Final Results - Pre-tax Profit Up 20%, Part 1
Lloyds TSB Group PLC
11 February 2000
PART 1
LLOYDS TSB GROUP
11 February 2000
LLOYDS TSB GROUP plc
1999 RESULTS HIGHLIGHTS
Results - statutory basis
Profit before tax up 20 per cent to £3,621 million from
£3,015 million.
Income up 11 per cent to £7,872 million.
Economic profit increased by 25 per cent to £1,772 million.
Earnings per share increased by 18 per cent to 46.2p.
Total capital ratio further strengthened to 15.1 per cent;
tier 1 capital ratio to 10.0 per cent.
Final dividend of 18.5p per share, making a total of 26.6p
for the year, an increase of 20 per cent.
Results - excluding the impact of pension provisions and the
loss/profit on the sale and closure of businesses.
Profit before tax up 16 per cent to £3,849 million from £3,331
million.
Income up 7 per cent to £7,974 million.
Operating expenses reduced by 3 per cent.
Trading surplus up 15 per cent to £4,601 million.
Efficiency ratio further improved to 42.3 per cent from 46.4 per
cent.
Economic profit increased by 22 per cent to £1,968 million.
Earnings per share up 16 per cent to 49.8p.
Post-tax return on shareholders' equity 32.9 per cent.
UK Retail Financial Services profit up £298 million, or 13 per
cent, to £2,670 million, representing 69 per cent of total
group profit.
The Group announced an agreement with Scottish Widows providing
for the transfer of Scottish Widows' business to the Lloyds TSB
Group.
Commenting on the results Lloyds TSB Group chairman, Sir Brian
Pitman, said:-
1999 was another successful year for the Lloyds TSB Group, with
record profits and earnings per share. This strong performance
enables the board to recommend a final dividend of 18.5p per
share, making a total of 26.6p for the year, an increase of 20
per cent. This is covered 1.7 times by earnings and reflects
the confidence of the board in the prospects for the Group and
the continued strong internal generation of capital.
Page 1 of 42
LLOYDS TSB GROUP
PRESENTATION OF RESULTS
In 1998 two factors had a significant impact on Lloyds TSB
Group's results on a statutory basis: the provision for
redress to past purchasers of pension policies and the disposal
of a number of businesses. In order to facilitate comparisons
at that time, certain financial information and commentaries
were presented on a Continuing Businesses basis which excluded
the effect of these factors.
In 1999 the impact of these issues was less significant and the
Group's results have therefore been presented on a statutory
basis. In addition, the impact of pension provisions and the
sale and closure of businesses has been excluded, where
appropriate, from commentaries and figures to facilitate
performance comparisons.
SUMMARY OF RESULTS
1999 1998 Increase
(Decrease)
RESULTS (statutory basis) £m £m %
Total income 7,872 7,078 11
Operating expenses 3,373 3,472 (3)
Trading surplus 4,499 3,606 25
Provisions for bad and doubtful
debts 588 528 11
Profit before tax 3,621 3,015 20
Profit attributable to
shareholders 2,514 2,120 19
Economic profit (page 38, note
2) 1,772 1,417 25
RESULTS (excluding pension £m £m
provisions and loss/profit on
sale and closure of
businesses)
Total income 7,974 7,478 7
Operating expenses 3,373 3,472 (3)
Trading surplus 4,601 4,006 15
Provisions for bad and doubtful
debts 588 528 11
Profit before tax 3,849 3,331 16
Profit attributable to
shareholders 2,711 2,316 17
Economic profit 1,968 1,617 22
PER SHARE p p
Earnings (statutory basis) 46.2 39.3 18
Earnings (excluding pension
provisions and loss/profit on
sale and closure of
businesses) 49.8 42.9 16
Net assets 157 136 15
SHAREHOLDER VALUE
Closing market price per share 774p 855p (9)
Total market value of
shareholders' equity £42.4bn £46.5bn (9)
Dividends per share 26.6p 22.2p 20
PERFORMANCE MEASURES % %
Post-tax return on average
shareholders' equity
(statutory basis) 30.5 30.2
Post-tax return on average
shareholders' equity
(excluding pension provisions
and loss/profit on sale and
closure of businesses) 32.9 33.2
Post-tax return on average
assets* 1.70 1.53
Post-tax return on average risk-
weighted assets 3.02 2.67
BALANCE SHEET £m £m
Shareholders' equity 8,693 7,475 16
Total assets 176,091 167,997 5
RISK ASSET RATIOS % %
Total capital 15.1 11.3
Tier 1 capital 10.0 8.7
* Assets exclude long-term assurance assets attributable to
policyholders.
Page 2 of 42
LLOYDS TSB GROUP
GROUP CHIEF EXECUTIVE'S SUMMARY OF RESULTS
We continue to pursue the Group's three strategic aims to be a
leader in our chosen markets, to be first choice for our
customers and to drive down day-to-day operational costs to
enable us to further invest in the business. Whilst this has
not been reflected in our share price during the year, by the
end of 1999 the Group's total shareholder return since the
merger of Lloyds Bank and TSB Group four years ago had grown by
27 per cent per annum, equivalent to doubling shareholder value
every three years. During this time our share price has risen
134 per cent.
Our business continued to make very good progress in 1999.
Profit before tax on a statutory basis (page 8) rose by
£606 million, or 20 per cent, to £3,621 million from £3,015
million in 1998, which included a £400 million pension provision
and disposal gains totalling £84 million. 1999 figures included
a further pension provision of £102 million, a £28 million
provision for the closure of Lloyds TSB Securities Services, and
a provision of £98 million for the sale of the new business
capability of Abbey Life. Economic profit increased by 25 per
cent to £1,772 million (page 38, note 2) and earnings per share
increased by 18 per cent to 46.2p. The post-tax return on
average shareholders' equity was 30.5 per cent, the post-tax
return on assets improved to 1.70 per cent from 1.53 per cent
and the post-tax return on average risk-weighted assets, a key
measure of the efficient use of capital, improved to 3.02 per
cent, up from 2.67 per cent in 1998 (page 32). Total income
rose by 11 per cent while operating expenses were further
reduced by 3 per cent, producing a 25 per cent increase in the
trading surplus to £4,499 million. Customer lending and
deposits continued to grow and, despite intensifying
competition, the net interest margin held up well at 3.86 per
cent.
Excluding the impact of pension provisions and the sale and
closure of businesses, profit before tax rose by £518 million,
or 16 per cent, to £3,849 million from £3,331 million in 1998.
Total income increased by 7 per cent and there was a 15 per cent
increase in the trading surplus. The efficiency ratio improved
further to 42.3 per cent from 46.4 per cent in 1998 (page 27).
Shareholders' equity increased by 16 per cent (page 10), profit
attributable to shareholders increased by 17 per cent and
economic profit increased by 22 per cent. The post-tax return
on average shareholders' equity was 32.9 per cent.
Underlying operating expenses (page 28) have reduced by a
further £66 million bringing total costs saved since the merger
of Lloyds Bank and TSB Group and the integration of Lloyds Abbey
Life to £417 million per annum, exceeding the £400
million per annum cost reduction target. Although this
reduction in our costs compared to the 1995 base is a
significant achievement, giving Lloyds TSB an important
competitive advantage, competition in the financial services
market is now so fierce that we must continuously drive to
improve our operating efficiency whilst continuing to grow our
revenues.
In December 1999 we announced a revised Group structure based
upon delivering a stronger customer focus to strengthen the
continuous drive for revenue growth and further improvements in
efficiency. We will continue to invest heavily in improving our
services to customers to help deliver our extensive plans for
revenue growth, and we have also identified additional
opportunities to reduce further our operating costs. We have
now begun a major new efficiency programme and the cost
reductions from this programme, together with the expected
revenue growth, are such that by 2002 we expect that the Group's
efficiency ratio will be below 35 per cent, and we forecast
further progress thereafter. The start of this efficiency
programme will require a restructuring charge of up to £200
million in 2000 (page 39, note 6).
Page 3 of 42
LLOYDS TSB GROUP
The total charge for bad and doubtful debts (page 30) was 11 per
cent higher at £588 million, compared with £528 million in 1998.
The domestic charge increased to £501 million, largely due to
some deterioration at the beginning of 1999 in the personal
lending and credit card portfolios and higher provisions in our
asset finance business, Lloyds UDT, mainly as a result of higher
arrears and the decline in the residual value of second-hand
cars. Provisions overseas decreased to £87 million from £165
million mainly as a result of a lower provisions charge from the
Losango consumer finance business in Brazil. The Group's charge
for bad and doubtful debts, expressed as a percentage of average
lending, was 0.57 per cent compared to 0.56 per cent in 1998.
At the end of the year specific provisions for bad debts for the
Group totalled £1,762 million, representing over 160 per cent of
non-performing loans (1998: 150 per cent).
Excluding the impact of pension provisions and the sale of the
new business capability of Abbey Life, profit before tax from UK
Retail Financial Services (page 13), encompassing UK Retail
Banking, Mortgages, and Insurance and Investments, increased by
£298 million, or 13 per cent, to £2,670 million. This
represents 69 per cent of total group profit (1998: 71 per
cent).
Pre-tax profit from UK Retail Banking (page 14) rose by £77
million, or 11 per cent, to £761 million. Growth
in revenue of 7 per cent and tight control of costs was partly
offset by increased bad debts.
Pre-tax profit from Mortgages (page 15) increased by £163
million, or 22 per cent, to £903 million. In the face of
aggressive competition during 1999, C&G was able to achieve an
estimated market share of net new lending of 7.5 per cent,
whilst substantially increasing its profitability. The
efficiency ratio of the Group's total mortgage business further
improved to 21.9 per cent, from 24.5 per cent in 1998.
Pre-tax profit from Insurance and Investments (page 16),
rose by £58 million, or 6 per cent, to £1,006 million, from £948
million. Strong revenue growth in the general insurance
business offset a reduction of £27 million in profit before tax
from our life and pensions businesses. Underlying profits in
the life and pensions businesses, however, increased by £13
million from £401 million in 1998 to £414 million in 1999 (page
17).
In Wholesale Markets (page 20), profit before tax, excluding the
write-down of finance leases in 1998 and the £28 million
provision in 1999 for the closure of Lloyds TSB Securities
Services, was £70 million, or 10 per cent, higher at £799
million. Total revenue increased by 4 per cent to £1,437
million and, as a result of lower costs in both Treasury and
Corporate and Institutional Banking, operating expenses fell by
9 per cent to £555 million, producing a 15 per cent increase in
the trading surplus.
In International Banking (page 21), profit before tax was £86
million higher at £434 million compared with 1998. In New
Zealand we started to see the benefits of the successful
integration of Countrywide Bank and The National Bank of New
Zealand and profits were also up in the international private
banking and offshore banking operations. Profits from our Latin
American businesses held up well despite difficult economic
conditions and our consumer finance business in Brazil, Losango,
made a pre-tax profit of £31 million compared with a profit of
£5 million in 1998.
Page 4 of 42
LLOYDS TSB GROUP
On 23 June 1999, the Group announced an agreement with Scottish
Widows providing for the transfer of Scottish Widows' business
to the Lloyds TSB Group. The transfer has been approved by
Scottish Widows members and, subject to the sanction of the
Court of Session in Edinburgh, the transfer is expected to be
completed on schedule on 3 March 2000. The results of the
Scottish Widows business will be consolidated in full with
effect from 3 March 2000, however in order to provide an
indication of the historic performance of the enlarged Group,
pro forma financial information is shown on pages 34 to 37.
Completion of the proposed transaction will bring together the
life, pensions, unit trust and fund management businesses of
Lloyds TSB and Scottish Widows and create a business capable of
achieving greater sales, increased revenue growth and lower unit
costs. This is a further manifestation of one of the Group's
strategic aims to become a leader in its chosen markets, and the
addition of Scottish Widows to the Lloyds TSB Group will enable
the Group to achieve this aim in the rapidly growing long-term
savings and pensions market. It will bring to the Group a
powerful and leading brand, and expertise and presence in the
important Independent Financial Adviser market.
On 1 February 2000 the Group announced the sale of the new
business capability of Abbey Life to Allied Dunbar for £100
million, of which £20 million is conditional upon the salesforce
achieving agreed sales targets over the next two years. In the
future, Abbey Life will focus on providing an efficient service
to its existing 1.5 million customers and the only new business
that will be undertaken will be in relation to increases to
existing plans. The value of the in-force business, which is
being retained by Lloyds TSB, was £1.2 billion at the end of
December 1999. In 1999 the new business profitability of Abbey
Life was £11 million and the disposal is likely to be earnings
neutral for the Group. A provision of £98 million has been made
in the 1999 accounts for the expected loss on the sale,
including £80 million in respect of goodwill previously written
off to reserves, and other asset write-offs.
In June 1999 the national roll-out of the single Lloyds TSB
brand was completed following the enactment of the Lloyds TSB
Act 1998. This brought together over 2,300 former Lloyds and
TSB branches under the Lloyds TSB name and has laid the
foundations for the generation of increased revenue growth from
higher sales, increased cost effectiveness from a simplified
branch network and the move towards a single IT platform, and
material service enhancements for our customers.
We have continued to develop a number of alternative
distribution channels in order to offer the broadest possible
range of access points for our customers in order to improve
service and to enhance revenue growth. PhoneBank, our telephone
banking operation, is one of the largest in Europe with 1.6
million customers. It handled some 19 million calls during the
year and was further enhanced with the launch, in March 1999, of
PhoneBank Express which incorporates leading edge interactive
voice recognition systems. PhoneBank Express now has some
500,000 registered users. Our supermarket banking operation,
branded easibank, continues to expand and we now have 17
branches in ASDA stores or large shopping centres.
Our Internet Banking Service has some 160,000 registered
customers and we anticipate that by the end of the year 2000
some 1 million customers will be registered to use the service.
In addition, in October 1999, we launched a free Internet
Service Provider to give Gold Service customers free internet
access, e-mail, and access to a range of on-line services and
products. In March 1999 we successfully launched a new Internet
Banking Service for business customers.
Page 5 of 42
LLOYDS TSB GROUP
The impact of e-commerce is considerably greater than just
internet banking and the Group's e-commerce
strategy is being further developed on the basis of four key
themes. First, during 2000 we shall be further enhancing our
current Internet Banking Service to UK personal customers by
expanding our on-line capabilities. Second, we plan to launch a
stand alone pan-European internet bank focused initially on
Spain, with the objective of obtaining 1 million customers
within 3-4 years, and it is our intention to introduce a similar
stand alone internet bank in the UK towards the end of the year.
Third, we shall be launching a range of trade facilitation
(business to business) services to assist our corporate,
commercial and small business customers. Finally, we plan to
make greater use of internet technology to redesign our internal
operating processes, to improve customer service and efficiency,
and to realise significant cost savings over time.
In March 1999 the Group announced an agreement with Post Office
Counters Limited that allows personal customers of Lloyds TSB to
carry out straightforward banking transactions at over 15,500
post offices in England and Wales. This is a significant
enhancement to our customer service, allowing Lloyds TSB
customers access to deposit and withdrawal services in many
areas where we are not represented.
The total capital ratio (page 32) further strengthened to 15.1
per cent and the tier 1 capital ratio increased to 10.0 per
cent. This reflects both the strong internal generation of
capital and the raising of some £2.4 billion of loan
capital in anticipation of the completion of the Scottish Widows
acquisition. Balance sheet assets (page 9) increased by £8
billion, or 5 per cent, to £176 billion, largely as a result of
further growth in mortgages and other customer lending. Risk-
weighted assets (page 32) increased to £84.2 billion from £83.3
billion at the end of 1998.
Staff eligible to participate in the staff profit sharing scheme
will receive 10.5 per cent of basic salary (1998: 9.5 per cent).
The total payment will be £104 million (1998: £93 million).
The four Lloyds TSB Foundations support registered charities
throughout the UK that enable people, particularly disabled and
disadvantaged people, to play a fuller role in society. The
Foundations receive 1 per cent of the Group's pre-tax profit,
averaged over 3 years, instead of the dividend on their
shareholdings. In 2000 they will receive £31 million (1999: £27
million) to distribute to charities, making them in aggregate
one of the largest general grant-giving organisations in the UK.
Outlook
1999 saw a great deal of progress made on our three strategic
aims, but significant opportunities lie ahead.
Our first strategic aim is to be a leader in our chosen markets.
The acquisition of Scottish Widows will greatly enhance our
market position in the life assurance business. The combined
business will immediately make Lloyds TSB the second largest
life assurance and pensions provider in the UK.
Our second strategic aim is to be first choice for our
customers. We have a product range which is more competitive
than ever before and, augmenting our comprehensive branch
network, we have continued to extend our telephone banking and
internet banking operations during the year. We aim to offer
our customers the widest possible choice of when, where and how
they want to transact their financial business, be it at the
branch, over the telephone or through the internet. The extent
and range of ways by which we serve our customers is second to
none.
Page 6 of 42
LLOYDS TSB GROUP
We need constantly to improve our understanding of our
customers' needs and to be able to respond to those needs. We
have invested heavily in systems which help us to do this and we
have put this information to good use in 1999. Our aim is to
become world class in the management of our relationships with
our customers. It is only by satisfying our customers needs and
earning their trust by offering first class products and
excellent service that we will gain the privilege of looking
after more of their business, leading to improved revenue
growth. This will remain the focus of our attention. In the
meantime we will continue to seek further acquisition
opportunities both in the UK and overseas.
Strong revenue generation remains at the heart of our
strategies, but being the lowest cost provider of services and
products is also a key measure of a company's ability to obtain
and sustain competitive advantage. Our third strategic aim is
to drive down our day-to-day operating costs so that we will
have more resources to reinvest in the business to improve our
services and products. 1999 saw the successful attainment of
the £400 million per annum cost saving target we promised as a
result of the merger of Lloyds Bank and TSB Group, and the
integration of Lloyds Abbey Life. We are committed to build on
past success and to bring about further reductions in the early
years of the new millennium, whilst at the same time further
investing in business growth. The new efficiency programme will
help to achieve this.
The core fundamentals of our business remain strong: 1999
produced another record year of good quality earnings and we
anticipate that Scottish Widows will join the Group in March
2000 to further enhance the Group's revenue growth prospects.
As we strive to improve the Group's competitive advantage by
focusing on our three strategic aims, we expect to continue to
make strong progress this year, particularly in our core UK
Retail Financial Services business, by further developing our
strengths in customer relationship management and by expanding
the Group's e-commerce strategy.
The quality of our earnings remains high, our efficiency ratio
continues to improve, revenue growth remains good and, by
focusing on our core retail strengths, we are well positioned to
continue delivering value for our customers, our staff and our
shareholders.
Peter Ellwood
Group Chief Executive
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