20-F 1 a42097.htm LLOYDS TSB GROUP PLC

As filed with the Securities and Exchange Commission on 6 June 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 31 December 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15246
LLOYDS TSB GROUP plc
(Exact name of Registrant as Specified in Its Charter)

Scotland

(Jurisdiction of Incorporation or Organization)

25 Gresham Street
London EC2V 7HN
United Kingdom
(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

Name of each exchange on which registered


 


Ordinary shares of nominal value 25 pence each, represented
by American Depositary Shares.

 

The New York Stock Exchange.

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

The number of outstanding shares of each of Lloyds TSB Group plc’s classes of capital or common stock as of 31 December 2005 was:

 

Ordinary shares, nominal value 25 pence each, as of 31 December 2005...5,602,613,600

 

Limited voting shares, nominal value 25 pence each, as of 31 December 2005... 78,947,368

 

Preference shares, nominal value 25 pence each, as of 31 December 2005... 400

 

Preference shares, nominal value 25 cents each, as of 31 December 2005..... 0

 

Preference shares, nominal value 25 euro cents each, as of 31 December 2005..... 0

 

Preference shares, nominal value Japanese ¥25 each, as of 31 December 2005... 0



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Yes o No x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Large accelerated filer x

Accelerated filer o

Non-Accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 o Item 18 x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).

Yes o No x



TABLE OF CONTENTS




PRESENTATION OF INFORMATION

In this annual report, references to “Lloyds TSB Group” are to Lloyds TSB Group plc and its subsidiary and associated undertakings; references to “Lloyds TSB Bank” are to Lloyds TSB Bank plc; and references to the “Consolidated Financial Statements” or “financial statements” are to Lloyds TSB Group’s Consolidated Financial Statements included in this annual report. References to the “Financial Services Authority” are to the United Kingdom (the “UK”) Financial Services Authority.

Lloyds TSB Group publishes its Consolidated Financial Statements expressed in British pounds (“pounds sterling”, “sterling” or “£”), the lawful currency of the UK. In this annual report, references to “pence” and “p” are to one-hundredth of one pound sterling; references to “US dollars”, “US$” or “$” are to the lawful currency of the United States (the “US”); references to “cent” are to one-hundredth of one US dollar; references to “euro” or “€” are to the lawful currency of the member states of the European Union that have adopted a single currency in accordance with the Treaty establishing the European Communities, as amended by the Treaty of European Union; and references to “Japanese yen” “Japanese ¥” or “¥” are to the lawful currency of Japan. Solely for the convenience of the reader, this annual report contains translations of certain pounds sterling amounts into US dollars at specified rates. These translations should not be construed as representations by Lloyds TSB Group that the pounds sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated or any other rate. Unless otherwise stated, the translations of pounds sterling into US dollars have been made at the noon buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) in effect on 31 December 2005, which was $1.7188 = £1.00. The Noon Buying Rate on 31 December 2005 differs from certain of the actual rates used in the preparation of the Consolidated Financial Statements, which are expressed in pounds sterling, and therefore US dollar amounts appearing in this annual report may differ significantly from actual US dollar amounts which were translated into pounds sterling in the preparation of the Consolidated Financial Statements in accordance with International Financial Reporting Standards as adopted by the European Union.

1


BUSINESS OVERVIEW

Lloyds TSB Group is a leading UK-based financial services group, whose businesses provide a wide range of banking and financial services in the UK and in certain locations overseas; although, following a number of sales of overseas businesses in recent years, the Lloyds TSB Group’s activities are now concentrated in the UK. At 31 December 2005 total Lloyds TSB Group assets were £309,754 million and Lloyds TSB Group had some 67,000 employees. Lloyds TSB Group plc’s market capitalisation at that date was some £27,400 million. The profit on ordinary activities before tax for the 12 months to 31 December 2005 was £3,820 million and the risk asset ratios as at that date were 10.9 per cent for total capital and 7.9 per cent for tier 1 capital.

The operations of Lloyds TSB Group in the UK were conducted through over 2,100 branches of Lloyds TSB Bank, Lloyds TSB Scotland plc and Cheltenham & Gloucester plc at the end of December 2005. International business is conducted mainly in the US and continental Europe. Lloyds TSB Group’s services in these countries are offered largely through branches of Lloyds TSB Bank. Lloyds TSB Group also offers offshore banking facilities in a number of countries. For additional information see “Regulation”.

Lloyds TSB Group’s activities are organised into three segments: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Services provided by UK Retail Banking encompass the provision of banking and other financial services to personal customers, private banking and mortgages. Insurance and Investments offers life assurance, pensions and investment products, general insurance and fund management services. Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks and financial institutions, and small and medium-sized UK businesses, including venture capital finance. It also provides asset finance and share registration services to personal and corporate customers, manages Lloyds TSB Group’s activities in financial markets through its treasury function and provides banking and financial services overseas.

The following table shows the results of Lloyds TSB Group’s UK Retail Banking, Insurance and Investments and Wholesale and International Banking segments and Central group items in each of the last two fiscal years. The impact of adopting International Financial Reporting Standards (‘IFRS’), and in particular the increased use of fair values, has resulted in greater earnings volatility. In order to provide a more comparable representation of business performance this volatility has been separately analysed from the results of the individual business units (see “Operating and financial review and prospects – Results of operations for 2005 and 2004 – Volatility”).

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 









 

UK Retail Banking

 

 

1,394

 

 

1,639

 

Insurance and Investments

 

 

725

 

 

778

 

Wholesale and International Banking

 

 

1,518

 

 

1,272

 

Central group items

 

 

(442

)

 

(350

)









 

 

 

 

 

 

 

 

Profit before tax, excluding volatility

 

 

3,195

 

 

3,339

 

Volatility*

 

 

625

 

 

138

 









Profit before tax

 

 

3,820

 

 

3,477

 










 

 

*

Volatility relates to Insurance and Investments (2005: £749 million; 2004: £138 million) and Central group items (2005: £(124) million; 2004: £nil).

Lloyds TSB Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on 21 October 1985 with the registered number 95000. Lloyds TSB Group plc’s registered office is Henry Duncan House, 120 George Street, Edinburgh EH2 4LH, Scotland, and its principal executive offices in the UK are located at 25 Gresham Street, London, EC2V 7HN, United Kingdom, telephone number + 44 (0) 20 7626 1500.

2


SELECTED CONSOLIDATED FINANCIAL DATA

The financial information set out in the tables below has been derived from the annual reports and accounts of Lloyds TSB Group plc for each of the past five years adjusted for subsequent changes in accounting policy and presentation. The financial statements for the year 2001 were audited by PricewaterhouseCoopers, independent accountants; the financial statements for each of the years 2002 to 2005 have been audited by their successor firm PricewaterhouseCoopers LLP, independent accountants.

The financial statements have been prepared in accordance with IFRS which differs in certain significant respects from US Generally Accepted Accounting Principles (‘US GAAP’). A discussion of the differences between IFRS and US GAAP and a reconciliation of certain IFRS amounts to US GAAP are included in note 56 to the financial statements.

 

 

 

 

 

 

 

 

IFRS

 

2005

 

2004

 









Income statement data for the year ended 31 December (£m)

 

 

 

 

 

 

 

Net interest income

 

 

5,671

 

 

5,110

 

Other income

 

 

17,055

 

 

14,173

 

Trading surplus

 

 

5,069

 

 

4,364

 

Impairment losses on loans and advances

 

 

(1,299

)

 

(866

)

Profit before tax

 

 

3,820

 

 

3,477

 

Profit for the year

 

 

2,555

 

 

2,459

 

Profit for the year attributable to equity shareholders

 

 

2,493

 

 

2,392

 

Total dividend for the year1

 

 

1,915

 

 

1,914

 









Balance sheet data at 31 December (£m)

 

 

 

 

 

 

 

Share capital

 

 

1,420

 

 

1,419

 

Shareholders’ equity

 

 

10,195

 

 

11,047

 

Customer accounts

 

 

131,070

 

 

119,811

 

Undated subordinated loan capital

 

 

7,733

 

 

5,852

 

Dated subordinated loan capital

 

 

4,669

 

 

4,400

 

Loans and advances to customers

 

 

174,944

 

 

155,318

 

Total assets

 

 

309,754

 

 

284,422

 









Share information

 

 

 

 

 

 

 

Basic earnings per ordinary share

 

 

44.6

p

 

42.8

p

Diluted earnings per ordinary share

 

 

44.2

p

 

42.5

p

Net asset value per ordinary share

 

 

180

p

 

195

p

Total dividend per ordinary share1

 

 

34.2

p

 

34.2

p

Equivalent cents per share1, 2

 

 

62.2

c

 

63.7

c

Market price (year-end)

 

 

488.5

p

 

473

p

Number of shareholders (thousands)

 

 

920

 

 

953

 

Number of ordinary shares in issue (millions)3

 

 

5,603

 

 

5,596

 









Financial ratios (%)4

 

 

 

 

 

 

 

Dividend payout ratio

 

 

76.8

 

 

80.0

 

Post-tax return on average shareholders’ equity

 

 

25.6

 

 

22.8

 

Post-tax return on average assets

 

 

0.84

 

 

0.92

 

Post-tax return on average risk-weighted assets

 

 

1.81

 

 

1.99

 

Average shareholders’ equity to average assets

 

 

3.2

 

 

3.9

 

Cost:income ratio5

 

 

51.9

 

 

54.8

 









Capital ratios (%)6

 

 

 

 

 

 

 

Total capital

 

 

10.9

 

 

10.1

 

Tier 1 capital

 

 

7.9

 

 

8.2

 










 

 

1

Annual dividends comprise both interim and final dividend payments. For the purposes of the IFRS disclosures in this table, the total dividend for the year represents the interim dividend paid during the year and the final dividend which will be paid and accounted for during the following year.

 

 

2

Translated into US dollars at the Noon Buying Rate on the date each payment was made.

 

 

3

This figure excludes the 79 million limited voting ordinary shares owned by the Lloyds TSB Foundations.

 

 

4

Averages are calculated on a monthly basis from the consolidated financial data of Lloyds TSB Group.

 

 

5

The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims).

 

 

6

In order to provide a more meaningful comparison, capital ratios are shown at 31 December 2005 and 1 January 2005, after the application of those accounting standards applied with effect from 1 January 2005.

3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SELECTED US GAAP FINANCIAL DATA

 

2005

 

2004

 

2003

 

2002

 

2001

 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income statement data for the year ended 31 December (£m)(1)

Total revenues, net of interest expense

 

 

20,413

 

 

16,668

 

 

14,139

 

 

10,498

 

 

9,335

 

Policyholder benefits and claims expense

 

 

(7,479

)

 

(4,473

)

 

(3,036

)

 

(1,565

)

 

(2,228

)

Allowance for loan losses

 

 

(1,613

)

 

(866

)

 

(950

)

 

(1,029

)

 

(747

)

Income before tax

 

 

2,605

 

 

3,214

 

 

4,220

 

 

2,378

 

 

2,221

 

Net income

 

 

1,351

 

 

1,508

 

 

3,231

 

 

1,753

 

 

1,635

 

Dividends

 

 

1,914

 

 

1,913

 

 

1,908

 

 

1,903

 

 

1,738

 


















Balance sheet data at 31 December (£m)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

10,981

 

 

11,458

 

 

11,892

 

 

10,164

 

 

13,505

 

Deposits

 

 

162,491

 

 

159,546

 

 

140,451

 

 

141,777

 

 

133,419

 

Loans, net of provisions

 

 

173,981

 

 

152,428

 

 

134,043

 

 

134,202

 

 

122,485

 

Total assets

 

 

305,917

 

 

281,598

 

 

251,158

 

 

254,352

 

 

243,187

 


















Share information (pence per ordinary share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

 

24.1

 

 

27.0

 

 

57.9

 

 

31.5

 

 

29.5

 

Diluted earnings

 

 

24.0

 

 

26.8

 

 

57.7

 

 

31.3

 

 

29.2

 

Net asset value

 

 

193

 

 

202

 

 

210

 

 

180

 

 

240

 

Dividends

 

 

34.2

 

 

34.2

 

 

34.2

 

 

34.2

 

 

31.5

 


















Financial ratios (%)(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend payout ratio

 

 

141.7

 

 

126.9

 

 

59.1

 

 

108.6

 

 

106.4

 

Post-tax return on average shareholders’ equity

 

 

12.0

 

 

12.9

 

 

29.3

 

 

14.8

 

 

12.0

 

Post-tax return on average assets

 

 

0.60

 

 

0.65

 

 

1.29

 

 

0.73

 

 

0.72

 

Average shareholders’ equity to average assets

 

 

3.8

 

 

4.4

 

 

4.4

 

 

4.8

 

 

5.8

 



















 

 

(1)

For the purposes of this five year summary, income statement items in respect of discontinued operations have been aggregated with those of continuing operations.

 

 

(2)

Lloyds TSB Group does not have sufficient information to calculate US GAAP average balances on a monthly basis. Where applicable, these financial ratios have been based upon simple averages of the opening and closing balances.

4


EXCHANGE RATES

In this annual report, unless otherwise indicated, all amounts are expressed in pounds sterling. For the months shown the US dollar high and low Noon Buying Rates per pound sterling were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006
April

 

2006
March

 

2006
February

 

2006
January

 

2005
December

 

2005
November

 















US dollars per pound sterling:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

1.82

 

 

1.76

 

 

1.78

 

 

1.79

 

 

1.77

 

 

1.78

 

Low

 

 

1.74

 

 

1.73

 

 

1.73

 

 

1.74

 

 

1.72

 

 

1.71

 





















For the years shown the averages of the US dollar Noon Buying Rates per pound sterling on the last day of each month were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 













US dollars per pound sterling:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

1.81

 

 

1.84

 

 

1.64

 

 

1.51

 

 

1.44

 


















On 26 May 2006, the latest practicable date, the US dollar Noon Buying Rate was $1.857 = £1.00. Lloyds TSB Group makes no representation that amounts in pounds sterling have been, could have been or could be converted into US dollars at that rate or at any of the above rates.

5


BUSINESS

History and development of Lloyds TSB Group

The history of Lloyds TSB Bank can be traced back to the 18th century when the banking partnership of Taylor and Lloyds was established in the UK. The late 19th and early 20th centuries were marked by many acquisitions and mergers, significantly increasing the number of banking offices in the UK. In 1988 Lloyds TSB Bank acquired a majority shareholding in Abbey Life Group Plc (renamed Lloyds Abbey Life plc (“LAL”)) in return for the sale to LAL of five of Lloyds TSB Bank’s businesses; and in 1995 the business of Cheltenham and Gloucester Building Society was acquired.

TSB Group plc became operational in 1986 when, following UK government legislation, the operations of four Trustee Savings Banks and other related companies were transferred to TSB Group plc and its new banking subsidiaries. By 1995, the TSB Group had, either through organic growth or acquisition, developed life and general insurance operations, investment management activities, a motor vehicle hire purchase and leasing operation, and an estate agency business to supplement its retail banking activities.

In 1995, TSB Group plc merged with Lloyds TSB Bank. Under the terms of the merger, the TSB and Lloyds TSB Bank groups were combined under TSB Group plc, which was re-named Lloyds TSB Group plc. In 1999, the businesses, assets and liabilities of TSB Bank plc, the principal banking subsidiary of the TSB Group prior to the merger, and its subsidiary Hill Samuel Bank Limited were vested in Lloyds TSB Bank. In 1996, Lloyds TSB Group acquired the minority interest in LAL. In 2000, Lloyds TSB Group acquired Scottish Widows, for a total consideration of £5,947 million. In addition to being one of the leading providers of banking services in the UK, this transaction also positioned Lloyds TSB Group as one of the leading suppliers of long-term savings and protection products in the UK.

During the last three years, the Lloyds TSB Group has disposed of a number of its overseas operations, as part of the process of managing its portfolio of businesses to focus on its core markets. These disposals have resulted in a significant reduction in the size of the Lloyds TSB Group’s international business. For additional information on the Lloyds TSB Group see “Business Overview”.

Management and resources

Lloyds TSB Group recognises that it will create value for its shareholders if it creates value for its customers. Its constant aim is to meet the rapidly changing needs and expectations of its customers. Lloyds TSB Group believes that success depends upon service, consistency and commitment and it aims, wherever possible, to maintain long-term relationships with its customers.

Lloyds TSB Group operates in a marketplace which is continually changing. No organisation can successfully manage change without the support and commitment of its staff. The pace and scope of change will not diminish as competition in the financial services market continues to increase. Lloyds TSB Group recognises that it is the staff of the organisation who have delivered, and will continue to deliver, its success. The Lloyds TSB Group invests a significant amount in training to develop the knowledge and skills of its employees, which it considers to be a key element in the achievement of its overall strategy.

Lloyds TSB Group recognises that long-term success depends on the quality of its management. It is therefore committed to developing the potential of all managers; in particular ensuring that it has the succession management capability to meet future needs for top management. Peter Ayliffe, group executive director, UK Retail Banking, left the board on 31 January 2005 and was replaced by Terri Dial, formerly group executive vice president and member of the management committee of Wells Fargo & Co, who joined the board on 1 June 2005. In the intervening period Mike Fairey acted as group executive director, UK Retail Banking in addition to his other responsibilities.

Two non-executive directors, Dr Chris Gibson-Smith and David Pritchard, left the board on 5 May 2005. Sir Julian Horn-Smith joined the board, as a non-executive director, on 1 January 2005; Jan du Plessis and Lord Leitch joined the board, also as non-executive directors, on 1 October 2005.

Sir Victor Blank, Chairman of GUS and former chairman of Trinity Mirror (until 4 May 2006) joined the board as deputy chairman on 1 March 2006. Sir Victor took over as chairman of the Lloyds TSB Group at the annual general meeting on 11 May 2006, upon the retirement of Maarten van den Bergh.

6


Strategy of Lloyds TSB Group

The governing objective of Lloyds TSB Group is to maximise shareholder value over time. In an environment of increasing competition and empowered customers, Lloyds TSB Group believes that this shareholder value objective can best be achieved by:

 

 

focusing on markets where it can build and sustain competitive advantage;

 

 

developing business strategies for those markets which are founded on being profitably different in the way it creates customer value; and

 

 

building a high-performance organisation focused on the right goals and the best possible execution of those strategies.

Reflecting this, in 2003 the Lloyds TSB Group put in place a three-phase strategy. In phase 1, now completed, the Lloyds TSB Group focused on enhancing the quality of its earnings by exiting businesses which were not regarded as core or which added unnecessary volatility to its earnings. During this phase, the Lloyds TSB Group divested businesses in New Zealand and Latin America, markets in which it did not expect to be able to build and sustain competitive advantage. In phase 2, Lloyds TSB Group’s focus is on accelerating growth by deepening its customer relationships and improving its productivity and in the process building competitive advantage through enhancing its capabilities. This has already resulted in improved earnings growth in the Lloyds TSB Group’s core markets. In phase 3, the Lloyds TSB Group will look to leverage its financial strength and enhanced capabilities in new markets.

Lloyds TSB Group remains alert for opportunities to grow inorganically to complement its organic strategies and help provide new opportunities for profitable growth, both in the UK and overseas.

Markets

Lloyds TSB Group continues to focus on building competitive advantage in its core markets by seeking opportunities to consolidate its position in businesses where it is already strong, through a combination of organic growth and acquisitions, and by divesting businesses in markets where it is not a leader and cannot aspire reasonably to leadership.

Customer value

In an increasingly competitive financial services market, and with customers able to exercise choice amongst alternative providers, shareholder value creation is closely linked to customer value creation. Shareholder value can only be created by attracting and retaining customers and winning a greater share of their financial services business. Across its main businesses, Lloyds TSB Group has strong core banking franchises, but smaller market shares in associated product areas. The Lloyds TSB Group’s strategy is focused on being differentiated in the creation of customer value to win a bigger share of its customers’ total financial services spend.

Lloyds TSB Group continues to develop new strategies to leverage the strength of its brands, its multi-channel distribution capability and its enhanced understanding of what its customers want to deliver greater value.

High performance organisation

Even the best strategies will fail to deliver shareholder value if poorly executed. Lloyds TSB Group has restructured its businesses and reinvigorated its governance and performance management processes to link plans and budgets much more closely to the highest value strategy for each business, to ensure maximum clarity and accountability for execution within all levels of its management team, and to link reward much more closely to performance.

Lloyds TSB Group measures value internally by economic profit growth, a measure of financial performance which signals unambiguously where value is being created or destroyed. It has developed a framework to be able to measure economic equity requirements across all its businesses, taking into account market, credit, insurance, business and operational risk. Economic profit is measured by applying a charge for this economic equity to post-tax earnings. Using economic profit as a key performance measure enables the Group to understand which strategies, products, channels and customer segments are destroying value and which are creating the most value and to make better strategic choices as a result.

Business and activities of Lloyds TSB Group

Lloyds TSB Group’s activities are organised into three divisions: UK Retail Banking, Insurance and Investments, and Wholesale and International Banking. The main activities of Lloyds TSB Group’s three divisions are described below.

UK Retail Banking

UK Retail Banking provides banking, financial services, mortgages and private banking to some 15 million personal customers through the Lloyds TSB Group’s multi-channel distribution capabilities.

Branches. Lloyds TSB Group provides wide-reaching geographic branch coverage in England, Scotland and Wales, with over 2,100 branches of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester as at the end of 2005.

Internet banking. Internet banking provides online banking facilities for personal customers. Some 3.7 million customers have registered to use Lloyds TSB Group’s internet banking services. At the end of 2005, these customers were conducting more than 45 million transactions per month online, a 50 per cent increase on 2004.

7


Telephone banking. Telephone banking continues to grow and Lloyds TSB Group provides one of the largest telephone banking services in Europe. At the end of 2005, some 4.2 million customers had registered to use the services of PhoneBank and the automated voice response service, PhoneBank Express. Lloyds TSB Group’s telephone banking centres handled some 69 million calls during 2005.

Cash machines. Lloyds TSB Group has one of the largest cash machine networks of any leading banking group in the UK and, at 31 December 2005, personal customers of Lloyds TSB Bank and Lloyds TSB Scotland were able to withdraw cash and check balances through some 4,200 ATMs at branches and external locations around the country. In addition, our personal customers have access to a further 54,000 cash machines via LINK in the UK and to cash machines worldwide through the VISA and MasterCard networks.

Current accounts. Lloyds TSB Bank and Lloyds TSB Scotland offer a wide range of current accounts, including interest-bearing current accounts and a range of added value accounts.

Savings accounts. Lloyds TSB Bank and Lloyds TSB Scotland offer a wide range of savings accounts and Cheltenham & Gloucester provide retail investments through their branch networks and a postal investment centre.

Personal loans. Lloyds TSB Bank and Lloyds TSB Scotland offer a range of personal loans through their branch networks and directly to the customer via the internet and telephone.

Credit cards. Lloyds TSB Group provides a range of card-based products and services, including credit and debit cards and card transaction processing services for retailers. Lloyds TSB Group is a member of both the VISA and MasterCard payment systems and has access to the American Express payment system. The Lloyds TSB Group had a 12.4 per cent share of outstanding UK credit card balances at 31 December 2005.

Mortgages. Cheltenham & Gloucester is Lloyds TSB Group’s specialist residential mortgage provider, offering a range of mortgage products to personal customers through its own branches and those of Lloyds TSB Bank in England and Wales, as well as through the telephone, internet and postal service, C&G TeleDirect. Lloyds TSB Group also provides mortgages through Lloyds TSB Scotland and Scottish Widows Bank. Lloyds TSB Group is one of the largest residential mortgage lenders in the UK on the basis of outstanding balances, with mortgages outstanding at 31 December 2005 of £88,376 million, representing a market share of 9.1 per cent.

UK Wealth Management. Private Banking provides a range of tailor-made wealth management services and products to individuals from 28 offices throughout the UK. In addition to asset management, these include tax and estate planning, executor and trustee services, deposit taking, lending and insurance. Shareview Dealing provides retail stockbroking services, personal equity plan and individual savings account (ISA) products.

Insurance and Investments

Insurance and Investments offers life assurance, pensions and investment products, general insurance and fund management services.

Life assurance, pensions and investments. Scottish Widows is Lloyds TSB Group’s specialist provider of life assurance, pensions and investment products, which are distributed through Lloyds TSB Bank’s branch network, through independent financial advisers and directly via the telephone and the internet. The Scottish Widows brand is the main brand for new sales of Lloyds TSB Group’s life, pensions, open ended investment companies and other long-term savings products.

In common with other life assurance companies in the UK, the life and pensions business of each of the life assurance companies in the Lloyds TSB Group is written in a long-term business fund. The main long-term business fund is divided into With-Profits and Non-Profit sub-funds.

With-profits life and pensions products are written from the With-Profits sub-fund. The benefits accruing from these policies are designed to provide a smoothed return to policyholders who hold their policies to maturity through a mix of annual and final (or terminal) bonuses added to guaranteed basic benefits. The guarantees generally only apply on death or maturity. The actual bonuses declared will reflect the experience of the With-Profits sub-fund.

Other life and pensions products are generally written from the Non-Profit sub-fund. Examples include unit-linked policies, annuities, term assurances and health insurance (under which a predetermined amount of benefit is payable in the event of an insured event such as death). The benefits provided by linked policies are wholly or partly determined by reference to a specific portfolio of assets known as unit-linked funds.

General insurance. Lloyds TSB General Insurance provides general insurance through the retail branches of Lloyds TSB Bank and Cheltenham & Gloucester, and through a direct telephone operation and the internet. Lloyds TSB General Insurance is one of the leading distributors of household insurance in the UK.

Scottish Widows Investment Partnership. Scottish Widows Investment Partnership manages funds for Lloyds TSB Group’s retail life, pensions and investment products. Clients also include corporate pension schemes, local authorities and other institutions in the UK and overseas.

8


Wholesale and International Banking

Wholesale and International Banking provides banking and related services for major UK and multinational corporates and financial institutions, and small and medium-sized UK businesses. It also provides asset finance and share registration services to personal and corporate customers, manages Lloyds TSB Group’s activities in financial markets through its treasury function and provides banking and financial services overseas.

Wholesale

Corporate Markets. Combining the respective strengths of 2,700 people in Corporate Banking, Structured Finance and Financial Markets, plays an integral role in leveraging and expanding Lloyds TSB Group’s customer franchise and building deep, long-lasting relationships with around 16,000 corporate customers.

Corporate Banking manages the core customer franchise, providing a relationship-based financial and advisory service to the corporate marketplace through dedicated regional teams throughout the UK and key strategic locations abroad, including New York. Customers have access to the Lloyds TSB Group’s expertise and a broad range of financial solutions. The relationship managers act as a conduit to partners in Corporate Markets and other parts of the Lloyds TSB Group.

Structured Finance comprises the structured asset finance, leveraged lending and private equity and other transactional lending and structuring businesses of Corporate Markets. Structured Finance executes transactions with existing corporate customers as well as introducing new to bank relationships to the franchise.

Financial Markets provides market access to sources of liquidity, hedging tools and investment products on behalf of Lloyds TSB Group and its customers. Financial Markets also provides risk management solutions to corporate customers and structured credit and investment products to the investor community.

Registrars. Lloyds TSB Registrars, part of the Corporate Bank, operates as receiving bank and registrar to some of the UK’s leading public limited companies. As market leader, it currently maintains the share registers of more than 700 clients, including around 60 per cent of the FTSE 100, managing some 22 million shareholder accounts.

Asset Finance. Lloyds TSB Group’s asset finance businesses provide individuals and companies with finance through leasing, hire purchase and contract hire packages. Hire purchase, or instalment credit, is a form of consumer financing where a customer takes possession of goods on payment of an initial deposit but the legal title to the goods does not pass to the customer until the agreed number of instalments have been paid and the option to purchase has been exercised. Through its invoice discounting and factoring subsidiary, Lloyds TSB Commercial Finance, Lloyds TSB Group provides working capital finance for its customers. Specialist personal lending, store credit and the Dutton-Forshaw motor dealership group complete this group of businesses. Altogether Asset Finance has over 1.7 million individual customers and relationships with some 40,000 companies and small businesses.

Business Banking. A growing business which has relationships with some 587,000 small businesses managed by business managers based in 500 locations throughout the UK. This has been reinforced by an additional 300 business managers moving back into branches. Lloyds TSB Group has a leading share of the new business start-up market, with some 100,000 new businesses opening an account with Lloyds TSB in 2005. The main activity of The Agricultural Mortgage Corporation is to provide long-term finance to the agricultural sector.

International Banking

The Lloyds TSB Group has continued to shape its international network to support its UK operations.

Offshore banking. Lloyds TSB Group’s offshore banking operations comprise offices in the UK, the Channel Islands, the Isle of Man, Hong Kong, Singapore, Malaysia and overseas representative offices in the Middle East, Africa, Asia and the Americas. The business provides a wide range of retail banking, wealth management and expatriate services to local island residents, UK expatriates, foreign nationals and to other customers requiring offshore financial services.

International private banking. Lloyds TSB Group has international private banking operations for wealthy individuals. The business is conducted through branches of Lloyds TSB Bank located in Switzerland, Luxembourg, Monaco, Gibraltar, Uruguay, Dubai and the US, supported by representative offices in Latin America.

International corporate banking. Serves the corporate and institutional market in Europe, the Middle East and Japan through offices in Belgium, the Netherlands, Spain, Dubai and Japan. Lloyds TSB Group continues to have offices in Ecuador and Uruguay which provide mainly corporate banking services. The sale of the business in Paraguay is expected to complete in 2006 after receipt of the required regulatory approval.

9


Material contracts

Lloyds TSB Group and its subsidiaries are party to various contracts in the ordinary course of business. In 2005, there have been no material contracts entered into outside the ordinary course of business.

Recent developments

Lloyds TSB Group issued a trading statement at its annual general meeting on 11 May 2006, which made the following comments:

“In the first few months of 2006 the Group has maintained good progress in the delivery of its growth strategies. As a result, we are confident that we will deliver a satisfactory performance for the half-year.”

Properties

As at 31 December 2005, Lloyds TSB Group occupied 3,370 properties in the UK. Of these, 639 were held as freeholds, 69 as long-term leaseholds and 2,662 as short-term leaseholds. The majority of these properties are retail branches, widely distributed throughout England, Scotland and Wales. Other buildings include the Lloyds TSB Group’s head office in the City of London, and customer service and support properties located to suit business needs, but clustered largely in London, Birmingham, Bristol (in England), Edinburgh (in Scotland) and Cardiff and Newport (in Wales).

In addition, Lloyds TSB Group owns, leases or uses under licence properties for business operations elsewhere in the world, principally in Spain, Switzerland, Dubai and Asia.

Legal actions

Lloyds TSB Group is periodically subject to threatened or filed legal actions in the ordinary course of business. Lloyds TSB Group does not expect the final outcome of any legal proceedings currently known to it to have a material adverse effect on its consolidated results of operations or financial condition.

10


Competitive environment

Lloyds TSB Group operates in a financial services world that is experiencing consolidation at national and, to a lesser extent, international levels. The last few years have seen the beginnings of pan-European consolidation and considerable consolidation within the US.

Globalisation and developments in technology continue to expand Lloyds TSB Group’s range of competitors. The rising intensity of competition is expected to put Lloyds TSB Group’s margins under further pressure with many products becoming increasingly commoditised. Wholesale markets are integrating more rapidly across the European Union than their retail counterparts, leading to a deeper, more liquid, and more competitive corporate securities market, and the gradual disintermediation of traditional bank lending.

Lloyds TSB Group expects competition within the industry to continue to be based on service and relationships as well as price, particularly for core banking services. Lloyds TSB Group has significant strengths, in its portfolio of strong brands, its existing customer franchises in both retail and corporate, commercial and business banking, its multi-channel distribution capability and its knowledge and understanding of its customers.

Lloyds TSB Group’s key markets are in the UK, in both the retail and corporate, commercial and business banking sectors, where the markets for basic financial and banking services are relatively mature. Retail banking markets have shown strong rates of growth in recent years, notably in consumer borrowing and mortgages, but the resultant high rates of consumer indebtedness are expected to restrain future growth. The markets for life and pensions and investment products are expected to show strong rates of growth in a number of key areas, although stock market weakness has depressed demand for some equity-based products in the recent past, and a considerable amount of uncertainty exists about the impact of regulatory change. Wholesale markets have shown strong growth recently, and cyclically low levels of bad debt. Going forward, some slowing of market growth is likely, plus a return to more normal levels of bad debt.

Lloyds TSB Group’s competitors include all the major financial services and fund management companies operating in the UK. De-mutualised building societies which have become banks and life assurers which have entered the banking market have become direct competitors in the provision of banking products.

In the mortgage market, competitors include the traditional banks and building societies and new entrants to the market, with the market becoming increasingly competitive as both new entrants and incumbents endeavour to gain market share. Lloyds TSB Group’s competitors in the credit card market again include both the traditional banks and new entrants, including overseas companies. In the last few years a significant share of new business has been acquired by US and new UK competitors.

In the distribution of life, pensions and investments products Lloyds TSB Group has seen increased competition from new market entrants, such as traditional retailers, primarily in specialist areas. The fragmented nature of the life, pensions and investments market in the UK has resulted in some consolidation within the sector; government regulations on product charges and competitive pressures are likely to drive further consolidation as providers seek to achieve the benefits of economies of scale. Changes to the regulation of life, pensions and investment products are expected to favour distributors, including banks, rather than product providers, although the impact of the recent government sponsored Turner Report findings is not clear.

In the general insurance sector, the market has seen significant consolidation amongst underwriters but continued fragmentation in distribution and an increasing number of new market entrants including both overseas insurers and direct operators.

In commercial and corporate markets, margins are typically finer than in retail, but probably under less overall downward pressure. Nevertheless, traditional forms of bank finance face increasing competition from market-based products as companies increasingly access those markets directly.

In addition to the challenging competitive environment, in the UK and elsewhere, there is continuing political, regulatory and competition scrutiny of banking and, in particular, retail banking.

In the UK, the Office of Fair Trading (OFT) is carrying out several inquiries:

 

 

In April 2006, the OFT launched a market study on payment protection insurance (PPI), following a super complaint submitted by the Citizens’ Advice Bureau in September 2005. The OFT expects to publish its report by the end of 2006.

 

 

The OFT has carried out investigations into Visa and MasterCard credit card interchange rates. In the MasterCard interchange case, the OFT decision is being appealed by MasterCard to the Competition Appeals Tribunal and the appeal is expected to be heard towards the end of 2006. The OFT’s investigation in the Visa interchange case is at an earlier stage.

 

 

Following discussions with the industry, in April 2006 the OFT issued a statement on default charges in credit card contracts. In this the OFT state that it will not challenge default charges set below £12. This is lower than the current level charged by Lloyds TSB Group and most other card issuers. Lloyds TSB Group does not agree with the OFT’s interpretation of the law, but has written to the OFT to confirm that it will be reducing its credit card charges to £12 from 29 June 2006.

11


 

 

In addition to its comments on credit cards, the OFT statement also suggested the same principles should apply to some other consumer contracts such as those for store cards, mortgages and bank accounts. So far as Lloyds TSB Group is aware these matters have not been previously discussed with the industry by the OFT. Lloyds TSB Group has informed the OFT that it strongly disagrees that these principles are applicable to current account charges.

 

 

The Competition Commission inquiry in 2002 into the supply of banking services to small and medium-sized enterprises (SMEs), resulted in a number of banks, including Lloyds TSB Group, giving certain undertakings to the OFT.The OFT announced in January 2006 that it would be reviewing these undertakings. The OFT is expected to commence that review in the second quarter of 2006 and anticipates that it will take nine months to complete. Lloyds TSB Group will cooperate fully with that review.

 

 

There is a continuing market study by the OFT into payments systems, with the OFT chairing a Payments Systems Task Force. This was established in 2004 to look at competition issues relating to payments systems over a four year period. In December 2005, the OFT welcomed proposals for reducing the clearing times for electronic banking payments. Lloyds TSB Group will continue to co-operate with the Task Force.

In addition, in June 2005, the European Union (EU) announced an inquiry into retail banking. The inquiry will cover the 25 Member states and will be executed in a phased approach. The inquiry is focusing on payment cards, retail banking (including SME banking) and business insurance in Europe generally. Lloyds TSB Group is co-operating with the inquiry and the outcome is unclear, though the European Commission has recently published a preliminary report on payment cards for consultation.

These investigations and any connected matters are likely to affect the industry and have an impact on the Lloyds TSB Group’s business. Lloyds TSB Group is considering actions to mitigate any financial impact. The net effect from a product and cost/income perspective is currently under consideration, however, the Lloyds TSB Group is presently unable to quantify with any reasonable certainty the aggregate cost or income implications in relation to the above enquiries.

12


OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The results discussed below are not necessarily indicative of Lloyds TSB Group’s results in future periods. The following information contains certain forward-looking statements. For a discussion of certain cautionary statements relating to forward-looking statements, see “Forward-Looking Statements”.

The following discussion is based on and should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included elsewhere in this annual report. For a discussion of the accounting policies used in the preparation of the Consolidated Financial Statements, see “Accounting policies” in note 1 to the Consolidated Financial Statements. The Consolidated Financial Statements are prepared in accordance with IFRS, which varies in certain significant respects from US GAAP. A discussion of such differences and a reconciliation of certain IFRS amounts to US GAAP is included in note 56 to the Consolidated Financial Statements. Certain information for years prior to 2004 has been prepared under UK GAAP, which is not comparable with IFRS.

TABLE OF CONTENTS



13


Overview and trend information

Lloyds TSB Group has operations in both the UK and overseas; however, its earnings are heavily dependent upon its domestic activities and in 2005 substantially all of Lloyds TSB Group’s profit before tax was derived from its UK operations. The state of the UK economy, therefore, has significant implications for the way in which Lloyds TSB Group runs its business and its performance.

After slowing to growth of around 1.7 per cent in 2005, the UK economy is expected to recover to around 2.0 per cent to 2.5 per cent in 2006. Global economic growth is expected to remain robust and domestic consumer spending growth should gradually improve after a period of unchanged interest rates which has stabilised the UK housing market. The pace of recovery is likely to remain restrained, however, as unemployment has started to rise gradually. Increasing global economic imbalances indicate some risks around this outcome however, although continuing low inflation and the sound state of public finances in the UK suggest that the UK economy is well positioned to resist any sudden deterioration in the external environment.

Against this economic backdrop, there has been continued growth in each of Lloyds TSB Group’s three divisions: UK Retail Banking, as a result of strong growth in mortgage and customer deposit balances with costs remaining tightly controlled, although impairment charges rose significantly reflecting a marketwide deterioration in retail credit quality as a result of more customers, with higher levels of indebtedness, experiencing repayment difficulties; Insurance and Investments, as a result of increased weighted sales through both the Independent Financial Adviser and bancassurance distribution channels and an increase in the life and pensions new business margin; and Wholesale and International Banking, which has seen significant progress in delivering the strategy to build an integrated wholesale bank for corporate markets, and good levels of new business growth in Business Banking and Asset Finance.

Critical accounting policies

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates.

The accounting policies that are deemed critical to the Lloyds TSB Group’s results and financial position, based upon materiality and significant judgements and estimates, are discussed in note 2 to the Consolidated Financial Statements.

14


Results of operations – 2005 compared with 2004

The Lloyds TSB Group has applied IFRS as adopted by the European Union (EU) in its financial statements for the year ended 31 December 2005. IFRSs as adopted by the EU are identical in all respects to the current IFRSs as issued by the IASB, except for the EU’s amendment to IAS 39. The Lloyds TSB Group has not taken advantage of the EU’s amendment to IAS 39; accordingly, there would be no change to the reported income or equity if Lloyds TSB Group were to adopt fully the current IFRSs as issued by the IASB. The rules for first time adoption of IFRS require the application of certain exceptions and permit certain other transition exemptions; further information is provided on page F-8. The application of these exceptions and exemptions means that the 2004 figures disclosed are not fully comparable with those presented in respect of 2005.

The adoption of IAS 32, IAS 39 and IFRS 4 with effect from 1 January 2005 has also resulted in certain classifications being appropriate for only 2004 or 2005; in order to provide a more meaningful presentation, and to differentiate from a nil balance, shading has been used where a caption is not relevant for a particular year.

Summary

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Net interest income

 

 

5,671

 

 

5,110

 

Other income

 

 

17,055

 

 

14,173

 









Total income

 

 

22,726

 

 

19,283

 

Insurance claims

 

 

(12,186

)

 

(9,622

)









Total income, net of insurance claims

 

 

10,540

 

 

9,661

 

Operating expenses

 

 

(5,471

)

 

(5,297

)









Trading surplus

 

 

5,069

 

 

4,364

 

Impairment losses on loans and advances

 

 

(1,299

)

 

(866

)

Profit(loss) on sale and closure of businesses

 

 

50

 

 

(21

)









Profit before tax

 

 

3,820

 

 

3,477

 

Taxation

 

 

(1,265

)

 

(1,018

)









Profit for the year

 

 

2,555

 

 

2,459

 









 

 

 

 

 

 

 

 

Profit attributable to minority interests

 

 

62

 

 

67

 

Profit attributable to equity shareholders

 

 

2,493

 

 

2,392

 









Profit for the year

 

 

2,555

 

 

2,459

 









Economic profit1

 

 

1,616

 

 

1,448

 










 

 

1

Lloyds TSB Group defines economic profit as the earnings on the equity invested in the business less a notional charge for the cost of the equity invested in that business. See ‘Operating and financial review and prospects – Economic profit’.

In 2005 the Lloyds TSB Group’s profit before tax was £3,820 million, an increase of £343 million, or 10 per cent, compared to £3,477 million in 2004. Profit attributable to shareholders was £101 million, or 4 per cent, higher at £2,493 million compared to £2,392 million in 2004. Earnings per share were 44.6p compared to 42.8p in 2004, an increase of 4 per cent.

Net interest income was £561 million, or 11 per cent, higher at £5,671 million compared to £5,110 million in 2004. The international accounting standards implemented with effect from 1 January 2005 have had a marked effect on the Lloyds TSB Group’s net interest income as certain amounts previously accounted for within fees receivable and administrative expenses are now included within the effective interest rate calculations. Adjusting for this effect, underlying net interest income was £403 million, or 8 per cent, higher. Average interest-earning assets increased as a result of continued strong lending growth, particularly in respect of mortgages, personal loans and credit cards as well as corporate lending and asset finance. The Lloyds TSB Group’s net interest margin fell by 10 basis points to 2.62 per cent; however if the impact of the accounting standards applied with effect from 1 January 2005 and the growth in reverse repurchase agreement balances are excluded, the underlying net interest margin was 2.82 per cent in 2005, compared to 2.86 per cent in 2004; a fall of 4 basis points. This fall in the underlying margin reflected competitive pressures in both the personal and corporate lending books.

Other income, at £17,055 million, was £2,882 million, or 20 per cent, higher than £14,173 million in 2004. Fees and commissions receivable were £64 million, or 2 per cent, lower at £2,990 million; however, if the effect of the accounting standards applied with effect from 1 January 2005 are excluded, underlying fees and commissions receivable were £261 million, or 9 per cent, higher at £3,315 million compared to £3,054 million in 2004. The increase in underlying fee income reflects good growth in current account fees, mortgage and other lending fees and wealth management products. Fees and commissions payable, again excluding the impact of the accounting standards applied with effect from 1 January 2005, were £74 million higher, largely as a result of increased volumes within Scottish Widows. Net trading income was £4,262 million higher, principally within the insurance and investment businesses, and insurance premium income (excluding the impact of the accounting standards applied with effect from 1 January 2005) was £1,131 million higher. These increases reflect substantial inflows of funds from policyholders and strong investment gains over the year; this income, however, is largely for the benefit of policyholders and is matched by the commensurate increase in insurance claims.

15


Insurance claims, at £12,186 million, were £2,564 million, or 27 per cent, higher than £9,622 million in 2004. The impact of the accounting standards applied with effect from 1 January 2005 in respect of the insurance businesses caused a significant reduction in both the premium income and claims figures, as a large number of insurance products were reclassified as investment products. Adjusting for this effect, underlying insurance claims were £5,172 million, or 54 per cent, higher at £14,794 million compared to £9,622 million in 2004.

Operating expenses were £174 million, or 3 per cent, higher at £5,471 million compared to £5,297 million in 2004. Staff costs were £151 million, or 6 per cent, higher reflecting annual pay awards, increased bonus and incentive payments in certain areas as a result of business success and increased severance costs in relation to rationalisation programmes. Staff numbers, on a full time equivalent basis, decreased by 3,188 to 66,797 at 31 December 2005 compared to 69,985 at 31 December 2004; however, much of this fall occurred towards the end of the year and consequently there was little impact on staff costs. Premises and equipment costs were £35 million higher. Other costs were £19 million lower; an increase of £38 million in the charge in respect of provisions for customer redress, following a review of the expected cost by the Lloyds TSB Group, was more than offset by a net credit of £45 million in respect of deferred acquisition costs within the insurance businesses.

Impairment losses on loans and advances, at £1,299 million, were £433 million, or 50 per cent, higher than 2004. Excluding the impact of the accounting standards applied with effect from 1 January 2005 and a small release of £3 million from other credit risk provisions, underlying impairment losses on loans and advances were £227 million, or 26 per cent, higher at £1,093 million in 2005 compared to £866 million in 2004. The overall charge in respect of Wholesale and International Banking was little changed with the majority of the increase arising within UK Retail Banking. The underlying impairment charge in UK Retail Banking was £229 million higher as a result of volume growth in both personal loans and credit card lending, the absence of a mortgage related provision release which in 2004 totalled £39 million, and the impact of more customers with higher levels of indebtedness experiencing repayment difficulties.

A net profit of £50 million arose on the sale and closure of businesses in 2005, principally as a result of the disposal of the Goldfish credit card portfolios, compared to a loss of £21 million in 2004, which largely reflected the sale of the Lloyds TSB Group’s businesses in Argentina and Colombia.

The tax charge, at £1,265 million, represented 33.1 per cent of profit before tax compared to 29.3 per cent in 2004; the increase in the effective tax rate largely reflects the IFRS requirement to include, within the tax charge, tax attributable to UK life insurance policyholder earnings and interests in Open Ended Investment Companies (OEICs).

At the end of 2005, the total capital ratio was 10.9 per cent. Risk-weighted assets increased by £13,091 million, or 10 per cent, since the beginning of 2005 to £144,921 million at the end of the year; this increase reflected new mortgage and other personal lending together with substantial growth in corporate, SME, asset finance and structured finance lending. Total assets grew by £25,332 million, or 9 per cent, to £309,754 million compared to £284,422 million at 31 December 2004. Of this growth, £9,649 million was due to the grossing-up of balances no longer eligible for set-off following the implementation of IAS 32 with effect from 1 January 2005. The remaining increase of £15,683 million was due to the lending growth and higher securities balances within the long-term insurance business.

16


Net interest income

 

 

 

 

 

 

 

 

 

 

2005

 

2004

 







Net interest income £m

 

 

5,671

 

 

5,110

 

Average interest-earning assets £m

 

 

216,153

 

 

187,643

 

Average rates:

 

 

 

 

 

 

 

– Gross yield on interest-earning assets %1

 

 

5.82

 

 

5.71

 

– Interest spread %2

 

 

2.40

 

 

2.50

 

– Net interest margin %3

 

 

2.62

 

 

2.72

 

Margin excluding average balances held under reverse repurchase agreements 4:

 

 

 

 

 

 

 

– Net interest income £m

 

 

5,671

 

 

5,110

 

– Average interest-earning assets £m

 

 

201,813

 

 

178,887

 

– Net interest margin %

 

 

2.81

 

 

2.86

 










 

 

1

Gross yield is the rate of interest earned on average interest-earning assets.

 

 

2

Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities.

 

 

3

The net interest margin represents the interest spread together with the contribution of interest-free liabilities. It is calculated by expressing net interest income as a percentage of average interest-earning assets.

 

 

4

Comparisons of net interest income and margins are impacted by the holdings of fine margin reverse repurchase agreements. To improve comparability, figures are also shown excluding average balances held under reverse repurchase agreements (2005: £14,340 million; 2004: £8,756 million)

Net interest income increased by £561 million, or 11 per cent, to £5,671 million compared to £5,110 million in 2004. However, net interest income is impacted by the accounting standards applied with effect from 1 January 2005 and adjusting for this, net interest income was £403 million, or 8 per cent, higher at £5,513 million compared to £5,110 million in 2004.

Average interest-earning assets grew by £28,510 million, or 15 per cent, to £216,153 million in 2005 compared to £187,643 million in 2004. However, comparisons are distorted by the substantial growth, during 2004 and 2005, in assets held under reverse repurchase agreements for liquidity purposes. Excluding the balances held under reverse repurchase agreements, average interest-earning assets grew by £22,926 million, of which the grossing-up of balances subject to set-off arrangements in 2005 following the implementation of IAS 32 accounted for £6,396 million. The underlying growth in average interest-earning assets was therefore £16,530 million, or 9 per cent, adding £475 million to net interest income. Good levels of consumer lending growth increased average personal lending and credit card balances by £1,691 million and average mortgage balances by £7,808 million. Average interest-earning assets within the insurance and investment businesses, which include policyholder and long-term fund balances, increased by £1,891 million as a result of business growth and increased fund activity. Strong lending growth lead to an increase of £4,373 million in average interest-earning assets in the Business Banking and Corporate Markets franchises and average balances in Asset Finance were £484 million higher, reflecting the full year impact of lending growth over 2004.

The Lloyds TSB Group’s net interest margin fell by 10 basis points to 2.62 per cent in 2005, compared to 2.72 per cent in 2004; if the average balances held under reverse repurchase agreements are excluded from both years, the margin in 2005 was 5 basis points lower at 2.81 per cent compared to 2.86 per cent in 2004. After taking into account the impact of the accounting standards applied with effect from 1 January 2005 the underlying margin fell by 4 basis points reducing net interest income by £72 million. The underlying net interest margin in UK Retail Banking was 23 basis points lower, as a result of competitive pressures and a reduced benefit from current account funding balances. Within Wholesale and International Banking the underlying net interest margin was 5 basis points higher. On this basis, margins on treasury balances improved, as a result of a change in mix; the margin in Structured Finance improved as a result of the impact of new transactions; Corporate Banking margins were lower, as a result of competitive pressures on new lending balances; and margins were also down in Business Banking.

17


Other income

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Fees and commissions receivable:

 

 

 

 

 

 

 

– UK current account fees

 

 

593

 

 

637

 

– Other UK fees and commissions

 

 

1,041

 

 

1,087

 

– Insurance broking

 

 

681

 

 

672

 

– Card services

 

 

545

 

 

520

 

– International fees and commissions

 

 

130

 

 

138

 

 

 

 

2,990

 

 

3,054

 

Fees and commissions payable

 

 

(842

)

 

(844

)

Net trading income

 

 

9,298

 

 

5,036

 

Insurance premium income

 

 

4,469

 

 

6,070

 

Other operating income

 

 

1,140

 

 

857

 









Total other income

 

 

17,055

 

 

14,173

 









Other income was £2,882 million, or 20 per cent, higher at £17,055 million compared to £14,173 million in 2004.

Fees and commissions receivable were £64 million, or 2 per cent, lower at £2,990 million compared to £3,054 million in 2004. However, year-on-year comparisons are affected by the impact of IAS 39, which has been applied with effect from 1 January 2005 and has resulted in some £325 million of income previously classified within fees and commissions now being included within net interest income via the effective interest rate calculations. Adjusting for this, underlying fees and commissions receivable were £261 million, or 9 per cent, higher at £3,315 million compared to £3,054 million in 2004. Underlying UK current account fees were £117 million higher reflecting continuing growth in added value account products, the impact of pricing reviews in 2004 and 2005 and increased charges in respect of returned cheques and unauthorised borrowings. Also on this underlying basis, other UK fees and commissions were up £114 million, or 10 per cent, at £1,201 million compared to £1,087 million in 2004, reflecting increased levels of mortgage-related fees, increased wealth management fees as a result of higher sales and improved retention rates and increased levels of corporate lending and other fees. Insurance broking income was £9 million, or 1 per cent, higher at £681 million, compared to £672 million in 2004, as lower levels of loan protection income were more than offset by increased income in respect of motor insurance and retrospective commissions. Fees for card services were £25 million higher as a result of increased volumes and some tariff changes.

Fees and commissions payable were £2 million lower at £842 million compared to £844 million in 2004; however, adjusting for fees payable of £76 million included within the effective interest rate calculations in 2005, underlying fees payable were £74 million, or 9 per cent, higher at £918 million compared to £844 million in 2004. The impact of increased business and trading volumes within Scottish Widows more than offset the lower level of dealership commissions within Asset Finance as a result of reduced new business levels.

Net trading income increased by £4,262 million, or 85 per cent, to £9,298 million compared to £5,036 million in 2004. The majority of this increase is attributable to the insurance businesses and reflects significant trading gains on policyholder investments over the year, which are largely matched by an increase in claims expense.

Insurance premium income was £1,601 million, or 26 per cent, lower at £4,469 million compared to £6,070 million in 2004. However, year-on-year comparisons are affected by the impact of IFRS 4, which has caused a significant proportion of contracts to be reclassified as investment products with effect from 1 January 2005. Adjusting for this, underlying insurance premium income was £1,131 million, or 19 per cent, higher at £7,201 million in 2005. Long-term insurance income grew substantially as a result of strong sales through the bancassurance and independent financial advisor channels; however general insurance premium income was little changed as growth in creditor insurance income was largely offset by reduced levels of health insurance premiums.

Other operating income was £283 million, or 33 per cent, higher at £1,140 million compared to £857 million in 2004; excluding the impact of accounting standards applied with effect from 1 January 2005, underlying other operating income was £139 million, or 16 per cent, higher in 2005. Income from investment properties was £114 million higher, in part reflecting portfolio growth, and there were increased gains from the sale and leaseback of premises.

18


Operating expenses

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Administrative expenses:

 

 

 

 

 

 

 

Staff:

 

 

 

 

 

 

 

– Salaries

 

 

2,068

 

 

1,970

 

– National insurance

 

 

154

 

 

144

 

– Pensions

 

 

308

 

 

307

 

– Other staff costs

 

 

325

 

 

283

 

 

 

 

2,855

 

 

2,704

 

Premises and equipment:

 

 

 

 

 

 

 

– Rent and rates

 

 

305

 

 

294

 

– Hire of equipment

 

 

13

 

 

17

 

– Repairs and maintenance

 

 

136

 

 

129

 

– Other

 

 

152

 

 

131

 

 

 

 

 

606

 

 

571

 

Other expenses:

 

 

 

 

 

 

 

– Communications and external data processing

 

 

467

 

 

449

 

– Advertising and promotion

 

 

207

 

 

205

 

– Professional fees

 

 

216

 

 

223

 

– Provisions for customer redress

 

 

150

 

 

112

 

– Other

 

 

325

 

 

395

 

 

 

 

 

 

 

 

 

 

 

 

1,365

 

 

1,384

 









Administrative expenses

 

 

4,826

 

 

4,659

 

Depreciation

 

 

639

 

 

638

 

Impairment of goodwill

 

 

6

 

 

 









Total operating expenses

 

 

5,471

 

 

5,297

 









Cost: income ratio (%)*

 

 

51.9

 

 

54.8

 










 

 

*

Total operating expenses divided by total income, net of insurance claims

2005 compared with 2004

Operating expenses were £174 million, or 3 per cent, higher at £5,471 million compared to £5,297 million in 2004.

Staff costs were £151 million, or 6 per cent, higher at £2,855 million compared to £2,704 million in 2004. Salaries were £98 million higher at £2,068 million reflecting annual pay awards and an increase in levels of bonus and incentive payments in some parts of the Lloyds TSB Group. A reduction in overall staff numbers had little impact upon costs as this was biased towards the end of the year. National insurance costs were £10 million higher, reflecting the increase in salary costs, but pension costs were largely unchanged as a decrease in the charge in respect of defined benefit schemes was offset by an increase in cash payments to defined contribution schemes. Other staff costs were £42 million higher as decreases in agency and other costs were more than offset by an increase in severance charges, reflecting rationalisation programmes in a number of parts of the Lloyds TSB Group.

Premises and equipment costs were £35 million, or 6 per cent, higher at £606 million compared to £571 million in 2004. Rent and rates were £11 million higher as a result of general increases in property rental charges and a higher level of costs in relation to the expanding investment property portfolios within the insurance operations. A small decrease in equipment hire charges resulted from a favourable renegotiation of certain contracts, but this has been more than offset by increased repairs and maintenance expenditure, in particular in relation to ATM’s and network costs. Other premises and equipment costs were £21 million higher as a result of increased energy costs and other increased costs in relation to the investment property portfolios.

Other expenses were £19 million, or 1 per cent, lower at £1,365 million compared to £1,384 million in 2004. Communications and external data processing costs were £18 million higher as a result of increased network charges. Advertising costs were little changed at £207 million and professional fees were £7 million lower, reflecting some reduction in consultancy charges. The charge of £150 million in 2005 in respect of provisions for customer redress (£38 million higher than the £112 million charge in 2004) follows a review by the Lloyds TSB Group of the estimated cost of redress payments to customers, principally relating to past sales of mortgage endowment policies through the branch network. This review took in to account the introduction of time barring and the consequent increase in claims. Other costs were £70 million lower at £325 million. Much of this decrease reflected a credit of £45 million representing the net movement in deferred acquisition costs relating to the insurance businesses, the accounting for which has changed as a result of the prospective IFRS accounting changes applied with effect from 1 January 2005. There were efficiency savings in stationery and other administrative costs and costs were also lower following the sale of certain Latin American businesses towards the end of 2004.

19


The depreciation charge was little changed at £639 million as a small reduction in the charge in respect of operating lease assets was offset by the effect of general portfolio growth in relation to own-use assets. There was a goodwill impairment charge in relation to an acquisition made in earlier years.

The cost:income ratio improved to 51.9 per cent in 2005 compared to 54.8 per cent in 2004.

Impairment losses on loans and advances

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Impairment losses on loans and advances

 

 

1,302

 

 

866

 

Other credit risk provisions

 

 

(3

)

 

 







Impairment losses on loans and advances and other credit risk provisions

 

 

1,299

 

 

866

 








 

 

 

 

 

 

 

 

Impairment losses on loans and advances

 

 

2005
£m

 

2004
£m

 







UK Retail Banking

 

 

1,111

 

 

676

 

Insurance and Investments

 

 

 

 

(3

)

Wholesale and International Banking

 

 

191

 

 

193

 







Total charge for impairment losses on loans and advances

 

 

1,302

 

 

866

 







 

 

 

 

 

 

 

 

Charge as % of average lending:

 

 

%

 

 

%

 

 

 

 

 

 

 

 

 

- Total charge

 

 

0.76

 

 

0.59

 

- Total charge, excluding impact of IAS 39

 

 

0.66

 

 

0.59

 







The impairment charge in respect of loans and advances and other credit risk provisions was £433 million, or 50%, higher at £1,299 million compared to £866 million in 2004. This represents a charge in respect of loans and advances of £1,302 million slightly offset by a release of £3 million from provisions held in respect of contingent liabilities and commitments.

The impairment charge in respect of loans and advances in 2005 was significantly affected by the adoption of the requirements of IAS 39 with effect from 1 January 2005. IAS 39 requires the impairment provision to be calculated by comparing the carrying value of the loan with the discounted value of future cashflows. As a result, in circumstances where a customer’s borrowings have been rescheduled onto a concessionary rate which is below market interest rate, an impairment allowance will be required even where full recovery of the principal is anticipated; this had the effect of increasing the 2005 charge by £209 million.

Excluding this effect, underlying impairment losses on loans and advances in 2005 totalled £1,093 million, £227 million or 26 per cent higher than £866 million in 2004.

The underlying charge in UK Retail Banking rose by £229 million, or 34 per cent, to £905 million in 2005. The charges in respect of personal loans and overdrafts and credit cards increased by £112 million and £65 million respectively as a result of volume growth and some deterioration in credit quality as increasing numbers of customers are experiencing repayment difficulties. There was a charge of £13 million in respect of the mortgage portfolio, compared to a release of £39 million in 2004.

The underlying charge in Wholesale and International Banking was £188 million compared to £193 million in 2004. The underlying charge within Corporate Markets was £91 million lower as a result of lower new provisions and maintaining a good level of recoveries; this was partially offset by higher charges in Asset Finance. The charge within Business Banking, which deals with small business customers, was little changed. Within International Banking, there was a credit of £15 million in 2005 compared to a credit of £39 million in 2004; both years benefited from good recoveries in Latin America although 2004 also benefited from a release of £30 million from the Lloyds TSB Group’s centrally held provision in respect of exposures in Argentina.

Overall, the Lloyds TSB Group’s charge in respect of impairment losses on loans and advances expressed as a percentage of average lending increased to 0.76 per cent compared to 0.59 per cent in 2004; although excluding the impact of IAS 39 the charge represented 0.66 per cent of average lending in 2005.

20


Taxation

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







UK corporation tax:

 

 

 

 

 

 

 

– Current tax on profits for the year

 

 

862

 

 

759

 

– Adjustments in respect of prior years

 

 

(20

)

 

(69

)

 

 

 

842

 

 

690

 

 

 

 

 

 

 

 

 

Double taxation relief

 

 

(138

)

 

(57

)









 

 

 

704

 

 

633

 

Foreign tax:

 

 

 

 

 

 

 

– Current tax on profits for the year

 

 

78

 

 

118

 

– Adjustments in respect of prior years

 

 

(8

)

 

(2

)

 

 

 

70

 

 

116

 

 

 

 

 

 

 

 

 









Current tax charge

 

 

774

 

 

749

 

Deferred tax

 

 

491

 

 

269

 









Total charge

 

 

1,265

 

 

1,018

 









The rate of tax is influenced by the geographic and business mix of profits. The effective rate of tax in 2005 was 33.1 per cent, compared to an effective rate of tax in 2004 of 29.3 per cent and the corporation tax rate in 2005 of 30 per cent. The effective tax rate is distorted by the requirement to include, within the income tax expense, policyholders’ tax and Open Ended Investment Company interests of £318 million (2004: £47 million); excluding these the effective tax rate in 2005 was 27.0 per cent compared to 28.3 per cent in 2004. The reduced effective tax rate in 2005 on this adjusted basis was primarily due to tax benefits arising on disposal and other gains. Lloyds TSB Group does not expect the tax rate, excluding the impact of policyholders’ tax and Open Ended Investment Company interests, to vary significantly from the average UK corporation tax rate.

Economic profit

In pursuit of the Group’s aim to maximise shareholder value over time, management has for a number of years used a system of value based management as a framework to identify and measure value creation. Management uses economic profit, a non-GAAP measure, as a measure of performance, and believes that it provides important information for investors, because it captures both growth in investment and return; profit before tax is the comparable GAAP measure used by management. Lloyds TSB Group defines economic profit as the earnings on the equity invested in the business less a notional charge for the cost of the equity invested in that business.

Lloyds TSB Group believes that economic profit instils financial discipline in determining investment decisions throughout Lloyds TSB Group and that it enables Lloyds TSB Group 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. Awards to senior executives under Lloyds TSB Group’s annual bonus arrangements are partly determined by the achievement of economic profit targets.

Management changes its estimates of the cost of equity only to reflect significant changes in long-term interest rates and other external market factors which are considered sustainable. The principal factor in estimating the cost of equity is sustainable long-term interest rates. If long-term interest rates increase, management will consider raising its estimate of the cost of equity; if long-term interest rates fall, management will consider reducing its estimate of the cost of equity. The principal other external market factors considered are equity risk premium and Lloyds TSB Group’s share price volatility relative to the UK stock market as a whole. Any change to the estimated cost of equity will be disclosed. For the last two years, management has used a cost of equity of 9 per cent to reflect the shareholders’ minimum required rate of return on equity invested.

The table below summarises Lloyds TSB Group’s calculation of economic profit for the years indicated.

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Average shareholders’ equity

 

 

9,747

 

 

10,493

 









Profit attributable to equity shareholders

 

 

2,493

 

 

2,392

 

Less: notional charge

 

 

(877

)

 

(944

)









Economic profit

 

 

1,616

 

 

1,448

 









The notional charge has been calculated by multiplying average shareholders’ equity by the cost of equity.

Economic profit increased to £1,616 million in 2005 compared to £1,448 million in 2004. Profit attributable to equity shareholders increased by £101 million, or 4 per cent, to £2,493 million; the notional charge on average equity, however, was £67 million lower, as a result of a 7 per cent decrease in average equity to £9,747 million compared to £10,493 million in 2004. The decrease in average equity primarily reflects the decrease of £1,558 million arising from the implementation of IAS 32, IAS 39 and IFRS 4 with effect from 1 January 2005.

21


Line of business information

Summary

The impact of IFRS, and in particular the increased use of fair values, has resulted in greater earnings volatility. In order to provide a more comparable representation of business performance this volatility has been separately analysed from the results of the individual business units. The results of the businesses are set out below:

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







UK Retail Banking

 

 

1,394

 

 

1,639

 

Insurance and Investments

 

 

725

 

 

778

 

Wholesale and International Banking

 

 

1,518

 

 

1,272

 

Central group items

 

 

(442

)

 

(350

)









Profit before tax, excluding volatility

 

 

3,195

 

 

3,339

 

Volatility

 

 

625

 

 

138

 









Profit before tax

 

 

3,820

 

 

3,477

 









Comparative figures for 2004 have been restated to reflect the adoption of those IFRS standards which are required to be applied retrospectively, but do not reflect the additional impacts arising from first time application of IAS 32 ‘Financial Instruments: Disclosure and Presentation’, IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 4 ‘Insurance Contracts’ (including UK Financial Reporting Standard 27 ‘Life Assurance’), which have been implemented with effect from 1 January 2005, with the opening balance sheet at that date adjusted accordingly.

22


UK Retail Banking

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Net interest income

 

 

3,521

 

 

3,228

 

Other income

 

 

1,605

 

 

1,696

 









Total income

 

 

5,126

 

 

4,924

 

Operating expenses

 

 

(2,697

)

 

(2,609

)









Trading surplus

 

 

2,429

 

 

2,315

 

Impairment losses on loans and advances

 

 

(1,111

)

 

(676

)

Profit on sale of businesses

 

 

76

 

 

 









Profit before tax

 

 

1,394

 

 

1,639

 









Cost:income ratio

 

 

52.6

%

 

53.0

%

Total assets (year-end)*

 

 

£103,930

m

 

£96,472

m

Total risk-weighted assets (year-end)*

 

 

£  60,582

m

 

£57,241

m










 

 

*

To ensure comparability, prior year asset and risk-weighted asset figures are shown as at 1 January 2005, following implementation of those international accounting standards for which restated comparatives are not required.

Profit before tax from UK Retail Banking decreased by £245 million, or 15 per cent, to £1,394 million, compared to £1,639 million in 2004. However, comparisons of performance are affected by the impact of the accounting standards implemented with effect from 1 January 2005, which has reduced the profit of UK Retail Banking in 2005 by £213 million; excluding this profit before tax was £1,607 million in 2005 which was £32 million, or 2 per cent, lower than 2004.

Net interest income was £293 million, or 9 per cent, higher at £3,521 million compared to £3,228 million; excluding the impact of IAS 39 which was implemented with effect from 1 January 2005, net interest income was £79 million, or 2 per cent, higher at £3,307 million. During 2005, good levels of growth were achieved in all key product areas. Gross new mortgage lending for the Group totalled £25,979 million; net new lending totalled £8,311 million resulting in a market share of net new lending of 9.1 per cent, and mortgage balances outstanding increased by 10 per cent to £88,376 million. Personal loan balances outstanding at the year-end were £11,023 million, an increase of 3 per cent and credit card balances totalled £7,209 million, an increase of 9 per cent, after adjusting to exclude the effect of the Goldfish disposal. Credit balances on current accounts and savings and investment accounts increased by 7 per cent. The benefit of this volume growth was, however, partly offset by reduced margins on mortgages and personal loans, as a result of competitive pressures.

Other income was £91 million, or 5 per cent, lower at £1,605 million compared to £1,696 million in 2004; however, excluding the effect of those accounting standards applied with effect from 1 January 2005 other income was £115 million, or 7 per cent, higher at £1,811 million. This increase in underlying other income reflects growth in current accounts fees, due to the continuing success of added-value accounts and the benefit of tariff reviews; increased card fee income, particularly in relation to overseas-use charges; and income from the successful new wealth management products.

Operating expenses were £88 million, or 3 per cent, higher at £2,697 million. Of this increase, £50 million is as a result of an increased charge in respect of customer redress, mainly relating to past sales of endowment products through the branch network, following a review by the Lloyds TSB Group of the expected total cost, in the light of the introduction of time-barring and a consequent increase in claims. Underlying operating expenses remain well controlled with the residual increase being largely attributable to higher levels of restructuring costs as back office operations continue to be rationalised.

Impairment losses on loans and advances, at £1,111 million, were £435 million or 64 per cent higher than 2004. The impact of the accounting standards applied with effect from 1 January 2005 accounted for £206 million of this increase; excluding this underlying impairment losses were £229 million, or 34 per cent, higher at £905 million in 2005. The charge in respect of personal loans, overdrafts and credit cards increased as a result of volume growth over recent years as well as some deterioration in credit quality as increasing numbers of customers, with higher levels of indebtedness, are experiencing repayment difficulties. Within the mortgage business there continued to be a low level of losses and as a result the impairment charge was £13 million, compared to a release of £39 million in 2004. Cheltenham & Gloucester (C&G) continued to focus on prime lending market segments during 2005. The average indexed loan-to-value ratio for C&G new mortgages and further advances written during 2005 was 64 per cent. At 31 December 2005, 95 per cent of C&G mortgage balances had an indexed loan-to-value ratio of less than 85 per cent and only 0.6 per cent of balances had an indexed loan-to-value ratio in excess of 95 per cent.

A profit of £76 million arose in 2005 on the disposal of the Goldfish credit card business.

23


Insurance and Investments

Lloyds TSB Group’s insurance and investments activities comprise the life, pensions and OEICs businesses of Scottish Widows and Abbey Life, general insurance underwriting and broking, and Scottish Widows Investment Partnership.

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Net interest income

 

 

389

 

 

283

 

Other income

 

 

13,116

 

 

10,736

 









Total income

 

 

13,505

 

 

11,019

 

Insurance claims

 

 

(12,186

)

 

(9,622

)









Total income, net of insurance claims

 

 

1,319

 

 

1,397

 

Operating expenses

 

 

(594

)

 

(622

)









Trading surplus

 

 

725

 

 

775

 

Impairment losses on loans and advances - credit

 

 

 

 

3

 









Profit before tax, excluding volatility

 

 

725

 

 

778

 

Volatility

 

 

749

 

 

138

 









Profit before tax

 

 

1,474

 

 

916

 









 

 

 

 

 

 

 

 

Analysis by area of business of profit before tax, excluding volatility

 

 

 

 

 

 

 

Life, pensions and OEIC’s

 

 

500

 

 

598

 

General insurance

 

 

209

 

 

172

 

Scottish Widows Investment Partnership

 

 

16

 

 

8

 









Profit before tax, excluding volatility

 

 

725

 

 

778

 









2005 compared to 2004

Profit before tax from the Lloyds TSB Group’s Insurance and Investments businesses was £1,474 million which was £558 million, or 61 per cent, higher than £916 million in 2004. However, much of this increase is due to volatility arising from market movements (see ‘Operating and financial review and prospects – Line of business information – Volatility’) and profit before tax excluding volatility was £53 million, or 7 per cent, lower at £725 million compared to £778 million in 2004. The 2005 results were reduced by a provision of £155 million for the strengthening of mortality reserves. The impact of the new accounting standards applied with effect from 1 January 2005 has been to reduce profit before tax, excluding volatility, by £73 million; excluding this effect profit before tax was £20 million, or 3 per cent, higher at £798 million compared to £778 million in 2004.

Net interest income, excluding volatility, was £106 million, or 37 per cent, higher at £389 million compared to £283 million in 2004. This increase reflected higher average levels of cash deposit investments in long-term business and policyholder funds.

Other income, excluding volatility, was £2,380 million, or 22 per cent, higher at £13,116 million compared to £10,736 million in 2004. One of the impacts of the application of IFRS 4 with effect from 1 January 2005 has been the need to reclassify as investment contracts certain transactions that were previously treated as insurance contracts. This has resulted in a decrease in other income largely offset by a decrease in insurance claims. Adjusting for this effect, underlying other income in 2005 was £15,820 million which was £5,084 million, or 47 per cent, higher than £10,736 million in 2004. This increase in underlying other income is principally due to a £1,131 million increase in insurance premium income, reflecting improved sales and increased policyholder activity, together with a £3,728 million increase in net trading income. Net trading income represents the realised and unrealised gains on investments held in the long-term funds, together with the interest and dividend income on those investments and the significant increase in 2005 reflects improved market returns.

The increase in premium income and trading income are largely offset by a matching increase in insurance claims, reflecting the fact that the majority of the premium inflows and investment gains are for the benefit of policyholders. Insurance claims were £2,564 million, or 27 per cent, higher at £12,186 million in 2005 compared to £9,622 million in 2004. If the 1 January 2005 reclassifications to investment contracts, described above, are excluded underlying insurance claims were £5,172 million, or 54 per cent, higher at £14,794 million in 2005, compared to £9,622 million in 2004.

Operating expenses reduced by £28 million, or 5 per cent, from £622 million in 2004 to £594 million in 2005. This decrease reflects the absence of a charge in respect of customer redress (£12 million in 2004) and a net credit in respect of deferred acquisition costs of £45 million in 2005, following the adoption of IFRS 4 with effect from 1 January 2005. Adjusting for these items, underlying operating expenses were £639 million in 2005, £29 million or 5 per cent higher than £610 million in 2004. This underlying increase in operating expenses reflected increased business volumes and some targeted project expenditure.

The profits of the life, pensions and OEIC’s business and the General insurance business are discussed further below.

24


Life, pensions and OEICs

The table below shows the level of new business premiums for the life and pensions business and OEIC sales. Management monitor these figures because they provide an indication of both the performance and the profitability of the business.

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







New business and OEIC sales

 

 

 

 

 

 

 

Regular premiums

 

 

356

 

 

343

 

Single premiums

 

 

3,982

 

 

3,141

 

OEIC’s

 

 

 

 

 

 

 

– Regular premiums

 

 

33

 

 

33

 

– Single premiums

 

 

1,148

 

 

538

 

Total OEIC’s

 

 

1,181

 

 

571

 









Weighted sales is a UK insurance industry standard which measures the new business volumes; the weighting is made towards regular premium policies to reflect the long-term nature of these contracts. There are three main distribution channels for the sale of Lloyds TSB Group’s life, pension and OEIC products and the table below shows the relative importance of each.

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Weighted sales (regular + 1/10 single):

 

 

 

 

 

 

 

Life and pensions

 

 

754

 

 

657

 

OEICs

 

 

148

 

 

86

 









Life, pensions and OEICs

 

 

902

 

 

743

 









Weighted sales by distribution channel:

 

 

 

 

 

 

 

Bancassurance

 

 

274

 

 

242

 

Independent financial advisers

 

 

562

 

 

432

 

Direct

 

 

66

 

 

69

 









Life, pensions and OEICs

 

 

902

 

 

743

 









Overall, weighted sales in 2005 increased by 21 per cent to £902 million and as a result the Lloyds TSB Group’s life, pensions and investments market share increased significantly to 6.0 per cent, compared with 5.7 per cent in 2004. New business regular premiums were £13 million, or 4 per cent, higher at £356 million compared to £343 million in 2004. Strong growth in sales of pension products, as a result of more focussed marketing, more than offset lower life protection sales, resulting from the slow down in the housing market. Single premium new business sales were £841 million, or 27 per cent, higher at £3,982 million compared to £3,141 million in 2004. Single premium life sales increased, particularly the Unit Linked Flexible Options Bond product, and single premium pension sales were higher, again as a result of the specific marketing focus.

Total OEICs sales increased significantly, by £610 million to £1,181 million in 2005 compared to £571 million in 2004. Regular premium sales were little changed with the increase being in single premium sales, primarily through bancassurance; this reflects a successful campaign in relation to the April 2005 tax year end and builds on the launch of the simplified product suite that was introduced at the end of 2004.

By distribution channel, bancassurance weighted sales were £32 million, or 13 per cent, higher at £274 million compared to £242 million in 2004; this reflected, in particular, the successful OEIC sales. Weighted sales via independent financial advisers were £130 million, or 30 per cent, higher at £562 million in 2005 compared to £432 million in 2004 supported by significant product and service enhancements; as a result the Lloyds TSB Group’s market share of the IFA market improved to 6.5 per cent, compared with 5.9 per cent in 2004.

Profit before tax, excluding volatility, from life, pensions and OEICs was £98 million, or 16 per cent, lower at £500 million compared to £598 million in 2004. Profitability in 2005 benefited from the absence of a provision for customer redress but the results in 2005 were reduced by a provision of £155 million for the strengthening of mortality reserves. Adjusting for these items, profit before tax, excluding volatility, in 2005 was £655 million compared to £610 million in 2004, an increase of £45 million or 7 per cent. The strong sales lead to an increased contribution from new business, partly offset by a commensurate increase in distribution costs. Improved investment earnings resulted from higher cash balances held for the account of the shareholder. OEICs profitability has risen following improved markets and sales volumes.

25


General insurance

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Net interest income

 

 

23

 

 

44

 

Other income

 

 

543

 

 

496

 









Total income

 

 

566

 

 

540

 

Insurance claims

 

 

(197

)

 

(214

)









Total income, net of insurance claims

 

 

369

 

 

326

 

Operating expenses

 

 

(160

)

 

(154

)









Profit before tax, excluding volatility

 

 

209

 

 

172

 

Volatility

 

 

28

 

 

8

 









Profit before tax

 

 

237

 

 

180

 









Profit before tax, excluding volatility, from the General insurance business was £209 million in 2005, which was £37 million, or 22 per cent, higher than £172 million in 2004. Net interest income was £21 million lower at £23 million, compared to £44 million in 2004, principally reflecting the adoption of IFRS 4 and IAS 39 from 1 January 2005.

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Premium income from underwriting:

 

 

 

 

 

 

 

Creditor

 

 

127

 

 

114

 

Home

 

 

441

 

 

442

 

Health

 

 

16

 

 

27

 

Reinsurance premiums

 

 

(22

)

 

(29

)









 

 

 

562

 

 

554

 









Commissions from insurance broking:

 

 

 

 

 

 

 

Creditor

 

 

396

 

 

442

 

Home

 

 

49

 

 

45

 

Health

 

 

15

 

 

20

 

Other

 

 

221

 

 

165

 









 

 

 

681

 

 

672

 









Other income, was £47 million, or 9 per cent, higher at £543 million compared to £496 million in 2004; £18 million of this reflected the impact of the accounting standards applied with effect from 1 January 2005 giving an underlying increase of £29 million, or 6 per cent. Premium income from underwriting, net of reinsurance, was £8 million, or 1 per cent, higher at £562 million; creditor insurance income was higher as a result of the business written in conjunction with the Lloyds TSB Group’s asset finance businesses but health premium income declined as a result of the transfer of part of this business to BUPA in 2004. Insurance broking commissions were £9 million, or 1 per cent, higher at £681 million compared to £672 million in 2004; creditor commissions were £46 million lower, as a result of a slowdown in unsecured lending growth during 2005. Other commissions, however, were £56 million higher due largely to higher levels of retrospective income on existing business.

Insurance claims, at £197 million, were £17 million, or 8 per cent, lower than £214 million in 2004. Creditor insurance payouts were lower due to a lower level of unemployment claims and home insurance claims were lower due to the relatively benign weather conditions. Health claims also fell, following the transfer of part of this business in 2004. The general insurance underwriting ratio improved to 34 per cent compared to 37 per cent in 2004.

Operating expenses, at £160 million, were £6 million, or 4 per cent, higher than £154 million in 2004; this increase reflects higher marketing spend together with some specific project costs.

26


Wholesale and International Banking

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Net interest income

 

 

2,265

 

 

2,006

 

Other income

 

 

1,628

 

 

1,558

 









Total income

 

 

3,893

 

 

3,564

 

Operating expenses

 

 

(2,181

)

 

(2,078

)









Trading surplus

 

 

1,712

 

 

1,486

 

Impairment losses on loans and advances

 

 

(188

)

 

(193

)

Loss on sale of businesses

 

 

(6

)

 

(21

)









Profit before tax

 

 

1,518

 

 

1,272

 









Cost:income ratio

 

 

56.0

%

 

58.3

%

Total assets (year-end) *

 

 

£124,044

m

 

£123,826

m

Total risk-weighted assets (year-end) *

 

 

£  80,154

m

 

£  71,013

m










 

 

*

To ensure comparability, prior year asset and risk-weighted asset figures are shown as at 1 January 2005, following implementation of those international accounting standards for which restated comparatives are not required.

Profit before tax from Wholesale and International Banking in 2005 was £246 million, or 19 per cent, higher at £1,518 million compared to £1,272 million in 2004. The overall impact of the accounting standards implemented with effect from 1 January 2005 was limited and accounted for £20 million of the increase in profits.

Net interest income was £259 million, or 13 per cent, higher at £2,265 million compared to £2,006 million in 2004. Of this increase, £100 million reflects the impact of implementation of IAS 39 from 1 January 2005 which has caused certain income previously classified as fees to be included in the effective interest rate calculation. Excluding this impact, net interest income was £159 million, or 8 per cent, higher at £2,165 million compared to £2,006 million in 2004. This underlying growth in net interest income reflected good growth in average lending balances in Corporate Banking, Structured Finance, Asset Finance and Business Banking; net interest margins were higher within Financial Markets, as a result of a change in mix of balances held, and within Structured Finance, as a result of the terms of new transactions taken on, although Corporate Banking margins reduced as a result of competitive pressures.

Other income was £70 million, or 4 per cent, higher at £1,628 million compared to £1,558 million in 2004. However, excluding the impact of the accounting standards implemented with effect from 1 January 2005, other income was £152 million, or 10 per cent, higher. This growth in underlying other income reflected increases in customer volumes within Corporate Banking, Structured Finance and Business Banking which resulted in higher lending and other fees. Business Banking also benefited from tariff reviews and from a lower level of commission clawback in respect of insurance sales; Asset Finance income increased as a result of organic growth and the impact of the motor dealerships acquired by the Lloyds TSB Group’s Dutton Forshaw subsidiary during 2005.

Operating expenses were £103 million, or 5 per cent, higher at £2,181 million compared to £2,078 million in 2004. This largely reflects higher staff costs in support of the substantial business growth within Wholesale and International Banking over 2005, together with the impact of the motor dealership acquisitions.

Impairment losses on loans and advances were £5 million, or 3 per cent, lower at £188 million compared to £193 million in 2004. Charges within Corporate Banking and Structured Finance reduced by £94 million as a result of lower new provisions and a good level of recoveries in 2005, in part reflecting the benign economic environment. The impairment charge within Asset Finance was £66 million higher than in 2004 as a result of the substantial lending growth in recent years, particularly in respect of personal finance. There was also a lower level of releases within the International Banking businesses, which in 2004 had benefited from a release of £30 million from the Lloyds TSB Group’s centrally held provision in respect of exposures in Argentina.

Wholesale and International Banking profit in 2005 was also reduced by a charge of £6 million in respect of the sale and closure of businesses; 2004 included a loss of £21 million which principally related to the sale of the Lloyds TSB Group’s businesses in Argentina and Colombia.

27


Central group items

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Lloyds TSB Foundations

 

 

(34

)

 

(31

)

Funding cost of acquisitions less earnings on capital

 

 

(380

)

 

(317

)

Central costs and other unallocated items

 

 

(8

)

 

(2

)

Loss on sale and closure of businesses

 

 

(20

)

 

 









Profit before tax, excluding volatility

 

 

(442

)

 

(350

)

Volatility

 

 

(124

)

 

 









Profit before tax

 

 

(566

)

 

(350

)









2005 compared to 2004

The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly the disabled and disadvantaged, to play a fuller role in society. The Foundations receive 1 per cent of the Lloyds TSB Group’s pre-tax profit after adjusting for gains and losses on the disposal of businesses and pre-tax minority interests, averaged over three years, instead of a dividend on their shareholdings. In 2005, the Lloyds TSB Group accrued £34 million for payment to registered charities. See note 42 to the financial statements.

The funding cost of acquisitions, less earnings on capital, was £63 million higher at £380 million; this increase principally reflects the reclassification, as a result of the implementation of IAS 39 with effect from 1 January 2005, of certain capital instruments from minority interests to loan capital. As a result, the funding cost is now reported within interest expense.

Volatility

 

 

 

 

 

 

 

 

 

 

2005
£m

 

2004
£m

 







Banking volatility

 

 

(124

)

 

 

Insurance volatility

 

 

438

 

 

168

 

Policyholder interests volatility

 

 

311

 

 

(30

)









Total volatility

 

 

625

 

 

138

 









Banking volatility

In accordance with IFRS, it is the Lloyds TSB Group’s policy to recognise all derivatives at fair value. The banking businesses manage their interest rate and other market risks primarily through the use of intra-Group derivatives, with the resulting net positions managed centrally using external derivatives. IFRS does not, however, permit the intra-Group derivatives to be used in a hedge relationship for reporting purposes. Although fair value accounting can have a significant impact on reported earnings, it does not impact on the business fundamentals or cash flows of the businesses. The Group has, therefore, implemented an internal pricing structure that allows divisions to transfer to central group items the volatility associated with marking-to-market derivatives held for risk management purposes. ‘Banking volatility’ is principally comprised of the difference between the result that would be recognised on an accrual accounting basis for derivatives held for risk management purposes and their mark-to-market value. The Lloyds TSB Group has set up a central hedging function to reduce the impact of this volatility by establishing, where possible, accounting hedge relationships for the external derivatives. During 2005, profit before tax included a negative banking volatility of £124 million.

Insurance volatility

Changes in market variables such as the performance of equity markets and the level of interest rates, which are beyond the control of management, can result in significant volatility in the profitability of the Lloyds TSB Group’s insurance businesses. As in previous years, in order to provide a clearer representation of the underlying performance of the life and pensions and general insurance businesses, the effect of these changes is separately analysed within insurance volatility. Following the implementation of the requirements of IFRS and FRS 27, insurance volatility is principally comprised of the elements described below.

The Lloyds TSB Group’s insurance businesses have substantial holdings of investments which are accounted for at fair value with changes being reflected within the income statement. The difference between the actual return on these investments attributable to shareholders and the expected return based upon economic assumptions made at the beginning of the year is included within insurance volatility. In addition, the calculation of the value of in-force business makes assumptions about future investment returns; to the extent that actual experience is different the effect is also included within insurance volatility.

28


The main assumptions used in the calculation of the value of in-force business were as follows:

 

 

 

 

 

 

 

 

 

 

31 December
2005
%

 

31 December
2004
%

 







Risk-adjusted discount rate (net of tax)

 

 

7.02

 

 

7.40

 

Return on equities (gross of tax)

 

 

6.72

 

 

7.17

 

Return on fixed interest securities (gross of tax)

 

 

4.12

 

 

4.57

 

Expenses inflation

 

 

3.79

 

 

3.76

 









Changes in stock market performance also affect the realistic valuation of the guarantees and options embedded within products written in the Scottish Widows With-Profits Fund, which following the implementation of FRS 27 is now reflected on the Lloyds TSB Group’s balance sheet. Fluctuations in this valuation caused by market-related movements are also included within insurance volatility. During 2005, profit before tax included positive insurance volatility of £438 million.

Policyholder interests volatility

As a result of the requirement contained in IFRS to consolidate life and pensions businesses on a line-by-line basis, the Lloyds TSB Group’s income statement includes amounts attributable to policyholders which affect profit before tax; the most significant of these items is policyholder tax. Under IFRS, tax on policyholder investment returns is included in the tax charge rather than being offset against the related income, either increasing or decreasing profit before tax with a corresponding change in the tax charge. In order to provide a clearer representation of the underlying performance of the Lloyds TSB Group’s life and pensions businesses the impact of these items upon pre-tax profit has been separately identified within volatility. During 2005, profit before tax included positive policyholder interests volatility of £311 million.

29


Future accounting developments

Future developments in relation to the Lloyds TSB Group’s IFRS reporting are discussed in note 55 to the financial statements and future developments in relation to US GAAP are discussed in note 56 to the financial statements.

IFRS compared with US GAAP

Under US GAAP, Lloyds TSB Group’s net income for the year ended 31 December 2005 was £1,351 million (2004: £1,508 million) compared to £2,493 million (2004: £2,392 million) under IFRS. Reconciliations between IFRS and US GAAP figures, together with detailed explanations of the accounting differences, are included in note 56 to the financial statements.

The Lloyds TSB Group’s IFRS net income increased by £101 million, or 4 per cent, in 2005 compared with 2004, whereas its US GAAP net income decreased by £157 million, or 10 per cent. The US GAAP results have been adversely affected by the Lloyds TSB Group’s decision not to hedge any of its financial instruments for US GAAP accounting purposes and the increased US GAAP net pension charge.

Hedge accounting. Under IFRS, changes in the fair value of derivatives that are designated as hedges are either offset against the change in fair value of the hedged asset or liability through earnings or recognised directly in equity until the hedged item is recognised in earnings, depending on the nature of the hedge. Under US GAAP, because Lloyds TSB Group has elected not to satisfy the more onerous hedging criteria of SFAS No. 133 ‘Accounting for Derivative Instruments and for Hedging Activities’ in respect of derivative contracts, these instruments are treated as being held for trading purposes, with the unrealised mark-to-market gains and losses taken to income as they arise and the resulting assets or liabilities recorded on the balance sheet. As Lloyds TSB Group continues to hold a significant number of derivatives which are hedge accounted under IFRS this means that net income and shareholders’ equity under US GAAP are subject to greater volatility.

Pensions. IFRS requires that the pension costs in the income statement reflect the cost of accruing benefits for active employees, benefit improvements and the cost of severances borne by the schemes net of the expected return on scheme assets. The Lloyds TSB Group has elected to apply the corridor approach in respect of actuarial gains and losses and so, to the extent that the cumulative gains or losses remain within a corridor defined as the greater of 10 per cent of the scheme assets or liabilities, they are not reflected in the accounts. US GAAP prescribes a similar method but allows a certain portion of actuarial gains and losses to be deferred and allocated in equal amounts over the average remaining service lives of the current employees.

At the beginning of the year the cumulative unrecognised actuarial losses related to the Lloyds TSB Group’s pension schemes exceeded the corridor limits on a US GAAP basis, but did not on an IFRS basis (as the relevant cumulative losses have only arisen since the adoption of IAS 19, Employee Benefits, on 1 January 2004) and consequently the 2005 US GAAP results include an amortisation charge which is not required under IFRS.

Other areas where differences in accounting have had a significant effect upon the Lloyds TSB Group’s US GAAP results are as follows:

Insurance accounting. Under IFRS, for insurance contracts (and, in 2004, investment contracts within life assurance operations) the discounted value of the projected future cash flows attributable to the shareholder is recognised at the point of sale. IFRS therefore results in a proportion of the profit expected to accrue over the life of various products being recognised at their inception. Under US GAAP income is recognised in the income statement in the period in which it is earned and expenses in the period in which they are incurred. This results in a more even recognition of profit over the life of the related policies.

Intangible assets. Under US GAAP, the Lloyds TSB Group has recognised intangible assets reflecting the value of the customer relationships associated with acquisitions made in prior periods. These intangible assets are amortised through the income statement reducing US GAAP net income. The reconciling item still exists, despite the convergence of IFRS and US GAAP in this area, as, on transition, the Lloyds TSB Group chose not to apply IFRS to business combinations that occurred before 1 January 2004.

30


Average balance sheet and net interest income

The tables below have been prepared in accordance with IFRS (for 2004 and 2005) and with UK Generally Accepted Accounting Principles (for 2003) and, as a result, the information included in the tables for 2004 and 2005 is not directly comparable with that for 2003.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

2005

 

 

 

 

 

2004

 

 

2004

 

 

 

 

 

 

 

Average

 

 

Interest

 

 

2005

 

 

Average

 

 

Interest

 

 

2004

 

 

 

 

balance

 

 

income

 

 

Yield

 

 

balance

 

 

income

 

 

Yield

 

IFRS

 

 

£m

 

 

£m

 

 

%

 

 

£m

 

 

£m

 

 

%

 





















Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury bills and other eligible bills:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

 

 

 

 

 

 

 

 

 

41

 

 

2

 

 

4.88

 

– Foreign offices

 

 

 

 

 

 

 

 

 

 

 

161

 

 

4

 

 

2.48

 

Loans and advances to banks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

31,198

 

 

1,111

 

 

3.56

 

 

26,731

 

 

917

 

 

3.43

 

– Foreign offices

 

 

2,224

 

 

88

 

 

3.96

 

 

2,071

 

 

62

 

 

2.99

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

152,469

 

 

9,859

 

 

6.47

 

 

127,646

 

 

8,221

 

 

6.44

 

– Foreign offices

 

 

4,948

 

 

236

 

 

4.77

 

 

5,514

 

 

219

 

 

3.97

 

Available-for-sale financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

9,623

 

 

349

 

 

3.63

 

 

 

 

 

 

 

 

 

 

– Foreign offices

 

 

4,554

 

 

159

 

 

3.49

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

 

 

 

 

 

 

 

 

 

9,989

 

 

300

 

 

3.00

 

– Foreign offices

 

 

 

 

 

 

 

 

 

 

 

4,372

 

 

118

 

 

2.70

 

Lease and hire purchase receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

11,137

 

 

787

 

 

7.07

 

 

11,118

 

 

864

 

 

7.77

 

– Foreign offices

 

 

 

 

 

 

 

 

 

 

 

 

 





















Total interest-earning assets of banking book

 

 

216,153

 

 

12,589

 

 

5.82

 

 

187,643

 

 

10,707

 

 

5.71

 

Total interest-earning trading securities and other financial assets at fair value through profit or loss (2004: trading assets)

 

 

31,185

 

 

1,563

 

 

5.01

 

 

34,037

 

 

1,536

 

 

4.51

 





















Total interest-earning assets

 

 

247,338

 

 

14,152

 

 

5.72

 

 

221,680

 

 

12,243

 

 

5.52

 

Allowance for impairment losses on loans and advances

 

 

(2,058

)

 

 

 

 

 

 

 

(1,729

)

 

 

 

 

 

 

Non-interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

58,916

 

 

 

 

 

 

 

 

47,510

 

 

 

 

 

 

 

– Foreign offices

 

 

919

 

 

 

 

 

 

 

 

902

 

 

 

 

 

 

 





















Total average assets and interest income

 

 

305,115

 

 

14,152

 

 

4.64

 

 

268,363

 

 

12,243

 

 

4.56

 





















Percentage of assets applicable to foreign activities (%)

 

 

4.2

 

 

 

 

 

 

 

 

4.8

 

 

 

 

 

 

 






















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

Average

 

 

2005

 

 

2005

 

 

Average

 

 

2004

 

 

2004

 

 

 

 

interest

 

 

Net

 

 

Net

 

 

interest

 

 

Net

 

 

Net

 

 

 

 

earning

 

 

interest

 

 

interest

 

 

earning

 

 

interest

 

 

interest

 

 

 

 

assets

 

 

income

 

 

margin

 

 

assets

 

 

income

 

 

margin

 

IFRS

 

 

£m

 

 

£m

 

 

%

 

 

£m

 

 

£m

 

 

%

 





















Average interest-earning assets and net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Banking business

 

 

216,153

 

 

5,671

 

 

2.62

 

 

187,643

 

 

5,110

 

 

2.72

 

– Trading securities and other financial assets at fair value through profit or loss (2004: trading assets)

 

 

31,185

 

 

1,114

 

 

3.57

 

 

34,037

 

 

947

 

 

2.78

 





















Net yield on interest-earning assets

 

 

247,338

 

 

6,785

 

 

2.74

 

 

221,680

 

 

6,057

 

 

2.73

 





















31


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

2005

 

 

 

 

 

2004

 

 

2004

 

 

 

 

 

 

 

Average

 

 

Interest

 

 

2005

 

 

Average

 

 

Interest

 

 

2004

 

 

 

 

balance

 

 

expense

 

 

Cost

 

 

balance

 

 

expense

 

 

Cost

 

IFRS

 

 

£m

 

 

£m

 

 

%

 

 

£m

 

 

£m

 

 

%

 





















Liabilities and shareholders’ funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits by banks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

23,645

 

 

854

 

 

3.61

 

 

20,199

 

 

456

 

 

2.26

 

– Foreign offices

 

 

4,075

 

 

99

 

 

2.43

 

 

4,227

 

 

102

 

 

2.41

 

Liabilities to banks under sale and repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

4,419

 

 

258

 

 

5.84

 

 

4,200

 

 

192

 

 

4.57

 

– Foreign offices

 

 

3

 

 

 

 

1.56

 

 

4

 

 

 

 

2.41

 

Customer accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

117,622

 

 

3,329

 

 

2.83

 

 

105,400

 

 

2,963

 

 

2.81

 

– Foreign offices

 

 

2,194

 

 

72

 

 

3.28

 

 

2,303

 

 

40

 

 

1.74

 

Liabilities to customers under sale and repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

4,179

 

 

134

 

 

3.21

 

 

2,787

 

 

125

 

 

4.49

 

– Foreign offices

 

 

106

 

 

2

 

 

1.89

 

 

121

 

 

2

 

 

1.65

 

Debt securities in issue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

27,895

 

 

1,199

 

 

4.30

 

 

19,837

 

 

924

 

 

4.66

 

– Foreign offices

 

 

3,026

 

 

108

 

 

3.57

 

 

2,685

 

 

48

 

 

1.79

 

Other interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

3,618

 

 

262

 

 

7.24

 

 

2,635

 

 

144

 

 

5.46

 

– Foreign offices

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinated liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

11,515

 

 

601

 

 

5.22

 

 

10,175

 

 

601

 

 

5.91

 

– Foreign offices

 

 

 

 

 

 

 

 

 

 

 

 

 





















Total interest-bearing liabilities of banking book

 

 

202,297

 

 

6,918

 

 

3.42

 

 

174,573

 

 

5,597

 

 

3.21

 

Total interest-bearing liabilities of trading book

 

 

11,245

 

 

449

 

 

3.99

 

 

14,992

 

 

589

 

 

3.93

 





















Total interest-bearing liabilities

 

 

213,542

 

 

7,367

 

 

3.45

 

 

189,565

 

 

6,186

 

 

3.26

 

Interest-free liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interests and shareholders’ funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

7,202

 

 

 

 

 

 

 

 

8,789

 

 

 

 

 

 

 

– Foreign offices

 

 

2,844

 

 

 

 

 

 

 

 

2,388

 

 

 

 

 

 

 

Non-interest bearing customer accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

3,636

 

 

 

 

 

 

 

 

3,134

 

 

 

 

 

 

 

– Foreign offices

 

 

267

 

 

 

 

 

 

 

 

372

 

 

 

 

 

 

 

Other interest-free liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

77,177

 

 

 

 

 

 

 

 

63,364

 

 

 

 

 

 

 

– Foreign offices

 

 

447

 

 

 

 

 

 

 

 

751

 

 

 

 

 

 

 





















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities and interest expense

 

 

305,115

 

 

7,367

 

 

2.41

 

 

268,363

 

 

6,186

 

 

2.31

 





















Percentage of liabilities applicable to foreign activities (%)

 

 

3.4

 

 

 

 

 

 

 

 

4.1

 

 

 

 

 

 

 





















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

2004

 

IFRS

 

 

 

 

 

 

 

 

 

 

 

%

 

 

 

 

 

%

 





















Net interest margin for the banking book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic offices

 

 

 

 

 

 

 

 

 

 

 

2.68

 

 

 

 

 

2.79

 

Foreign offices

 

 

 

 

 

 

 

 

 

 

 

1.72

 

 

 

 

 

1.74

 

Group margin

 

 

 

 

 

 

 

 

 

 

 

2.62

 

 

 

 

 

2.72

 





















Loans and advances to banks and customers include impaired lending. In 2004, interest receivable on such loans was only included to the extent to which cash payments had been received, in accordance with Lloyds TSB Group’s policy on income recognition. In 2005, interest has been recognised using the effective interest rate method, as required by IAS 39.

Approximately 85 per cent of the value of the balances are calculated on a daily basis with balances held by Lloyds TSB Group’s leasing and asset finance businesses averaged on a monthly basis. Management believes that the interest rate trends are substantially the same as they would be if all balances were averaged on the same basis.

32


Changes in net interest income – volume and rate analysis

The following table allocates changes in net interest income between volume and rate for 2005 compared with 2004. Where variances have arisen from both changes in volume and rate these are allocated to volume.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005 compared with 2004

 

 

 

 

Increase/(decrease)

 

 

 

Total change

 

Volume

 

Rate

 

IFRS

 

£m

 

£m

 

£m

 









Interest receivable and similar income

 

 

 

 

 

 

 

 

 

 

Loans and advances to banks:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

194

 

 

159

 

 

35

 

– Foreign offices

 

 

26

 

 

6

 

 

20

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

1,638

 

 

1,605

 

 

33

 

– Foreign offices

 

 

17

 

 

(27

)

 

44

 

Available-for-sale financial assets (2004: Treasury and other eligible bills and Debt securities):

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

47

 

 

(15

)

 

62

 

– Foreign offices

 

 

37

 

 

1

 

 

36

 

Lease and hire purchase receivables:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

(77

)

 

1

 

 

(78

)

– Foreign offices

 

 

 

 

 

 

 












Total banking book interest receivable and similar income

 

 

1,882

 

 

1,730

 

 

152

 

Total interest receivable and similar income on trading securities and other financial assets at fair value through profit or loss (2004: trading assets)

 

 

27

 

 

(143

)

 

170

 












Total interest receivable and similar income

 

 

1,909

 

 

1,587

 

 

322

 













 

 

 

 

 

 

 

 

 

 

 

 

 

2005 compared with 2004

 

 

 

Increase/(decrease)

 

 

 

Total change

 

Volume

 

Rate

 

IFRS

 

£m

 

£m

 

£m

 









Interest payable

 

 

 

 

 

 

 

 

 

 

Deposits by banks:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

398

 

 

124

 

 

274

 

– Foreign offices

 

 

(3

)

 

(4

)

 

1

 

Liabilities to banks under sale and repurchase agreements:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

66

 

 

13

 

 

53

 

– Foreign offices

 

 

 

 

 

 

 

Customer accounts:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

366

 

 

346

 

 

20

 

– Foreign offices

 

 

32

 

 

(4

)

 

36

 

Liabilities to customers under sale and repurchase agreements:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

9

 

 

45

 

 

(36

)

– Foreign offices

 

 

 

 

 

 

 

Debt securities in issue:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

275

 

 

346

 

 

(71

)

– Foreign offices

 

 

60

 

 

12

 

 

48

 

Other interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

118

 

 

71

 

 

47

 

– Foreign offices

 

 

 

 

 

 

 

Subordinated liabilities:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

 

 

70

 

 

(70

)

– Foreign offices

 

 

 

 

 

 

 












Total banking book interest payable

 

 

1,321

 

 

1,019

 

 

302

 

Total trading book interest payable

 

 

(140

)

 

(150

)

 

10

 












Total interest payable

 

 

1,181

 

 

869

 

 

312

 












33


The average balance sheet for 2003 excludes the long-term assurance business assets and liabilities attributable to policyholders. The interest yields and costs for foreign office assets and liabilities have been affected by Lloyds TSB Group’s operations in Latin America since the countries in which Lloyds TSB Group has operated are periodically subject to comparatively high rates of interest, in certain instances this has had the effect of producing unusually high yields and costs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

2003

 

 

2003

 

 

 

 

Average

 

 

Interest

 

 

 

 

 

 

 

balance

 

 

income

 

 

Yield

 

UK GAAP

 

 

£m

 

 

£m

 

 

%

 












Assets

 

 

 

 

 

 

 

 

 

 

Treasury bills and other eligible bills:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

2,237

 

 

68

 

 

3.04

 

– Foreign offices

 

 

541

 

 

5

 

 

0.92

 

Loans and advances to banks:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

11,831

 

 

412

 

 

3.48

 

– Foreign offices

 

 

2,487

 

 

117

 

 

4.70

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

111,340

 

 

6,877

 

 

6.18

 

– Foreign offices

 

 

18,491

 

 

1,434

 

 

7.76

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

9,863

 

 

350

 

 

3.55

 

– Foreign offices

 

 

4,664

 

 

102

 

 

2.19

 

Lease and hire purchase receivables:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

11,429

 

 

783

 

 

6.85

 

– Foreign offices

 

 

13

 

 

1

 

 

7.69

 












Total interest-earning assets of banking book

 

 

172,896

 

 

10,149

 

 

5.87

 

Total interest-earning assets of trading book

 

 

17,622

 

 

666

 

 

3.78

 












Total interest-earning assets

 

 

190,518

 

 

10,815

 

 

5.68

 

Provisions for bad and doubtful debts

 

 

(1,846

)

 

 

 

 

 

 

Non-interest earning assets:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

18,973

 

 

 

 

 

 

 

– Foreign offices

 

 

3,353

 

 

 

 

 

 

 












Total average assets and interest income

 

 

210,998

 

 

10,815

 

 

5.13

 












Percentage of assets applicable to foreign activities (%)

 

 

13.8

 

 

 

 

 

 

 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

2003

 

 

2003

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

interest

 

 

Net

 

 

 

 

 

 

 

earning

 

 

interest

 

 

 

 

 

 

 

assets

 

 

income

 

 

Yield

 

UK GAAP

 

 

£m

 

 

£m

 

 

%

 












Average interest-earning assets and net interest income:

 

 

 

 

 

 

 

 

 

 

– Banking business

 

 

172,896

 

 

5,255

 

 

3.04

 

– Trading business

 

 

17,622

 

 

 

 

 












Net yield on interest-earning assets

 

 

190,518

 

 

5,255

 

 

2.76

 












34


 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

2003

 

 

2003

 

 

 

 

Average

 

 

Interest

 

 

 

 

 

 

 

balance

 

 

expense

 

 

Cost

 

UK GAAP

 

 

£m

 

 

£m

 

 

%

 












Liabilities and shareholders’ funds

 

 

 

 

 

 

 

 

 

 

Deposits by banks:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

13,610

 

 

259

 

 

1.90

 

– Foreign offices

 

 

5,333

 

 

113

 

 

2.12

 

Liabilities to banks under sale and repurchase agreements:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

1,449

 

 

29

 

 

2.00

 

– Foreign offices

 

 

253

 

 

37

 

 

14.62

 

Customer accounts:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

97,864

 

 

2,282

 

 

2.33

 

– Foreign offices

 

 

8,637

 

 

450

 

 

5.21

 

Liabilities to customers under sale and repurchase agreements:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

2,990

 

 

148

 

 

4.95

 

– Foreign offices

 

 

156

 

 

3

 

 

1.92

 

Debt securities in issue:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

16,793

 

 

606

 

 

3.61

 

– Foreign offices

 

 

7,959

 

 

345

 

 

4.33

 

Subordinated liabilities:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

10,371

 

 

610

 

 

5.88

 

– Foreign offices

 

 

198

 

 

12

 

 

6.06

 












Total interest-bearing liabilities of banking book

 

 

165,613

 

 

4,894

 

 

2.96

 

Total interest-bearing liabilities of trading book

 

 

17,622

 

 

666

 

 

3.78

 












Total interest-bearing liabilities

 

 

183,235

 

 

5,560

 

 

3.03

 

Interest-free liabilities

 

 

 

 

 

 

 

 

 

 

Minority interests and shareholders’ funds:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

6,133

 

 

 

 

 

 

 

– Foreign offices

 

 

3,064

 

 

 

 

 

 

 

Non-interest bearing customer accounts:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

2,745

 

 

 

 

 

 

 

– Foreign offices

 

 

845

 

 

 

 

 

 

 

Other interest-free liabilities:

 

 

 

 

 

 

 

 

 

 

– Domestic offices

 

 

12,282

 

 

 

 

 

 

 

– Foreign offices

 

 

2,694

 

 

 

 

 

 

 












Total average liabilities and interest expense

 

 

210,998

 

 

5,560

 

 

2.64

 












Percentage of liabilities applicable to foreign activities (%)

 

 

12.9

 

 

 

 

 

 

 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

UK GAAP

 

 

 

 

 

 

 

 

%

 












Net interest margin for the banking book

 

 

 

 

 

 

 

 

 

 

Domestic offices

 

 

 

 

 

 

 

 

3.11

 

Foreign offices

 

 

 

 

 

 

 

 

2.67

 

Group margin

 

 

 

 

 

 

 

 

3.04

 












35


Risk management

Risk as a strategic differentiator

Following the embedding of the risk governance framework and the repositioning of specialist risk functions closer to the business in 2004, the focus for 2005 has been the development of a new risk framework which clearly aligns our risk taking to the objectives and priorities of Lloyds TSB Group and facilitates more effective decision making. The Group’s ability to take risks which are well understood, consistent with our strategy and plans and appropriately remunerated, is a key driver of shareholder return.

The maintenance of a strong control framework remains a priority and is the foundation for the delivery of effective risk management. Risk analysis and reporting have been further strengthened to identify opportunities as well as risks, to improve the Group’s ability to take an aggregate view of the overall risk portfolio and assign clear responsibilities and timescales at group and divisional level for risk mitigation strategies. Risk continues to be a key component of routine management information reporting and is embedded within staff objectives via balanced scorecards.

The objective remains to go beyond risk mitigation and control to developing risk capabilities as a key strategic differentiator for Lloyds TSB.

Regulatory requirements

Risk control

Defining and promoting
effective use of the
Group’s risk capacity

Differentiating excellence
in risk management

Effectiveness

Risk governance structures

The changing regulatory environment faced by the Group’s businesses, and developments in best practice, prompted the Group during 2003 and 2004 to perform an extensive review of its risk governance structures. During 2005 these structures have enabled the Group to strengthen risk evaluation and management.

Board and committees

Risk management oversight

Business risk management

Board and board committees

Management committees

Personnel

Functions

Direct reporting line

Functional reporting line to support committees

Functional reporting line

Business risk functions report to their respective managing director, who in turn reports to the group executive directors

Audit committee

Risk oversight committee

Group executive committee

Group chief executive

Group executive directors

Divisional risk officers

Director of group audit

Group Risk

Chief risk director

Business risk functions*

Group asset and liability
committee

Group business risk
committee

Lloyds TSB board

36


The board, assisted by its sub-committees, the risk oversight committee, the group executive committee and the audit committee approves the Group’s overall risk management framework. The board also reviews the Group’s aggregate risk exposures and concentrations of risk to seek to ensure that these are consistent with the board’s appetite for risk. The risk oversight responsibilities of the board, audit committee and risk oversight committee are shown in the corporate governance section (see ‘Management and employees – Corporate governance’) and further key risk oversight roles are described below.

The group executive committee, assisted by its sub-committees the group business risk committee and the group asset and liability committee, supports the group chief executive in ensuring the development, implementation and effectiveness of the Group’s risk management framework and the clear articulation of the Group’s risk policies, and reviews the Group’s aggregate risk exposures and concentrations of risk. The group executive committee’s duties are described more fully on page 92.

Directors of the Group’s businesses have primary responsibility for measuring, monitoring and controlling risks within their areas of accountability and are required to establish control frameworks for their businesses that are consistent with the Group’s high level policies and within the parameters set by the board, group executive committee and Group Risk. Compliance with policies and parameters is overseen by the risk oversight committee, the group business risk committee, the group asset and liability committee, Group Risk and the divisional risk officers.

The chief risk director, a member of the group executive committee and reporting directly to the group chief executive, oversees and promotes the development and implementation of a consistent group wide risk management framework. The chief risk director, supported by Group Risk, provides objective challenge to the Group’s senior management.

Divisional risk officers provide oversight of risk management activity within each of the Group’s operating divisions. Reporting directly to the group executive directors responsible for the divisions and the chief risk director, their day-to-day contact with business management, business operations and risk initiatives seeks to provide an effective risk oversight mechanism. The direct reporting line to the chief risk director enables the Group to maintain a wide ranging and current perspective on material risks facing the Group and provides a mechanism to share best risk management practice.

The director of group audit provides the required independent assurance to the audit committee and the board that risks within the Group are recognised, monitored and managed within acceptable parameters. Group Audit is fully independent of Group Risk, seeking to ensure objective challenge to the effectiveness of the risk governance framework.

Accountability of line management has been further reinforced in relation to the management of risks arising from the Group’s business and in developing the risk awareness and risk management capability of the Group’s staff. A key objective is to ensure that business decisions strike an appropriate balance between risk and reward, consistent with the Group’s risk appetite. The top management team received regular briefings and guidance from the chief risk director to ensure awareness of the overarching risk model and a clear understanding of their accountabilities for risk and internal control.

During the year a new Control Self Assessment process has increased the focus of management at all levels on risk management and reinforced accountabilities. All business units, divisional risk offices and group functions have completed a Control Self Assessment, reviewing the effectiveness of their internal controls and putting in place enhancements where appropriate. Managing directors and group executive directors have certified the accuracy of their assessment.

Business management forms part of a tiered risk management model, as shown on page 36, with the divisional risk officers providing oversight and challenge, as described above, and the chief risk director and group committees establishing the group wide perspective.

The model seeks to provide the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. It also facilitates effective communication on these matters across the Group. These arrangements enable the Group to anticipate and pre-empt risks better, and to manage more effectively those risks which crystallise.

Reflecting the importance the Group places on risk management, risk is one of the five principal criteria that it includes in its balanced scorecard on which individual staff performance is judged. Business executives have specified risk management objectives, and incentive schemes take account of performance against these.

Risk management framework

Lloyds TSB Group uses an enterprise-wide framework for the identification, assessment, measurement and management of risk, designed to meet its customers’ needs and maximise value for shareholders over time by aligning risk management with the corporate strategy; assessing the impact of emerging risks from new technologies or markets; and developing risk tolerances and mitigating strategies. The framework strengthens the Group’s ability to identify and assess risks; aggregate group-wide risks and define the corporate risk appetite; develop solutions for reducing or transferring risk, where appropriate; and exploit risks to gain competitive advantage, thereby seeking to increase shareholder value.

A key focus for 2005 has been the enhancement of this framework. The approach starts with a simple but clear articulation of the Group’s strategic vision and the desired outcomes for our key stakeholders (shareholders, customers, staff, debt holders and regulators). The risk implications are expressed in a risk vision and high level risk appetite measures, which are in turn translated into high level risk principles and risk appetite measures and metrics for the primary risk types (credit risk, market risk, insurance risk, operational risk, strategy risk and financial soundness). The degree of sophistication continues to evolve. An overview of each of the primary risk drivers is set out on pages 39 to 60. The more detailed articulation of the risk principles and distribution of the risk appetite measures amongst the divisions and businesses is subsequently agreed by the group chief executive, through consultation with the group executive committee and on the advice of the group business risk committee and the group asset and liability committee.

37


Risk language

The Group has revised the risk language during the year such that all risks are classified within one of six primary risk drivers. These are further broken down into thirteen enterprise wide risk management (EWRM) risk types to enable more detailed review and facilitate appropriate reporting and analysis of root causes, as set out below.

Primary risk
drivers

EWRM
risk types

Strategy

Strategy

Credit

Credit

Market

Market

Insurance

Insurance

Operational

Financial soundness

Financial soundness

Governance

Legal and regulatory

Customer treatment

Process and resource

Theft, fraud and
other criminal acts

People

Change

Product and service

Governance risk, legal and regulatory risk, customer treatment risk, process and resource risk, theft, fraud and other criminal acts risk, people risk and change-related risk are all categories of operational risk. A more detailed language has been identified for these operational risks.

Risk policy

A key component of the risk management framework is the policy framework. During the year this has been substantially revised to reinforce clarity of accountabilities, efficiency and effectiveness. The process of embedding will continue into 2006.

The main policy levels are identified below:

 

 

Principles – high level policy for the six primary risk drivers (agreed by the board)

 

 

Group policy – policy for the main EWRM risk types aligned to the risk drivers (agreed by the group chief executive)

 

 

Detailed group policy – detailed policy that applies across the Group (agreed by the chief risk director)

 

 

Divisional policy – local policy that specifically applies to a division (agreed by the appropriate group risk director)

 

 

Business unit policy – local policy that specifically applies to a business unit (agreed by the divisional risk officer)

Divisional and business unit policy is only produced by exception and is not necessary unless there is a specific area for which a particular division or business unit requires a greater level of detail than is appropriate for group level policy. The governance arrangements for development of, and compliance with, group, divisional and business unit policy, and the associated accountabilities are clearly outlined. All staff are expected to be aware of the policies and procedures which apply to them and their work and to observe the relevant policies and procedures. Line management in each business area has primary responsibility for ensuring that group policies and the relevant local policies and procedures are known and observed by all staff within that area.

Group and divisional risk functions have responsibility for overseeing effective implementation of policy. Group Audit provides independent assurance to the board about the effectiveness of the Group’s control framework and adherence to policy.

Policies are reviewed regularly to seek to ensure accuracy and appropriateness.

Risk reporting

Divisional risk functions use the standard language when reporting risks centrally, to enable risk aggregation, and when assessing risk levels of new products, change initiatives or business plans. Divisional risk committees monitor their risk levels against their risk appetite seeking to ensure effective mitigating action is being taken where appropriate. Divisional risk reports are reviewed by divisional executive committees to ensure divisional senior management are satisfied with the overall risk profile, risk accountabilities and progress on any necessary mitigating actions.

At group level a consolidated risk report is produced which is reviewed and debated by group business risk committee, group executive committee, risk oversight committee and board to ensure senior management and the board are satisfied with the overall risk profile, risk accountabilities and any necessary mitigating actions. During the year the Group’s consolidated risk report was further enhanced to support the identification, control and effective management of risk.

38


Strategy risk

The Group includes product and service risk within the wider definition of strategy risk and the two categories are described in further detail below.

Strategy risk

Definition

Strategy risk is the risk arising from developing a strategy that does not maximise franchise value and/or fails to achieve the initiatives in the agreed strategic plan due to changing or flawed assumptions. In assessing strategic risk consideration is given to both:

 

 

external factors (i.e. economic, technological, political, social and ethical, environmental, legal and regulatory, market expectations, reputation and competitive behaviour), and

 

 

internal factors (i.e. resource capability and availability, customer treatment, service level agreements, products and funding and the risk appetite of other risk categories).

Control

An annual strategic planning process is conducted at group and business level which includes a quantitative and qualitative assessment of the risks in the Group’s plan. Within the planning round, the Group conducts both scenario analysis and stress tests to assess risks to future earning streams.

The Group’s strategy is reviewed and approved by the board. Regular reports are provided to the group executive committee and the board on the progress of the Group’s key strategies and plans. Group Risk conducts oversight to seek to ensure the business plans remain consistent with the Group’s strategy. Revenue and capital investment decisions require additional formal assessment and approval. Formal risk assessment is conducted as part of the financial approval process. Significant company mergers and acquisitions require specific approval by the board. In addition to the standard due diligence conducted during a merger or acquisition, Group Risk conducts, where appropriate, an independent risk assessment of the target company and its proposed integration into Lloyds TSB Group.

A common approach is applied across the Group to assess the creation of shareholder value. This is measured by economic profit (the profit attributable to shareholders, less a notional charge for the equity invested in the business). The focus on economic profit allows the Group to compare the returns being made on capital employed in each business. The use of risk-based economic capital and regulatory capital is closely monitored at business and group level. The Group’s economic capital model covers credit, market, insurance, business and operational risks.

Product and service risk

Definition

The risk of reductions in earnings and/or value, through financial or reputational loss, from the inherent characteristics, management or distribution of products or services, or from failure to meet or better customer expectations and competitor offerings.

Control

The Group is strongly committed to the fair treatment of its customers. This is embedded into the processes and risk assessment which takes place to seek to ensure businesses have developed customer centric strategies for product and business development, marketing, selling and after sales service. Businesses maintain a range of products to meet customers’ needs and the business strategy and are responsible for managing and controlling product risks and complying with applicable regulations.

Businesses have formal processes for reviewing the range of their product portfolios and subject all product development to rigorous assessment. The assessment includes seeking to ensure that the product meets clearly defined customer needs. Businesses have a defined channel distribution strategy for products, consistent with the Group’s distribution strategy. Businesses launching new products are responsible for ensuring compliance with all applicable regulations and that the proposed sales activity is appropriate for the type of customer and their attitude to risk.

The Group defines a new product as a new or amended product that introduces a significantly different risk profile at group or business level. In line with defined policy, businesses provide divisional risk management with details of new products at an early stage of product or service development to seek to ensure compliance with the Group’s risk appetite and strategy. Businesses are required to demonstrate that new products meet clearly defined customer needs and that the sales process mitigates the risks of unsuitable sales. Where appropriate, technical advice and approval is sought from specialist functions. Only new products carrying the approval of divisional risk management and the businesses involved in their manufacture and delivery are offered to customers.

Businesses establish and monitor performance standards for all marketed products across a range of indicators, for example sales volumes, customer service and risk profile. Significant deviations from these standards are investigated and appropriate action taken.

39


Credit risk

Definition

The risk of reductions in earnings and/or value, through financial or reputational loss, as a result of the failure of the party with whom we have contracted to meet its obligations (both on and off balance sheet).

Credit risk framework

Credit risk is managed according to baseline credit framework standards, against which all activity is assessed. This framework identifies the following key elements: governance, organisational framework, policies, people, processes and procedures, management information, and systems and technology.

Credit risk can arise from lending or investing or through off balance sheet activities such as guarantees or the undertaking of settlement or delivery risk. The primary off balance sheet instruments used by the Group are guarantees together with standby, documentary and commercial letters of credit.

In its principal retail portfolios, the Group uses statistically-based decisioning techniques (primarily credit scoring), although thresholds are set above which an individual credit assessment takes place. Divisional risk departments review scorecard effectiveness and approve changes, with material changes subject to Group Risk approval. Credit risk in non-retail portfolios is subject to individual credit assessments, which consider the strengths and weaknesses of individual transactions and the balance of risk and reward.

Credit risk exposures in the insurance businesses arise primarily from holding investments and from exposure to reinsurers. Control is exercised over those exposures through a suitable combination of formal limits set out in mandates, credit policy parameters and high level committee oversight.

Credit risk also arises from the use of derivatives. Note 17 to the financial statements shows the total notional principal amount of interest rate, exchange rate and equity and other contracts outstanding at 31 December 2005. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure.

Credit risk may also arise through the existence of contracts for the provision of services or products to Lloyds TSB and this is also considered through individual credit assessments, where the risks of loss are material.

Day-to-day credit management and asset quality within each business is primarily the responsibility of the relevant business director.

Credit quality is supported by specialist units to provide, for example: intensive management and control; security perfection, maintenance and retention; expertise in documentation for lending and associated products; sector-specific expertise; and legal services applicable to the particular market place and product range offered by the business.

Impairment provisions are provided for losses that have been incurred at the balance sheet date. Changes in general economic conditions in the UK or in interest rates could result in losses that are different from those provided for at the balance sheet date.

Control

The following are the principal mechanisms through which the Group operates the credit risk framework set out above:

Credit rating systems. All business units operate appropriate rating system(s) for their portfolio(s). All rating systems, which are authorised by executive management, comply with the Group’s standard methodology. The Group uses a ‘Master Scale’ rating structure with ratings corresponding to a range of probabilities of future default.

Monitoring of rating systems. The Group uses rating systems as an integral part of the credit process deployed within the credit life cycle. Whilst divisional risk teams have responsibility for monitoring rating model performance, Group Risk reviews new models and material changes to existing models, seeking executive management approval as necessary.

Portfolio monitoring and reporting. With Group Risk, businesses and divisions identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed in terms of credit risk exposure. This entails the production and analysis of regular portfolio monitoring reports for review by Group Risk. Group Risk in turn produces an aggregated review of credit risk throughout the Group, which is presented to the group business risk committee.

Credit principles and policy. Group Risk sets out the group credit principles according to which credit risk is managed. These form the basis of the group credit policy, which in turn is the basis for divisional and business unit credit policy. Principles and policy are reviewed regularly and any changes are subject to a review and approval process.

Lending guidelines. These define the responsibilities of lending officers and seek to provide a disciplined and focused benchmark for credit decisions.

Counterparty limits. Exposure to individual counterparties, groups of counterparties or customer risk segments is controlled through a tiered hierarchy of delegated sanctioning authorities. Approval requirements for each decision are based on the transaction amount, the customer’s aggregate facilities, credit risk ratings and the nature and term of the risk. Regular reports on significant credit exposures are provided to the group executive committee and board.

40


Cross-border and cross-currency exposures. Country limits are authorised and managed by a dedicated unit taking into account economic and political factors.

Concentration risk. Credit risk management sets portfolio controls on certain industries, sectors and product lines that reflect risk appetite, and monitors exposures to prevent excessive concentration of risk. These concentration risk controls are not necessarily in the form of a maximum limit on lending but may instead require new business in concentrated sectors to fulfil additional hurdle requirements. Amongst these controls is a series of time-referenced sector caps to manage residual value risk exposure, seeking to ensure an acceptable distribution of risk. The Group’s large exposures are managed in accordance with regulatory reporting requirements.

Impairment process. The maintenance of adequate impairment allowances is considered a key issue from a credit control perspective. Impairment methodology is set out in credit policy and is subject to a rigorous governance process, including the preparation of a regular Impairment Review paper to executive management, consideration by dedicated business unit and divisional impairment review committees and the reporting to the group executive committee of material individual counterparty impairment charges.

Facilities database. A database is maintained of all non-retail customer relationships to assist in the identification and aggregation of cross-business unit commitments. The Group uses a system known as parent company executives, under which there is a central person responsible for each non-retail customer relationship, to whom other business units wishing to do business with the same customer must apply for credit limits.

Credit portfolio model. The Group models portfolio credit risk based on defaults, using a statistically-based model which calculates the economic equity employed and credit value at risk for each portfolio.

Stress testing and scenario analysis. The credit portfolio model is also used in stress-testing, to simulate a scenario and calculate its impact. Our modelling capabilities are currently subject to further development. Events are modelled both at a group wide level, at divisional and business unit level and by portfolio, for example, for a specific industry sector.

Risk assurance and oversight. Divisional and group level oversight teams monitor credit performance trends, review and challenge exceptions to planned outcomes and test the adequacy of credit risk infrastructure and governance processes throughout the Group. This includes tracking portfolio performance against an agreed set of key risk indicators. Risk assurance teams and Group Audit are engaged where appropriate to conduct further credit reviews if a need for closer scrutiny is identified.

Risk appetite

Credit risk appetite is defined as the quantum and quality of the desired credit portfolio and the direction in which the Group wants to manage it, in order to achieve its short and long-term strategic goals.

Historically, credit risk appetite has been described through a series of policies, sector caps, country limits and the annual and planned bad debt charge. To supplement this, and provide a more forward looking view of credit risk, we have now embarked on the process of introducing more sophisticated metrics to define credit risk appetite, assisted by the introduction of more advanced rating systems across the Group to support Basel II developments. A number of different measures have been developed to describe the Group’s credit risk appetite, since no single measure is considered sufficient. These metrics will be used as the basis for setting appetite ranges, at business unit, division and aggregated group level.

These appetite ranges will not replace the existing controls and measures set out above. It is expected that our appetite measures will be improved over time as usage is widened and methodologies developed.

Risk mitigation

Lloyds TSB Group uses a range of approaches to mitigate credit risk. In the case of individual exposures, the Group makes use of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure. The Group will also consider the sale of assets, where credit concerns exist. Securitisation is another credit mitigation technique which receives consideration as does the use of credit derivative-based approaches.

Where it is efficient and likely to be effective (generally with counterparties with which it undertakes a significant volume of transactions), the Group enters into master netting arrangements. Although master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis, they do reduce the credit risk to the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period since it is affected by each transaction subject to the arrangement.

41


Loan portfolio

The tables below have been prepared in accordance with IFRS (for 2004 and 2005) and with UK Generally Accepted Accounting Principles (for 2001, 2002 and 2003) and, as a result, the information included in the tables for 2004 and 2005 is not directly comparable with that for 2001, 2002 and 2003.

Analysis of loans and advances to banks and customers

The following tables analyse loans to banks and customers by geographical area and type of loan at 31 December for each of the five years listed.

 

 

 

 

 

 

 

 

IFRS

 

 

2005
£m

 

 

2004
£m

 









Domestic

 

 

 

 

 

 

 

Loans and advances to banks

 

 

28,859

 

 

29,052

 

Loans and advances to customers:

 

 

 

 

 

 

 

– Mortgages

 

 

88,528

 

 

80,065

 

– Other personal lending

 

 

22,776

 

 

22,830

 

– Agriculture, forestry and fishing

 

 

2,299

 

 

2,076

 

– Manufacturing

 

 

5,983

 

 

3,292

 

– Construction

 

 

2,059

 

 

1,877

 

– Transport, distribution and hotels

 

 

7,649

 

 

6,753

 

– Financial, business and other services

 

 

16,272

 

 

13,442

 

– Property companies

 

 

8,267

 

 

5,775

 

– Lease financing

 

 

5,815

 

 

6,227

 

– Hire purchase

 

 

4,853

 

 

4,828

 

– Other

 

 

7,696

 

 

5,223

 









 

 

 

 

 

 

 

 

Total domestic loans

 

 

201,056

 

 

181,440

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Loans and advances to banks

 

 

2,797

 

 

2,797

 

Loans and advances to customers:

 

 

 

 

 

 

 

– Mortgages

 

 

367

 

 

277

 

– Other personal lending

 

 

260

 

 

256

 

– Agriculture, forestry and fishing

 

 

46

 

 

31

 

– Manufacturing

 

 

795

 

 

511

 

– Construction

 

 

130

 

 

87

 

– Transport, distribution and hotels

 

 

730

 

 

1,041

 

– Financial, business and other services

 

 

1,586

 

 

1,763

 

– Property companies

 

 

142

 

 

64

 

– Other

 

 

763

 

 

583

 

 

Total foreign loans

 

 

7,616

 

 

7,410

 









Total loans

 

 

208,672

 

 

188,850

 

Allowance for impairment losses

 

 

(2,073

)

 

(1,663

)

Interest held in suspense

 

 

 

 

 

(21

)









Total loans and advances net of allowance for impairment losses

 

 

206,599

 

 

187,166

 









42


 

 

 

 

 

 

 

 

 

 

 

UK GAAP

 

 

2003
£m

 

 

2002
£m

 

 

2001
£m

 












Domestic

 

 

 

 

 

 

 

 

 

 

Loans and advances to banks

 

 

13,671

 

 

15,291

 

 

12,737

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– Mortgages

 

 

70,750

 

 

62,467

 

 

56,578

 

– Other personal lending

 

 

20,139

 

 

16,579

 

 

13,765

 

– Agriculture, forestry and fishing

 

 

2,025

 

 

2,076

 

 

2,074

 

– Manufacturing

 

 

3,211

 

 

3,373

 

 

3,321

 

– Construction

 

 

1,497

 

 

1,482

 

 

1,309

 

– Transport, distribution and hotels

 

 

4,741

 

 

4,696

 

 

4,440

 

– Financial, business and other services

 

 

9,652

 

 

8,352

 

 

8,736

 

– Property companies

 

 

4,577

 

 

4,008

 

 

2,907

 

– Lease financing

 

 

6,470

 

 

7,285

 

 

7,552

 

– Hire purchase

 

 

4,701

 

 

4,342

 

 

4,364

 

– Other

 

 

3,351

 

 

3,397

 

 

2,992

 












Total domestic loans

 

 

144,785

 

 

133,348

 

 

120,775

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

Loans and advances to banks

 

 

1,894

 

 

2,239

 

 

2,489

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– Mortgages

 

 

331

 

 

4,763

 

 

3,467

 

– Other personal lending

 

 

263

 

 

1,098

 

 

1,672

 

– Agriculture, forestry and fishing

 

 

40

 

 

2,220

 

 

1,708

 

– Manufacturing

 

 

926

 

 

1,608

 

 

2,004

 

– Construction

 

 

124

 

 

328

 

 

304

 

– Transport, distribution and hotels

 

 

1,423

 

 

2,459

 

 

2,570

 

– Financial, business and other services

 

 

1,866

 

 

3,196

 

 

2,631

 

– Property companies

 

 

74

 

 

1,117

 

 

896

 

– Lease financing

 

 

 

 

15

 

 

33

 

– Other

 

 

795

 

 

1,436

 

 

1,148

 

 

Total foreign loans

 

 

7,736

 

 

20,479

 

 

18,922

 












Total loans

 

 

152,521

 

 

153,827

 

 

139,697

 

Provisions for loan losses

 

 

(1,695

)

 

(1,767

)

 

(1,468

)

Interest held in suspense

 

 

(28

)

 

(57

)

 

(70

)












Total loans and advances net of provisions and interest held in suspense

 

 

150,798

 

 

152,003

 

 

138,159

 













 

 

 

 

 

 

 

 

IFRS

 

 

2005
£m

 

 

2004
£m

 








 

Analysis of foreign loans by region

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

– Latin America

 

 

173

 

 

125

 

– USA

 

 

1,984

 

 

2,385

 

– Europe

 

 

1,927

 

 

1,587

 

– Rest of the world

 

 

735

 

 

516

 









 

 

 

4,819

 

 

4,613

 









Loans and advances to banks:

 

 

 

 

 

 

 

– Latin America

 

 

76

 

 

72

 

– USA

 

 

315

 

 

69

 

– Europe

 

 

1,470

 

 

1,853

 

– Rest of the world

 

 

936

 

 

803

 









 

 

 

2,797

 

 

2,797

 









Total foreign loans

 

 

7,616

 

 

7,410

 









43


 

 

 

 

 

 

 

 

 

 

 

UK GAAP

 

 

2003
£m

 

 

2002
£m

 

 

2001
£m

 












Analysis of foreign loans by region

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– New Zealand

 

 

 

 

10,447

 

 

8,435

 

– Latin America

 

 

557

 

 

1,591

 

 

2,347

 

– USA

 

 

2,681

 

 

3,412

 

 

3,059

 

– Europe

 

 

1,981

 

 

2,142

 

 

2,118

 

– Rest of the world

 

 

623

 

 

648

 

 

474

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,842

 

 

18,240

 

 

16,433

 












Loans and advances to banks:

 

 

 

 

 

 

 

 

 

 

– New Zealand

 

 

 

 

622

 

 

534

 

– Latin America

 

 

143

 

 

52

 

 

209

 

– USA

 

 

95

 

 

227

 

 

158

 

– Europe

 

 

1,408

 

 

1,164

 

 

1,379

 

– Rest of the world

 

 

248

 

 

174

 

 

209

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,894

 

 

2,239

 

 

2,489

 












 

 

 

 

 

 

 

 

 

 

 

Total foreign loans

 

 

7,736

 

 

20,479

 

 

18,922

 












The classification of lending as domestic or foreign is based on the location of the office recording the transaction, except for certain lending of the international business booked in London.

44


Summary of loan loss experience

The following tables analyse the movements in the allowance for impairment losses for each of the five years listed.

 

 

 

 

 

 

 

 

IFRS

 

 

2005
£m

 

 

2004
£m

 









Balance at beginning of year

 

 

 

 

 

 

 

Domestic

 

 

1,562

 

 

1,468

 

Foreign

 

 

101

 

 

227

 









 

 

 

 

 

 

 

 

Total balance at beginning of year – before transition to IAS 39

 

 

1,663

 

 

1,695

 

Adjustment to reflect transition to IAS 39 on 1 January 2005

 

 

256

 

 

 

 









Balance at beginning of year after transition to IAS 39

 

 

1,919

 

 

 

 









Exchange and other adjustments

 

 

1

 

 

(11

)

 

 

 

 

 

 

 

 

Reclassifications

 

 

43

 

 

 

Acquisition and disposal of businesses

 

 

(27

)

 

(33

)

Advances written off:

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

– Mortgages

 

 

(6

)

 

(2

)

– Other personal lending

 

 

(900

)

 

(760

)

– Agriculture, forestry and fishing

 

 

(1

)

 

(4

)

– Manufacturing

 

 

(26

)

 

(39

)

– Construction

 

 

(8

)

 

(3

)

– Transport, distribution and hotels

 

 

(37

)

 

(33

)

– Financial, business and other services

 

 

(146

)

 

(17

)

– Property companies

 

 

 

 

(15

)

– Lease financing

 

 

(5

)

 

(3

)

– Hire purchase

 

 

(77

)

 

(49

)

– Other

 

 

(25

)

 

(36

)

Loans and advances to banks

 

 

 

 

(15

)









Total domestic

 

 

(1,231

)

 

(976

)

Foreign

 

 

(5

)

 

(52

)









 

 

 

 

 

 

 

 

Total advances written off

 

 

(1,236

)

 

(1,028

)









Recoveries of advances written off:

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

– Mortgages

 

 

2

 

 

2

 

– Other personal lending

 

 

124

 

 

119

 

– Agriculture, forestry and fishing

 

 

 

 

1

 

– Manufacturing

 

 

2

 

 

7

 

– Construction

 

 

1

 

 

7

 

– Transport, distribution and hotels

 

 

5

 

 

14

 

– Financial, business and other services

 

 

14

 

 

14

 

– Hire purchase

 

 

5

 

 

6

 

– Other

 

 

2

 

 

1

 









 

 

 

 

 

 

 

 

Total domestic

 

 

155

 

 

171

 

Foreign

 

 

3

 

 

3

 









 

 

 

 

 

 

 

 

Total recoveries of advances written off

 

 

158

 

 

174

 









Net advances written off:

 

 

 

 

 

 

 

Domestic

 

 

(1,076

)

 

(805

)

Foreign

 

 

(2

)

 

(49

)









Total net advances written off

 

 

(1,078

)

 

(854

)









45


 

 

 

 

 

 

 

 

IFRS

 

2005
£m

 

2004
£m

 







Effect of unwinding of discount recognised through interest income

 

 

(87

)

 

 

 

 

 

 

 

 

 

 

 

Allowances for impairment losses charged against income for the year:

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

– Mortgages

 

 

18

 

 

4

 

– Other personal lending

 

 

1,193

 

 

807

 

– Agriculture, forestry and fishing

 

 

 

 

(3

)

– Manufacturing

 

 

1

 

 

(1

)

– Construction

 

 

(3

)

 

4

 

– Transport, distribution and hotels

 

 

20

 

 

43

 

– Financial, business and other services

 

 

14

 

 

(13

)

– Property companies

 

 

 

 

15

 

– Lease financing

 

 

(3

)

 

7

 

– Hire purchase

 

 

70

 

 

57

 

– Other

 

 

(4

)

 

35

 

– General provisions

 

 

 

 

 

(57

)

 

 

 

 

 

 

 

 

Loans and advances to banks

 

 

 

 

 









Total domestic

 

 

1,306

 

 

898

 

Foreign

 

 

(4

)

 

(32

)









Total allowances for impairment losses charged against income for the year

 

 

1,302

 

 

866

 









Balance at end of year

 

 

 

 

 

 

 

Domestic

 

 

2,037

 

 

1,562

 

Foreign

 

 

36

 

 

101

 









Total balance at end of year

 

 

2,073

 

 

1,663

 









Ratio of net write-offs during the year to average loans outstanding during the year

 

 

0.6

%

 

0.6

%







46


 

 

 

 

 

 

 

 

 

 

 

UK GAAP

 

2003
£m

 

2002
£m

 

2001
£m

 









Balance at beginning of year

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

1,344

 

 

1,162

 

 

1,129

 

Foreign

 

 

423

 

 

306

 

 

297

 












Total balance at beginning of year

 

 

1,767

 

 

1,468

 

 

1,426

 












Exchange and other adjustments

 

 

(1

)

 

(58

)

 

(14

)

Acquisition and disposal of businesses

 

 

(54

)

 

3

 

 

 

Advances written off:

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– Mortgages

 

 

(1

)

 

(21

)

 

(23

)

– Other personal lending

 

 

(691

)

 

(554

)

 

(456

)

– Agriculture, forestry and fishing

 

 

(11

)

 

(2

)

 

(9

)

– Manufacturing

 

 

(30

)

 

(25

)

 

(18

)

– Construction

 

 

(11

)

 

(17

)

 

(8

)

– Transport, distribution and hotels

 

 

(40

)

 

(27

)

 

(34

)

– Financial, business and other services

 

 

(11

)

 

(53

)

 

(44

)

– Property companies

 

 

(36

)

 

(19

)

 

(21

)

– Lease financing

 

 

(4

)

 

(17

)

 

(11

)

– Hire purchase

 

 

(44

)

 

(50

)

 

(68

)

– Other

 

 

(47

)

 

(2

)

 

(9

)

Loans and advances to banks

 

 

 

 

 

 

 












Total domestic

 

 

(926

)

 

(787

)

 

(701

)

Foreign

 

 

(219

)

 

(91

)

 

(184

)












Total advances written off

 

 

(1,145

)

 

(878

)

 

(885

)












Recoveries of advances written off:

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– Mortgages

 

 

2

 

 

5

 

 

17

 

– Other personal lending

 

 

103

 

 

83

 

 

81

 

– Agriculture, forestry and fishing

 

 

2

 

 

3

 

 

4

 

– Manufacturing

 

 

6

 

 

17

 

 

5

 

– Construction

 

 

2

 

 

3

 

 

2

 

– Transport, distribution and hotels

 

 

7

 

 

12

 

 

10

 

– Financial, business and other services

 

 

7

 

 

13

 

 

11

 

– Property companies

 

 

6

 

 

10

 

 

6

 

– Lease financing

 

 

1

 

 

3

 

 

4

 

– Hire purchase

 

 

6

 

 

15

 

 

22

 

– Other

 

 

 

 

1

 

 

3

 












Total domestic

 

 

142

 

 

165

 

 

165

 

Foreign

 

 

36

 

 

38

 

 

29

 












Total recoveries of advances written off

 

 

178

 

 

203

 

 

194

 












Net advances written off:

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

(784

)

 

(622

)

 

(536

)

Foreign

 

 

(183

)

 

(53

)

 

(155

)












Total net advances written off

 

 

(967

)

 

(675

)

 

(691

)












47


 

 

 

 

 

 

 

 

 

 

 

UK GAAP

 

2003
£m

 

2002
£m

 

2001
£m

 












Provision for loan losses charged against income for the year:

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

– Mortgages

 

 

(19

)

 

(5

)

 

2

 

– Other personal lending

 

 

679

 

 

514

 

 

423

 

– Agriculture, forestry and fishing

 

 

8

 

 

 

 

3

 

– Manufacturing

 

 

 

 

31

 

 

40

 

– Construction

 

 

11

 

 

14

 

 

(2

)

– Transport, distribution and hotels

 

 

26

 

 

28

 

 

28

 

– Financial, business and other services

 

 

49

 

 

107

 

 

39

 

– Property companies

 

 

22

 

 

(1

)

 

4

 

– Lease financing

 

 

2

 

 

3

 

 

5

 

– Hire purchase

 

 

40

 

 

57

 

 

47

 

– Other specific provisions

 

 

32

 

 

38

 

 

23

 

– General provisions

 

 

9

 

 

14

 

 

(42

)

Loans and advances to banks

 

 

16

 

 

 

 

 












Total domestic

 

 

875

 

 

800

 

 

570

 

Foreign

 

 

75

 

 

229

 

 

177

 












Total provision for loan losses charged against income for the year

 

 

950

 

 

1,029

 

 

747

 












Balance at end of year

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

1,468

 

 

1,344

 

 

1,162

 

Foreign

 

 

227

 

 

423

 

 

306

 












Total balance at end of year

 

 

1,695

 

 

1,767

 

 

1,468

 












Ratio of net write-offs during the year to average loans outstanding during the year

 

 

0.7

%

 

0.5

%

 

0.6

%












48


The following tables analyse the coverage of the allowance for loan losses by category of loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

2004

 

IFRS

 

2005
Allowance
£m

 

Percentage of
loans in each
category to
total loans
%

 

2004
Allowance
£m

 

Percentage of
loans in each
category to
total loans
%

 











Balance at year end applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and advances to banks

 

 

1

 

 

13.8

 

 

1

 

 

15.4

 

Loans and advances to customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgages

 

 

36

 

 

42.4

 

 

11

 

 

42.3

 

Other personal lending

 

 

1,530

 

 

10.9

 

 

788

 

 

12.1

 

Agriculture, forestry and fishing

 

 

2

 

 

1.1

 

 

3

 

 

1.1

 

Manufacturing

 

 

28

 

 

2.9

 

 

64

 

 

1.7

 

Construction

 

 

8

 

 

1.0

 

 

17

 

 

1.0

 

Transport, distribution and hotels

 

 

58

 

 

3.7

 

 

84

 

 

3.6

 

Financial, business and other services

 

 

165

 

 

7.8

 

 

158

 

 

7.1

 

Property companies

 

 

4

 

 

4.0

 

 

 

 

3.1

 

Lease financing

 

 

4

 

 

2.8

 

 

10

 

 

3.3

 

Hire purchase

 

 

99

 

 

2.3

 

 

91

 

 

2.6

 

Other

 

 

102

 

 

3.7

 

 

55

 

 

2.8

 















Total domestic

 

 

2,037

 

 

96.4

 

 

1,282

 

 

96.1

 

Foreign

 

 

36

 

 

3.6

 

 

101

 

 

3.9

 

General provision

 

 

 

 

 

 

 

280

 

 

 















Total balance at year end

 

 

2,073

 

 

100.0

 

 

1,663

 

 

100.0

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

 

2002

 

 

 

2001

 

UK GAAP

 

2003
Allowance
£m

 

Percentage of
loans in each
category to
total loans
%

 

2002
Allowance
£m

 

Percentage of
loans in each
category to
total loans
%

 

2001
Allowance
£m