SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
24 February 2006
LLOYDS TSB GROUP plc
(Translation of registrant's name into English)
5th Floor
25 Gresham Street
London
EC2V 7HN
United Kingdom
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F..X..Form 40-F.....
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes .....No ..X..
If "Yes" is marked, indicate below the file number
assigned to the registrant in connection with Rule
12g3-2(b): 82- ________
Index to Exhibits
Item
No. 1 Regulatory News Service Announcement, dated 24 February 2006
re: Final Results
Lloyds TSB Group plc
2005 Results
PRESENTATION OF RESULTS
Up to 31 December 2004 the Group prepared its financial statements in accordance
with UK Generally Accepted Accounting Principles (UK GAAP). With effect from 1
January 2005 the Group implemented International Financial Reporting Standards
(IFRS). In this document the 2004 comparative financial information has been
restated to reflect the adoption of those IFRS standards which are required to
be applied retrospectively, but does not include 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. Further
information on the impact of implementing IFRS on comparative information was
published in the Group's 'Transition to IFRS' announcement on 27 May 2005.
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 for the Group's insurance and banking businesses (page 31, note 4). In
addition, other IFRS related adjustments applied with effect from 1 January
2005, for which comparatives are not required to be restated (page 31, note 3),
and the impact on the Group's results of businesses sold in 2004, have been
separately analysed in the Group's results. A reconciliation of this '
comparable' basis of presentation to the statutory profit before tax is shown on
page 1.
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the
business, strategy and plans of the Lloyds TSB Group, its current goals and
expectations relating to its future financial condition and performance. By
their nature, forward looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
The Group's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a result of a
variety of factors, including UK domestic and global economic and business
conditions, risks concerning borrower credit quality, market related risks such
as interest rate risk and exchange rate risk in its banking business and equity
risk in its insurance businesses, changing demographic trends, unexpected
changes to regulation or regulatory actions, changes in customer preferences,
competition and other factors. Please refer to the latest Annual Report on Form
20-F filed with the US Securities and Exchange Commission for a discussion of
such factors.
CONTENTS
Page
Profit before tax by division 1
Assets by division 1
Performance highlights 2
Summary of results 3
Group Chief Executive's statement 4
Group Finance Director's review of financial performance 8
Segmental analysis 11
Divisional performance
- UK Retail Banking 12
- Insurance and Investments 15
- Wholesale and International Banking 19
Consolidated income statement - statutory 22
Consolidated balance sheet - statutory 23
Condensed consolidated cash flow statement - statutory 24
Consolidated statement of changes in equity - statutory 25
Summarised segmental analysis - statutory 26
Notes 27
Contacts for further information 44
PROFIT BEFORE TAX BY Division
2005 2004 Change
GBPm GBPm %
UK Retail Banking
Before provisions for customer redress 1,681 1,739 (3)
Provisions for customer redress (150) (100)
1,531 1,639 (7)
Insurance and Investments
Before provisions for customer redress and strengthening of 908 790 15
reserves for mortality
Provisions for customer redress - (12)
Strengthening of reserves for mortality (page 10) (110) -
798 778 3
Wholesale and International Banking 1,504 1,253 20
Central group items (page 34 note 7) (367) (350)
Profit before tax - comparable basis 3,466 3,320 4
Volatility (page 31, note 4)
- Banking (124) -
- Insurance 438 168
- Policyholder interests 311 (30)
Other IFRS adjustments applied from 1 January 2005
(page 31, note 3)
- Before strengthening of reserves for mortality (276) -
- Strengthening of reserves for mortality (45) -
(321) -
Profit (loss) on sale of businesses (page 41, note 20) 50 (21)
Trading results of discontinued operations in 2004 - 40
Profit before tax 3,820 3,477 10
A more detailed reconciliation of comparable profit before tax to the Group's
profit before tax for the year is shown in note 2 on page 29.
ASSETS BY DIVISION
31 December 1 January
2005 2005 Change
GBPm GBPm %
UK Retail Banking 103,930 96,472 8
Insurance and Investments 80,148 70,734 13
Wholesale and International Banking 124,044 123,826 -
Central group items 1,632 1,822 (10)
Total assets 309,754 292,854 6
Page 1 of 44
PERFORMANCE HIGHLIGHTS
Results - statutory
- Profit before tax increased by GBP343 million, or 10 per cent, to GBP3,820
million.
- Profit attributable to equity shareholders increased by 4 per cent to
GBP2,493 million.
- Earnings per share increased by 4 per cent to 44.6p.
- Post-tax return on average shareholders' equity increased to 25.6 per cent,
from 22.8 per cent.
- Total capital ratio 10.9 per cent, tier 1 capital ratio 7.9 per cent.
- Dividend maintained. Final dividend of 23.5p per share, making a total of
34.2p for the year. Dividend cover increased to 1.3 times.
Results - comparable basis
- Profit before tax increased by GBP146 million, or 4 per cent, to GBP3,466
million.
Excluding customer redress provisions and the strengthening of reserves for
mortality:
- Profit before tax increased by GBP294 million, or 9 per cent, to GBP3,726
million.
- Income growth of 7 per cent exceeded cost growth of 4 per cent.
- Earnings per share increased by 11 per cent to 47.2p.
- Economic profit increased by 14 per cent to GBP1,620 million.
- Post-tax return on average shareholders' equity increased to 23.3 per cent,
from 22.2 per cent.
Key achievements
- Continued good levels of earnings momentum. Improved levels of revenue
growth.
- Costs remain firmly under control. Income growth of 7 per cent exceeded
cost growth of 4 per cent. Enhanced cost management programme announced.
- Good franchise growth with customer lending up by 9 per cent to GBP175
billion and customer deposits up by 4 per cent to GBP131 billion.
- Increasing signs of net interest margin stability. 5 basis points increase
in the banking net interest margin in the second half of 2005, compared to
the first half of 2005.
- 28 per cent increase in retail banking target customer recruitment. Good
levels of customer balance growth in many product areas.
- 21 per cent increase in life assurance new business weighted sales
(bancassurance up 13 per cent; IFA sales up 30 per cent). Significant
improvement in market share to an estimated 6.2 per cent, from 5.7 per
cent. 19 per cent increase in new business contribution, and higher new
business margin.
- Excellent progress in delivering the strategy to build an integrated
Wholesale bank. 31 per cent increase in Corporate Markets profit before
tax, and 35 per cent increase in Business Banking profit before tax.
- Overall credit quality remains satisfactory.
- Capital ratios remain robust, continued improvement in balance sheet
management.
Page 2 of 44
SUMMARY OF RESULTS
2005 2004 Change
Results - statutory GBPm GBPm %
Total income, net of insurance claims 10,540 9,661 9
Operating expenses 5,471 5,297 3
Trading surplus 5,069 4,364 16
Impairment losses on loans and advances 1,299 866 50
Profit before tax 3,820 3,477 10
Profit attributable to equity shareholders 2,493 2,392 4
Economic profit (page 40, note 17) 1,616 1,448 12
Earnings per share (page 40, note 18) 44.6p 42.8p 4
Post-tax return on average shareholders' equity 25.6% 22.8%
Results - comparable basis (page 29, note 2)
Total income, net of insurance claims 10,062 9,489 6
Operating expenses 5,506 5,266 5
Trading surplus 4,556 4,223 8
Impairment losses on loans and advances 1,090 903 21
Profit before tax 3,466 3,320 4
Excluding customer redress provisions and strengthening
of reserves for mortality
Total income, net of insurance claims 10,172 9,489 7
Operating expenses 5,356 5,154 4
Profit before tax 3,726 3,432 9
Economic profit 1,620 1,417 14
Earnings per share 47.2p 42.6p 11
Post-tax return on average shareholders' equity 23.3% 22.2%
Post-tax return on average risk-weighted assets 1.92% 1.98%
Shareholder value
Closing market price per share (year end) 488.5p 473p 3
Total shareholder return 10.9% 15.1%
Total market value of shareholders' equity GBP27.4bn GBP26.5bn 3
Proposed dividend per share (page 43, note 22) 34.2p 34.2p
31 December 1 January
2005 2005
GBPm GBPm
Balance sheet - statutory
Shareholders' equity 10,195 9,489 7
Net assets per share (pence) 180 167 8
Total assets 309,754 292,854 6
Loans and advances to customers 174,944 161,162 9
Customer deposits 131,070 126,349 4
Risk asset ratios
Total capital 10.9% 10.1%
Tier 1 capital 7.9% 8.2%
Page 3 of 44
GROUP CHIEF EXECUTIVE'S STATEMENT
2005 was a good year for the Group, both in terms of our financial performance
and, as importantly, in making further progress in the development of our
organic growth strategy.
On the financial side, we increased our already high return on equity and we
delivered a total return of 10.9 per cent to our shareholders. We grew the
trading surplus in each division as the rate of growth in income exceeded that
of costs and we achieved good overall earnings growth in the face of a slower
economic environment.
In terms of delivering the Group strategy, we have established better sales
momentum and stronger levels of customer acquisition in our banking businesses
and delivered good sales growth in our life assurance business over the course
of the year. Our market shares are either stable, or growing, in most of our
key product lines. Most importantly, our customer relationship programmes are
being effectively implemented and we are delivering higher revenues per customer
in our retail and corporate banking businesses.
We have significantly enhanced our productivity, as the quality programmes that
we commenced in 2003 continue to show improving results. This is reflected in
our cost:income ratio which, on a comparable basis and excluding customer
redress provisions and the strengthening of reserves for mortality, improved to
52.7 per cent, from 54.3 per cent in 2004, and I am pleased that we have
achieved this whilst continuing to invest substantially in the business. Our
customer satisfaction scores hit record highs in 2005, again reflecting the
improvement programmes established over the last couple of years, and we will
continue to drive further improvements as we seek to differentiate our service
performance against that of our competitors.
The risk environment remains satisfactory overall, although we have seen a
deterioration in the unsecured consumer lending portfolios as a result of an
increase in the number of customers facing repayment difficulties, which has
been offset by a strong performance in the Corporate lending portfolios. Over
time, we expect the consumer position to stabilise in an improving economy, and
for the trend in corporate impairments to move away from the unusually benign
recent experience.
Our employee engagement scores have also improved significantly during the year,
indicating that our people understand and are committed to our strategy, and we
have improved our performance management processes in support of the Group
strategy. We also strengthened our senior management team, with the addition of
key hires in the Retail Bank.
Overall, I am pleased with the progress of the Group during 2005. We delivered
on our financial plans and we also used the time to develop the franchise
successfully in line with our growth strategy. We have continued to make good
progress in each of the divisions, the highlights of which are summarised below.
In the Retail Bank, income grew 4 per cent whilst costs rose by just 1 per cent,
on a comparable basis and excluding customer redress provisions. This led to 7
per cent growth in the trading surplus which was offset by an increase in the
charge for impaired lending, reflecting an increase in customers experiencing
repayment difficulties. Profit before tax reduced by 3 per cent. To reflect
the general slowdown in the consumer credit markets, a number of actions were
taken over the course of the year to tighten credit underwriting.
Page 4 of 44
It is not in the interests of the individual customer or the Group to lend money
to a customer who cannot afford to repay. The Group takes its responsibilities
in this regard very seriously and has a responsible lending programme, to ensure
we help our customers clearly understand the nature of the agreements they are
entering into and we confirm affordability before agreeing to any borrowing
requests. Where customers do experience repayment difficulties, our staff are
trained to offer the necessary advice and support to manage their finances and
we have a Customer Support Unit, whose role it is to identify customers who are
showing early signs of financial difficulty so that we can provide early advice
and support to them.
The Retail Bank is committed to achieving top performance in both effectiveness
and efficiency. Effectiveness is the ability to recruit, develop and retain
loyal customers who think of us first for their next financial services need.
Efficiency is the ability to provide service and sales at a lower cost so that
we can give our customers better value. We believe that in order to achieve our
goal we must be customer rather than product centric.
We continue to focus our efforts on our existing customers where we have an
information advantage that allows us to be more effective and efficient in
providing sales and service that meet our customers' financial needs. We have
also stepped up our new customer recruitment efforts, which have helped drive
good target customer recruitment, particularly in the second half of the year,
to give a 28 per cent increase over last year.
We have committed ourselves to earning the right to meet 100 per cent of our
customers' financial services needs and helping them succeed financially. In
2005, we recorded our highest ever customer satisfaction scores across all our
channels - branch, telephone and internet banking. The improvement in customer
satisfaction and the renewed focus on meeting all our customers' financial
services needs has helped to drive an improving sales performance during 2005,
and has been accompanied by good balance growth in our key product lines with
mortgages up 10 per cent, credit cards (excluding Goldfish) up 9 per cent and
customer deposits 7 per cent higher. Sales through our internet and telephone
channels grew strongly by 28 per cent and 39 per cent respectively.
In Insurance and Investments, profits showed significant growth, reflecting
further success in delivering our strategies. Profit before tax, on a
comparable basis and excluding the 2004 customer redress provision and the
strengthening of reserves for mortality, increased by 15 per cent, underpinned
by strong growth in both the bancassurance and IFA channels and continued
control of costs. Profits grew strongly in both our life assurance and general
insurance businesses.
Scottish Widows delivered a significant increase in sales as we focused on more
profitable and more capital efficient business lines. This led to a 19 per cent
increase in new business contribution. Bancassurance sales grew by 13 per cent
despite a slowdown seen in the levels of mortgage related protection business.
The sales of OEICs increased by 72 per cent, building on the launch of the
simplified product suite that was introduced at the end of 2004.
IFA sales grew strongly with a 30 per cent improvement in weighted sales,
underpinned by product and service improvements in pensions and investments.
This improved performance led to an estimated market share of 6.8 per cent in
2005, compared to 5.9 per cent last year.
We have also invested in the development of new pensions and life platforms, and
continue to develop our distribution capabilities. We remain well placed to
benefit from the anticipated growth in savings and investment product sales over
the coming years. The new life platform has already supported the launch of the
new partnership with Virgin Money.
Page 5 of 44
Scottish Widows remains strongly capitalised. In addition to the payment of a
GBP200 million dividend to the Group in March 2005, Scottish Widows made a
further GBP800 million distribution to the Group in December 2005 as part of our
plans to improve capital efficiency. A second annual dividend will be paid in
March 2006.
Our General Insurance business continued its successful development, delivering
a 22 per cent growth in profits, supported by improvements to both the claims
and combined ratios. The results reflect continued successful cross sales to
franchise customers in both retail and business banking as well as continued
investment in our service performance, direct channel business and claims
processing.
In Wholesale and International Banking, our results show excellent progress in
our core businesses and the division delivered a 20 per cent improvement in
profit before tax, on a comparable basis, at the same time as improving returns.
The good results were achieved by the successful implementation of our
strategies in Business Banking and Corporate Markets and these businesses will
continue to provide the platform for profitable growth in the division. We
again maintained our management discipline of positive jaws, with the rate of
growth in income increasing by 10 per cent whilst costs grew by 7 per cent,
partly reflecting the increase in investment costs necessary to fund the ongoing
development of the division.
In Business Banking, we have again reported strong franchise growth winning
increasing numbers of new customers both through attracting profitable '
switchers' from other banks and by cementing our position as the leader in the
business start-ups market with a share of 22 per cent. We have continued to
build stronger relationships with our customers, as we satisfy more of their
needs, and this has been reflected in good balance growth in both customer
lending and deposits, as well as fee income.
Corporate Markets has delivered another strong performance with a 31 per cent
improvement in profits supported by a 27 per cent growth in income from the
cross-sale of products. The results reflect our strategy of managing these
businesses in an integrated manner in support of our customers' success. We
were pleased to receive external recognition of our efforts as we won a range of
awards including the CBI Bank of the Year Award 2005. Across the businesses,
our asset quality remains very strong with impairment losses declining year on
year. We are continuing to invest within Corporate Markets, in terms of our
relationship offers, our product range and our infrastructure, to ensure we can
meet even more of our customers' needs in a highly competitive market.
Turning to 2006, our objective across each of the divisions is to continue to
improve sales performance and deepen our customer relationships, which will
result in market share growth. To support our efficiency and productivity
objectives, we will continue to focus on the centralisation and
industrialisation of our manufacturing capabilities, take the next steps in our
procurement programme and further embed our quality approach throughout the
Group.
In support of our customer objectives, we have set stretching customer
satisfaction targets and will continue to develop our products, policies and
procedures in line with those targets. Our strong risk and control
infrastructure remains an important element of our growth strategy and will be
further enhanced as we seek to develop risk into a differentiating competency.
We will also continue to focus on the development of our staff, whilst aiming
for even stronger engagement scores.
Page 6 of 44
In summary, 2005 was a good year for the Group. We delivered on our short-term
financial goals whilst also investing in the long-term health of the business,
which is necessary to drive sustainable future earnings growth. This is our
last set of results under the chairmanship of Maarten van den Bergh and I would
like to take this opportunity to record my appreciation for his major
contribution to the Group over the past five and a half years. We are delighted
that Sir Victor Blank will succeed him and we look forward to welcoming him to
the Group shortly.
Continuing to grow a successful business is the best way for Lloyds TSB to
create value for all our stakeholders and to contribute to the wider economy.
We maintain one of the largest community investment programmes in the UK,
supporting our customers and staff and making a significant contribution to the
local communities in which we operate. Since 1997, the Lloyds TSB Foundations
have received over GBP250 million from the Group's pre-tax profits to distribute
to community groups and in 2006 they will receive in excess of GBP30 million.
Finally, I would like to express my continued thanks to all of the staff who
work for the Lloyds TSB Group. They remain committed to serving the needs of
our customers and their wonderful efforts are the key element to our continued
success.
J Eric Daniels
Group Chief Executive
Page 7 of 44
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
With effect from 1 January 2005, the Group has been using IFRS for financial
reporting. Although IFRS significantly changes the timing of earnings
recognition in financial results it has no impact on our business fundamentals
and cash flows, the development of our organic growth strategies, or our capital
management policies.
Details of the retrospective impact of the Group's implementation of IFRS were
published in our 'Transition to IFRS' announcement on 27 May 2005. The
increased use in IFRS of fair values has, however, led to greater volatility in
the earnings of the Group. In order to provide a more comparable representation
of our business performance this earnings volatility, together with other IFRS
related adjustments applied with effect from 1 January 2005 and the impact on
the Group's results of businesses sold in 2004, have been separately analysed to
provide a comparable basis of presentation.
In 2005 statutory profit before tax was GBP3,820 million, an increase of GBP343
million, or 10 per cent (2004: GBP3,477 million). Profit attributable to equity
shareholders increased by GBP101 million, or 4 per cent, to GBP2,493 million and
earnings per share increased by 4 per cent to 44.6p. Economic profit increased
by 12 per cent to GBP1,616 million.
On a comparable basis, profit before tax increased by GBP146 million, or 4 per
cent, to GBP3,466 million (2004: GBP3,320 million). Excluding the impact of
customer redress provisions and the strengthening of reserves for mortality,
profit before tax increased by 9 per cent to GBP3,726 million. Income increased
by 7 per cent whilst costs grew by only 4 per cent. Earnings per share
increased by 11 per cent to 47.2p. The post-tax return on shareholders' equity
increased to 23.3 per cent (2004: 22.2 per cent) and economic profit rose by 14
per cent to GBP1,620 million.
Our strategy to deepen customer relationships has led to an increase in customer
advances, particularly in mortgages, credit cards and corporate lending, and is
reflected in a 9 per cent increase in loans and advances to customers to GBP175
billion. Customer deposits increased by GBP5 billion, or 4 per cent, to GBP131
billion, largely as a result of good growth in customer savings accounts in the
retail business.
Group net interest income, on a comparable basis, increased by GBP423 million,
or 8 per cent, compared with last year. Good levels of consumer lending growth
increased average personal lending and credit card balances by GBP1.7 billion
and average mortgage balances by GBP7.8 billion. Customer lending growth in our
Business Banking and Corporate Markets franchises increased average
interest-earning assets by GBP4.4 billion. The banking net interest margin (page
34, note 8) decreased by 6 basis points to 2.78 per cent. Much of this margin
decline has been caused by the impact of lower earnings on the Group's capital
and other interest-free liabilities and, excluding this funding impact, the
margin was broadly stable year-on-year. The banking net interest margin in the
second half of 2005 actually increased by 5 basis points to 2.80 per cent,
compared with 2.75 per cent in the first half of 2005.
Other income, net of insurance claims, on a comparable basis and excluding the
strengthening of reserves for mortality, increased by GBP260 million, or 6 per
cent, to GBP4,659 million. Fees and commissions receivable increased by 9 per
cent to GBP3,315 million as a result of higher income from the strong volume
growth in current account fees and an increase in fees from large corporate
business and asset based lending, as a result of growing customer transaction
volumes.
Page 8 of 44
Operating expenses continued to be tightly controlled and on a comparable basis
increased by 5 per cent to GBP5,506 million (page 36, note 11). Excluding the
impact of customer redress provisions, operating expenses increased by only 4
per cent. Significant improvements continue to be made in processing and
operational efficiency and we have continued to expand our programme of
offshoring a number of our processing and back office operations to India.
Staff numbers reduced by 3,652 to 69,778 during the year, improving Group
productivity. As a result of this constant focus on day-to-day operating cost
control, the cost:income ratio, excluding customer redress provisions and the
strengthening of reserves for mortality, improved to 52.7 per cent, from 54.3
per cent in 2004.
Whilst the Group has demonstrated strong cost control during 2005, we have also
identified a number of key initiatives which collectively have the potential to
significantly improve our cost:income ratio over the next few years whilst also
improving operational efficiency and speed of execution. These self-funding
initiatives will capture significant groupwide synergies and fall broadly into
three categories:-
- improve our operational efficiency and management accountabilities through
organisational redesign and process re-engineering;
- consolidating similar back-office operations and achieving cost reductions
through standardising the way we operate and manage back-office processes
across the Group; and
- transforming groupwide procurement to enhance the way we manage suppliers
and achieve the most efficient pricing available.
This programme of efficiency improvement initiatives is expected to deliver
gross benefits of GBP275 million per annum for an initial investment of less
than GBP200 million, of which GBP40 million was charged in 2005. This will
continue to improve the Group's cost:income ratio whilst allowing substantial
scope to re-invest in the business. From 2007 onwards we expect the Group's
profit before tax to be increased by approximately GBP100-GBP150 million per
annum as a result of this programme of cost saving initiatives.
Overall asset quality remains satisfactory. On a comparable basis, impairment
losses on loans and advances increased by 21 per cent to GBP1,090 million. A
substantial reduction in impairment losses in the corporate franchise was more
than offset by higher retail impairments, resulting from a combination of volume
related asset growth in personal loan and credit card lending, the absence of a
provision release in the mortgage business which totalled GBP39 million in 2004
and more customers, with higher levels of indebtedness and therefore lower
levels of recovery, experiencing repayment difficulties. As a result of
tightening our credit underwriting criteria during 2005, the quality of new
business written during 2005 is good. Our impairment charge expressed as a
percentage of average lending increased to 0.66 per cent, compared to 0.61 per
cent in 2004 (page 37, note 13). On a statutory basis, impaired assets totalled
GBP4,122 million, compared with GBP3,515 million at 1 January 2005, representing
2.3 per cent of total lending, up from 2.1 per cent at 1 January 2005, but
unchanged from 30 June 2005.
We expect a further deterioration in the retail credit environment in the first
half of 2006 however, as a result of the improved quality of new business
written in the last 12 months, we expect greater stability in the second half of
2006. In Wholesale Markets, impairment levels have remained low throughout 2005
and the outlook for corporate lending remains good, although we expect a return
to more normal levels of impairment over time.
Page 9 of 44
Following the publication of revised annuitant mortality tables and consultation
on future mortality projections by the actuarial profession's Mortality
Committee, the Group has reviewed the annuitant mortality assumptions used in
its life assurance businesses. While the actuarial profession is still
consulting on the adoption of the new projections, the Group has decided to
strengthen its mortality related reserves by GBP155 million (GBP110 million on a
comparable basis).
Following the introduction of time-barring, and the consequent increase in
claims, the Group has also reviewed the estimated cost of redress payments to
customers, principally relating to past sales of mortgage endowment policies
through the branch network. This has led to an increased provision for customer
redress of GBP150 million.
Our capital position remains robust. At the end of December 2005, the total
capital ratio was 10.9 per cent and the tier 1 capital ratio was 7.9 per cent.
During the year, risk-weighted assets increased by 10 per cent to GBP144.9
billion, reflecting good levels of growth in consumer lending and mortgages and
strong growth in our Corporate Markets businesses. We continue to plan for
risk-weighted asset growth of mid-to-high single digits over the next few years,
and expected profit retentions remain sufficient to support this level of
risk-weighted asset growth. We are also significantly improving our balance
sheet management and capital efficiency, moving from a 'buy and hold' model
towards an 'origination and distribution' framework. In this context we are
planning to initiate a rolling residential mortgage securitisation programme in
the second half of 2006.
Scottish Widows continues to be one of the most strongly capitalised life
assurance companies in the UK. The working capital ratio of the Scottish Widows
Long-Term Fund remained strong at an estimated 17.8 per cent at the end of
December 2005. The required risk capital margin was covered over 11 times. In
March 2005, Scottish Widows paid a 2004 dividend of GBP200 million to Lloyds TSB
reflecting the start of an expected regular dividend stream, and in December
2005 a further GBP800 million of surplus capital was repatriated to the Group.
In March 2006, a second annual dividend will be paid to the Group. We are
continuing to examine opportunities to improve our capital efficiency and have
work in progress that we believe will allow Scottish Widows to repatriate
further surplus capital to the Group.
The Group's pension schemes accounting deficit totalled GBP2,910 million at the
end of December 2005 (GBP2,037 million net of deferred tax). During 2005 the
Group made additional voluntary contributions of GBP220 million to these schemes
to be applied in reduction of the schemes' deficit. The Group is currently in
the process of finalising its triennial actuarial valuation of the schemes and,
as part of this process, is also considering other methods of addressing the
schemes' deficit.
The board has decided to maintain the final dividend at 23.5p per share, to make
a total for the year of 34.2p. This represents a dividend yield for
shareholders of 7 per cent, calculated using the 31 December 2005 share price of
488.5p.
Helen A Weir
Group Finance Director
Page 10 of 44
SEGMENTAL ANALYSIS
Year ended
31 December 2005
Life,
pensions, Wholesale
UK OEICs Insurance and Central
Retail General and asset and International group
Banking Insurance management Investments Banking items Total
Comparable basis GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,307 41 370 411 2,165 (370) 5,513
Other income 1,811 525 15,295 15,820 1,710 2 19,343
Total income 5,118 566 15,665 16,231 3,875 (368) 24,856
Insurance claims - (197) (14,597) (14,794) - - (14,794)
Total income, net of 5,118 369 1,068 1,437 3,875 (368) 10,062
insurance claims
Operating expenses (2,682) (160) (479) (639) (2,186) 1 (5,506)
Trading surplus (deficit) 2,436 209 589 798 1,689 (367) 4,556
Impairment losses on loans (905) - - - (185) - (1,090)
and advances
Profit (loss) before tax* 1,531 209 589 798 1,504 (367) 3,466
Volatility
- Banking - - - - - (124) (124)
- Insurance - 28 410 438 - - 438
- Policyholder interests - - 311 311 - - 311
Other IFRS adjustments (213) - (73) (73) 20 (55) (321)
applied from 1 January
2005
Profit (loss) on sale and 76 - - - (6) (20) 50
closure of businesses
Profit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820
Year ended
31 December 2004
Life,
pensions, Wholesale
UK OEICs Insurance and Central
Retail General and asset and International group
Banking Insurance management Investments Banking items Total
Comparable basis GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,228 44 239 283 1,986 (407) 5,090
Other income 1,696 496 10,240 10,736 1,544 45 14,021
Total income 4,924 540 10,479 11,019 3,530 (362) 19,111
Insurance claims - (214) (9,408) (9,622) - - (9,622)
Total income, net of 4,924 326 1,071 1,397 3,530 (362) 9,489
insurance claims
Operating expenses (2,609) (154) (468) (622) (2,047) 12 (5,266)
Trading surplus (deficit) 2,315 172 603 775 1,483 (350) 4,223
Impairment losses on loans (676) - 3 3 (230) - (903)
and advances
Profit (loss) before tax* 1,639 172 606 778 1,253 (350) 3,320
Volatility
- Insurance - 8 160 168 - - 168
- Policyholder interests - - (30) (30) - - (30)
Loss on sale of businesses - - - - (21) - (21)
Trading results of - - - - 40 - 40
discontinued operations
Profit (loss) before tax 1,639 180 736 916 1,272 (350) 3,477
*comparable basis
Page11 of 44
DIVISIONAL PERFORMANCE
UK RETAIL BANKING
Comparable basis 2005 2004 Change
GBPm GBPm %
Net interest income 3,307 3,228 2
Other income 1,811 1,696 7
Total income 5,118 4,924 4
Operating expenses (2,532) (2,509) 1
Trading surplus 2,586 2,415 7
Impairment losses on loans and advances (905) (676) 34
Profit before tax, before provisions for customer redress 1,681 1,739 (3)
Provisions for customer redress (150) (100)
Profit before tax 1,531 1,639 (7)
Cost:income ratio, before provisions for customer redress 49.5% 51.0%
31 December 1 January
2005 2005
Total assets GBP103.9bn GBP96.5bn 8
Total risk-weighted assets GBP60.6bn GBP57.2bn 6
Key achievements
- Satisfactory income growth in a more challenging consumer environment, with
good growth in income per customer and a 28 per cent increase in target
customer current account recruitment.
- Tight cost control, with a clear focus on improving efficiency. Staff
reductions of 2,713 during the year resulted in lower costs in the second
half of the year.
- Positive jaws with income growth of 4 per cent exceeding cost growth,
excluding customer redress provisions, of 1 per cent.
- Good and broad customer balance growth:
- Group mortgage balances increased by 10 per cent to GBP88.4 billion.
- Credit card balances, adjusted to exclude the effect of the Goldfish
disposal, increased by 9 per cent to GBP7.2 billion.
- Personal loan balances increased by 3 per cent to GBP11.0 billion.
- Customer deposit balances increased by 7 per cent to GBP71.0 billion.
- Customer satisfaction levels reached their highest level in recent years
during 2005.
- Higher impairment charge reflecting marketwide deterioration in retail
credit quality as a result of more customers, with higher levels of
indebtedness, experiencing repayment difficulties.
Page 12 of 44
UK RETAIL BANKING (continued)
Profit before tax, on a comparable basis, from UK Retail Banking decreased by
GBP108 million, or 7 per cent, to GBP1,531 million, reflecting good levels of
business growth offset by higher impairment losses and customer redress
provisions. Increased income from continued growth in the Group's consumer
lending and customer deposit portfolios and improved current account fee income
was offset by a higher level of impairment losses in the Group's unsecured
lending portfolios. Total income increased by 4 per cent, notwithstanding a
decrease in commissions from creditor insurance, whilst cost growth, excluding
customer redress provisions, was 1 per cent. Other income increased by 7 per
cent, and now represents 35 per cent of total income.
During 2005, good levels of growth were achieved in all key product areas. Gross
new mortgage lending for the Group totalled GBP26.0 billion (2004: GBP26.3
billion). Net new lending totalled GBP8.3 billion resulting in a market share of
net new lending of 9.1 per cent, and mortgage balances outstanding increased by
10 per cent to GBP88.4 billion. Personal loan balances outstanding at the
year-end were GBP11.0 billion, an increase of 3 per cent and credit card
balances totalled GBP7.2 billion, an increase of 9 per cent, adjusting to
exclude the effect of the Goldfish disposal. Credit balances on current accounts
and savings and investment accounts increased by 7 per cent. Income per customer
continued to improve during the year.
Customers are increasingly choosing to buy through direct channels as well as
through our branches. Towards the end of 2005 we saw improved levels of growth
in branch based sales, particularly current and savings accounts, whilst
continued investment in our direct channel capabilities has supported good
levels of business growth. Sales through direct channels represent half of
total sales and, during 2005, internet product sales increased by 28 per cent
and product sales via the telephone increased by 39 per cent. Our internet bank
now has 3.7 million registered users and over 470 million transactions were
processed through internet banking, an increase of 40 per cent.
Lloyds TSB remains a leader in the added value current account market, with over
4 million customers. Target customer current account recruitment increased by
28 per cent, compared with 2004.
Operating expenses remained well controlled and, excluding customer redress
provisions, increased by only GBP23 million, or 1 per cent. This included higher
levels of restructuring costs as we continue to rationalise back office
operations to improve efficiency. Levels of customer service and satisfaction
have also continued to improve.
Impairment losses on loans and advances increased by GBP229 million, or 34 per
cent, to GBP905 million, reflecting a combination of volume related asset growth
in personal loan and credit card lending, the absence of a mortgage provision
release which in 2004 totalled GBP39 million, and the impact of more customers,
with higher levels of indebtedness, experiencing repayment difficulties. The
impairment charge as a percentage of average lending for personal loans and
overdrafts increased to 4.76 per cent, from 4.20 per cent in 2004, while the
charge in the credit card portfolio increased to 4.01 per cent, from 3.42 per
cent in 2004. In the mortgage business the Group continued to experience a low
level of losses and as a result the mortgage impairment charge was GBP13
million. Overall, the provisions charge as a percentage of average lending, on a
comparable basis, was 0.92 per cent, compared to 0.75 per cent in 2004.
Page 13 of 44
UK RETAIL BANKING (continued)
Within personal loans, key initiatives have been the increased use of
behavioural and risk-based pricing, and leveraging our customer insight
capabilities to enable the Group to deliver more competitive pricing to better
quality customers within our existing customer base. Over 99 per cent of new
personal loans and 77 per cent of new credit cards sold during 2005 were to
existing customers, where the Group has a better understanding of an individual
customer's total financial position. Dynamic delinquency measures remain in
line with our expectations given the slowdown in consumer spending.
Cheltenham & Gloucester (C&G) continued to focus on prime lending market
segments during 2005. The average indexed loan-to-value ratio on the C&G
mortgage portfolio was 43 per cent (31 December 2004: 41 per cent), and the
average loan-to-value ratio for C&G new mortgages and further advances written
during 2005 was 64 per cent (2004: 62 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 (31 December 2004: 94 per cent) and only 0.6 per cent of balances had
an indexed loan-to-value ratio in excess of 95 per cent (31 December 2004: 0.3
per cent).
Page 14 of 44
INSURANCE AND INVESTMENTS
2005 2004 Change
Comparable basis GBPm GBPm %
Net interest income 411 283
Other income 15,820 10,736
Total income 16,231 11,019
Insurance claims (14,684) (9,622)
Total income, net of insurance claims 1,547 1,397 11
Operating expenses (639) (610) 5
Trading surplus 908 787 15
Impairment losses on loans and advances - 3
Profit before tax, excluding customer redress provisions and 908 790 15
strengthening of reserves for mortality
Provisions for customer redress - (12)
Strengthening of reserves for mortality (110) -
Profit before tax 798 778 3
Profit before tax analysis
Life, pensions and OEICs* 683 610 12
General insurance 209 172 22
Scottish Widows Investment Partnership 16 8 100
Profit before tax* 908 790 15
*excluding customer redress provisions and strengthening of reserves for
mortality
Key achievements
- Significantly improved profit performance. Profit before tax, on a
comparable basis and excluding customer redress provisions and a
significant strengthening of reserves for mortality, increased by 15 per
cent to GBP908 million.
- Strong, and improving, sales performance. 21 per cent increase in Scottish
Widows' new business weighted sales, increasing the Group's market share of
life, pensions and long-term savings to an estimated 6.2 per cent, from
5.7 per cent.
- Excellent progress in increasing bancassurance sales, particularly in the
second half of 2005 when sales grew by 23 per cent, compared with the second
half of 2004.
- Improved profitability. New business contribution in Scottish Widows
increased by 19 per cent. Life and pensions new business margin increased
to 29.7 per cent.
- Good progress with General Insurance's strategy to develop its manufacturing
business and increase focus on direct channels. Strong focus on
improving underwriting capability, supply chain efficiency and claims
management led to profit before tax, on a comparable basis, increasing by
22 per cent.
- Strong capital position maintained. During 2005, Scottish Widows Group
repatriated GBP1 billion surplus capital to the Group.
Page 15 of 44
INSURANCE AND INVESTMENTS (continued)
Profit before tax, on a comparable basis, increased by GBP20 million, or 3 per
cent to GBP798 million despite a significant strengthening of reserves for
mortality which, on a comparable basis, totalled GBP110 million.
2005 2004 Change
Scottish Widows - profit before tax analysis* GBPm GBPm %
Life and pensions
New business contribution 224 188 19
Existing business 181 181 -
Investment earnings - normalised 196 167 17
Profit before tax 601 536 12
OEICs
Profit before tax 82 74 11
Profit before tax (life, pensions and OEICs) 683 610 12
New business margin (life and pensions) 29.7% 28.6%
*comparable basis, excluding customer redress provisions and the strengthening
of reserves for mortality
Profit before tax, excluding customer redress provisions and the strengthening
of reserves for mortality, from the Group's life, pensions and OEICs business
increased by 12 per cent to GBP683 million. The Group's strategy to improve its
returns by focusing on more profitable, less capital intensive, business whilst
constantly seeking to improve process and distribution efficiency has led to a
19 per cent increase in new business contribution to GBP224 million. As a result
of this improved capital efficiency and strong sales of pensions and single
premium investments, the life and pensions new business margin increased to 29.7
per cent (2004: 28.6 per cent).
Page 16 of 44
INSURANCE AND INVESTMENTS (continued)
2005 2004 Change
Weighted sales (regular + 1/10 single) GBPm GBPm %
Life and pensions 754 657 15
OEICs 148 86 72
Life, pensions and OEICs 902 743 21
Bancassurance 274 242 13
Independent financial advisers 562 432 30
Direct 66 69 (4)
Life, pensions and OEICs 902 743 21
Overall, weighted sales in 2005 increased by 21 per cent to GBP902 million and
as a result the Group's life, pensions and investments market share increased
significantly to an estimated 6.2 per cent, compared with 5.7 per cent in 2004.
During 2005 the Group launched a new group pensions platform which supported the
strong growth in sales during the year. Scottish Widows is now also one of the
largest UK providers of individual pensions. IFA sales grew 30 per cent to
GBP562 million, supported by significant product and service enhancements in
pensions and investments, and our estimated market share of the IFA market
improved to 6.8 per cent, from 5.9 per cent in 2004. Bancassurance sales were 13
per cent higher at GBP274 million. Weighted sales of OEICs were 72 per cent
higher, largely through the branch network and to Lloyds TSB private banking
clients. Our estimated market share through the bancassurance and direct
channels increased to an estimated 5.5 per cent, from 5.4 per cent in 2004.
In January 2006, Scottish Widows announced a new partnership with Virgin to
market life assurance and a new cancer insurance product under the Virgin Money
brand. This supports Scottish Widows' long-term strategy to secure a greater
breadth of distribution for its products.
Scottish Widows Investment Partnership
Pre-tax profit, on a comparable basis, from Scottish Widows Investment
Partnership (SWIP) increased to GBP16 million, compared with GBP8 million in
2004, reflecting improved market performance and increased revenues from new
business. SWIP won GBP4.4 billion of gross new business in 2005, an increase of
110 per cent on 2004, and its assets under management increased by 16 per cent
to GBP95 billion. Overall investment performance during 2005 has continued to
improve. Groupwide funds under management increased by 12 per cent to GBP121
billion.
Page 17 of 44
Insurance and Investments (continued)
General insurance
2005 2004 Change
Comparable basis GBPm GBPm %
Commission receivable 681 672 1
Commission payable (695) (750) (7)
Underwriting income (net of reinsurance) 562 554 1
Other income 18 64
Net operating income 566 540 5
Claims paid on insurance contracts (net of reinsurance) (197) (214) (8)
Operating income, net of claims 369 326 13
Operating expenses (160) (154) 4
Profit before tax 209 172 22
Claims ratio 34% 37%
Combined ratio 80.8% 83.2%
Profit before tax, on a comparable basis, from our general insurance operations
increased by GBP37 million, or 22 per cent, to GBP209 million. Operating income,
net of claims, increased by 13 per cent compared with cost growth of 4 per cent.
Good progress continues to be made in implementing new platforms for
underwriting and claims processes.
Net operating income improved by GBP26 million as growth in income from home and
motor business was partly offset by reduced broking commission from loan
protection insurance, reflecting the slowdown in unsecured consumer lending
growth during 2005 (page 35, note 10) and lower health premiums following the
transfer of the Group's medical insurance business to BUPA during 2004. Good
progress has also been made in building the Group's corporate partnering
capability with a new distribution agreement secured with MORE TH>N during 2005.
Our strategy to increase investment in more cost efficient distribution through
direct channels continues to generate earnings momentum with gross written
premiums from new policies sold through direct channels increasing by 9 per cent
in 2005. This reflected strong growth in levels of new business through the
internet, where home insurance sales increased by 39 per cent and motor
insurance sales by 12 per cent. New motor insurance sales by telephone
increased by 15 per cent. The business has also delivered substantial
improvements in business retention reflecting higher levels of customer
satisfaction and improvements in operational efficiency.
Claims fell by GBP17 million to GBP197 million, and the claims ratio improved to
34 per cent (2004: 37 per cent), reflecting good progress in re-engineering the
claims process and improvements in the cost effectiveness of the claims supply
chain, as well as lower health claims as a result of the transfer of the Group's
private medical insurance business to BUPA. As a result, the combined ratio
relating to the underwriting business improved to 80.8 per cent in 2005 (2004:
83.2 per cent).
Page 18 of 44
WHOLESALE AND INTERNATIONAL BANKING
2005 2004 Change
Comparable basis GBPm GBPm %
Net interest income 2,165 1,986 9
Other income 1,710 1,544 11
Total income 3,875 3,530 10
Operating expenses (2,186) (2,047) 7
Trading surplus 1,689 1,483 14
Impairment losses on loans and advances (185) (230) (20)
Profit before tax 1,504 1,253 20
Cost:income ratio 56.4% 58.0%
31 December 1 January
2005 2005
Total assets GBP124.0bn GBP123.8bn -
Total risk-weighted assets GBP80.1bn GBP71.0bn 13
2005 2004
Profit before tax by business unit GBPm GBPm
Corporate Markets 958 732 31
Business Banking 206 153 35
Asset Finance 219 240 (9)
International Banking 133 120 11
Other (12) 8
1,504 1,253 20
Key achievements
- Excellent profit growth. Profit before tax, on a comparable basis,
increased by 20 per cent to GBP1,504 million.
- Strong income growth, up 10 per cent, as Corporate Markets strategy begins
to deliver results. Income momentum improved during the year.
- Positive jaws. Income growth of 10 per cent exceeded cost growth of 7 per
cent. Continued investment in people and systems to support new product
capabilities.
- Low levels of impairment as a result of high corporate liquidity and a
continued strong level of recoveries. Impairment charge reduced
by 20 per cent.
- Good progress in delivering the strategy to build an integrated wholesale
bank for corporate markets. 17 per cent increase in Corporate Markets
trading surplus, and 31 per cent increase in profit before tax.
- Good levels of franchise growth in Business Banking. 24 per cent growth in
trading surplus, and 35 per cent growth in profit before tax.
- Good new business growth in Asset Finance with trading surplus up 12 per
cent. However, higher levels of retail impairment resulted in a fall
of 9 per cent in profit before tax.
- Improved post-tax return on risk-weighted assets from 1.41 per cent to
1.50 per cent.
Page 19 of 44
WHOLESALE AND INTERNATIONAL BANKING (continued)
Wholesale and International Banking profit before tax, on a comparable basis,
increased by GBP251 million, or 20 per cent, to GBP1,504 million. Income growth
of 10 per cent exceeded cost growth of 7 per cent, leading to a reduction in the
cost:income ratio to 56.4 per cent. Trading surplus increased by GBP206 million
or 14 per cent, to GBP1,689 million. There was strong profit growth in Corporate
Markets, Business Banking and International Banking while Asset Finance saw
strong trading surplus growth before higher impairment losses. Overall growth in
profit was ahead of growth in risk-weighted assets and has led to an increase in
the post-tax return on average risk weighted assets to 1.50 per cent, compared
to 1.41 per cent in 2004.
Net interest income increased by GBP179 million, or 9 per cent, reflecting
higher income from strong growth in customer lending in Corporate Markets,
Business Banking and Asset Finance. Other income increased by GBP166 million, or
11 per cent. Strong growth in structured finance transactions, increased fee
income from relationship business products and higher levels of cross-selling
activity led to an increase of 18 per cent in other income from Corporate
Markets. In addition, other income benefited from the impact of motor dealership
acquisitions in Asset Finance and sustained customer growth in Business Banking.
Costs were 7 per cent higher at GBP2,186 million, reflecting higher staff costs
as a result of our increased investment in people, as we continue to build up
our Corporate Markets product capability and expertise, and the impact of the
motor dealership acquisitions within Asset Finance.
The charge for impairment losses on loans and advances decreased by GBP45
million, or 20 per cent, to GBP185 million, as a result of lower provisions and
a good level of recoveries from the corporate lending portfolio, partially
offset by higher charges in the Asset Finance business.
In Corporate Markets, profit before tax grew by 31 per cent, from GBP732 million
in 2004, to GBP958 million, driven by a combination of higher income and a
reduction in impairment losses. Income increased by 15 per cent, including
higher levels of cross-selling income which increased by 27 per cent reflecting
our increased customer focus and integration across the business. Income growth
was strong in both relationship and transactional business. Customer
relationships continue to be deepened, and there has been considerable
investment in the business to broaden origination, distribution and portfolio
management capabilities. This has included the build up of new credit
structuring and loan trading teams and the launch of a variety of new products.
Profit before tax in Business Banking grew by GBP53 million, or 35 per cent, to
GBP206 million reflecting our strategy to move relationship managers back into
branches and closer to our customers. There was good growth in customer income,
tight control of costs and service and operational improvements. This supported
a 4 percentage point reduction in the cost:income ratio for the business.
Customer deposits rose by 4 per cent to GBP10.7 billion and customer lending
increased by 11 per cent to GBP8.0 billion. Business Banking continued to
develop and grow its customer franchise, with net customer recruitment of some
13,350 during 2005, reflecting a market leading position in both the overall and
start-up markets. Over 18,000 customers transferred their banking arrangements
to the Group from other banking providers.
Page 20 of 44
WHOLESALE AND INTERNATIONAL BANKING (continued)
Profit before tax in Asset Finance decreased by 9 per cent to GBP219 million,
reflecting higher impairment losses, which offset the continued development of
the motor and leisure, and contract hire businesses. Income increased by GBP71
million, or 8 per cent, leading to a 12 per cent growth in the trading surplus.
New business has increased by 7 per cent in the personal and retail finance
business. Lloyds TSB Commercial Finance has continued to grow strongly with a
19 per cent market share, measured by client numbers, and the motor and leisure
business continues to be the largest independent lender in the UK motor and
leisure point of sale market with a market share of 18 per cent.
In International Banking, profit before tax increased by GBP13 million, or 11
per cent, to GBP133 million. This reflects a reduction in costs and lower
impairment provisions which offset a GBP12 million, or 3 per cent, reduction in
income as a result of lower earnings on retained capital following the
repatriation of offshore capital to the Group.
Page 21 of 44
CONSOLIDATED INCOME STATEMENT - STATUTORY
2005 2004
GBPm GBPm
Interest and similar income 12,589 10,707
Interest and similar expense (6,918) (5,597)
Net interest income 5,671 5,110
Fees and commissions income 2,990 3,054
Fees and commissions expense (842) (844)
Net fees and commissions income 2,148 2,210
Net trading income 9,298 5,036
Insurance premium income 4,469 6,070
Other operating income 1,140 857
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
Basic earnings per share 44.6p 42.8p
Diluted earnings per share 44.2p 42.5p
Total dividend per share for the year* 34.2p 34.2p
Total dividend for the year* GBP1,915m GBP1,914m
*total dividend for the year represents the interim dividend paid in October
2005 and the final dividend which will be paid and accounted for in May 2006.
Page 22 of 44
CONSOLIDATED BALANCE SHEET - STATUTORY
31 December 1 January
2005 2005 31 December 2004
Assets GBPm GBPm GBPm
Cash and balances at central banks 1,156 1,078 1,078
Items in course of collection from banks 1,310 1,462 1,462
Treasury bills and other eligible bills 92
Trading securities and other financial
assets at fair value through profit or loss 60,374 56,840
Derivative financial instruments 5,878 9,263
Loans and advances to banks 31,655 31,851 31,848
Loans and advances to customers 174,944 161,162 155,318
Debt securities 43,485
Equity shares 27,310
Available-for-sale financial assets 14,940 14,593
Investment property 4,260 3,776 3,776
Goodwill 2,373 2,469 2,469
Value of in-force business 2,922 2,760 4,363
Other intangible assets 50 28 28
Tangible fixed assets 4,291 4,180 4,180
Other assets 5,601 3,392 9,013
Total assets 309,754 292,854 284,422
Equity and liabilities
Deposits from banks 31,527 39,723 39,723
Customer accounts 131,070 126,349 119,811
Items in course of transmission to banks 658 631 631
Derivative financial instruments and
other trading liabilities 6,396 10,334
Debt securities in issue 39,346 28,728 28,770
Liabilities arising from insurance contracts and 40,550 36,725 52,289
participating investment contracts
Liabilities arising from non-participating
investment contracts 21,839 16,361
Unallocated surplus within insurance businesses 518 426 1,362
Other liabilities 10,395 8,526 14,916
Retirement benefit obligations 2,910 3,075 3,075
Deferred tax liabilities 1,145 925 1,704
Other provisions 368 270 211
Subordinated liabilities 12,402 11,211 10,252
Total liabilities 299,124 283,284 272,744
Equity
Share capital 1,420 1,419 1,419
Share premium account 1,170 1,145 1,145
Other reserves 383 371 343
Retained profits 7,222 6,554 8,140
Shareholders' equity 10,195 9,489 11,047
Minority interests 435 81 631
Total equity 10,630 9,570 11,678
Total equity and liabilities 309,754 292,854 284,422
Page 23 of 44
CONDENSED CONSOLIDATED CASH FLOW STATEMENT - STATUTORY
2005 2004
GBPm GBPm
Net cash (used in) provided by operations (331) 12,214
Cash flows from investing activities
Purchase of fixed asset investments (10,088)
Proceeds from sale and maturity of fixed asset investments 9,732
Purchase of available-for-sale investments (10,108)
Proceeds from sale and maturity of available-for-sale investments 10,266
Purchase of fixed assets (1,843) (1,565)
Proceeds from sale of fixed assets 1,073 698
Acquisition of businesses, net of cash acquired (27) (16)
Disposal of businesses, net of cash disposed (4) (25)
Net cash used in investing activities (643) (1,264)
Cash flows from financing activities
Dividends paid to equity shareholders (1,914) (1,913)
Dividends paid to minority interests (37) (68)
Proceeds from issue of subordinated liabilities 1,361 699
Proceeds from issue of ordinary shares and transactions in own shares held in 26 11
respect of employee share schemes
Repayment of subordinated liabilities (loan capital) (232) (764)
Capital element of finance lease rental payments (2) (1)
Change in minority investment in subsidiaries 329 (151)
Net cash used in financing activities (469) (2,187)
Change in cash and cash equivalents (1,443) 8,763
Cash and cash equivalents at beginning of year 28,196 19,433
Cash and cash equivalents at end of year 26,753 28,196
Cash and cash equivalents comprise cash and balances at central banks (excluding
mandatory deposits) and amounts due from banks with a maturity of less than
three months.
Page 24 of 44
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - STATUTORY
Attributable to equity shareholders
Share capital Other Retained Minority
and premium reserves profits interests Total
GBPm GBPm GBPm GBPm GBPm
Balance at 1 January 2004 2,554 343 7,646 782 11,325
Currency translation differences - - (12) 1 (11)
Profit for the period - - 2,392 67 2,459
Total recognised income for the period - - 2,380 68 2,448
Dividends - - (1,913) (68) (1,981)
Purchase/sale of treasury shares - - 8 - 8
Employee share option schemes:
- value of employee services - - 19 - 19
- proceeds from shares issued 10 - - - 10
Changes in minority interests - - - (151) (151)
Balance at 31 December 2004 2,564 343 8,140 631 11,678
Adjustments on transition to IAS 32, - 28 (1,586) (550) (2,108)
IAS 39 and IFRS 4
Restated balance at 2,564 371 6,554 81 9,570
1 January 2005
Movement in available-for-sale - 8 - - 8
investments, net of tax
Movement in cash flow hedges, net of - 11 - - 11
tax
Currency translation differences - (7) 24 - 17
Net income recognised directly in - 12 24 - 36
equity
Profit for the period - - 2,493 62 2,555
Total recognised income for the period - 12 2,517 62 2,591
Dividends - - (1,914) (37) (1,951)
Purchase/sale of treasury shares - - 18 - 18
Employee share option schemes:
- value of employee services - - 47 - 47
- proceeds from shares issued 26 - - - 26
Changes in minority interests - - - 329 329
Balance at 31 December 2005 2,590 383 7,222 435 10,630
Page 25 of 44
SUMMARISED SEGMENTAL ANALYSIS - STATUTORY
Year ended
31 December 2005
Life,
pensions, Wholesale
UK OEICs Insurance and Central
Retail General and asset and International group
Banking Insurance management Investments Banking items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,521 23 372 395 2,265 (510) 5,671
Other income 1,605 571 13,288 13,859 1,628 (37) 17,055
Total income 5,126 594 13,660 14,254 3,893 (547) 22,726
Insurance claims - (197) (11,989) (12,186) - - (12,186)
Total income, net of 5,126 397 1,671 2,068 3,893 (547) 10,540
insurance claims
Operating expenses (2,697) (160) (434) (594) (2,181) 1 (5,471)
Trading surplus (deficit) 2,429 237 1,237 1,474 1,712 (546) 5,069
Impairment losses on loans (1,111) - - - (188) - (1,299)
and advances
Profit (loss) on sale and 76 - - - (6) (20) 50
closure of businesses
Profit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820
Year ended
31 December 2004
Life,
pensions, Wholesale
UK OEICs Insurance and Central
Retail General and asset and International group
Banking Insurance management Investments Banking items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,228 44 239 283 2,006 (407) 5,110
Other income 1,696 504 10,370 10,874 1,558 45 14,173
Total income 4,924 548 10,609 11,157 3,564 (362) 19,283
Insurance claims - (214) (9,408) (9,622) - - (9,622)
Total income, net of 4,924 334 1,201 1,535 3,564 (362) 9,661
insurance claims
Operating expenses (2,609) (154) (468) (622) (2,078) 12 (5,297)
Trading surplus (deficit) 2,315 180 733 913 1,486 (350) 4,364
Impairment losses on loans (676) - 3 3 (193) - (866)
and advances
Loss on sale of businesses - - - - (21) - (21)
Profit (loss) before tax 1,639 180 736 916 1,272 (350) 3,477
Page 26 of 44
NOTES
1. Accounting policies and presentation
Except as noted below, the accounting policies adopted in the preparation of the
2005 results are unchanged from those disclosed in the Group's announcement
setting out the effects of the implementation of International Financial
Reporting Standards ('IFRS') and Financial Reporting Standard 27 ('FRS 27'),
published on 27 May 2005. Copies of this announcement are available on the
Group's website at www.lloydstsb.com/investorrelations.
The Group recognises as an asset the value of in-force life assurance business
in respect of life assurance contracts and participating investment contracts,
representing the net present value of future profits expected to accrue to the
shareholder from these contracts. In the Group's first IFRS results for the six
months ended 30 June 2005, the asset in the consolidated balance sheet and
movements in the asset recognised in the income statement were calculated and
disclosed on a net of tax basis. Since that time accounting practice has
continued to evolve and a consensus has emerged that the value of in-force
business should be presented gross of tax. The Group has therefore changed its
accounting policy to present movements in the value of in-force business gross
of attributable tax with a consequential adjustment to the tax charge; there is
no effect upon the Group's earnings or shareholders' equity. Comparative
figures have been restated accordingly.
Comparative figures have also been restated to allow for deferred tax on
properties acquired as part of a business combination and for the
reclassification of certain balance sheet items following revised
interpretations of the requirements of IFRS. This has resulted in a reduction
in shareholders' equity although there is no significant impact upon the Group's
income statement.
The effect of these changes is set out below.
Year ended 31 December 2004 Value of
Previous in-force Other
basis business adjustments Restated
GBPm GBPm GBPm GBPm
Profit before volatility 3,348 (9) - 3,339
Volatility 147 (9) - 138
Profit before tax 3,495 (18) - 3,477
Taxation (1,036) 18 - (1,018)
Profit for the year 2,459 - - 2,459
At 1 January 2005
Total assets 291,997 870 (13) 292,854
Shareholders' equity 9,572 - (83) 9,489
Page 27 of 44
1. Accounting policies and presentation (continued)
Half-year ended 30 June 2005 Value of
Previous in-force Other
basis business adjustments Restated
GBPm GBPm GBPm GBPm
Profit before volatility 1,723 45 - 1,768
and other IFRS adjustments
Volatility 77 10 - 87
Other IFRS adjustments (124) (18) - (142)
Profit before tax 1,676 37 - 1,713
Taxation (472) (37) - (509)
Profit for the period 1,204 - - 1,204
At 30 June 2005
Total assets 305,212 907 (13) 306,106
Shareholders' equity 9,475 - (83) 9,392
Year ended 31 December 2005 Value of
Previous in-force Other
basis business adjustments Restated
GBPm GBPm GBPm GBPm
Profit before volatility 3,492 24 - 3,516
and other IFRS adjustments
Volatility 548 77 - 625
Other IFRS adjustments (284) (37) - (321)
Profit before tax 3,756 64 - 3,820
Taxation (1,201) (64) - (1,265)
Profit for the year 2,555 - - 2,555
At 31 December 2005
Total assets 308,820 934 - 309,754
Shareholders' equity 10,259 - (64) 10,195
Comparative information for 2004 has been restated to take into account the
requirements of all the standards except for IAS 32, IAS 39 and IFRS 4
(including FRS 27). As permitted by IFRS, these standards have been implemented
with effect from 1 January 2005 and the opening balance sheet at this date has
been adjusted accordingly.
Page 28 of 44
2. Basis of presentation
The Group implemented the requirements of IAS 32, IAS 39 and IFRS 4 (including
FRS 27) with effect from 1 January 2005 without restating 2004 comparative
figures and as a consequence the 2005 results are not directly comparable with
those of 2004. Therefore, in order to provide a clearer representation of the
underlying performance of the business the impact of those standards for which
comparatives have not been restated has been separately analysed. In addition,
to facilitate comparisons, volatility arising from the use of fair values in the
Group's banking and insurance businesses (page 31, note 4) together with the
profit on sale or closure of businesses have also been separately identified.
A reconciliation of this 'comparable' basis of presentation to the Group's
profit before tax for the year ended 31 December 2005 is shown below.
Other IFRS
related
adjustments Profit on
applied from sale and
Comparable 1 January closure of Statutory
basis Volatility 2005 businesses basis
GBPm GBPm GBPm GBPm GBPm
Net interest income 5,513 (73) 231 - 5,671
Other income 19,343 698 (2,986) - 17,055
Total income 24,856 625 (2,755) - 22,726
Insurance claims (14,794) - 2,608 - (12,186)
Total income, net of insurance 10,062 625 (147) - 10,540
claims
Operating expenses (5,506) - 35 - (5,471)
Trading surplus (deficit) 4,556 625 (112) - 5,069
Impairment losses on loans and (1,090) - (209) - (1,299)
advances
Profit on sale and closure of - - - 50 50
businesses
Profit (loss) before tax 3,466 625 (321) 50 3,820
Taxation (941) (392) 84 (16) (1,265)
Profit (loss) for the year 2,525 233 (237) 34 2,555
Profit (loss) attributable to 67 36 (41) - 62
minority interests
Profit (loss) attributable to 2,458 197 (196) 34 2,493
equity shareholders
Profit (loss) for the year 2,525 233 (237) 34 2,555
Earnings per share 43.9p 3.6p (3.5)p 0.6p 44.6p
In the reconciliation above, no adjustment has been made to show the volatility
element of policyholder income and insurance claims as, with the exception of
policyholder interests, which is included in volatility, these offset each
other.
Page 29 of 44
2. Basis of presentation (continued)
In 2006, the Group plans to report its results on a full IFRS basis, separately
analysing volatility and the profit (loss) on sale and closure of businesses.
The Group's 2005 results on this basis are shown below.
Half-year ended
30 June 2005
Life,
pensions, Wholesale
UK OEICs Insurance and Central
Retail General and asset and International group
Banking Insurance management Investments Banking items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 1,730 10 184 194 1,084 (219) 2,789
Other income 815 270 5,403 5,673 759 7 7,254
Total income 2,545 280 5,587 5,867 1,843 (212) 10,043
Insurance claims - (108) (5,060) (5,168) - - (5,168)
Total income, net of 2,545 172 527 699 1,843 (212) 4,875
insurance claims
Operating expenses (1,281) (78) (196) (274) (1,046) 22 (2,579)
Trading surplus (deficit) 1,264 94 331 425 797 (190) 2,296
Impairment losses on loans (568) - - - (102) - (670)
and advances
Profit (loss) before tax* 696 94 331 425 695 (190) 1,626
Volatility
- Banking - - - - - (73) (73)
- Insurance - 7 124 131 - - 131
- Policyholder interests - - 29 29 - - 29
Profit (loss) before tax 696 101 484 585 695 (263) 1,713
Year ended
31 December 2005
Life,
pensions, Wholesale
UK OEICs Insurance and Central
Retail General and asset and International group
Banking Insurance management Investments Banking items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 3,521 23 366 389 2,265 (431) 5,744
Other income 1,605 543 12,573 13,116 1,628 8 16,357
Total income 5,126 566 12,939 13,505 3,893 (423) 22,101
Insurance claims - (197) (11,989) (12,186) - - (12,186)
Total income, net of 5,126 369 950 1,319 3,893 (423) 9,915
insurance claims
Operating expenses (2,697) (160) (434) (594) (2,181) 1 (5,471)
Trading surplus (deficit) 2,429 209 516 725 1,712 (422) 4,444
Impairment losses on loans (1,111) - - - (188) - (1,299)
and advances
Profit (loss) before tax* 1,318 209 516 725 1,524 (422) 3,145
Volatility
- Banking - - - - - (124) (124)
- Insurance - 28 410 438 - - 438
- Policyholder interests - - 311 311 - - 311
Profit (loss) on sale and 76 - - - (6) (20) 50
closure of businesses
Profit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820
*comparable basis
Page 30 of 44
3. Impact of the adoption of IFRS
Information on the effect of implementing IFRS upon the Group's 2004 results and
balance sheet at 1 January 2005 was set out in the Group's announcement
published on 27 May 2005. Excluding volatility, the impact of those standards
applied with effect from 1 January 2005 has been to reduce earnings largely
reflecting the application of effective interest rates, the reclassification of
certain securities from equity to debt, and the impact of discounting on levels
of loan loss impairment. There has also been a significant reduction in other
income, with a corresponding decrease in insurance claims, as a result of the
impact of IFRS 4 on the accounting treatment of certain insurance products. An
analysis of the reduction in profit before tax by division is provided below.
Other IFRS adjustments
applied from
1 January 2005
Life,
pensions, Wholesale
UK OEICs Insurance and Central
Retail General and asset and International group
Banking Insurance management Investments Banking items Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 214 (18) (4) (22) 100 (61) 231
Other income (206) 18 (2,722) (2,704) (82) 6 (2,986)
Total income 8 - (2,726) (2,726) 18 (55) (2,755)
Insurance claims - - 2,608 2,608 - - 2,608
Total income, net of 8 - (118) (118) 18 (55) (147)
insurance claims
Operating expenses (15) - 45 45 5 - 35
Trading surplus (7) - (73) (73) 23 (55) (112)
Impairment losses on loans (206) - - - (3) - (209)
and advances
Profit (loss) before tax (213) - (73) (73) 20 (55) (321)
4. Volatility
Banking volatility
In accordance with IFRS, it is the 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 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 GBP124
million.
Page 31 of 44
4. Volatility (continued)
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 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 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.
The main assumptions used in the calculation of the value of in-force business
at 31 December 2005 were as follows:
31 December 31 December
2005 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
in the 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 GBP438
million.
Policyholder interests volatility
As a result of the requirement contained in IFRS to consolidate the Group's life
and pensions businesses on a line by line basis, the 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 Group's 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 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 GBP311 million.
Page 32 of 44
5. Insurance grossing adjustments
IFRS requires line-by-line consolidation for all items of income and expenditure
and, as a result, the Group can no longer report the results of its life
assurance businesses as a single line item; in addition certain investment
vehicles which were previously off-balance sheet are now consolidated. The
income statement therefore now includes premiums receivable from policyholders
and the returns on investments held within the life funds and OEICs which are
shown within total income, and related deductions within interest expense and
insurance claims. Whilst this represents a significant presentational change,
there is no material impact upon the Group's profitability. The following
tables show the impact on the comparable income statement of these grossing
adjustments:
Insurance and Investments
Year ended 31 December 2005 Comparable Insurance Comparable
basis gross-up basis*
GBPm GBPm GBPm
Net interest income 411 310 101
Other income 15,820 14,337 1,483
Insurance claims (14,794) (14,597) (197)
Total income, net of insurance claims 1,437 50 1,387
Operating expenses (639) (32) (607)
Profit before tax 798 18 780
*comparable basis, excluding insurance grossing adjustment
Year ended 31 December 2004 Comparable Insurance Comparable
basis gross-up basis*
GBPm GBPm GBPm
Net interest income 283 189 94
Other income 10,736 9,270 1,466
Insurance claims (9,622) (9,408) (214)
Total income, net of insurance claims 1,397 51 1,346
Operating expenses (622) (37) (585)
Impairment losses 3 - 3
Profit before tax 778 14 764
*comparable basis, excluding insurance grossing adjustment
Page 33 of 44
6. Mortgage lending
2005 2004
Gross new mortgage lending GBP26.0bn GBP26.3bn
Market share of gross new mortgage lending 9.0% 9.0%
Net new mortgage lending GBP8.3bn GBP9.3bn
Market share of net new mortgage lending 9.1% 9.2%
Mortgages outstanding (year-end)* GBP88.4bn GBP80.1bn
Market share of mortgages outstanding 9.1% 9.1%
*excluding the effect of IFRS related adjustments
7. Central group items*
2005 2004
GBPm GBPm
Lloyds TSB Foundations (34) (31)
Funding cost of acquisitions less earnings on capital (325) (317)
Central costs and other unallocated items (8) (2)
(367) (350)
*comparable basis
The four independent Lloyds TSB Foundations support registered charities
throughout the UK that enable people, particularly disabled and disadvantaged,
to play a fuller role in society. The Foundations receive 1 per cent of the
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, GBP34 million was
accrued for payment to registered charities.
8. Group net interest income
2005 2004
Statutory basis GBPm GBPm
Net interest income 5,671 5,110
Average interest-earning assets, excluding reverse repos 201,813 178,887
Net interest margin 2.81% 2.86%
Banking margin - comparable basis*
Net interest income 5,149 4,847
Average interest-earning assets, excluding reverse repos 185,468 170,438
Net interest margin 2.78% 2.84%
*As a result of the implementation of IFRS, the Group's net interest income
includes certain amounts attributable to policyholders, in addition to the
interest earnings on shareholders' funds held in the Group's insurance
businesses. In order to maintain the comparability of the Group's banking net
interest margin these amounts, together with the related average
interest-earning assets, have been excluded from the comparable basis
calculation.
Page 34 of 44
9. Other income
2005 2004
Comparable basis GBPm GBPm
Fees and commissions receivable:
UK current account fees 754 637
Other UK fees and commissions 1,201 1,087
Insurance broking 681 672
Card services 545 515
International fees and commissions 134 131
3,315 3,042
Fees and commissions payable (918) (842)
Net fees and commissions income 2,397 2,200
Net trading income 8,749 4,886
Insurance premium income 7,201 6,070
Other operating income 996 865
Total other income* 19,343 14,021
Insurance claims (14,794) (9,622)
Total other income, net of insurance claims* 4,549 4,399
Volatility
- Banking (45) -
- Insurance 432 168
- Policyholder interests 311 (30)
Other IFRS adjustments applied from 1 January 2005 (378) -
Discontinued operations - 14
Total other income, net of insurance claims 4,869 4,551
*comparable basis
10. General insurance income
2005 2004
GBPm GBPm
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
Page 35 of 44
11. Operating expenses
2005 2004
Comparable basis GBPm GBPm
Administrative expenses:
Staff:
Salaries 2,068 1,961
National insurance 154 142
Pensions 308 307
Other staff costs 325 280
2,855 2,690
Premises and equipment:
Rent and rates 305 293
Hire of equipment 13 16
Repairs and maintenance 136 128
Other 152 130
606 567
Other expenses:
Communications and external data processing 452 446
Advertising and promotion 207 205
Professional fees 216 222
Provisions for customer redress 150 112
Other 375 387
1,400 1,372
Administrative expenses 4,861 4,629
Depreciation 639 637
Impairment of goodwill 6 -
Total operating expenses - comparable basis 5,506 5,266
Discontinued operations - 31
Other IFRS adjustments applied from 1 January 2005 (35) -
Total operating expenses 5,471 5,297
Cost:income ratio - comparable basis* 52.7% 54.3%
Cost:income ratio - statutory basis* 51.9% 54.8%
*total operating expenses divided by total income, net of insurance claims. The
cost:income ratio on a comparable basis also excludes provisions for customer
redress and the strengthening of reserves for mortality.
Page 36 of 44
12. Number of employees (full-time equivalent)
31 December 31 December
2005 2004
UK Retail Banking 33,593 36,306
Insurance and Investments 6,283 5,944
Wholesale and International Banking 19,763 19,554
Other, largely IT and Operations 10,139 11,626
69,778 73,430
Agency staff (FTE) (2,981) (3,445)
Total number of employees (full-time equivalent) 66,797 69,985
13. Impairment losses on loans and advances
2005 2004
GBPm GBPm
Impairment losses on loans and advances (see below) 1,302 866
Other credit risk provisions (3) -
1,299 866
Impairment losses and loans and advances - comparable basis
UK Retail Banking
Personal loans/overdrafts 585 473
Credit cards 307 242
Mortgages 13 (39)
905 676
Insurance and Investments - (3)
Wholesale and International Banking 188 230
Total charge - comparable basis 1,093 903
Discontinued operations - (37)
Other IFRS adjustments applied from 1 January 2005 209 -
Total charge 1,302 866
% %
Charge as % of average lending:
Personal loans/overdrafts 4.76 4.20
Credit cards 4.01 3.42
Mortgages 0.02 (0.05)
UK Retail Banking 0.92 0.75
Insurance and Investments - (0.10)
Wholesale and International Banking 0.31 0.43
Total charge - comparable basis 0.66 0.61
Discontinued operations - (13.11)
Other IFRS adjustments applied from 1 January 2005 n/a -
Total charge 0.76 0.59
Page 37 of 44
14. Capital ratios
31 December 1 January
2005 2005
GBPm GBPm
Capital
Tier 1 11,478 10,753
Tier 2 10,447 8,767
21,925 19,520
Supervisory deductions (6,160) (6,219)
Total capital 15,765 13,301
Risk-weighted assets GBPbn GBPbn
UK Retail Banking 60.6 57.2
Insurance and Investments 2.6 1.9
Wholesale and International Banking 80.1 71.0
Central group items 1.6 1.7
Total risk-weighted assets 144.9 131.8
Risk asset ratios
Total capital 10.9% 10.1%
Tier 1 7.9% 8.2%
2005 2004
Post-tax return on average risk-weighted assets 1.81% 1.99%
Post-tax return on average risk-weighted assets* 1.92% 1.98%
*comparable basis, excluding customer redress provisions and strengthening of
reserves for mortality
15. Retirement benefit obligations
The amounts recognised in the balance sheet are as follows:
31 December 31 December
2005 2004
Defined benefit schemes GBPm GBPm
Present value of scheme liabilities 17,320 14,866
Fair value of scheme assets (14,026) (11,648)
Net defined benefit scheme deficit 3,294 3,218
Unrecognised actuarial losses (485) (237)
Net recognised defined benefit scheme deficit 2,809 2,981
Other retirement benefit schemes 101 94
Net recognised liability 2,910 3,075
Page 38 of 44
15. Retirement benefit obligations (continued)
The net recognised liability has reduced by GBP165 million from GBP3,075 million
to GBP2,910 million at 31 December 2005, as cash contributions to the Group's
defined benefit schemes exceeded the regular cost, partly reflecting the
additional voluntary contributions of GBP220 million made during the year.
However, unrecognised actuarial losses increased by GBP248 million to GBP485
million; a reduction in the discount rate used to value the schemes'
liabilities, as a result of the fall in corporate bond yield (GBP1.6bn), and an
increased allowance for mortality (GBP0.2bn) more than offset the effect of a
stronger than expected return from the schemes' assets (GBP1.4bn). Overall,
therefore, the net defined benefit scheme deficit is little changed from 2004 at
GBP3,294 million before tax (GBP2,306 million net of tax).
16. Balance sheet information
31 December 1 January
2005 2005
Deposits - customer accounts GBPm GBPm
Sterling:
Non-interest bearing current accounts 3,604 3,300
Interest bearing current accounts 37,976 35,863
Savings and investment accounts 60,522 57,255
Other customer deposits 16,809 17,058
Total sterling 118,911 113,476
Currency 12,159 12,873
Total deposits - customer accounts 131,070 126,349
Loans and advances to customers
Domestic:
Agriculture, forestry and fishing 2,299 2,083
Manufacturing 5,983 4,622
Construction 2,059 2,147
Transport, distribution and hotels 7,649 7,063
Property companies 8,267 5,943
Financial, business and other services 16,272 16,862
Personal : mortgages 88,528 80,282
: other 22,776 22,841
Lease financing 5,815 6,227
Hire purchase 4,853 4,828
Other 7,696 5,930
Total domestic 172,197 158,828
International:
Latin America 173 125
United States of America 1,984 2,028
Europe 1,927 1,583
Rest of the world 735 516
Total international 4,819 4,252
177,016 163,080
Impairment provisions for loans and advances (2,072) (1,918)
Total loans and advances to customers 174,944 161,162
Page 39 of 44
17. Economic profit
2005 2004
Comparable basis, excluding customer redress provisions and GBPm GBPm
strengthening of reserves for mortality
Average shareholders' equity 11,331 10,735
Profit attributable to equity shareholders 2,640 2,383
Less: notional charge (1,020) (966)
Economic profit 1,620 1,417
Statutory basis
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
Economic profit represents the difference between the earnings on the equity
invested in a business and the cost of the equity. The notional charge has been
calculated by multiplying average shareholders' equity by the cost of equity
used by the Group of 9 per cent (2004: 9 per cent).
18. Earnings per share
2005 2004
Comparable basis, excluding customer redress provisions and strengthening of
reserves for mortality
Profit attributable to equity shareholders GBP2,640m GBP2,383m
Weighted average number of ordinary shares in issue 5,595m 5,590m
Earnings per share 47.2p 42.6p
Statutory basis
Basic
Profit attributable to equity shareholders GBP2,493m GBP2,392m
Weighted average number of ordinary shares in issue 5,595m 5,590m
Earnings per share 44.6p 42.8p
Fully diluted
Profit attributable to equity shareholders GBP2,493m GBP2,392m
Weighted average number of ordinary shares in issue 5,639m 5,625m
Earnings per share 44.2p 42.5p
Page 40 of 44
19. Tax
Under IFRS the Group is required to include in income tax expense the tax
attributable to UK life insurance policyholder earnings and its interests in
Open Ended Investment Companies (OEICs).
The effective tax rate of the Group, excluding gross policyholder tax charge and
OEIC interests from profit before tax and the tax charge, was 27.0 per cent
(2004: 28.3 per cent) compared to the standard UK corporation tax rate of 30 per
cent.
The effective tax rate including policyholder tax and OEIC interests was 33.1
per cent, compared to 29.3 per cent in 2004.
A reconciliation of the charge that would result from applying the standard UK
corporation tax rate to profit before tax to the tax charge, including
policyholder tax and OEIC interests, is given below:
2005 2004
GBPm GBPm
Profit before tax 3,820 3,477
Tax charge thereon at UK corporation tax rate of 30% 1,146 1,043
Factors affecting charge:
Disallowed and non-taxable items (47) (32)
Overseas tax rate differences (1) (14)
Net tax effect of disposals and unrealised gains (59) (2)
Tax deductible coupons on non-equity minority interests - (12)
Policyholder tax and OEIC interests 223 33
Other items 3 2
Tax charge 1,265 1,018
20. Profit/loss on sale of businesses
In December 2005, the Group announced the disposal of its Goldfish credit card
business and this, together with additional costs incurred in relation to
business closures or previous disposals, has led to a net profit of GBP50 million
being recognised in the income statment. During 2004, the Group disposed of a
number of its businesses in Latin America and a net loss of GBP21 million was
recognised in the income statement.
Page 41 of 44
21. Scottish Widows - realistic balance sheet information
Financial Services Authority (FSA) returns for large with-profits companies now
include realistic balance sheet information. The information included in FSA
returns concentrates on the position of the with-profits fund. However, under
the Scottish Widows demutualisation structure, which was court approved, the
fund is underpinned by certain assets outside the with-profits fund and it is
more appropriate to consider the long-term fund position as a whole to measure
the realistic capital position of Scottish Widows. Estimated positions at 31
December 2005 are shown below, together with the actual position at 31 December
2004.
31 December 2005 (estimated) With-profits Long-term
fund fund
GBPbn GBPbn
Available assets, including support account 20.1 23.2
Realistic value of liabilities (19.2) (19.1)
Working capital for fund 0.9 4.1
Working capital ratio 4.4% 17.8%
Risk capital margin cover 2.7 times 11.5 times
31 December 2004 With-profits Long-term
fund fund
GBPbn GBPbn
Available assets, including support account 19.1 22.0
Realistic value of liabilities (18.1) (17.8)
Working capital for fund 1.0 4.2
Working capital ratio 5.1% 19.0%
Risk capital margin cover 2.4 times 9.3 times
Page 42 of 44
22. Dividend
A final dividend for 2005 of 23.5p per share (2004: 23.5p) will be paid on 3 May
2006, making a total for the year of 34.2p (2004: 34.2p).
Shareholders who have already joined the dividend reinvestment plan will
automatically receive shares instead of the cash dividend. Key dates for the
payment of the dividend are:
Shares quoted ex-dividend 8 March
Record date 10 March
Final date for joining or leaving the dividend reinvestment plan 5 April
Final dividend paid 3 May
Annual general meeting 11 May
23. Other information
The financial information included in this news release does not constitute
statutory accounts within the meaning of section 240 of the Companies Act 1985.
Statutory accounts for the year ended 31 December 2005 were approved by the
directors on 23 February 2006 and will be delivered to the registrar of
companies following publication on 1 April 2006. The auditors' report on these
accounts was unqualified and did not include a statement under sections 237(2)
(accounting records or returns inadequate or accounts not agreeing with records
and returns) or 237(3) (failure to obtain necessary information and
explanations) of the Companies Act 1985.
A report on Form 20-F will be filed with the Securities and Exchange Commission
in the United States.
Page 43 of 44
CONTACTS
For further information please contact:-
Michael Oliver
Director of Investor Relations
Lloyds TSB Group plc
020 7356 2167
E-mail: michael.oliver@ltsb-finance.co.uk
Mary Walsh
Director of Corporate Relations
Lloyds TSB Group plc
020 7356 2121
E-mail: mary.walsh@lloydstsb.co.uk
Copies of this news release may be obtained from Investor Relations, Lloyds TSB
Group plc, 25 Gresham Street, London EC2V 7HN. The full news release can also
be found on the Group's website - www.lloydstsb.com.
A copy of the Group's corporate responsibility report may be obtained by writing
to Corporate Responsibility, Lloyds TSB Group plc, 25 Gresham Street, London
EC2V 7HN. This information together with the Group's code of business conduct
is also available on the Group's website.
Page 44 of 44
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LLOYDS TSB GROUP plc
(Registrant)
By: M D Oliver
Name: M D Oliver
Title: Director of Investor Relations
Date: 24 February 2006