Interim Results-Part 1

Lloyds TSB Group PLC 28 July 2000 PART 1 LLOYDS TSB GROUP 2000 INTERIM RESULTS PRESENTATION OF RESULTS On 3 March 2000 the Group completed the acquisition of Scottish Widows and, as a result, the investments now held to support the with-profits business of the Group's life companies are much more significant than in previous years. In accordance with generally accepted accounting practice amongst listed insurance companies in the UK, the results of the Group's life and pensions business have been separately analysed between an operating profit, which includes investment earnings calculated using longer-term investment rates of return, and a profit before tax, separately identifying the short-term fluctuations in investment returns (page 36, note 7). Other items are also having a significant impact on the Group's 2000 results: changes in the economic assumptions applied to our long-term assurance business (page 36, note 8) and exceptional restructuring costs (page 37, note 9). In the second half of 1999, the impact of a provision for redress to past purchasers of pension policies ('pension provision') and the sale and closure of businesses was also significant (page 12). To facilitate comparisons of the results, certain financial information and commentaries have been presented excluding the effect of these items. Results - statutory basis Highlights Profit before tax up 12 per cent to £2,068 million from £1,853 million. Income up 8 per cent to £4,266 million. Economic profit increased by 11 per cent to £1,064 million. Earnings per share increased by 11 per cent to 26.8p. Shareholders' funds up by 16 per cent to £9,651 million. Post-tax return on average shareholders' equity 32.7 per cent. Total capital ratio 9.5 per cent, tier 1 capital ratio 9.3 per cent. Interim dividend increased by 15 per cent to 9.3p per share. Half-year to Increase Half-year 30 June (Decrease) to 31 % December 2000 1999 1999 Results £m £m £m Total income 4,266 3,950 8 3,978 Operating expenses 1,876 1,694 11 1,723 Trading surplus 2,390 2,256 6 2,255 Provisions for bad and doubtful debts 247 315 (22) 273 Profit before tax 2,068 1,853 12 1,768 Profit attributable to shareholders 1,469 1,315 12 1,199 Economic profit (page 34, note 2) 1,064 962 11 810 Earnings per share (pence) 26.8 24.2 11 22.0 Post-tax return on average shareholders'equity (%) 32.7 33.5 27.7 Shareholder value Closing market price per share 624p 860p (27) 774p Total market value of shareholders' equity £34.3bn £46.8bn (27) £42.4bn Dividends per share 9.3p 8.1p 15 18.5p Balance sheet £m £m £m Shareholders' equity 9,651 8,305 16 8,581 Total assets 210,037 173,249 21 175,979 Net assets per share (pence) 173 151 15 155 Risk asset ratios % % % Total capital 9.5 12.1 15.0 Tier 1 capital 9.3 9.8 9.9 Page 1 of 39 Results - excluding the impact of short-term fluctuations in investment returns, changes in the economic assumptions applied to our long-term assurance business and exceptional restructuring costs in the first half of 2000, and other one-off items in the second half of 1999 (page 12) Highlights Total revenue increased by 7 per cent to £4,198 million. Operating profit up 13 per cent to £2,074 million from £1,841 million. Efficiency ratio improved to 42.9 per cent from 43.0 per cent in the first half of 1999. Earnings per share increased by 12 per cent to 26.9p. Post-tax return on average shareholders' equity 32.6 per cent. UK Retail Financial Services profit up £206 million, or 17 per cent, to £1,432 million. Customer lending grew by 8 per cent to £107 billion and customer deposits increased by 3 per cent to £97 billion. Nearly 500,000 internet banking customers; on target for 1 million by the end of 2000. 10.7 per cent estimated market share of net new mortgage lending. Funds under management throughout the Group now total £126 billion. Half-year to Increase Half-year 30 June (Decrease) to 31 % December 2000 1999 1999 Results £m £m £m Total income 4,198 3,938 7 4,064 Operating expenses 1,802 1,694 6 1,723 Trading surplus 2,396 2,244 7 2,341 Provisions for bad and doubtful debts 247 315 (22) 273 Operating profit 2,074 1,841 13 1,980 Profit attributable to shareholders 1,473 1,307 13 1,384 Economic profit (page 34, note 2) 1,066 954 12 995 Earnings per share (pence) 26.9 24.1 12 25.3 Post-tax return on average shareholders'equity (%) 32.6 33.4 32.0 Commenting on the results Lloyds TSB Group chairman, Sir Brian Pitman, said:- 'I am pleased to report both record half-year profits and earnings per share. At the same time, we are investing heavily in e-commerce and restructuring to enhance future earnings. This continuing good performance enabled the board to increase the interim dividend by 15 per cent. We expect further progress in the second half of the year'. Page 2 of 39 LLOYDS TSB GROUP GROUP CHIEF EXECUTIVE'S STATEMENT Our statutory results for the first half of 2000 were good, with an 8 per cent growth in income, profit before tax up 12 per cent, customer lending up 8 per cent, and customer deposits up by 3 per cent. Our efficiency ratio remained low at 44.0 per cent despite an increase in investment expenditure, asset quality improved and we maintained our strong position in all our core markets. We are delighted to welcome Scottish Widows to the Group; they bring to us a powerful and leading brand, expertise, and access to the important Independent Financial Adviser market. But the financial services sector in the UK, as in many other parts of the world, is at a watershed created by a rapid change in technology, principally driven by the internet, a dramatic increase in competition, and the increasing requirements of consumers who are rightly becoming more aware and more demanding. We believe that the organisations which will survive and prosper in this changed environment will be those which maximise shareholder value by creating real value for their customers. Our vision is to create an organisation that understands and looks after our customers so well that they give us the privilege of looking after all their financial affairs. So, our Governing Objective to maximise shareholder value over time remains unchanged, and our strategy to deliver real value to our customers will be achieved by meeting our three strategic aims of being a leader in our chosen markets, being first choice for our customers by better understanding and meeting their needs, and by driving down our day-to-day operating costs so that we have greater scope for investment in better products, superior service and multi-channel distribution. We have made good progress on a number of fronts, but must press on with a great sense of urgency to meet all our strategic aims. Essentially we need to grow quality income and continue to reduce unit costs. On the income side we are focusing on three key areas. First, the further development and implementation of a segmented, relationship driven, approach to customers. Second, developing and implementing an improved wealth management strategy and, third, maximising the competitive advantage of our brand and distribution capability, including e- commerce. On segmentation, we have increased the number of customers in our higher value personal choice portfolio to over 650,000, with a further 200,000 increase planned for the second half. In the first half, total product holdings increased by a net 325,000, and we expect this rate of growth to be exceeded in the second half, taking us towards our commitment to increase our total product holdings by a net 3 million by the end of 2002. We are also experiencing success with the segmentation of our non- personal businesses where we have a range of offers from which our commercial customers can choose. In terms of Customer Relationship Management (CRM), we have been further developing this vital component of our future income growth strategy. CRM is about bringing all customer information that we hold as a Group together so that we can build on our relationship with individual customers by providing them with products, service and access suited to their individual requirements. We are already piloting an enhanced model of CRM which has increased the volume and quality of leads, and demonstrated a greater awareness of individual customer needs. Segmentation also features strongly in our new wealth management strategy which represents a significant revenue growth opportunity for us. We currently make some £300 million per annum pre-tax Page 3 of 39 LLOYDS TSB GROUP profit from wealth management and believe that this contribution can be doubled within 4 years. We will capitalise on this market by investing in improved products and service, launching a new wealth management offer towards the end of 2000 that will include a sophisticated cash management account, a financial hypermarket offering products manufactured within the Lloyds TSB stable and complemented by others manufactured elsewhere, a dedicated service centre and highly trained personal managers to deal professionally with the high net worth market. The third way by which we will capitalise on our competitive strength in order to maximise quality income is to leverage our distribution capability. Lloyds TSB has one of the most powerful brands in the UK and excellent distribution capability, including e-commerce. We have a comprehensive network of branches together with the largest telephone banking business in the UK with 1.8 million customers, and we are a market leader in internet banking, with nearly 500,000 customers rising to 1 million by the end of the year, giving us an estimated 20 per cent market share. Distribution over the internet will also generate additional revenue in the important business to business market, and we are engaged in a number of areas of trade facilitation. Our overall distribution capability will also be much improved within the next 12 months as we complete our IT integration as planned, giving us online real time technology for our retail banking customers, a facility offered by no other bank of our size, and a facility which will become increasingly important in the internet world. Turning from income generation to cost management, we are confident of achieving major efficiency improvements by applying internet and intranet technology throughout our own business. In addition, our restructuring programme, which we announced earlier this year, is now making strong progress, with further centralisation of processing achieved and consolidation of IT centres underway. We are also accelerating the expansion of lower cost delivery channels which will involve greater use of telephony, with more telephone calls taken out of our branches into dedicated call centres, allowing the branches to concentrate on face-to-face contact. Going forward, the thrust of our strategy is about organic revenue growth through customer relationship management, leveraging the strength of our brand and our multi-channel distribution capability, reducing our day-to-day unit costs and driving forward our e-commerce strategy. We continue to develop new strategies which will use our distribution capability, our enhanced understanding of what our customers want, and our cost advantage to deliver greater value to customers. We also intend to participate in the further consolidation of financial services, both in the UK and overseas, where our focus remains in Europe and the USA. The implementation of our strategies will ensure that, through profitable top line revenue growth and a strong grip on our day- to-day costs, the Group can continue to deliver a strong and sustainable return on equity, together with robust growth in equity and economic profit. The future for the financial services sector will undoubtedly be more challenging than it has been in the past, but we believe we are equipped with the strategy, the competence and the determination to continue to succeed even more in the future than we have in the past. Peter Ellwood Group Chief Executive Page 4 of 39 LLOYDS TSB GROUP REVIEW OF FINANCIAL PERFORMANCE Profit before tax on a statutory basis rose by £215 million, or 12 per cent, to £2,068 million from £1,853 million in the first half of 1999. Economic profit increased by 11 per cent to £1,064 million, earnings per share increased by 11 per cent to 26.8p, shareholders' equity increased by 16 per cent and the post-tax return on average shareholders' equity was 32.7 per cent. 2000 figures however contain a number of items which have a significant impact on the Group's results; short-term fluctuations in investment returns (page 36, note 7), changes in the economic assumptions applied to our long-term assurance business (page 36, note 8) and exceptional restructuring costs (page 37, note 9). Excluding the impact of these items, profit before tax rose by £233 million, or 13 per cent, to £2,074 million from £1,841 million in the first half of 1999. Total income increased by 7 per cent, operating expenses increased by 6 per cent and there was a 7 per cent increase in the trading surplus. Customer lending and deposits continued to grow, however the net interest margin decreased by 29 basis points to 3.58 per cent, partly as a result of the impact of the funding cost of the purchase of Scottish Widows and lower interest rates in Latin America reducing the contribution of interest-free liabilities. The efficiency ratio was 42.9 per cent compared with 43.0 per cent in the first half of 1999. Profit attributable to shareholders increased by 13 per cent, earnings per share increased by 12 per cent to 26.9p and economic profit increased by 12 per cent. The post-tax return on average shareholders' equity was 32.6 per cent, compared with 33.4 per cent in the first half of 1999. The post-tax return on average assets increased to 1.92 per cent from 1.80 per cent in the first half of 1999, and the post-tax return on average risk- weighted assets increased to 3.51 per cent from 3.17 per cent. The transfer of Scottish Widows' business to the Lloyds TSB Group was completed on 3 March 2000 and the results of the Scottish Widows' business have been consolidated in full with effect from that date. The impact on Group figures of Scottish Widows' incorporation has been to reduce net interest income by £76 million, as a result of the funding cost of the acquisition, increase other income by £112 million, increase operating expenses by £45 million and decrease profit before tax by £9 million. These include adverse short-term fluctuations in investment returns of £51 million and restructuring costs of £28 million, £15 million of which relate to Scottish Widows integration costs. Excluding these two issues Scottish Widows contributed £70 million since 3 March 2000, after taking into account funding costs of £80 million. Total profit before tax, excluding short-term fluctuations in investment returns, changes in the economic assumptions applied to our long-term assurance business and exceptional restructuring costs, from UK Retail Financial Services which encompasses UK Retail Banking, Mortgages, and Insurance and Investments, increased by £206 million, or 17 per cent, to £1,432 million from £1,226 million in the first half of 1999. Pre-tax profit from UK Retail Banking rose by £23 million, or 6 per cent, to £391 million. Total income increased by 4 per cent, costs increased by 5 per cent largely as a result of e-commerce investment costs, and there was a reduction of 2 per cent in bad debt provisions. Page 5 of 39 LLOYDS TSB GROUP Competition in the mortgage market was evident throughout the half-year leading, as anticipated, to a lower net interest margin which resulted in pre-tax profit from Mortgages decreasing by £16 million, or 4 per cent, to £429 million from the first half of 1999, but increasing by £6 million, or 1 per cent, compared to the second half of 1999. In comparison to the second half of last year margins were stable. Gross new lending increased by 15 per cent to £5.4 billion, compared with £4.7 billion a year ago, and net new lending was £2.1 billion, significantly higher than £1.1 billion in the first half of last year. This represented an estimated market share of net new lending of 10.7 per cent, higher than our 9.7 per cent share of mortgages outstanding. The Group continues to be one of the most efficient mortgage providers in the United Kingdom. Operating profit, including investment returns based on long-term rates of investment return, from Insurance and Investments increased by 48 per cent to £612 million from £413 million, largely as a result of the inclusion, since 3 March 2000, of Scottish Widows within our life and pensions business. Pre-tax profit from general insurance operations, comprising underwriting and broking, rose by £71 million, or 33 per cent, to £289 million, mainly as a result of continued strong revenue growth and an improvement in our claims experience. The Group has maintained its position as the leading distributor of personal lines insurance in the United Kingdom. Wholesale Markets pre-tax profit increased by £24 million, or 7 per cent, to £380 million. Provisions for bad and doubtful debts fell by £16 million to £34 million. Total assets were flat and risk-weighted assets grew by 2 per cent. International Banking pre-tax profit was £40 million higher at £263 million compared with the first half of 1999. Profits from New Zealand in local currency terms increased by 19 per cent. International private banking and the Group's offshore banking operations both showed improvements over the first half of 1999. Our consumer finance business in Brazil, Losango Consumer Finance, made a pre-tax profit of £22 million, compared with a profit of £13 million in the first half of 1999. The total Group charge for bad and doubtful debts was 22 per cent lower at £247 million, compared with £315 million in the first half of 1999. The domestic charge decreased to £231 million from £260 million, and provisions overseas decreased to £16 million from £55 million mainly as a result of a lower provisions charge from the Losango consumer finance business in Brazil and higher Emerging Market Debt provision releases. The Group's charge for bad and doubtful debts, expressed as a percentage of average lending, was 0.46 per cent compared to 0.63 per cent in the first half of 1999. At the end of the half-year specific provisions for bad and doubtful debts for the Group totalled £1,839 million, representing over 160 per cent of non-performing loans (1999 first half: 160 per cent). The total capital ratio was 9.5 per cent and the tier 1 capital ratio was 9.3 per cent. Balance sheet assets increased by £34 billion, or 19 per cent, to £210 billion from £176 billion at the end of 1999. £23 billion of this growth was represented by an increase in long-term assurance liabilities to policyholders following the acquisition of Scottish Widows. Over the last 12 months, loans and advances to customers increased by £8 billion, or 8 per cent. Risk-weighted assets increased by 5 per cent to £87.0 billion from £82.9 billion at the end of June 1999. Page 6 of 39 LLOYDS TSB GROUP CONSOLIDATED PROFIT AND LOSS ACCOUNT (Unaudited) Half-year to 30 June Group Scottish (excl. Widows Scottish (from 3 Widows) March)* Total 2000 2000 2000 £m £m £m Interest receivable: Interest receivable and similar income arising from debt securities 240 - 240 Other interest receivable and similar income 5,099 17 5,116 Interest payable 2,952 93 3,045 Net interest income 2,387 (76) 2,311 Other income Fees and commissions receivable 1,324 24 1,348 Fees and commissions payable (215) (8) (223) Dealing profits (before expenses) 97 3 100 Income from long-term assurance business 278 93 371 General insurance premium income 200 - 200 Other operating income 159 - 159 1,843 112 1,955 Total income 4,230 36 4,266 Operating expenses Administrative expenses 1,583 17 1,600 Exceptional restructuring costs 46 28 74 E-commerce investment costs 42 - 42 Total administrative expenses 1,671 45 1,716 Depreciation 154 - 154 Amortisation of goodwill 6 - 6 Depreciation and amortisation 160 - 160 Total operating expenses 1,831 45 1,876 Trading surplus (deficit) 2,399 (9) 2,390 General insurance claims 71 - 71 Provisions for bad and doubtful debts Specific 246 - 246 General 1 - 1 247 - 247 Amounts written off fixed asset investments 4 - 4 Profit (loss) on ordinary activities before tax 2,077 (9) 2,068 Tax on profit on ordinary activities 577 Profit on ordinary activities after tax 1,491 Minority interests - equity 6 - non-equity 16 Profit for the period attributable to shareholders 1,469 Dividends 511 Retained profit 958 * including funding costs of £80 million, adverse short-term fluctuations in investment returns of £51 million and exceptional restructuring costs of £28 million. Page 7 of 39 LLOYDS TSB GROUP CONSOLIDATED PROFIT AND LOSS ACCOUNT (Unaudited) Half-year to Half-year to 30 June 31 December 2000 1999 1999 £m £m £m Interest receivable: Interest receivable and similar income arising from debt securities 240 217 213 Other interest receivable and similar income 5,116 5,231 4,791 Interest payable 3,045 3,093 2,576 Net interest income 2,311 2,355 2,428 Other income Fees and commissions receivable 1,348 1,237 1,260 Fees and commissions payable (223) (214) (212) Dealing profits (before expenses) 100 107 108 Income from long-term assurance business: Income before pension provision 371 161 168 Pension provision - - (102) General insurance premium income 200 190 200 Other operating income 159 114 128 1,955 1,595 1,550 Total income 4,266 3,950 3,978 Operating expenses Administrative expenses 1,600 1,561 1,579 Exceptional restructuring costs 74 - - E-commerce investment costs 42 - - Total administrative expenses 1,716 1,561 1,579 Depreciation 154 127 138 Amortisation of goodwill 6 6 6 Depreciation and amortisation 160 133 144 Total operating expenses 1,876 1,694 1,723 Trading surplus 2,390 2,256 2,255 General insurance claims 71 84 85 Provisions for bad and doubtful debts Specific 246 315 273 General 1 - - 247 315 273 Amounts written off fixed asset 4 4 3 investments Operating profit 2,068 1,853 1,894 Loss on sale and closure of businesses - - 126 Profit on ordinary activities before tax 2,068 1,853 1,768 Tax on profit on ordinary activities 577 536 565 Profit on ordinary activities after tax 1,491 1,317 1,203 Minority interests - equity 6 2 4 - non-equity 16 - - Profit for the period attributable to shareholders 1,469 1,315 1,199 Dividends 511 437 1,014 Retained profit 958 878 185 Earnings per share 26.8p 24.2p 22.0p Page 8 of 39 LLOYDS TSB GROUP CONSOLIDATED BALANCE SHEET (Unaudited) 30 June 30 June 31 December 2000 1999* 1999* Assets £m £m £m Cash and balances at central banks 729 689 1,276 Items in course of collection from banks 2,021 2,111 1,743 Treasury bills and other eligible bills 1,876 1,776 2,065 Loans and advances to banks 16,265 21,508 16,963 Loans and advances to customers 106,876 99,296 102,149 Debt securities 14,886 11,999 14,184 Equity shares 201 216 213 Intangible assets 2,082 233 231 Tangible fixed assets 2,155 1,829 2,035 Own shares 29 11 35 Other assets 3,129 3,661 3,641 Prepayments and accrued income 3,271 2,523 2,628 Long-term assurance business attributable to shareholders 6,607 2,317 2,274 160,127 148,169 149,437 Long-term assurance assets attributable to policyholders 49,910 25,080 26,542 Total assets 210,037 173,249 175,979 Liabilities Deposits by banks 13,385 15,606 17,694 Customer accounts 97,001 94,499 92,851 Items in course of transmission to banks 547 902 757 Debt securities in issue 15,896 13,957 12,260 Other liabilities 10,964 5,731 5,526 Accruals and deferred income 3,302 3,223 3,309 Provisions for liabilities and charges: Deferred tax 1,529 1,261 1,459 Other provisions for liabilities and charges 458 482 474 Subordinated liabilities: Undated loan capital 3,389 1,577 3,294 Dated loan capital 3,456 2,584 3,199 Minority interests Equity 33 42 33 Non-equity 516 - - 549 42 33 Called-up share capital 1,395 1,381 1,389 Share premium account 546 151 404 Merger reserve 343 343 343 Profit and loss account 7,367 6,430 6,445 Shareholders' funds (equity) 9,651 8,305 8,581 160,127 148,169 149,437 Long-term assurance liabilities to policyholders 49,910 25,080 26,542 Total liabilities 210,037 173,249 175,979 * restated (page 34, note 1) Page 9 of 39 LLOYDS TSB GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (Unaudited) Half-year to Half-year to 30 June 31 December 2000 1999 1999 £m £m £m Profit attributable to shareholders 1,469 1,315 1,199 Currency translation differences on foreign currency net investments (17) 12 (45) Total recognised gains and losses relating to the period 1,452 1,327 1,154 Prior period adjustment (page 34, note 1) (112) Total gains and losses recognised during the period 1,340 HISTORICAL COST PROFITS AND LOSSES There was no material difference between the results as reported and the results that would have been reported on an unmodified historical cost basis. Accordingly, no note of historical cost profits and losses has been included. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Half-year to Half-year to 30 June 31 December 2000 1999 1999 £m £m £m Profit attributable to shareholders 1,469 1,315 1,199 Dividends (511) (437) (1,014) Retained profit 958 878 185 Currency translation differences on foreign currency net investments (17) 12 (45) Issue of shares 40 52 56 Goodwill written back on sale of businesses 89 - 80 Net increase in shareholders' funds 1,070 942 276 Shareholders' funds at beginning of period 8,581 7,475 8,305 Prior period adjustment (page 34, note 1) - (112) - Shareholders' funds at end of period 9,651 8,305 8,581 Page 10 of 39 LLOYDS TSB GROUP CONSOLIDATED CASH FLOW STATEMENT (Unaudited) Half-year to Half-year to 30 June 31 December 2000 1999 1999 £m £m £m Net cash inflow (outflow) from operating activities 4,928 6,765 (5,504) Returns on investments and servicing of finance: Dividends paid to equity minority interests (6) (4) (7) Payments made to non-equity minority interests (16) - - Interest paid on subordinated liabilities (loan capital) (210) (142) (128) Net cash outflow from returns on investments and servicing of finance (232) (146) (135) Taxation: UK corporation tax (194) (122) (548) Overseas tax (63) (72) (65) Total taxation (257) (194) (613) Capital expenditure and financial investment: Additions to fixed asset investments (12,811) (11,944) (11,203) Disposals of fixed asset investments 12,447 12,717 9,204 Additions to tangible fixed assets (306) (168) (427) Disposals of tangible fixed assets 26 12 71 Capital injection to life fund - (220) - Net cash (outflow) inflow from capital expenditure and financial investment (644) 397 (2,355) Acquisitions and disposals: Acquisition of group undertakings (19) (11) (16) Disposal of group undertakings and businesses 80 3 - Net cash inflow (outflow) from acquisitions and disposals 61 (8) (16) Equity dividends paid (1,011) (841) (444) Net cash inflow (outflow) before financing 2,845 5,973 (9,067) Financing: Issue of subordinated liabilities (loan capital) 278 330 2,439 Issue of preferred securities by subsidiary undertakings 509 - - Issue of ordinary share capital net of £105 million (1999:first half £ nil; second half £205m) contribution to the QUEST 40 52 56 Repayments of subordinated liabilities (loan capital) (51) (228) - Capital element of finance lease rental payments (1) (1) (2) Net cash inflow from financing 775 153 2,493 Increase (decrease) in cash 3,620 6,126 (6,574) Page 11 of 39 MORE TO FOLLOW
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