounts written off fixed asset investments 24 39 48 Operating profit 1,703 1,612 1,006 Income from joint ventures (11) (8) (3) Loss on sale of businesses (15) - - Profit on ordinary activities before tax 1,677 1,604 1,003 Tax on profit on ordinary activities 489 462 302 Profit on ordinary activities after tax 1,188 1,142 701 Minority interests - equity 10 9 10 - non-equity 23 20 23 Profit for the period attributable to shareholders 1,155 1,113 668 Dividends 597 597 1,311 Profit (loss) for the period 558 516 (643) Earnings per share 20.7p 20.0p 12.0p Diluted earnings per share 20.6p 19.9p 11.9p Page 11 of 48 LLOYDS TSB GROUP CONSOLIDATED BALANCE SHEET 30 June 30 June 31 December 2003 2002 2002 (unaudited) (unaudited) (audited) Assets Â£m Â£m Â£m Cash and balances at central banks 857 717 1,140 Items in course of collection from banks 2,433 2,384 1,757 Treasury bills and other eligible bills 3,577 3,645 2,409 Loans and advances to banks 18,306 18,386 17,529 Loans and advances to customers 141,990 128,478 134,474 Debt securities 28,682 27,022 29,314 Equity shares 230 222 206 Interests in joint ventures 38 33 45 Intangible assets 2,615 2,646 2,634 Tangible fixed assets 3,974 3,806 4,096 Own shares 29 38 18 Other assets 5,631 4,768 5,263 Prepayments and accrued income 2,142 2,587 2,305 Post-retirement benefit asset - 319 - Long-term assurance business attributable to the shareholder 6,362 6,506 6,228 216,866 201,557 207,418 Long-term assurance assets attributable to policyholders 47,813 44,822 45,340 Total assets 264,679 246,379 252,758 Liabilities Deposits by banks 23,882 22,091 25,443 Customer accounts 121,433 113,787 116,334 Items in course of transmission to banks 981 960 775 Debt securities in issue 34,498 31,495 30,255 Other liabilities 8,427 7,320 8,289 Accruals and deferred income 3,479 3,339 3,696 Post-retirement benefit liability 2,168 74 2,077 Provisions for liabilities and charges: Deferred tax 1,271 1,399 1,317 Other provisions for liabilities and charges 532 282 361 Subordinated liabilities: Undated loan capital 6,063 4,622 5,496 Dated loan capital 4,733 4,655 4,672 Minority interests: Equity 47 33 37 Non-equity 696 524 694 743 557 731 Called-up share capital 1,417 1,415 1,416 Share premium account 1,121 1,093 1,093 Merger reserve 343 343 343 Profit and loss account 5,775 8,125 5,120 Shareholders' funds (equity) 8,656 10,976 7,972 216,866 201,557 207,418 Long-term assurance liabilities to policyholders 47,813 44,822 45,340 Total liabilities 264,679 246,379 252,758 Page 12 of 48 LLOYDS TSB GROUP CONSOLIDATED CASH FLOW STATEMENT (unaudited) Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Net cash inflow from operating activities 4,670 4,235 1,159 Dividends received from associated undertakings 5 2 - Returns on investments and servicing of finance: Dividends paid to equity minority interests - (13) (5) Payments made to non-equity minority interests (40) (20) (23) Interest paid on subordinated liabilities (loan capital) (297) (231) (232) Net cash outflow from returns on investments and servicing of finance (337) (264) (260) Taxation: UK corporation tax (205) (329) (429) Overseas tax (119) (90) (103) Total taxation (324) (419) (532) Capital expenditure and financial investment: Additions to fixed asset investments (19,519) (23,866) (22,964) Disposals of fixed asset investments 18,656 23,740 21,767 Additions to tangible fixed assets (346) (536) (779) Disposals of tangible fixed assets 154 114 245 Capital injection to life fund - (140) - Net cash outflow from capital expenditure and financial investment (1,055) (688) (1,731) Acquisitions and disposals: Additions to interests in joint ventures (6) (6) (15) Acquisition of group undertakings (1) (53) (64) Net cash outflow from acquisitions and disposals (7) (59) (79) Equity dividends paid (1,311) (1,306) (597) Net cash inflow (outflow) before financing 1,641 1,501 (2,040) Financing: Issue of subordinated liabilities (loan capital) 532 1,145 975 Issue of ordinary share capital net of Â£3 million (2002 first half: Â£56 million; second half: Â£6 million) charge in respect of the QUEST 26 82 (5) Repayments of subordinated liabilities (loan capital) (54) (48) (7) Minority investment in subsidiaries - - 167 Capital element of finance lease rental payments (1) (3) (1) Net cash inflow from financing 503 1,176 1,129 Increase (decrease) in cash 2,144 2,677 (911) Page 13 of 48 LLOYDS TSB GROUP SEGMENTAL ANALYSIS Half-year to 30 June 2003 UK Retail Banking Insurance and and Wholesale International Central Mortgages Investments Markets Banking group items Total Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 1,719 39 574 406 (167) 2,571 Other finance income - - - - 17 17 Other income 558 771 518 177 288 2,312 Total income 2,277 810 1,092 583 138 4,900 Operating expenses 1,500 213 593 292 31 2,629 Trading surplus 777 597 499 291 107 2,271 General insurance claims - 108 - - - 108 Bad debt provisions 335 - 108 40 (13) 470 Amounts written off fixed asset investments - - 23 1 - 24 Income from joint ventures (11) - - - - (11) Loss on sale of businesses - - - (15) - (15) Profit before tax* 431 489 368 235 120 1,643 Changes in economic assumptions - (8) - - - (8) Investment variance - 42 - - - 42 Profit before tax 431 523 368 235 120 1,677 Half-year to UK Retail 30 June 2002 Banking Insurance and and Wholesale International Central Mortgages Investments Markets Banking group items Total Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 1,680 33 579 383 (118) 2,557 Other finance income - - - - 85 85 Other income 533 1,073 447 188 113 2,354 Total income 2,213 1,106 1,026 571 80 4,996 Operating expenses 1,313 242 512 277 16 2,360 Trading surplus 900 864 514 294 64 2,636 General insurance claims - 107 - - - 107 Bad debt provisions 270 - 151 63 (5) 479 Amounts written off fixed asset investments - - 9 - 30 39 Income from joint ventures (8) - - - - (8) Profit before tax* 622 757 354 231 39 2,003 Investment variance - (399) - - - (399) Profit before tax 622 358 354 231 39 1,604 *excluding changes in economic assumptions and investment variance Page 14of 48 LLOYDS TSB GROUP Segmental analysis (continued) Half-year to UK Retail 31 December 2002 Banking Insurance and and Wholesale International Central Mortgages Investments Markets Banking group items Total Â£m Â£m Â£m Â£m Â£m Â£m Net interest income 1,742 41 597 367 (133) 2,614 Other finance income - - - - 80 80 Other income 543 792 528 186 36 2,085 Total income 2,285 833 1,125 553 (17) 4,779 Operating expenses 1,370 240 621 304 20 2,555 Trading surplus 915 593 504 249 (37) 2,224 General insurance claims - 122 - - - 122 Bad debt provisions 293 - 160 99 (2) 550 Amounts written off fixed asset investments - - 48 - - 48 Income from joint ventures (3) - - - - (3) Profit before tax* 619 471 296 150 (35) 1,501 Changes in economic assumptions - 55 - - - 55 Investment variance - (553) - - - (553) Profit before tax 619 (27) 296 150 (35) 1,003 *excluding changes in economic assumptions and investment variance PERIOD END ASSETS BY MAIN BUSINESSES 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m UK Retail Banking and Mortgages 91,921 81,255 85,868 Insurance and Investments* 9,400 9,633 9,161 Wholesale Markets 92,148 87,823 89,547 International Banking 22,992 21,439 21,298 Central group items 405 1,407 1,544 Total assets* 216,866 201,557 207,418 *excluding long-term assurance assets attributable to policyholders Page 15 of 48 LLOYDS TSB GROUP PERFORMANCE BY SECTOR UK Retail Banking and Mortgages (covering the Group's UK retail businesses, providing banking and financial services to personal and small business customers; mortgages; private banking and stockbroking) Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Net interest income 1,719 1,680 1,742 Other income 558 533 543 Total income 2,277 2,213 2,285 Operating expenses: Before provisions for customer redress 1,300 1,313 1,370 Provisions for customer redress 200 - - 1,500 1,313 1,370 Trading surplus 777 900 915 Provisions for bad and doubtful debts 335 270 293 Income from joint ventures (11) (8) (3) Profit before tax 431 622 619 Profit before tax, before provisions for customer redress 631 622 619 Efficiency ratio, before provisions for customer redress 57.1% 59.3% 60.0% Total assets (period-end) Â£91.9bn Â£81.3bn Â£85.9bn Total risk-weighted assets (period-end) Â£57.7bn Â£51.2bn Â£54.2bn Profit before tax from UK Retail Banking and Mortgages, before customer redress provisions, increased by Â£9 million to Â£631 million, compared with Â£622 million in the first half of 2002 as a result of continued strong growth in the Group's consumer lending portfolios, particularly mortgages and credit cards, and a strict focus on cost control, which offset a reduction in income of some Â£65 million in the Group's business banking portfolio, as a result of the implementation of the Competition Commission's SME remedies. Excluding the impact of these remedies and provisions for customer redress, profit before tax from UK Retail Banking and Mortgages increased by 12 per cent, as a result of a 6 per cent growth in income and flat costs. Total income increased by Â£64 million, or 3 per cent, to Â£2,277 million. Net interest income increased by Â£39 million, or 2 per cent, to Â£1,719 million, as growth in the mortgage and consumer credit portfolios more than offset the impact of the Competition Commission's SME remedies. Personal loan and credit card balances outstanding increased by 8 per cent and 26 per cent respectively and, within Retail Banking, balances on current accounts and savings and investment accounts grew by 9 per cent. Over the last 12 months, mortgage balances outstanding increased by 15 per cent to Â£67.3 billion. Other income increased by Â£25 million to Â£558 million. There was an improvement in income earned from credit and debit cards, and increased income from added value current accounts, but this was partly offset by a higher level of fees and commissions payable. Page 16 of 48 LLOYDS TSB GROUP UK Retail Banking and Mortgages (continued) Excluding provisions for customer redress, operating expenses decreased by Â£13 million, or 1 per cent, to Â£1,300 million during the first half of 2003, compared to Â£1,313 million in the first half of 2002. The efficiency ratio improved to 57.1 per cent, from 59.3 per cent in the first half of last year. The trading surplus increased by Â£77 million, or 9 per cent, to Â£977 million. Bad debt provisions increased by Â£65 million to Â£335 million, mainly as a result of volume related asset growth in personal loan and credit card lending, and a higher charge for fraud in the personal lending portfolio. The provisions charge as a percentage of average lending for personal loans and overdrafts increased to 4.44 per cent, from 3.82 per cent in the first half of 2002, while the charge in the credit card portfolio decreased to 3.34 per cent, from 3.50 per cent in the first half of 2002. Overall the arrears position remained broadly stable. Provisions for bad and doubtful debts by product Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Personal loans/overdrafts 218 168 176 Credit cards 85 71 82 Business Banking 37 33 34 Mortgages (5) (2) 1 335 270 293 Charge as a percentage of average lending % % % Personal loans/overdrafts 4.44 3.82 3.65 Credit cards 3.34 3.50 3.53 Business Banking 1.34 1.21 1.22 Mortgages (0.02) (0.01) 0.00 In UK Retail Banking, strategic focus has been placed on organic growth; a number of programmes and initiatives are now underway, and are proving successful. There is increased focus on quality; acquiring and retaining higher value customers by meeting customer needs with tailored offers through a highly segmented approach, and deepening relationships through the use of our sophisticated customer relationship management capabilities. Day-to-day costs remain tightly controlled, while exploratory work and pilot schemes continue to assess the scope of outsourcing opportunities to further improve central processing efficiencies. Our multi-channel distribution, comprising a network of over 2,000 branches, one of the largest telephone banking operations in the UK, and lloydstsb.com, our internet banking system, one of the most visited financial websites in Europe, offers extensive customer choice. The retail bank has continued to develop a strategy of building deeper customer relationships, focusing product design to support the retention and recruitment of higher value customers, whilst retaining multi-channel functionality, and progressively meeting customer needs through increased use of lower cost distribution channels. Page 17 of 48 LLOYDS TSB GROUP UK Retail Banking and Mortgages (continued) The Group's internet bank continues to increase in popularity and customer usage. In the first half of 2003 over 10 million bill payments or account transfers were processed on-line. Product sales via the internet channel continue to grow rapidly, with more than 60,000 product sales per month, up 80 per cent on the first half of 2002. Within cards, supported by the launch of a number of segmented, competitive and innovative product offers including the Create card and the Premier Credit Card, strong growth was achieved both in new accounts and balances outstanding. Market share grew to an estimated 11 per cent. A general slowdown in the rate of growth of consumer credit in the UK led to a reduction in the rate of personal loan volume growth, although balances outstanding increased by 8 per cent in the year to 30 June 2003. The launch of the Group's "Plus" range of interest-bearing current accounts has supported the retention of high quality customers within the retail banking franchise, as well as being positioned to attract new-to-brand customers through a competitively priced offer, reflecting the use of lower cost distribution channels. Supported by the launch of "Plus" in February 2003, customer attrition rates have fallen by a fifth, reflecting improved levels of customer satisfaction and the Group's improved range of segmented and targeted offers in the personal market. Lloyds TSB has maintained its clear market leadership in the added value current account market. Extensive work continues, to improve levels of service and customer satisfaction, with a focus on continuous performance improvement and innovation to meet customer needs and expectations. Volatility in equity markets has continued to restrict short-term opportunities within the UK wealth management business. Lloyds TSB continues to be well positioned in this attractive market which has good long-term growth prospects, however, with a range of segmented offers, including the launch of its new Premier banking service for the "mass affluent". Following a successful pilot, the Group is now proceeding with national roll-out of Lloyds TSB energy and home telephone products. By leveraging the strategic advantages offered by the Lloyds TSB customer base, distribution strength and brand, the provision of Lloyds TSB branded gas, electricity and home telephone services adds value to existing customer relationships, and provides an opportunity for the Group to build new sustainable revenue streams. Business Banking continued to grow its customer franchise, regaining leadership in the start-up market, with customer deposits growing by 4 per cent to Â£10,046 million, from Â£9,693 million in June 2002. Customer lending increased slightly to Â£5,589 million, from Â£5,567 million in June 2002. 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 has implemented the remedies suggested by the Competition Commission and, as a result of this issue, profit before tax of Business Banking in the first half of 2003 was reduced by some Â£65 million. Page 18 of 48 LLOYDS TSB GROUP UK Retail Banking and Mortgages (continued) Mortgages Half-year to Half-year to 30 June 31 December 2003 2002 2002 Gross new mortgage lending Â£12.0bn Â£8.0bn Â£11.0bn Market share of gross new mortgage lending 10.0% 8.3% 9.0% Net new mortgage lending Â£4.8bn Â£2.0bn Â£3.9bn Market share of net new mortgage lending 11.4% 5.8% 8.8% Mortgages outstanding (period-end) Â£67.3bn Â£58.6bn Â£62.5bn Market share of mortgages outstanding 9.4% 9.3% 9.3% Gross new lending increased by 50 per cent to a record Â£12.0 billion, compared with Â£8.0 billion in the first half of 2002 and Â£11.0 billion in the second half of 2002. Net new lending increased to Â£4.8 billion resulting in a market share of net new lending of 11.4 per cent. Over the last twelve months, mortgage balances outstanding increased by 15 per cent to Â£67.3 billion. The Group continues to be one of the most efficient mortgage providers in the UK and Cheltenham & Gloucester's (C&G) total costs as a percentage of mortgage assets were an annualised 0.5 per cent in the first half of 2003. 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, and business levels sourced from intermediaries remain strong. A slight improvement in arrears and the beneficial effect of house price increases have meant that bad debt provisions remained at low levels. New provisions were more than offset by releases and recoveries resulting in a Â£5 million net provisions release for the half-year, compared with a net release of Â£2 million in the first half of 2002. The quality of our mortgage lending continues to be good. The average indexed loan-to-value ratio on the C&G mortgage portfolio was 44 per cent and the average loan-to-value ratio for C&G mortgage business written during the first half of 2003 was 65 per cent. C&G has continued its policies of not exceeding a 95 per cent loan-to-value ratio on new lending, and of avoiding significant exposure to the buy-to-let and sub-prime mortgage markets. Page 19 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 2003 2002 2002 Â£m Â£m Â£m Life, pensions and unit trusts Scottish Widows 194 308 280 Abbey Life 41 57 35 Provisions for customer redress (100) - (205) 135 365 110 General insurance 355 386 367 Operating profit from Insurance 490 751 477 Scottish Widows Investment Partnership (1) 6 (6) Profit before tax * 489 757 471 Profit before tax, before provisions for customer redress* 589 757 676 *excluding changes in economic assumptions and investment variance Profit before tax from Insurance and Investments, excluding changes in economic assumptions, investment variance and provisions for customer redress, decreased by Â£168 million, or 22 per cent, to Â£589 million, from Â£757 million in the first half of 2002, partly as a result of a reduction of Â£101 million in benefits from experience variances and assumption changes, and lower normalised investment earnings. On the same basis, profit before tax from our life, pensions and unit trust businesses decreased by Â£130 million, or 36 per cent, to Â£235 million. The market for medium and long-term investments continued to be adversely affected by uncertainties in global stock markets. Total sales from the Group's life, pensions and unit trust businesses were Â£1,992.2 million, compared with Â£2,138.7 million in the first half of 2002, a decrease of 7 per cent. Overall weighted sales were Â£366.6 million compared to Â£372.7 million in the first half of last year, a reduction of 2 per cent. This decrease in weighted sales reflected a 5 per cent increase in weighted sales from life and pensions, offset by a 22 per cent reduction in weighted sales from unit trusts and equity-based ISAs. The Group's estimated market share of the life, pensions and unit trusts market in the first quarter of 2003 was 5.4 per cent, compared with 4.6 per cent in the first quarter of 2002, and in life and pensions, market share in the first quarter of 2003 increased to 6.4 per cent, compared with 5.2 per cent in the comparable period of 2002. By distribution channel, weighted sales from independent financial advisors (IFA) rose by 36 per cent as a result of strong regular savings and pensions sales. Our share of the IFA market in the first quarter of 2003 increased to 5.4 per cent, compared with 3.4 per cent in the comparable period of 2002. In the branch network, weighted sales were 25 per cent lower as a result of a significant reduction in the sales of single premium investments. Page 20 of 48 LLOYDS TSB GROUP Insurance and Investments (continued) Sales through the branch network were also affected in the first half of 2003 by significant restructuring activity in the personal sector regulated salesforce, to reflect lower levels of new business and improve cost efficiency. This led to the reduction of almost one third of the regulated salesforce. Scottish Widows remains one of the leading unit trust and equity-based ISA providers in the UK, with a growing market share. In 2001, Scottish Widows was one of the first companies to be accredited under the "Raising Standards" quality mark, which aims to raise standards generally throughout the insurance industry to create an environment which encourages consumers to provide for their own future. In March 2003 Scottish Widows was one of the first companies to gain re-accreditation under "Raising Standards", confirming Scottish Widows' position at the forefront of industry-wide initiatives to improve standards. Profit before tax from general insurance operations, excluding investment variance, decreased by Â£31 million, or 8 per cent, to Â£355 million as continued revenue growth from home insurance was offset by lower levels of creditor insurance reflecting the slowdown in growth in personal loans. With over 9 million general insurance policies in force, we estimate that the Group is the market leader in the distribution of home and creditor insurance. The principal focus of Scottish Widows Investment Partnership (SWIP) is the delivery of consistently superior investment performance. At the end of the half-year SWIP had Â£73 billion of funds under management out of groupwide funds under management totalling Â£99 billion. Overall fund management performance continues to show a significant improvement. SWIP's largest UK equity fund, the UK Growth Fund, has achieved a second quartile performance within its sector over the last six months and top quartile over the last twelve months. The improvement in performance is also reflected in each of SWIP's mainstream, actively managed UK equity funds, which have all achieved above median performance over six month and twelve month periods, with the Â£400 million UK Select Growth Fund being in the top quartile over the last twelve months. In addition, SWIP now has a total of 18 funds rated A and above by Standard & Poor's, with 5 new ratings awarded in the first half of 2003. The pre-tax loss from SWIP for the half-year was Â£1 million compared with a profit of Â£6 million in the first half of 2002, the movement reflecting lower income as a result of lower equity markets and the impact of higher investment spend. Page 21 of 48 LLOYDS TSB GROUP Insurance and Investments (continued) Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Total new business premium income Regular premiums: Life - mortgage related 21.7 16.0 19.0 - non-mortgage related 28.0 14.0 18.7 Pensions 111.1 103.4 109.3 Health 3.2 2.9 3.0 Total regular premiums 164.0 136.3 150.0 Single premiums: Life 438.3 816.6 715.2 Annuities 271.4 180.1 316.9 Pensions 597.0 440.5 619.7 Total single premiums 1,306.7 1,437.2 1,651.8 External unit trust sales: Regular payments 22.0 40.2 31.3 Single amounts 499.5 525.0 484.5 Total external unit trust sales 521.5 565.2 515.8 Weighted sales (regular + 1/10 single) Life and pensions 294.7 280.0 315.2 Unit trusts 71.9 92.7 79.7 Life, pensions and unit trusts 366.6 372.7 394.9 Weighted sales by distribution channel Branch network 139.3 185.0 165.6 Independent financial advisors 197.5 145.4 190.0 Direct 28.9 31.6 36.3 International/Other 0.9 10.7 3.0 Life, pensions and unit trusts 366.6 372.7 394.9 Group funds under management Â£bn Â£bn Â£bn Scottish Widows Investment Partnership 73 76 70 UK Wealth Management 10 11 10 International 16 18 18 99 105 98 Page 22 of 48 LLOYDS TSB GROUP Insurance and Investments (continued) Life, pensions and unit trusts Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m New business income 204 182 216 Existing business - expected return 126 127 146 - experience variances - 18 (19) - assumption changes and other items (21) 62 16 - provisions for customer redress (100) - (205) 5 207 (62) Investment earnings 77 113 101 Life and pensions distribution costs (150) (136) (147) 136 366 108 Unit trusts 30 51 39 Unit trust distribution costs (31) (52) (37) (1) (1) 2 Profit before tax* 135 365 110 Profit before tax, excluding provisions for customer redress* 235 365 315 New business margin (life and pensions) 18.3% 16.4% 21.9% *excluding changes in economic assumptions and investment variance New business income increased by 12 per cent supported by a 5 per cent growth in weighted sales from life and pensions products, and an improved performance in the more profitable life products. The life and pensions new business margin, defined as new business income less distribution costs divided by weighted sales, increased to 18.3 per cent, from 16.4 per cent in the first half of 2002. The improvement largely arose from an improved product mix, particularly higher margin protection and regular premium life products. Profit before tax from existing business, excluding provisions for customer redress, fell by 49 per cent to Â£105 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 Â£1 million, to Â£126 million. This reduction reflects the lower value of in-force business at the beginning of the year and a lower discount rate following the reduction made in December 2002, which offset a lower level of restructuring costs. Page 23 of 48 LLOYDS TSB GROUP Insurance and Investments (continued) General Insurance Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Premium income from underwriting Creditor 52 54 53 Home 198 165 185 Health 22 22 22 Re-insurance premiums (11) (6) (9) 261 235 251 Commissions from insurance broking Creditor 190 227 199 Home 14 19 25 Health 8 9 8 Other 77 78 82 289 333 314 Profit before tax* 355 386 367 *excluding investment variance Profit before tax, excluding investment variance, from our general insurance operations, comprising both underwriting and broking activities, decreased by Â£31 million, or 8 per cent, to Â£355 million. Premium income from underwriting increased by Â£26 million, or 11 per cent, largely as a result of higher home insurance income which increased by 20 per cent. Commissions from insurance broking, however, decreased by Â£44 million, or 13 per cent, largely as a result of lower levels of creditor insurance, reflecting the slowdown in growth in personal loans. Sales from direct channels (direct mail, telephone, affinity and internet) continue to grow strongly with 62 per cent of new home insurance policies and 84 per cent of new motor insurance policies being sold through direct channels in the first half of 2003. Lloyds TSB Insurance's presence on the Automobile Association and Hill House Hammond insurance panels generated an additional 40,000 policies. Claims were Â£1 million higher at Â£108 million than in the first half of 2002. The overall claims ratio of 40 per cent was lower than in the first half of last year (44 per cent) as portfolio growth exceeded the growth in claims. With over 9 million policies in force as at 30 June 2003, an increase of 7 per cent from 30 June 2002, Lloyds TSB is the largest distributor of personal lines general insurance in the UK, and we estimate that the Group is the UK market leader in the distribution of home and creditor insurance. Page 24 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 2003 2002 2002 Â£m Â£m Â£m Net interest income 574 579 597 Other income 518 447 528 Total income 1,092 1,026 1,125 Operating expenses 593 512 621 Trading surplus 499 514 504 Provisions for bad and doubtful debts 108 151 160 Amounts written off fixed asset investments 23 9 48 Profit before tax 368 354 296 Efficiency ratio 54.3% 49.9% 55.2% Total assets (period-end) Â£92.1bn Â£87.8bn Â£89.5bn Total risk-weighted assets (period-end) Â£53.8bn Â£49.7bn Â£53.0bn Wholesale Markets pre-tax profit increased by Â£14 million, or 4 per cent, to Â£368 million as strong profit growth in Lloyds TSB Asset Finance and a reduction in provisions for bad and doubtful debts more than offset the impact of the introduction of the Competition Commission's SME report remedies, and lower income from Treasury. Net interest income decreased by Â£5 million reflecting lower income in Treasury but also as a result of a reduction of some Â£20 million following the implementation of the Competition Commission's SME remedies. Other income increased by Â£71 million, largely as a result of the acquisition of First National Vehicle Holdings and Abbey National Vehicle Finance in April 2002, and the Dutton-Forshaw Group in December 2002. Operating expenses increased by Â£81 million, compared with the first half of last year, of which Â£66 million reflected the asset finance acquisitions. The charge for provisions for bad and doubtful debts in Wholesale Markets decreased by Â£43 million, despite a small increase in provisions within the asset finance businesses reflecting portfolio growth. In the first half of 2002, provisions against Group loans and advances to certain large US corporate customers totalled some Â£70 million. Amounts written off fixed asset investments increased by Â£14 million. Assets grew by 5 per cent to Â£92.1 billion, an increase of Â£4.3 billion, reflecting growth in debt securities for structured transactions, and relationship lending, in the second half of 2002, together with strong growth in the asset finance businesses in the first half of 2003, partially offset by a reduction in Treasury. Page 25 of 48 LLOYDS TSB GROUP Wholesale Markets (continued) Treasury pre-tax profits decreased by 42 per cent to Â£68 million, compared with Â£117 million in the first half of 2002 reflecting less favourable trading conditions, lower money market income and finer margins on interest rate derivatives. Strategic Asset Finance, incorporating Lloyds TSB Leasing, remains one of the UK's leading large-ticket lessors. In support of corporate customers, Capital Markets improved market share in the UK loan syndications market, achieving second place for the number and value of Lead Arranger roles for UK investment grade companies. Lloyds TSB Registrars' share of the registration market for FTSE 100 companies was 57 per cent, and its market leadership in employee share administration services was maintained. Shareview Dealing, a telephone and internet based retail sharedealing service, was launched in March, and Votenow, an electronic voting system for AGMs was successfully launched in April. However, low levels of corporate transaction activity led to a reduction in pre-tax profits to Â£16 million, from Â£24 million in the first half of 2002. Due to market conditions, Lloyds TSB Development Capital undertook significantly lower levels of venture capital investment and, in a difficult market for disposals, realisations of venture capital gains remained low. Pre-tax losses were Â£3 million, compared to a loss of Â£8 million in the first half of last year. However, record levels of new acquisition finance commitments were achieved in the first half of 2003, with lower levels of provisions. Pre-tax profits in Lloyds TSB Asset Finance, which incorporates the Group's point-of-sale asset finance and receivables finance businesses, increased by 144 per cent to Â£66 million, compared with Â£27 million in the first half of last year. This reflects, in part, the acquisition of First National Vehicle Holdings and Abbey National Vehicle Finance in April 2002, and the Dutton-Forshaw Group in December 2002. These businesses have been successfully integrated into Lloyds TSB Asset Finance, where Lloyds TSB autolease is now the largest contract hire operator in the UK, and expected synergies are on track with the Group's original plans. We continue to grow market share in motor finance, in a buoyant market. The number of businesses using asset based finance continues to grow strongly, and Lloyds TSB Commercial Finance and its specialist factoring division, Alex Lawrie Factors, have been well positioned, growing market share in both invoice discounting and factoring. Data from The Factors and Discounters Association confirms Lloyds TSB Commercial Finance's market leadership position. Page 26 of 48 LLOYDS TSB GROUP International Banking (banking and financial services overseas in three main areas: The Americas, New Zealand, and Europe and Offshore Banking) Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Net interest income 406 383 367 Other income 177 188 186 Total income 583 571 553 Operating expenses 292 277 304 Trading surplus 291 294 249 Provisions for bad and doubtful debts 40 63 99 Amounts written off fixed asset investments 1 - - 250 231 150 Loss on sale of businesses (15) - - Profit before tax 235 231 150 Efficiency ratio 50.1% 48.5% 55.0% Total assets (period-end) Â£23.0bn Â£21.4bn Â£21.3bn Total risk-weighted assets (period-end) Â£15.3bn Â£14.4bn Â£14.2bn International Banking pre-tax profit increased by Â£4 million, or 2 per cent, to Â£235 million, notwithstanding a Â£15 million loss on the sale of the Group's French wealth management businesses, and a Â£23 million profit on the sale and leaseback of premises in the first half of 2002. Net interest income increased by Â£23 million, or 6 per cent, to Â£406 million reflecting volume growth and exchange rate movements in New Zealand, together with strong wholesale margins in Brazil. Other income decreased by Â£11 million, or 6 per cent, to Â£177 million reflecting lower equity market related earnings in Offshore Banking and European Private Banking. Operating expenses increased by Â£15 million, reflecting a combination of volume growth, local inflation, and the impact of exchange rate movements. Provisions for bad and doubtful debts were Â£23 million lower reflecting the absence of an increase in the general provision in Argentina. Pre-tax profits from The National Bank of New Zealand increased by 34 per cent to Â£147 million as a result of asset growth across all business sectors, with strong lending and deposit growth within the personal and small business markets. In a market affected by high interest rates, our consumer finance business in Brazil, Losango, increased lending volumes and, with the benefit of more favourable bond market conditions, the Group's businesses in Brazil made a pre-tax profit of Â£46 million, compared with Â£32 million in the first half of 2002. Page 27 of 48 LLOYDS TSB GROUP International Banking (continued) The Group's international wealth management businesses have been adversely impacted by equity market volatility and depressed investor sentiment, although the demand for services for UK expatriates working abroad remains strong. Offshore Banking and European Private Banking pre-tax profits fell by Â£49 million to Â£55 million, compared with the first half of 2002, which benefited from a Â£23 million profit on the sale and leaseback of premises. The Group reduced its total exposure to Brazil, net of provisions, to Â£1.5 billion during the first half of 2003 (December 2002: Â£1.9 billion) largely through the disposal of the remaining Brazilian component of the emerging markets debt portfolio. The Brazilian Real appreciated 20.3 per cent in the six months to 30 June 2003. Sentiment towards Brazil and Argentina has improved over the period, but the economic situation continues to be difficult and the outlook remains uncertain. The Group's total exposure to Argentina at the end of the half-year was some Â£170 million, net of provisions and charges (31 December 2002: Â£190 million), despite the impact of an appreciation of the Peso during the six months to 30 June 2003, largely reflecting emerging markets debt portfolio sales, and the repayment of some offshore lending. In May 2003 Lloyds TSB agreed the sale of its French fund management and private banking businesses, including its subsidiaries, Lloyds Bank SA, Chaillot Assurances SA and Capucines Investissements SA, to UBS (France) SA. The net asset value of businesses sold was approximately Â£20 million and funds under management were approximately â‚¬1 billion. A net loss of Â£15 million has been included in the profit and loss account. In June 2003, the Group announced that, following approaches, Lloyds TSB is considering its options relating to The National Bank of New Zealand. The Group is undertaking a strategic review so that potential offers for The National Bank of New Zealand, as well as retention of the business, can be considered. Page 28 of 48 LLOYDS TSB GROUP Central group items (earnings on surplus capital and the emerging markets debt investment portfolio, central costs and other unallocated items) Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Accrual for payment to Lloyds TSB Foundations (16) (19) (14) Other finance income 17 85 80 Earnings on surplus capital and the emerging markets debt investment portfolio 140 (23) (82) Central costs and other unallocated items (21) (4) (19) 120 39 (35) The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly disabled and disadvantaged, to play a fuller role in society. The Foundations receive 1 per cent of the Group's pre-tax profit, averaged over three years, instead of the dividend on their shareholdings, making them in aggregate one of the largest independent grant giving bodies in the UK. In the first half of 2003, the Group accrued Â£16 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 2003 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. Earnings on surplus capital and the emerging markets debt investment portfolio reflect earnings on capital held at the Group centre and profits from the Group's investment portfolio of emerging markets debt securities. During the first half of 2003 improved secondary bond market conditions allowed the Group to sell its portfolio of emerging markets debt securities. Profits on bond sales, and certain closed foreign exchange positions, in the first half of 2003 totalled some Â£295 million. The Group will not achieve any further contribution from the emerging markets debt portfolio in the second half of 2003 and beyond. Page 29 of 48 LLOYDS TSB GROUP INCOME Group net interest income Group net interest income increased by Â£14 million, or 1 per cent, to Â£2,571 million, despite a reduction of Â£203 million caused by a 26 basis point reduction in the net interest margin. The implementation of the Competition Commission's SME report remedies reduced Group net interest income by Â£82 million, and the net interest margin by some 10 basis points, in the first half of 2003. Average interest-earning assets increased by 9 per cent to Â£172 billion. Excluding the Competition Commission impact, the 16 basis points decrease in the overall net interest margin reflected a lower contribution from interest-free liabilities, partly caused by the fall in average interest rates, and a reduction of 12 basis points in the interest spread. Compared with the net interest margin in the second half of 2002, there was a reduction of 12 basis points, of which some 10 basis points represented the Competition Commission impact. The mix effect from the higher levels of growth in the mortgage portfolio and some mortgage margin erosion caused a 6 basis point reduction. This was partly offset by a 2 basis point improvement in the margin in the asset finance businesses. Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Net interest income 2,571 2,557 2,614 Average balances Short-term liquid assets 3,177 4,079 2,959 Loans and advances 153,688 139,722 147,456 Debt securities 15,217 13,859 15,493 Total interest-earning assets 172,082 157,660 165,908 Financed by: Interest-bearing liabilities 164,454 145,667 154,665 Interest-free liabilities 7,628 11,993 11,243 Average rates % % % Gross yield on interest-earning assets 5.87 6.58 6.46 Cost of interest-bearing liabilities 2.99 3.58 3.58 Interest spread 2.88 3.00 2.88 Contribution of interest-free liabilities 0.13 0.27 0.25 Net interest margin 3.01 3.27 3.13 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 Â£35 million higher in the first half of 2003 (2002 first half: Â£23 million higher; second half: Â£32 million higher). The deferred element of the expenditure amounting to Â£166 million at 30 June 2003 (30 June 2002: Â£233 million; 31 December 2002: Â£201 million) is included within prepayments and accrued income in the balance sheet. Page 30 of 48 LLOYDS TSB GROUP Domestic net interest income Domestic net interest income increased by Â£11 million, or 1 per cent, to Â£2,188 million, notwithstanding a reduction of Â£196 million caused by a 30 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 Â£14 billion, or 11 per cent, to Â£144 billion. Average personal lending and mortgage balances grew by Â£10 billion and wholesale balances increased by Â£4 billion. The net interest margin decreased by 30 basis points reflecting a reduction in the contribution of interest-free liabilities and the impact of the implementation of the remedies suggested by the Competition Commission, following its investigation into the supply of banking services to small and medium size enterprises (SMEs), together with a reduction of 16 basis points in the interest spread. Compared with the net interest margin in the second half of 2002, there was a reduction of 15 basis points, of which some 11 basis points represented the Competition Commission impact. A slight reduction in the margin earned on the mortgage portfolio was partly offset by a higher margin in the asset finance businesses. Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Net interest income 2,188 2,177 2,248 Average balances Short-term liquid assets 2,384 2,830 2,390 Loans and advances 131,812 119,950 127,256 Debt securities 10,202 7,889 9,420 Total interest-earning assets 144,398 130,669 139,066 Financed by: Interest-bearing liabilities 140,362 121,305 130,547 Interest-free liabilities 4,036 9,364 8,519 Average rates % % % Gross yield on interest-earning assets 5.75 6.14 6.06 Cost of interest-bearing liabilities 2.77 3.00 3.04 Interest spread 2.98 3.14 3.02 Contribution of interest-free liabilities 0.08 0.22 0.19 Net interest margin 3.06 3.36 3.21 Page 31 of 48 LLOYDS TSB GROUP International net interest income Net interest income from international operations increased by Â£3 million, or 1 per cent, to Â£383 million. This represents 15 per cent of total group net interest income. Strong volume growth, particularly in New Zealand, was offset by the adverse effect of exchange rate movements. Average interest-earning assets increased by 3 per cent but were flat on a local currency basis. The net interest margin reduced by 5 basis points as a result of the sale of the Group's portfolio of emerging markets debt securities. Compared with the net interest margin in the second half of 2002, there was an increase of 9 basis points, reflecting stronger margins in our Latin American businesses. Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Net interest income 383 380 366 Average balances Short-term liquid assets 793 1,249 569 Loans and advances 21,876 19,772 20,200 Debt securities 5,015 5,970 6,073 Total interest-earning assets 27,684 26,991 26,842 Financed by: Interest-bearing liabilities 24,092 24,362 24,118 Interest-free liabilities 3,592 2,629 2,724 Average rates % % % Gross yield on interest-earning assets 6.51 8.71 8.55 Cost of interest-bearing liabilities 4.28 6.51 6.51 Interest spread 2.23 2.20 2.04 Contribution of interest-free liabilities 0.56 0.64 0.66 Net interest margin 2.79 2.84 2.70 Page 32 of 48 LLOYDS TSB GROUP Other income Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Fees and commissions receivable: UK current account fees 316 282 297 Other UK fees and commissions 569 583 580 Insurance broking 289 333 314 Card services 213 198 216 International fees and commissions 122 127 123 1,509 1,523 1,530 Fees and commissions payable (346) (306) (339) Dealing profits (before expenses): Foreign exchange income 149 82 91 Securities and other gains 278 6 9 427 88 100 Income from long-term assurance business 175 23 (326) General insurance premium income 261 235 251 Other operating income 320 392 371 Total other income 2,346 1,955 1,587 Other income increased by Â£391 million, or 20 per cent, to Â£2,346 million. Fees and commissions receivable decreased slightly to Â£1,509 million, largely reflecting lower income from insurance broking and unit trust commissions, partly offset by good growth in UK current account fees and card services. Other UK fees and commissions decreased by Â£14 million, or 2 per cent, to Â£569 million as a result of a Â£26 million reduction in unit trust and asset management fees, offset by an increase of Â£6 million in mortgage related fees. There was also a Â£6 million increase in fees from large corporate and factoring activity reflecting increased transaction volumes. Insurance broking commission income decreased by Â£44 million, compared with the first half of 2002, reflecting lower creditor insurance commissions resulting from the slowdown in the rate of growth of personal loans. Income from credit and debit card services increased by Â£15 million, mainly as a result of higher merchant service charges and fees. UK current account fee income rose by Â£34 million, reversing the downward trend experienced in recent years largely as a result of an increase in fee income from added value current accounts. Fees and commissions payable increased by Â£40 million against the first half of last year as a result of higher reciprocity fees, increased dealer commissions in Lloyds TSB Asset Finance, an increase in package costs relating to a number of products, and higher costs relating to legal expenses and valuation fee incentives supporting the strong mortgage growth. Page 33 of 48 LLOYDS TSB GROUP Other income (continued) Dealing profits increased substantially by Â£339 million compared with the first half of 2002 as a result of an increase of Â£67 million in foreign exchange income and an increase of Â£272 million in gains from securities trading, largely reflecting earnings from the portfolio of emerging markets debt investments which, at the end of 2002, was reclassified as a trading portfolio. In 2002, earnings from emerging markets debt investments were primarily reported within other operating income. Income from long-term assurance business increased by Â£152 million, largely reflecting the absence of the negative investment variance reported in the first half of 2002. Excluding changes in economic assumptions and investment variance, income from long-term assurance business was Â£253 million lower, reflecting a reduction of Â£101 million in benefits from experience variances and actuarial assumption changes, and a Â£100 million provision for customer redress. Other operating income decreased by Â£72 million to Â£320 million, reflecting the reclassification of earnings on the emerging markets debt investment portfolio in 2003 into dealing profits, and the non-recurrence of profits on the sale and leaseback of premises which, in the first half of 2002, totalled Â£23 million. These decreases more than offset a Â£42 million increase following the acquisition of the Dutton-Forshaw Group in December 2002, and higher operating lease rentals following the acquisition of First National Vehicle Holdings and Abbey National Vehicle Finance. Page 34 of 48 LLOYDS TSB GROUP OPERATING EXPENSES Operating expenses Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Administrative expenses: Staff: Salaries and profit sharing 900 879 879 National insurance 72 71 63 Pensions 160 148 170 Restructuring 10 36 69 Other staff costs 113 94 108 1,255 1,228 1,289 Premises and equipment: Rent and rates 142 137 143 Hire of equipment 10 10 8 Repairs and maintenance 63 59 72 Other 60 63 51 275 269 274 Other expenses: Communications and external data processing 213 215 231 Advertising and promotion 86 81 66 Professional fees 53 41 72 Provisions for customer redress 200 - - Other 205 206 242 757 543 611 Administrative expenses 2,287 2,040 2,174 Depreciation 318 299 343 Amortisation of goodwill 24 21 38 Total operating expenses 2,629 2,360 2,555 Efficiency ratio 53.3% 51.3% 59.7% Efficiency ratio, excluding changes in economic assumptions, investment variance and provisions for customer redress 48.6% 47.2% 51.3% Total operating expenses increased by Â£269 million, or 11 per cent, compared with the first half of 2002. Excluding the impact of acquisitions, which increased operating expenses by Â£99 million in the first half of 2003 compared to Â£22 million in the first half of 2002, and a Â£200 million provision for customer redress, operating expenses were broadly flat. Page 35 of 48 LLOYDS TSB GROUP Operating expenses (continued) Excluding provisions for customer redress, administrative expenses increased by Â£47 million to Â£2,087 million. Staff costs were Â£27 million higher at Â£1,255 million, and other expenses increased by Â£14 million to Â£557 million. Depreciation rose by Â£19 million, reflecting an increase of Â£22 million in operating lease depreciation, partly acquisition related. Goodwill amortisation was Â£3 million higher. The efficiency ratio, excluding changes in economic assumptions, investment variance and provisions for customer redress, was 48.6 per cent, compared to 47.2 per cent in the first half of 2002. The Group remains committed to strict cost control and, largely as a result of continuing efficiency initiatives, we expect that the Group's operating expenses in 2003, excluding the impact of acquisitions, operating lease depreciation and provisions for customer redress, will grow by no more than the rate of inflation. This focus on cost control will be continued notwithstanding further significant investment throughout the business in 2003, to support increased business volumes, higher levels of service quality, further improvements in productivity, and increases in investment in mandatory projects. These include projects such as the Universal Banking Service, anti-money laundering financial crimes programmes and preparation for the forthcoming introduction of the Basel 2 capital accord. Number of employees (full-time equivalent) Staff numbers increased by 171 to 79,708 during the half-year. Within UK Retail Banking and Mortgages staff numbers increased by 445, reflecting planned improvements to customer service and a substantial increase in our branch sales activities, partially offset by reductions of staff numbers in back office operations. In International Banking staff numbers decreased by 220, partly as a result of the disposal of the Group's French wealth management businesses. 30 June 31 December 2003 2002 UK Retail Banking and Mortgages 48,214 47,769 Insurance and Investments 6,129 6,170 Wholesale Markets 11,459 11,446 International Banking 11,507 11,727 Other 2,399 2,425 Total number of employees (full-time equivalent) 79,708 79,537 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 2003 2002 2002 Â£m Â£m Â£m UK Retail Banking and Mortgages 335 270 293 Wholesale Markets 108 151 160 International Banking 40 63 99 Central group items (13) (5) (2) Total charge 470 479 550 Specific provisions 466 451 514 General provisions 4 28 36 Total charge 470 479 550 Charge as % of average lending: % % % Domestic 0.70 0.67 0.72 International 0.41 1.22 1.32 Total charge 0.66 0.75 0.80 The total charge for bad and doubtful debts decreased to Â£470 million from Â£479 million. In UK Retail Banking the provisions charge increased by Â£68 million, from Â£272 million in the first half of 2002, to Â£340 million, as a result of volume related asset growth in the personal loan and credit card portfolios, but also as a result of a higher charge for fraud in the personal lending portfolios. In Mortgages an improved arrears position and the beneficial effect of house price increases resulted in a Â£5 million provisions release for the half-year. In Wholesale Markets the provisions charge decreased by Â£43 million to Â£108 million from Â£151 million in the first half of 2002. In International Banking, provisions decreased by Â£23 million as a result of the absence of an increase in the general provision in Argentina. Non-performing loans increased to Â£1,513 million compared with Â£1,414 million in December 2002, largely reflecting higher levels of non-performing lending in the Group's corporate portfolio and general portfolio growth throughout the Group. In UK Retail Banking and Mortgages the overall arrears position remained stable. Non-performing lending represented 1.0 per cent of total lending, unchanged from December 2002. Our lending portfolio remains heavily influenced by our high quality, relatively low risk, mortgage business and, as a result, we remain relatively well positioned to withstand any continued economic slowdown. 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 2003 30 June 2002 31 December 2002 Specific General Specific General Specific General Â£m Â£m Â£m Â£m Â£m Â£m At beginning of period 1,334 433 1,099 369 1,167 399 Exchange and other 12 - (38) 2 (17) (2) adjustments Advances written off (514) - (444) - (434) - Recoveries of advances 87 - 99 - 104 - written off in previous years Charge to profit and loss account: New and additional 769 4 756 28 788 36 provisions Releases and recoveries (303) - (305) - (274) - 466 4 451 28 514 36 At end of period 1,385 437 1,167 399 1,334 433 1,822 1,566 1,767 Closing provisions as % of lending (excluding unapplied interest) Specific: Domestic 1,081 (0.9%) 899 (0.8%) 1,016 (0.8%) International 304 (1.6%) 268 (1.5%) 318 (1.7%) 1,385 (0.9%) 1,167 (0.9%) 1,334 (1.0%) General 437 (0.3%) 399 (0.3%) 433 (0.3%) Total 1,822 (1.2%) 1,566 (1.2%) 1,767 (1.3%) At the end of June 2003 provisions for bad and doubtful debts totalled Â£1,822 million. This represented 1.2 per cent of total lending (December 2002: 1.3 per cent). Non-performing lending increased to Â£1,513 million from Â£1,414 million in December 2002, largely reflecting higher levels of non-performing lending in the Group's corporate portfolio, and general portfolio growth throughout the Group. At the end of the half-year, total provisions represented over 120 per cent of non-performing loans (December 2002: 120 per cent). Page 38 of 48 LLOYDS TSB GROUP CAPITAL RATIOS Risk asset ratios 30 June 31 December 2003 2002 Â£m Â£m Capital Tier 1 10,355 9,490 Tier 2 9,287 8,846 19,642 18,336 Supervisory deductions (6,786) (6,588) Total capital 12,856 11,748 Risk-weighted assets Â£bn Â£bn UK Retail Banking and Mortgages 57.7 54.2 Insurance and Investments 0.2 0.2 Wholesale Markets 53.8 53.0 International Banking 15.3 14.2 Central group items 0.5 0.8 Total risk-weighted assets 127.5 122.4 Risk asset ratios Total capital 10.1% 9.6% Tier 1 8.1% 7.8% Half-year Half-year to 30 June to 31 December 2003 2002 Post-tax return on average risk-weighted assets 1.91% 1.18% At the end of June 2003 the risk asset ratios were 10.1 per cent for total capital and 8.1 per cent for tier 1 capital. During the first half of 2003, total capital for regulatory purposes increased by Â£1,108 million to Â£12,856 million. Tier 1 capital increased by Â£865 million, mainly from retained profits. Tier 2 capital increased by Â£441 million, as a result of the issue of new tier 2 capital instruments. Supervisory deductions increased by Â£198 million, as a result of an increase in the Group's embedded value to Â£6,362 million, from Â£6,228 million in December 2002. Risk-weighted assets increased by 4 per cent to Â£127.5 billion and the post-tax return on average risk-weighted assets increased to 1.91 per cent. Page 39 of 48 LLOYDS TSB GROUP OVERVIEW OF CONSOLIDATED BALANCE SHEET Review of balance sheet at 30 June 2003, compared to 31 December 2002 Assets Total assets increased by Â£11,921 million, or 5 per cent, to Â£264,679 million, largely reflecting business growth. Cash and balances at central banks reduced by Â£283 million, or 25 per cent, from Â£1,140 million as cash balances held at the year end are usually high, to cater for anticipated demand over the year-end holiday period. Treasury bills and other eligible bills increased to Â£3,577 million from Â£2,409 million reflecting liquidity management. Loans and advances to banks increased by Â£777 million to Â£18,306 million partly for liquidity management purposes, and partly as a result of an increase in the value of collateral loans in treasury. Loans and advances to customers increased by Â£7,516 million, or 6 per cent, to Â£141,990 million. This growth in loans and advances to customers largely reflects growth in UK retail lending, particularly the strong mortgage growth in the first half of 2003. 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Loans and advances to customers Domestic: Agriculture, forestry and fishing 2,089 2,096 2,076 Manufacturing 3,572 3,626 3,373 Construction 1,634 1,376 1,482 Transport, distribution and hotels 4,915 4,574 4,696 Property companies 4,222 3,277 4,008 Financial, business and other services 8,351 8,480 8,352 Personal : mortgages 67,316 58,614 62,467 : other 15,762 14,093 14,931 Lease financing 6,940 7,372 7,285 Hire purchase 6,489 5,708 5,990 Other 3,499 3,092 3,397 Total domestic 124,789 112,308 118,057 International: Latin America 1,470 1,914 1,591 New Zealand 11,939 9,866 10,447 Rest of the world 5,657 6,009 6,202 Total international 19,066 17,789 18,240 143,855 130,097 136,297 Provisions for bad and doubtful debts* (1,808) (1,565) (1,766) Interest held in suspense* (57) (54) (57) Total loans and advances to customers 141,990 128,478 134,474 *figures exclude provisions and interest held in suspense relating to loans and advances to banks Page 40 of 48 LLOYDS TSB GROUP Assets (continued) Debt securities decreased by Â£632 million to Â£28,682 million as a reduction of Â£1.1 billion on sales of emerging market debt investments was partly offset by increased holdings for liquidity management purposes. Intangible fixed assets declined by Â£19 million to Â£2,615 million as amortisation of Â£24 million and the reduction of Â£10 million due to the sale of the Group's French wealth management businesses was partially offset by positive exchange rate movements, principally relating to our New Zealand business. Tangible fixed assets fell by Â£122 million to Â£3,974 million reflecting depreciation of Â£318 million partially offset by net additions of Â£196 million. Other assets increased by Â£368 million to Â£5,631 million, largely as a result of increases in mark-to-market balances in respect of derivatives, higher settlement balances in treasury in respect of securities sales, and an increase in card settlement balances. Long-term assurance business attributable to the shareholder increased by Â£134 million to Â£6,362 million reflecting the after tax profit in the Group's life assurance businesses for the year to date of Â£132 million, and a small exchange gain from the life operations of The National Bank of New Zealand. Liabilities Deposits by banks have fallen by Â£1,561 million to Â£23,882 million as direct borrowing from banks has been replaced by the issue of debt securities. Customer deposits increased by Â£5,099 million to Â£121,433 million partly as a result of growth of Â£1.4 billion in current account credit balances. Savings and investment accounts grew by Â£3.0 billion, and currency deposits grew by Â£1.0 billion reflecting strong growth in New Zealand. 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Deposits - customer accounts Sterling: Non-interest bearing current accounts 2,420 5,904 2,211 Interest bearing current accounts 26,815 21,673 25,640 Savings and investment accounts 56,195 50,975 53,223 Other customer deposits 16,242 17,395 16,521 Total sterling 101,672 95,947 97,595 Currency 19,761 17,840 18,739 Total deposits - customer accounts 121,433 113,787 116,334 Page 41 of 48 LLOYDS TSB GROUP Liabilities (continued) Debt securities in issue were up Â£4,243 million to Â£34,498 million partly as a result of an increase in funding to replace deposits from banks, and higher balances in structured finance transactions. In addition, debt securities in issue in New Zealand increased by Â£0.7 billion to fund balance sheet expansion. Other liabilities increased by Â£138 million to Â£8,427 million. A lower interim dividend accrual than that for the final dividend was offset by higher settlement balances in respect of securities sales. Accruals and deferred income reduced by Â£217 million to Â£3,479 million largely as a result of lower interest payable. The post-retirement benefit liability increased by Â£91 million to Â£2,168 million as a result of the current year net pension cost. In provisions for liabilities and charges, deferred tax fell by Â£46 million to Â£1,271 million, largely reflecting a reduction arising from the sale of a portfolio of finance leases. Other provisions for liabilities and charges increased by Â£171 million to Â£532 million principally due to the establishment of a new provision for customer redress, offset by a small reduction in vacant leasehold property provisions in the UK. Subordinated liabilities increased by Â£628 million to Â£10,796 million largely as a result of a new issue of undated loan capital to fund balance sheet expansion and replace existing issues approaching maturity. Minority interests increased by Â£12 million to Â£743 million reflecting the minority share of profit after tax, and positive exchange rate movements, partly offset by the payment of dividends to minority shareholders. Shareholders' funds were up Â£684 million to Â£8,656 million principally due to retentions. Page 42 of 48 LLOYDS TSB GROUP NOTES 1. Accounting policies and presentation Accounting policies are unchanged from 2002. The Group has not revised the valuation of its pension schemes to reflect the circumstances prevailing at 30 June 2003. In accordance with FRS 17 the valuations will be formally updated at the year-end. 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 (2002: 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. Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Average shareholders' equity 8,301 10,748 10,590 Profit attributable to shareholders 1,155 1,113 668 Less: notional charge (370) (480) (480) Economic profit 785 633 188 The notional charge has been calculated by multiplying average shareholders' equity by the cost of equity. The reduction in average shareholders' equity in the first half of 2003 largely reflects actuarial losses in the Group's pension schemes recognised at the end of 2002. Page 43 of 48 LLOYDS TSB GROUP 3. Earnings per share Half-year to Half-year to 30 June 31 December 2003 2002 2002 Basic Profit attributable to shareholders Â£1,155m Â£1,113m Â£668m Weighted average number of ordinary shares in issue 5,581m 5,562m 5,578m Earnings per share 20.7p 20.0p 12.0p Fully diluted Profit attributable to shareholders Â£1,155m Â£1,113m Â£668m Weighted average number of ordinary shares in issue 5,617m 5,601m 5,593m Earnings per share 20.6p 19.9p 11.9p 4. Tax The effective rate of tax was 29.2 per cent (2002 first half: 28.8 per cent). The lower effective rate of tax, compared with the standard tax rate of 30 per cent, is primarily due to tax relief on tier 1 capital interest payments, and a lower effective rate of tax in the Group's life and pensions businesses. A reconciliation of the charge that would result from applying the standard UK corporation tax rate to profit before tax to the tax charge for the half-year, is given below: Half-year to Half-year to 30 June 31 December 2003 2002 2002 Â£m Â£m Â£m Profit on ordinary activities before tax 1,677 1,604 1,003 Tax charge thereon at UK corporation tax rate of 30% 503 481 301 Factors affecting charge: Goodwill amortisation 5 4 5 Overseas tax rate differences 3 18 6 Non-allowable and non-taxable items (7) (24) (16) Gains exempted or covered by capital losses 1 (6) (17) Tax deductible coupons on non-equity minority interests (6) (6) (6) Payments to employee trust - (10) (10) Life companies rate differences (10) 5 39 Tax charge 489 462 302 Page 44 of 48 LLOYDS TSB GROUP 5. Investment variance 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, which are beyond the control of management. Consequently, in order to provide a clearer representation of the underlying performance, the results of the life and pensions business are separately analysed to include investment earnings calculated using longer-term investment rates of return, and annual management charges based on unsmoothed fund values. This investment variance represents the difference between the actual investment return in the year on investments backing shareholder funds and the expected return based upon the economic assumptions made at the beginning of the year, and the effect of these fluctuations on the value of in-force business. The effects of other changes in economic circumstances beyond the control of management are also reflected in the investment variance. 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 7.10 per cent for equities and 4.50 per cent for gilts. 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 2003 the FTSE All-Share index rose by 4 per cent and this created a positive investment variance totalling Â£42 million. 6. Changes in economic assumptions In accordance with the Association of British Insurers' detailed guidance for the preparation of figures using the achieved profits method of accounting the Group has reviewed the economic assumptions used in the embedded value calculations. The guidance requires that the assumptions should be reviewed at each reporting date. The main economic assumptions were revised at 30 June 2003 as follows: 30 June 31 December 2003 2002 % % Risk-adjusted discount rate (net of tax) 7.35 7.35 Return on equities (gross of tax) 7.10 7.10 Return on fixed interest securities (gross of tax) 4.50 4.50 Expenses inflation 3.50 3.30 Page 45 of 48 LLOYDS TSB GROUP 6. Changes in economic assumptions (continued) At 30 June 2003 the review of the assumptions has led to an increase in the rate of expense inflation to 3.50 per cent. This has resulted in a charge to the profit and loss account in the first half of 2003 of Â£8 million. 7. Free Asset Ratio The free asset ratio is a common measure of financial strength in the UK for long-term insurance businesses. 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 2003, the free asset ratio of Scottish Widows plc was an estimated 12.7 per cent, compared with 12.2 per cent at 31 December 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 7.7 per cent at 30 June 2003, compared with 7.3 per cent at 31 December 2002. 8. Reconciliation of movements in shareholders' funds Half-year to Year ended 30 June 31 December 2003 2002 Â£m Â£m Profit attributable to shareholders 1,155 1,781 Dividends (597) (1,908) Profit (loss) for the period 558 (127) Currency translation differences on foreign currency net investments 100 (3) Actuarial losses recognised in post-retirement benefit schemes - (2,331) Issue of shares 26 77 Net increase (decrease) in shareholders' funds 684 (2,384) Shareholders' funds at beginning of period 7,972 10,356 Shareholders' funds at end of period 8,656 7,972 Page 46 of 48 LLOYDS TSB GROUP 9. Dividend An interim dividend for 2003 of 10.7p per share (2002: 10.7p), will be paid on 8 October 2003. 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 dividend are: Shares quoted ex-dividend. Shares purchased before this date 13 August qualify for the dividend Record date. Shareholders on the register on this date are 15 August entitled to the dividend Final date for joining or leaving the dividend reinvestment plan 10 September Interim dividend paid 8 October 10. Other information Results for the half-year ended 30 June were approved by the directors on 31 July 2003. Statutory accounts for the year ended 31 December 2002 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. 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 Lloyds TSB Group plc 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, 25 Gresham Street, London, EC2V 7HN. 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, 25 Gresham Street, London, EC2V 7HN. This information is also available on the Group's website. Page 48 of 48 This information is provided by RNS The company news service from the London Stock Exchange

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