Trading Statement

Lloyds TSB Group PLC 24 June 2002 78/02 24 June 2002 LLOYDS TSB - TRADING UPDATE Lloyds TSB Group plc will shortly be meeting analysts ahead of its close period for the half-year ending 30th June 2002. This announcement details the information that will be provided at those meetings. Lloyds TSB has made a solid start to 2002 and the Group expects to deliver a satisfactory underlying performance for the half-year, in line with market expectations. At 31st March 2002 total Group loans and advances to customers were £128.3 billion, an annualised increase of 12 per cent. This increase was well spread throughout the Group's retail and commercial businesses. Total Group risk weighted assets at 31st March 2002 were £112.7 billion. Customer deposits totalled £111.5 billion, an annualised increase of 9 per cent. The Group net interest margin for the first three months of 2002 was 3.36 per cent, a reduction of 6 basis points compared with the comparative period in 2001. The Group's core businesses have continued to perform satisfactorily. Product sales have remained buoyant, particularly in the branch network, resulting in market share growth in a number of the Group's key product areas. The Group remains on track to achieve the targeted average holding of 2.5 products per customer by the end of 2002. Whilst gross new mortgage lending remained buoyant, the Group's estimated share of net new mortgage lending in the first five months of the year was below the Group's market share of mortgage balances outstanding. The Group's current mortgage pipeline is however at record levels and we expect our overall share of net new lending to increase during the remainder of the year. Life assurance and pension sales in the first five months of 2002 were 16 per cent ahead of the comparative period in 2001, building on the strength of the Scottish Widows brand. In contrast, sales of unit trusts and ISAs were 31 per cent lower than in the first five months of 2001 due to reduced demand from customers as a result of the continuing downturn in equity markets. The reduction of some £350 million in the Group's gross sales of unit trusts was, however, offset by an increase in customer deposits of £2.4 billion during the first quarter of 2002, resulting in a modest increase in the Group's estimated market share. Sales of general insurance products continue to perform strongly and gross premiums written in the first five months of the year were 29 per cent ahead of the comparative period in 2001. There was a modest increase in weather related general insurance claims. .../more LLOYDS TSB - TRADING UPDATE ..../2 Strict control of the Group's costs has been maintained and the Group continues to expect that its core business as usual cost growth for 2002 will be no more than the rate of inflation. The Group's efficiency programme remains on track with both exceptional restructuring costs and the expected annualised benefits for 2002 being weighted towards the second half of the year, when the expected Group headcount reduction for 2002 will take place. There has been an increase in the Group's provisions for bad and doubtful debts, largely reflecting increased lending volumes. Overall asset quality remains satisfactory, with no material increase in the level of arrears or non-performing lending. In March 2002, the Competition Commission's report following its investigation into the supply of banking services to small and medium size enterprises (SMEs) was published by the government. The Group is currently in discussions with the Office of Fair Trading with regard to the detailed implementation of the proposed remedies suggested by the Competition Commission. The implications for Lloyds TSB and its SME customers have not yet therefore been fully assessed and, at this stage, the Group is unable to quantify in detail the impact upon its SME banking business. It is likely however that the annualised impact on profit before tax will be in the region of a reduction of some £100 million, based on the current level of interest rates. The Group will make a number of changes in accounting policies in the first half of 2002, following the issue of a number of new accounting standards and guidelines: Urgent Issues Task Force Abstract 33 - Reserve Capital Instruments, FRS 17 - Retirement Benefits, FRS 19 - Deferred Tax, and detailed guidance from the Association of British Insurers (ABI) for best practise in the preparation of results using the achieved profits method of accounting. Accounting standards require the Group to restate comparative figures to reflect changes. The attached appendix provides a detailed analysis of the likely impact of these changed accounting policies in 2002 and their effect on prior year figures. For further information:- Investor Relations Michael Oliver +44 (0) 20 7356 2167 Director of Investor Relations E-mail: michael.oliver@ltsb-finance.co.uk Media Terrence Collis +44 (0) 20 7626 1500 Director of Group Corporate Communications E-mail: terrence.collis@lloydstsb.co.uk FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to the business, strategy and plans of the Lloyds TSB Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds TSB Group's or management's beliefs and expectations, are forward looking statements. 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 businesses and equity risk in its insurance businesses, inherent risks regarding changing demographic developments, catastrophic weather and similar contingencies outside Lloyds TSB Group's control, any adverse experience in inherent operational risks, any unexpected developments in regulation or regulatory actions, changes in customer preferences, competition, industry consolidation, acquisitions and other factors. For more information on these and other factors, please refer to Lloyds TSB Group's Annual Report on Form 20-F filed with the US Securities and Exchange Commission and to any subsequent reports furnished by Lloyds TSB Group to the US Securities and Exchange Commission or to the London Stock Exchange. The forward looking statements contained in this announcement are made as of the date hereof, and Lloyds TSB Group undertakes no obligation to update any of its forward looking statements. Appendix Changes in Accounting Policies 1. Urgent Issues Task Force Abstract 33 (UITF 33) UITF 33 was issued in February 2002 and its implementation will result in Reserve Capital Instruments (RCIs) being treated as undated loan capital rather than minority interests. The related interest cost is now to be included within net interest income whereas previously this amount was shown within minority interests. Lloyds TSB issued £450 million RCIs in April 2001 and the Group estimates that implementing UITF 33 will reduce business as usual operating profit in 2002 by some £32 million; the effect on 2001 figures is to reduce business as usual operating profit by £22 million. Profit attributable to shareholders is unaffected in both periods. 2. Financial Reporting Standard 19 (FRS 19) - Deferred Tax The adoption of FRS 19 is mandatory for year 2002 reporting purposes, and its implementation requires full provision for all timing differences that will either increase or reduce a future tax liability. The effect on the Group in 2002 is immaterial but an adjustment will be required to the 2001 profit and loss account increasing the tax charge by £14 million. 3) Financial Reporting Standard 17 (FRS 17) - Pensions FRS 17 replaces SSAP 24 as the accounting standard dealing with the recognition of pension obligations in the accounts of UK companies. Full implementation of FRS 17 is required in 2003 but the Group has decided to implement the standard in 2002 to coincide with the triennial full actuarial valuations of the Group's pension schemes and because of the significant impact implementation has on the Group's reported numbers. This implementation will take effect in the first half of 2002. Implementation of FRS 17 affects only the Group's defined benefit pension schemes and, given that FRS 17 implementation reflects changes only to accounting practice, does not affect the cash funding of the pension schemes, which at 31st December 2001 showed a £508 million surplus of assets over liabilities on an FRS 17 basis. The accounting approach, adopted by SSAP 24, was to ensure that the Group's profit and loss account reflected the long-term cost of providing pension benefits to its employees. Accordingly the profit and loss account included a charge to reflect the normal cost of providing pension benefits, which was offset by a credit representing the amortisation of the surplus in the Group's pension schemes. In 2001 Lloyds TSB reflected a SSAP 24 pension credit of £126 million, in respect of its main schemes, in its profit and loss account as a result of the substantial surplus of the schemes' assets over their liabilities at that time. In contrast FRS 17 focuses on the Group's balance sheet and, as a result, the Group is required to include pension scheme assets on its balance sheet together with the ongoing liability to make pension payments. The Group profit and loss account will continue to incur a charge for the normal cost of providing pension benefits and any pension scheme related benefit improvements during the year (2001 restated: £291 million). However, because the net pension fund surplus is recognised on the balance sheet, there is no offsetting credit to be amortised through the profit and loss account. Instead, FRS 17 requires that the profit and loss account should include a credit in respect of the expected return on pension scheme assets less a charge in respect of the unwinding of the discount applied to pension scheme liabilities (2001 restated: £307 million). Implementation of FRS 17 in 2002 will require a series of adjustments to the Group's 2001 reported numbers. As a result, the SSAP 24 pension credit of £126 million, which reflected the last full triennial actuarial valuation of the pension schemes in 1999 and subsequent annual reconfirmations, will be replaced by a net credit, under FRS 17, of £16 million (£307 million less £291 million). In addition there is an additional charge 'below the line' of £35 million reflecting the cost of severance, borne by the pension schemes, for employees leaving early primarily as a result of the Group's efficiency programme related initiatives. The overall impact of these changes reduces the Group's business as usual operating profit for 2001 by £110 million and statutory profit before tax by £145 million. The overall effect on the Group's 2002 business as usual numbers will be to increase income by an estimated £172 million, increase expenses by an estimated £367 million and reduce business as usual operating profit by some £195 million. The significant reduction in the income impact in 2002, compared with 2001, 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. In addition the Group's exceptional restructuring costs will increase by up to £50 million. In summary, assuming the implementation of FRS 17 in both 2001 and 2002, the pension schemes' overall charge would increase by an estimated £100 million in 2002, compared with 2001. 4) Short-term fluctuations in investment returns The Association of British Insurers (ABI) finalised detailed guidance for the preparation of figures using the achieved profits method of accounting in December 2001 and are now encouraging all companies providing results calculated on this basis to adopt its requirements. The new ABI guidance recommends the use of unsmoothed fund values which, in view of the similarity between the achieved profits and embedded value methodologies, the Group is adopting within the embedded value calculation. To ensure that the results of the Group's insurance operations are comparable with the supplementary financial information published by listed insurers the Group will change the basis of its embedded value calculations to report on an unsmoothed basis. Previously fund values have been smoothed over a two-year period. As a result of this change, the 2001 adverse short-term fluctuations in investment returns increase by £211 million to £859 million and a prior year adjustment has been made. In 2002, short-term fluctuations in investment returns will, of course, be significantly affected by the continuing weakness of global stockmarkets. As a result of this continuing weakness, the Group's short-term fluctuations in investment returns, on the new basis of accounting, were £111 million adverse for the 5 months to 31st May 2002, based on the level of equity and gilt markets at that time. Using unsmoothed fund values also has a small effect on the Group's business as usual earnings. In 2001 the effect, for which a prior year adjustment has been made, was to reduce business as usual operating profit by £11 million. In 2002 we estimate that the reduction will be some £17 million. The following tables provide a summary of the impact of all accounting policy changes for the full year 2001 and the estimated impact on 2002 full year profits. 2001 Actual Short Term Price Fluctuation Published UITF 33 Adjustment FRS17 FRS19 Restated Results Adjustment Adjustment Adjustment Results £m £m £m £m £m £m Net interest income 4,944 (22) 4,922 Other finance income 307 307 Other income 4,600 (11) 4,589 TOTAL INCOME 9,544 (22) (11) 307 9,818 Operating expenses - Staff 1,985 417 2,402 - Other 2,106 2,106 TOTAL OPERATING EXPENSES 4,091 417 4,508 TRADING SURPLUS 5,453 (22) (11) (110) 5,310 Provisions 807 807 General insurance claims 174 174 Share of profit of associates/joint (10) (10) ventures OPERATING PROFIT - business as usual 4,462 (22) (11) (110) 4,319 Profit on sale of Lloyds TSB Asset Management S.A. 39 39 Exceptional restructuring costs (217) (35) (252) Abbey National offer costs (16) (16) Short-term fluctuations in investment (648) (211) (859) returns Pension provision (70) (70) PROFIT BEFORE TAX 3,550 (22) (222) (145) 3,161 Taxation 971 (67) (43) 14 875 PROFIT AFTER TAX 2,579 (22) (155) (102) (14) 2,286 Minority interests 79 (22) 57 ATTRIBUTABLE PROFIT 2,500 0 (155) (102) (14) 2,229 Estimated 2002 Impact Short Term Price Fluctuation UITF 33 Adjustment FRS17 FRS19 Total Adjustment Adjustment Adjustment Adjustment £m £m £m £m £m Net interest income (32) (32) Other finance income 172 172 Other income (17) (17) TOTAL INCOME (32) (17) 172 123 Operating expenses - Staff 367 367 - Other TOTAL OPERATING EXPENSES 367 367 TRADING SURPLUS (32) (17) (195) (244) Provisions General insurance claims Share of profit of associates/joint ventures OPERATING PROFIT - business as usual (32) (17) (195) (244) Exceptional restructuring costs (50) (50) Short-term fluctuations in investment returns 103 103 PROFIT BEFORE TAX (32) 86 (245) (191) Taxation 26 (74) (48) PROFIT AFTER TAX (32) 60 (171) (143) Minority interests (32) (32) ATTRIBUTABLE PROFIT - 60 (171) - (111) RESTATED 2001 CONSOLIDATED PROFIT AND LOSS ACCOUNT Half-year to Half-year to 31 December 2001 Full-year 30 June 2001 2001 £m £m £m Interest receivable: Interest receivable and similar income arising from debt 530 202 328 securities Other interest receivable and similar income 10,834 5,647 5,187 Interest payable 6,442 3,473 2,969 Net interest income 4,922 2,376 2,546 Other finance income 307 152 155 Other income Fees and commissions receivable 2,922 1,469 1,453 Fees and commissions payable (602) (271) (331) Dealing profits (before expenses) 233 106 127 Income from long-term assurance business (29) (79) 50 General insurance premium income 428 206 222 Other operating income 708 392 316 3,660 1,823 1,837 Total income 8,889 4,351 4,538 Operating expenses Administrative expenses 3,974 1,993 1,981 Exceptional restructuring costs 252 66 186 Total administrative expenses 4,226 2,059 2,167 Depreciation 511 259 252 Amortisation of goodwill 39 19 20 Depreciation and amortisation 550 278 272 Total operating expenses 4,776 2,337 2,439 Trading surplus 4,113 2,014 2,099 General insurance claims 174 77 97 Provisions for bad and doubtful debts Specific 736 327 409 General 11 (4) 15 747 323 424 Amounts written off fixed asset investments 60 6 54 Operating profit 3,132 1,608 1,524 Income from associated undertakings and joint ventures (10) (5) (5) Profit on sale of businesses 39 - 39 Profit on ordinary activities before tax 3,161 1,603 1,558 Tax on profit on ordinary activities 875 445 430 Profit on ordinary activities after tax 2,286 1,158 1,128 Minority interests - equity 17 7 10 - non-equity 40 20 20 Profit for the period attributable to shareholders 2,229 1,131 1,098 Dividends 1,872 566 1,306 Retained profit 357 565 (208) Earnings per share 40.3p 20.5p 19.8p Diluted earnings per share 39.9p 20.3p 19.6p RESTATED 2001 consolidated balance sheet 30 June 31 December 2001 2001 £m £m Cash and balances at central banks 688 1,240 Items in course of collection from banks 1,866 1,664 Treasury bills and other eligible bills 3,303 4,412 Loans and advances to banks 19,320 15,224 Loans and advances to customers 120,146 123,059 Non-returnable finance (230) (124) 119,916 122,935 Debt securities 17,749 24,225 Equity shares 240 225 Interests in associated undertakings and joint ventures 8 39 Intangible assets 2,573 2,566 Tangible fixed assets 3,125 3,365 Own shares 50 23 Other assets 4,150 4,468 Prepayments and accrued income 2,220 2,296 Pension asset* 3,411 508 Long-term assurance business attributable to the shareholder 6,414 6,366 185,033 189,556 Long-term assurance assets attributable to policyholders 47,536 46,389 Total assets 232,569 235,945 Liabilities Deposits by banks 26,033 24,310 Customer accounts 105,883 109,116 Items in course of transmission to banks 403 534 Debt securities in issue 19,587 24,420 Other liabilities 5,393 6,673 Accruals and deferred income 3,824 3,563 Provisions for liabilities and charges: Deferred tax 2,403 1,563 Other provisions for liabilities and charges 380 367 Subordinated liabilities: Undated loan capital 3,875 4,102 Dated loan capital 4,113 4,006 Minority interests: Equity 33 37 Non-equity 505 509 538 546 Called up share capital 1,409 1,411 Share premium account 906 959 Merger reserve 343 343 Profit and loss account 9,943 7,643 Shareholders' funds (equity) 12,601 10,356 185,033 189,556 Long-term assurance liabilities to policyholders 47,536 46,389 Total liabilities 232,569 235,945 * 30 June 2001 figure based on December 2000 valuation RESTATED 2001 RESULTS - BUSINESS AS USUAL Half-year to Half-year to Full-year 30 June 31 December 2001 2001 2001 £m £m £m Interest receivable: Interest receivable and similar income arising from debt 530 202 328 securities Other interest receivable and similar income 10,834 5,647 5,187 Interest payable 6,442 3,473 2,969 Net interest income 4,922 2,376 2,546 Other finance income 307 152 155 Other income Fees and commissions receivable 2,922 1,469 1,453 Fees and commissions payable (602) (271) (331) Dealing profits (before expenses) 279 131 148 Income from long-term assurance business 854 397 457 General insurance premium income 428 206 222 Other operating income 708 392 316 4,589 2,324 2,265 Total income 9,818 4,852 4,966 Operating expenses Administrative expenses 3,958 1,977 1,981 Depreciation 511 259 252 Amortisation of goodwill 39 19 20 Depreciation and amortisation 550 278 272 Total operating expenses 4,508 2,255 2,253 Trading surplus 5,310 2,597 2,713 General insurance claims 174 77 97 Provisions Provisions against advances and investments in Argentina 100 - 100 Specific provisions for bad and doubtful debts 736 327 409 Other general provisions for bad and doubtful debts (44) (4) (40) 692 323 369 Other amounts written off fixed asset investments 15 6 9 Operating profit 4,329 2,191 2,138 Income from associated undertakings and joint ventures (10) (5) (5) Business as usual operating profit 4,319 2,186 2,133 Short-term fluctuations in investment returns (859) (501) (358) Exceptional restructuring costs (252) (66) (186) Abbey National offer costs (16) (16) - Profit on sale of Lloyds TSB Asset Management S.A. 39 - 39 Pension provision (70) - (70) Statutory profit before tax 3,161 1,603 1,558 This information is provided by RNS The company news service from the London Stock Exchange

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