-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GMwDje+zoBG7h86KEkMHIXrG1egOxzepwXfPd3T4ZsKPopjAFBexEdL07lQa8yoa SNZAMSVt9CNc+jABUkmjDg== 0001191638-08-000293.txt : 20080222 0001191638-08-000293.hdr.sgml : 20080222 20080222062418 ACCESSION NUMBER: 0001191638-08-000293 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20080222 FILED AS OF DATE: 20080222 DATE AS OF CHANGE: 20080222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LLOYDS TSB GROUP PLC CENTRAL INDEX KEY: 0001160106 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL BANKS, NEC [6029] IRS NUMBER: 000000000 STATE OF INCORPORATION: X0 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15246 FILM NUMBER: 08634616 BUSINESS ADDRESS: STREET 1: 25 GRESHAM STREET CITY: LONDON EC2V 7HN STATE: X0 ZIP: 00000 MAIL ADDRESS: STREET 1: 25 GRESHAM STREET STREET 2: LONDON EC2V 7HN CITY: UNITED KINGDOM STATE: X0 ZIP: 00000 6-K 1 lloy200802226k2.txt FINAL RESULTS 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 22 February 2008 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 22 February 2008 re: Final Results LLOYDS TSB GROUP PLC - RESULTS 2007 CONTENTS Page Key highlights 1 Summary of results 2 Profit analysis by division 3 Group Chief Executive's statement 4 Group Finance Director's review of financial performance 7 Summarised segmental analysis 13 Divisional performance: 14 - UK Retail Banking 14 - Insurance and Investments 18 - Wholesale and International Banking 25 Consolidated income statement - statutory 29 Consolidated balance sheet - statutory 30 Consolidated statement of changes in equity - statutory 31 Condensed consolidated cash flow statement - statutory 32 Condensed segmental analysis - statutory 33 Notes 35 Contacts for further information 58 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, the policies and actions of governmental and regulatory authorities in the UK or jurisdictions outside the UK, including other European countries and the US, exposure to legal proceedings or complaints, 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. The forward looking statements contained in this announcement are made as at the date of this announcement, and the Group undertakes no obligation to update any of its forward looking statements. KEY HIGHLIGHTS Unless otherwise stated the analysis throughout this document compares the year to 31 December 2007 with the year to 31 December 2006 and excludes the impact of insurance related volatility, profit on disposal of businesses, settlement of overdraft claims in 2007 and the pension schemes related credit in 2006 (page 36, note 2). "I am delighted to report that the Group has continued to deliver a strong trading performance, notwithstanding the significant recent turbulence in global financial markets. Our higher quality, lower risk, business model has been clearly demonstrated in the resilience of our earnings stream. The Board remains confident in the Group's earnings outlook and, as a result, has decided to increase the final dividend by 5 per cent to 24.7 pence per share." Sir Victor Blank Chairman Strong financial performance with statutory earnings per share increased by 17 per cent to 58.3p. Economic profit increased by 21 per cent. Statutory profit before tax was 6 per cent lower at GBP4,000 million, largely reflecting adverse policyholder interests volatility. - - Strong underlying profit momentum. Profit before tax up 6 per cent to GBP3,919 million notwithstanding impact of global financial markets turbulence. Excluding the impact of GBP280 million market dislocation, profit before tax increased by 13 per cent to GBP4,199 million. - - High returns maintained, with return on equity of 25.2 per cent. Improved return on risk-weighted assets, and return on Embedded Value increased to 9.9 per cent. - - Good income growth. Income growth of 5 per cent, reflecting the strength and resilience of the Group's revenue base. Excluding the impact of market dislocation and insurance grossing, income increased by 6 per cent. - - Excellent cost management. Cost growth of only 1 per cent, delivering wide positive jaws. Cost:income ratio improved by 1.8 percentage points to 49.0 per cent. Groupwide productivity programme exceeded 2007 expectations, and remains on track to deliver benefits of GBP250 million in 2008. - - Satisfactory credit quality. Retail impairment charge lower than in 2006. Based on current trends, we do not expect a significant change in the retail impairment charge in the first half of 2008, compared to the first half of 2007. Corporate asset quality remains good. - - Strong liquidity and funding position maintained throughout the recent global financial markets turbulence. - - Excellent capital management. Robust capital ratios maintained. Satisfactory transition to Basel II, with tier 1 capital ratio increasing to 9.5 per cent. Over GBP3.6 billion of capital repatriated from Scottish Widows over the last 3 years. Page 1 of 58
SUMMARY OF RESULTS 2007 2006 Change GBPm GBPm % Results - statutory Total income, net of insurance claims 10,706 11,104 (4) Operating expenses 5,567 5,301 (5) Trading surplus 5,139 5,803 (11) Impairment 1,796 1,555 (15) Profit before tax 4,000 4,248 (6) Profit attributable to equity shareholders 3,289 2,803 17 Economic profit (page 48, note 17) 2,238 1,855 21 Earnings per share (page 48, note 18) 58.3p 49.9p 17 Post-tax return on average shareholders' equity 28.2% 26.6% Results - excluding volatility, profit on sale of businesses, settlement of overdraft claims in 2007 and the pension schemes related credit in 2006 Total income, net of insurance claims 11,206 10,694 5 Operating expenses 5,491 5,429 (1) Trading surplus 5,715 5,265 9 Impairment 1,796 1,555 (15) Profit before tax 3,919 3,710 6 Profit attributable to equity shareholders 2,863 2,634 9 Economic profit 1,842 1,690 9 Earnings per share 50.8p 46.9p 8 Post-tax return on average shareholders' equity 25.2% 25.1% Post-tax return on average risk-weighted assets 1.76% 1.72% Shareholder value Closing market price per share (year end) 472p 571.5p (17) Total market value of shareholders' equity GBP26.7bn GBP32.2bn (17) Total shareholder return (12.1)% 24.8% Proposed dividend per share (page 57, note 24) 35.9p 34.2p 5 31 December 31 December 2007 2006 Change GBPm GBPm % Balance sheet Shareholders' equity 12,141 11,155 9 Net assets per share 212p 195p 9 Total assets 353,346 343,598 3 Risk-weighted assets (Basel I basis) 171,971 156,043 10 Loans and advances to customers 209,814 188,285 11 Customer deposits 156,555 139,342 12 Risk asset ratios Total capital (Basel I basis) 11.0% 10.7% Tier 1 capital (Basel I basis) 8.1% 8.2% Page 2 of 58 PROFIT ANALYSIS BY DIVISION 2007 2006 Change GBPm GBPm % UK Retail Banking (page 14) 1,808 1,549 17 Insurance and Investments (page 18) 1,056 973 9 Wholesale and International Banking (page 25) - - Before impact of market dislocation 1,717 1,640 5 - - Impact of market dislocation (280) - 1,437 1,640 (12) Central group items (382) (452) Profit before tax* 3,919 3,710 6 Volatility (page 36, note 2) - - Insurance (267) 84 - - Policyholder interests (page 37, note 2) (233) 326 Profit on sale of businesses 657 - Settlement of overdraft claims (76) - Pension schemes related credit - 128 Profit before tax 4,000 4,248 (6) Taxation (page 56, note 23) (679) (1,341) Profit for the year 3,321 2,907 14 Profit attributable to minority interests 32 104 Profit attributable to equity shareholders 3,289 2,803 17 Profit for the year 3,321 2,907 14 Earnings per share (page 48, note 18) 58.3p 49.9p 17
*Excluding volatility, profit on sale of businesses, settlement of overdraft claims and pension schemes related credit. Page 3 of 58 GROUP CHIEF EXECUTIVE'S STATEMENT 2007 was another good year for Lloyds TSB. We delivered strong results, despite the more challenging operating environment that we saw in the second half of the year. Our business performance, excluding the impact of the market dislocation, continued its strong momentum as our relationship-based strategy serves us well. We believe this momentum will carry through to 2008, given we have a high quality, sustainable earnings stream, driven by the deep relationships we have with our customers, coupled with the significant growth potential we have both within our own franchise and in the UK market as a whole. As a result, we remain confident as to the Group's future outlook. Given this strong performance and confidence in our future earnings capacity, the Board has decided to increase the final dividend by 5 per cent to 24.7 pence per share. This brings the full year dividend to 35.9 pence per share, an increase of 5 per cent over that paid for 2006. Going forward, the Board expects to grow the dividend over time, whilst continuing to build dividend cover. Strong momentum On an underlying basis, the Group increased profit before tax by 6 per cent to GBP3,919 million. Excluding the GBP280 million charge arising from the market dislocation, the Group grew profits by 13 per cent from GBP3,710 million to GBP4,199 million. Whilst we cannot overlook the impact of the dislocation on our results, these numbers are more reflective of the ongoing performance of the Group. Our lower risk strategy limited the impact of the abrupt change in the markets and, consequently, our charge was relatively modest in comparison to our balance sheet size, our earnings, and the charges taken by many other organisations. This is in large part due to the conscious choice to focus the Group's strategy on building deep, long-lasting relationships with our customers in order to deliver high quality, sustainable results over time. Over the last few years, the successful execution of our strategy has delivered increasing levels of customer recruitment and enhanced sales volumes, and in 2007 we saw further progress on these leading indicators of future profit. In the Retail Bank, we attracted over one million new current accounts and we delivered strong flows of new business, with sales volumes rising 17 per cent. We are now the number one provider of current accounts, cards and personal loans. In Insurance and Investments, we have seen good progress in the sale of bancassurance products to our franchise customers and sales volumes rose by 20 per cent, with particular success in the sale of protection products through the branch network. In Wholesale and International Banking, we saw similar strong progress. Our Corporate Markets business is attracting growing numbers of new customers and recorded a further 46 per cent improvement in cross-sales. Our Commercial Banking business attracted good levels of the more valuable switcher accounts and we remain the leader in terms of the share of the start-up market, at 21 per cent. Key to supporting our relationship-focused strategy is the efficient management of costs and capital, allowing us to continue to invest in the franchise and drive future growth. Once again we have delivered a strong performance in these areas. Page 4 of 58 Costs rose by only 1 per cent, as we continue to embed our efficiency programmes, and our cost:income ratio improved to 49.0 per cent, from 50.8 per cent in 2006. The extension of our lean manufacturing and sigma efficiency programmes, the improvement of our procurement processes and the adoption of end-to-end processing led to improvements in efficiency as well as better levels of service quality. Our capital position is strong. We manage our capital to support efficient growth, directing capital to our higher growth and higher return business lines. We continued the capital efficiency programmes in Scottish Widows, with a further GBP1.9 billion repatriated to the Group during the year. High quality sustainable business Key to sustaining our strong momentum in future years are the relationships we are building with our customers, understanding their needs and developing the products and services to meet those needs. As our results in recent periods show, this strategy has served us well and has a number of benefits. A high percentage of our income is recurring customer revenue, which is by nature more stable and sustainable. By building deep relationships, meeting more of our customers' needs, we also benefit in that we have a lower cost of acquiring new sales. Additionally, because we understand our customers well, we tend to have lower impairments and thus require less capital. Perhaps as important as the decision to pursue the relationship strategy, was the decision not to pursue a product-led strategy which, as we have seen of late, results in more volatile revenues and carries a significantly higher risk profile. Significant growth potential The UK market represents the second largest economic profit pool for financial services, with high levels of household financial wealth. It enjoys the lowest level of unemployment in the G7 economies and despite a likely slow down in 2008, we are projecting good medium-term economic performance and strong long-term savings growth. We estimate that we currently only have a 10 per cent share of the economic profit pool, and so we have significant potential within our existing franchise to grow by meeting more of our customers' needs as well as through adding new customers to our franchise. To support this growth potential we are investing in developing the supporting infrastructure in areas such as customer data management and account planning tools. We continue to enhance our risk and financial systems and, together, these areas will ensure we have the necessary platform to safely support our future growth. Outlook As we look forward to 2008, we do so against a backdrop of turbulent markets and slowing global economic growth. Despite these challenges, we are well positioned to deliver further growth and to take advantage of the opportunities that the current environment offers. Page 5 of 58 Our relationship-focused strategy is delivering good results for all our stakeholders. The events of the last year show that it is effective in generating sustainable, high quality results through the cycle. Our prudent approach to risk ensured we experienced minimal impact from the US sub-prime fall-out. We have a strong capital position and this will support the future growth of the business. This has been a year of significant progress across the Group and let me express my thanks to all our staff for their wonderful contribution to our success. Relationship businesses thrive on great staff that understand customers and work towards meeting their needs. In this last year, the performance of our staff has been terrific. J Eric Daniels Group Chief Executive Page 6 of 58 GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE In 2007 the Group delivered a strong performance against the backdrop of significant turbulence in global financial markets. Statutory profit attributable to equity shareholders increased by GBP486 million, or 17 per cent, to GBP3,289 million and earnings per share increased by 17 per cent to 58.3p. Economic profit increased by 21 per cent to GBP2,238 million, and the post-tax return on equity improved from 26.6 per cent to 28.2 per cent. Profit before tax fell by 6 per cent to GBP4,000 million, largely as a result of significant adverse policyholder interests volatility. To enable meaningful comparisons to be made with 2006, the income statement commentaries below exclude insurance related volatility, the profit on sale of businesses, settlement of overdraft claims in 2007 and the pension schemes related credit in 2006. Building strong customer relationships Lloyds TSB's strategy to build strong customer franchises and grow our business by realising the considerable potential within those franchises continues to deliver strong results. We have continued to extend the reach and depth of our customer relationships, achieving good sales growth, whilst also improving productivity and efficiency. The underlying performance of the business remains strong with revenue growth remaining well ahead of cost growth. Like many other financial institutions, the Group has been affected by the recent market dislocation; however, the relationship focus of our strategy has meant that the impact on the Group's profit before tax was limited to GBP280 million in 2007 (GBP188 million reduction in income; GBP92 million increase in impairment). Continued momentum throughout the business Profit before tax increased by GBP209 million, or 6 per cent, to GBP3,919 million, underpinned by good relationship banking momentum, notwithstanding the impact of the GBP280 million market dislocation in Corporate Markets. Revenue growth of 5 per cent exceeded cost growth of 1 per cent, with each division delivering stronger revenue growth than cost growth. Earnings per share increased by 8 per cent to 50.8p and economic profit increased by 9 per cent to GBP1,842 million. Excluding the impact of market dislocation, Group profit before tax increased by 13 per cent to GBP4,199 million. Good income growth Overall, income growth of 5 per cent reflects good progress in delivering our divisional strategies. We have increased income from both new and existing customers, with strong growth in both assets and liabilities, as well as a significant increase in fee-related income. Excluding the impact of market dislocation and insurance grossing, income increased by 6 per cent. Group net interest income, excluding insurance grossing, increased by GBP349 million, or 7 per cent, to GBP5,631 million. Customer deposits increased by 12 per cent to GBP157 billion, supported by strong growth in savings balances in the retail bank, where bank savings increased by 15 per cent and wealth management balances by 12 per cent. Customer deposits in our Corporate Markets, Commercial and International businesses increased by 18 per cent. Page 7 of 58 Strong levels of customer lending growth in Commercial Banking and Corporate Markets, and good growth in mortgages and retail deposits, more than offset the marketwide experience of lower unsecured personal lending balances. Total assets increased by 3 per cent to GBP353 billion, with an 11 per cent increase in loans and advances to customers. The net interest margin from our banking businesses (page 39, note 4) decreased by 9 basis points, to 2.79 per cent, with broadly stable product margins but an adverse mix effect. Stronger growth in finer margin mortgages and flat wider margin unsecured consumer lending contributed to the negative mix effect which accounted for 9 basis points of margin decline. Overall product margins were 2 basis points lower, reflecting competitive pressures in the mortgage and asset finance businesses and a move to finer margin secured lending in Commercial Banking. Funding costs improved the margin by 2 basis points. During the second half of 2007, product margins have started to show signs of improving, with increased new business margins becoming evident in mortgages and corporate lending reflecting a marketwide trend towards more appropriate pricing for risk. Other income, net of insurance claims and excluding insurance grossing, increased by GBP133 million, or 2 per cent, to GBP5,530 million. This reflected higher fees and commissions receivable as a result of strong growth in added value current accounts and higher insurance commissions in the retail bank. In addition, good levels of growth were achieved in fee based product sales to corporate and commercial banking customers. Excellent cost management The Group continues to invest in improving processing efficiency, resulting in continued tight control over costs. During 2007, operating expenses increased by only 1 per cent to GBP5,491 million. Over the last 12 months, staff numbers have fallen by 4,552 (7 per cent) to 58,078, largely as a result of the disposal of Lloyds TSB Registrars and Dutton-Forshaw and further efficiency improvements in back-office processing centres. These improvements in operational effectiveness have resulted in a further reduction in the Group cost:income ratio from 50.8 per cent to 49.0 per cent. The Group's programme of productivity initiatives has continued to deliver significant benefits, improving underlying cost efficiency and creating greater headroom for further investment in the business. During 2007 the programme delivered net cost reductions of GBP145 million, exceeding the previously indicated net benefits of approximately GBP125 million, with gross benefits of GBP248 million and reinvestment in further programme initiatives of GBP103 million. The Group remains on track to deliver net benefits of approximately GBP250 million in 2008. Along with a number of other UK banks, during the year the Group has received a number of customer claims for the repayment of overdraft fees. On 27 July 2007, several banks, together with the Office of Fair Trading, asked the High Court of England and Wales to clarify the legal position regarding personal current account fees. The 2007 results include a charge of GBP76 million relating to the settlement of claims during the year, together with related costs. Page 8 of 58 Overall credit quality remains satisfactory Impairment losses increased by 15 per cent to GBP1,796 million. Our impairment charge on loans and advances expressed as a percentage of average lending was 0.82 per cent, excluding the impact of market dislocation and the 2007 Finance Act, compared to 0.83 per cent in 2006 (page 42, note 9). Impaired assets increased by 8 per cent to GBP5,311 million, less than the rate of lending growth, and now represent 2.5 per cent of total lending, down from 2.6 per cent at 31 December 2006. In UK Retail Banking, impairment losses decreased by GBP14 million, or 1 per cent, to GBP1,224 million. During 2007, we have seen a reduction in the level of customer insolvencies, improvements in the Group's collections procedures and better than assumed recoveries. The quality of new unsecured lending has continued to be strong and our arrears and delinquency trends have improved during the year. In addition, the asset quality of our mortgage portfolio has remained excellent. Whilst the uncertain UK macroeconomic environment and customer insolvency trends remain key factors in the outlook for retail impairment, our current lead indicators are good, we are continuing to enhance our underwriting and collections procedures and the quality of new business remains strong. As a result, based on current trends, we do not expect a significant change in the retail impairment charge in the first half of 2008, compared to the first half of 2007. The Wholesale and International Banking charge for impairment losses increased by GBP264 million to GBP572 million, including a GBP92 million impairment charge relating to the impact of market dislocation in the second half of 2007, and a one-off charge of GBP28 million relating to the impact of the 2007 Finance Act on the Group's leasing business. The increase in the impairment charge also reflects a lower level of releases and recoveries in Corporate Markets and the impact of recent double-digit growth rates in Corporate lending. Limited exposure to assets affected by current capital markets uncertainties Whilst no bank has been immune to the impact of the turbulence in global financial markets in the second half of 2007, Lloyds TSB's high quality business model means that the Group has relatively limited exposure to assets affected by current capital markets uncertainties (page 46, note 15). US sub-prime Asset Backed Securities (ABS) and ABS Collateralised Debt Obligations (CDOs) Lloyds TSB has no direct exposure to US sub-prime ABS and limited indirect exposure through ABS CDOs. During the second half of 2007, the market value of our holdings in ABS CDOs reduced and, as a result, the Group has taken an income statement charge of GBP114 million, leaving a residual investment of GBP130 million, net of hedges. The write-down largely reflects junior tranches of CDOs which have been written down to the expected interest payments to be received within the next 12 months. The Group has no exposure to mezzanine ABS CDOs. The Group's residual investment of GBP130 million is stated net of credit default swap (CDS) protection totalling GBP470 million purchased from a 'triple A' rated monoline Financial Guarantor. At 31 December 2007, the underlying assets supported by this protection had fallen in value, leaving a reliance on the CDS protection totalling GBP155 million. In addition, we have GBP1,861 million of ABS CDOs which are fully cash collateralised by major global financial institutions. Page 9 of 58 Structured Investment Vehicle (SIV) Capital Notes At 30 June 2007 the Group's exposure to SIV Capital Notes totalled GBP100 million. During the second half of 2007 the Group wrote down the value of these assets by GBP22 million, leaving a residual exposure at 31 December 2007 of GBP78 million. Additionally, at 31 December 2007 the Group had commercial paper back up liquidity facilities totalling GBP370 million, of which GBP98 million had been drawn. All of these liquidity lines are senior facilities. Since the year end, these facilities have been reduced to GBP208 million, of which GBP115 million has been drawn. The Group has no SIV-Lite exposure. Trading portfolio In the second half of 2007, Corporate Markets also saw a reduction in profit before tax of approximately GBP144 million as a result of the impact of mark-to-market adjustments in the Group's trading portfolio, to reflect the marketwide repricing of liquidity and credit. At 31 December 2007 the trading portfolio contained GBP181 million of indirect exposure to US sub-prime mortgages and ABS CDOs. This super senior exposure is protected by note subordination. Available-for-sale assets At 31 December 2007, the Group's portfolio of available-for-sale assets totalled GBP20,196 million (31 December 2006: GBP19,178 million). A significant proportion of these assets (GBP8.3 billion) related to the ABS in Cancara. The residual assets included GBP3.2 billion Student Loan ABS, predominantly guaranteed by the US Government, GBP4.6 billion Government bond and short-dated bank commercial paper and certificates of deposit and GBP4.1 billion major bank senior paper and high quality ABS. These available-for-sale assets are intended to be held to maturity however, under IFRS, they are marked-to-market through reserves. During 2007, a net GBP413 million reserves adjustment, which has no impact on the Group's capital ratios, has been made to reflect a reduction in the value of these assets. These assets are not impaired and we expect to obtain full value for them upon maturity. The Group's investment in Cancara, our hybrid Asset Backed Commercial Paper conduit, was GBP12.0 billion at 31 December 2007, comprising GBP8.3 billion ABS and GBP3.7 billion client receivables transactions. Cancara, which is fully consolidated in the Group's accounts, is managed in a very conservative manner, which is demonstrated by the quality and ratings stability of its underlying asset portfolio. At 31 December 2007, the ABS bonds in Cancara were 100 per cent Aaa/AAA rated by Moody's and Standard & Poor's respectively, and there was no exposure either directly or indirectly to sub-prime US mortgages within the ABS portfolio. Since the year end, ABS totalling GBP67 million have been downgraded. At 31 December 2007 the client receivables portfolio included GBP115 million of US sub-prime mortgage exposure. Scottish Widows has no exposure to US sub-prime ABS either directly or indirectly through CDOs. The Group holds GBP25 million of short-dated SIV commercial paper through Scottish Widows. Strong capital management disciplines Capital efficiency continued to improve throughout the Group, resulting in an increase in post-tax return on average shareholders' equity to 25.2 per cent, and in the post-tax return on average risk-weighted assets to 1.76 per cent, from 1.72 per cent. In our life assurance and investment businesses, the post-tax return on embedded value, on a European Embedded Value (EEV) basis, increased to 9.9 per cent, from 9.3 per cent. Page 10 of 58 At the end of December 2007, the total capital ratio on a Basel I basis was 11.0 per cent and the tier 1 ratio was 8.1 per cent. During the year, risk-weighted assets increased by 10 per cent to GBP172.0 billion, reflecting growth in our mortgage and Corporate Markets businesses. Going forward, we expect high single-digit or low double-digit annual growth in risk-weighted assets, reflecting increased opportunities to continue to grow our customer lending. The Group has successfully managed the transition to Basel II and the Group's opening capital ratios on a Basel II basis were 11.0 per cent for total capital and 9.5 per cent for tier 1 capital (page 43, note 11). Scottish Widows remains strongly capitalised and, at the end of December 2007, the working capital ratio of the Scottish Widows Long Term Fund was an estimated 19.2 per cent (page 49, note 19). During 2007, further capital repatriation totalling GBP1.9 billion was made to the Group, bringing the total capital repatriation since the beginning of 2005 to over GBP3.6 billion. On 5 December 2007 Standard & Poor's announced that it had re-affirmed its Scottish Widows 'AA-' debt rating and placed it on positive outlook. Maintaining a strong liquidity and funding position Throughout the recent marketwide liquidity turbulence, Lloyds TSB has maintained a strong liquidity position for both the Group's funding requirements, which are supported by our strong and stable retail and corporate deposit base, and those of its sponsored conduit, Cancara. Retail and corporate deposit inflows have been strong and the Group continues to benefit from its strong credit ratings and diversity of funding sources. This has resulted in the Group continuing to fund well over the last few months. In January 2008, Moody's announced that it had re-affirmed its 'Aaa' long-term debt rating for Lloyds TSB Bank plc. Significant reduction in the Group pension schemes' deficit The Group's defined benefit pension schemes' gross deficit at 31 December 2007 improved by GBP1,416 million to GBP683 million, comprising net recognised liabilities of GBP2,033 million partly offset by unrecognised actuarial gains of GBP1,350 million (page 42, note 10). This improvement reflects an increase in the real discount rate used to value the schemes' liabilities and Group contributions to the schemes, which exceeded the cost of accruing benefits. Substantial profit on sale of non-core businesses During 2007 the Group sold a number of non-core businesses realising profits on the disposal totalling GBP657 million (page 47, note 16). This has further strengthened the Group's capital ratios and improved capital flexibility. In May 2007, Lloyds TSB Group agreed the sale of the business and assets of Lloyds TSB Registrars to Advent International, subject to completion and other adjustments. The transaction was completed on 30 September 2007, following regulatory approval, and the Group has reported a profit before tax on the sale of this business of GBP407 million (tax: nil). In July 2007, the Group announced an agreement to sell Abbey Life Assurance Company Limited (Abbey Life) to Deutsche Bank AG. This transaction was also completed at the end of September 2007 and the Group has reported a profit before tax on the sale of this business of GBP272 million (tax: nil). In addition, a pre-sale dividend of GBP175 million was paid to Group in June 2007. Page 11 of 58 Taxation charge The Group's tax charge for 2007 was GBP679 million, which was an effective rate of 17.0 per cent (2006: 31.6 per cent). The effective tax rate is below the standard UK corporation tax rate as a result of the gains on disposals being either exempt from tax or covered by capital losses arising in earlier years, a deferred income tax credit following the reduction in the corporation tax rate announced in the 2007 Finance Act, and credits arising on policyholder interests. Under IFRS, the income statement includes a corresponding charge for policyholder interests within the Group's profit before tax. Excluding these items the Group's effective rate of tax was 28.3 per cent (page 56, note 23). The 2007 Finance Act reduction in corporation tax rate from 30 per cent to 28 per cent resulted in a one-off impairment charge of GBP28 million before tax (GBP20 million after tax), relating to a reduction in future rental income within the Group's leasing business. In addition, the Group's deferred tax liabilities at 31 December 2007 were reduced, resulting in a credit to the Group's tax charge of GBP110 million. The net impact of these items has been to increase earnings attributable to shareholders by GBP90 million during the year. Delivering accelerated earnings momentum, whilst improving profitability and returns 2007 has been a challenging year for all banks, however Lloyds TSB's high quality, more conservative business model has withstood the difficulties of global financial markets turbulence. Strong earnings momentum has continued in the UK retail banking and insurance businesses, and our relationship focused Corporate and Commercial businesses have also continued to perform well. These strong performances have resulted in a good level of income growth which, combined with excellent cost control, has resulted in strong underlying profit momentum. The Group has also continued to maintain satisfactory asset quality. Encouragingly, this performance has not come at the expense of returns, as the Group has continued to improve both its return on equity and return on risk-weighted assets. As a result, the Group is well placed to maintain the recent momentum established throughout the business, and we expect to continue to perform well in 2008. Helen A Weir Group Finance Director Page 12 of 58
SUMMARISED SEGMENTAL ANALYSIS 2007 Wholesale Group UK Insurance and Central excluding Retail and International group insurance Insurance Banking Investments** Banking items gross up gross up** Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm Net interest income 3,783 68 2,518 (738) 5,631 461 6,092 Other income 1,797 1,900 1,773 362 5,832 6,804 12,636 Total income 5,580 1,968 4,291 (376) 11,463 7,265 18,728 Insurance claims - (302) - - (302) (7,220) (7,522) Total income, net of 5,580 1,666 4,291 (376) 11,161 45 11,206 insurance claims Operating expenses (2,548) (636) (2,282) (6) (5,472) (19) (5,491) Trading surplus 3,032 1,030 2,009 (382) 5,689 26 5,715 (deficit) Impairment (1,224) - (572) - (1,796) - (1,796) Profit (loss) before 1,808 1,030 1,437 (382) 3,893 26 3,919 tax* Volatility - - Insurance - (267) - - (267) - (267) - - Policyholder - - - - - (233) (233) interests Profit on sale of businesses - 272 385 - 657 - 657 Settlement of overdraft claims (76) - - - (76) - (76) Profit (loss) before 1,732 1,035 1,822 (382) 4,207 (207) 4,000 tax 2006 Net interest income 3,642 56 2,177 (593) 5,282 78 5,360 Other income 1,621 1,740 2,035 201 5,597 8,306 13,903 Total income 5,263 1,796 4,212 (392) 10,879 8,384 19,263 Insurance claims - (200) - - (200) (8,369) (8,569) Total income, net of 5,263 1,596 4,212 (392) 10,679 15 10,694 insurance claims Operating expenses (2,476) (646) (2,264) (51) (5,437) 8 (5,429) Trading surplus 2,787 950 1,948 (443) 5,242 23 5,265 (deficit) Impairment (1,238) - (308) (9) (1,555) - (1,555) Profit (loss) before tax* 1,549 950 1,640 (452) 3,687 23 3,710 Volatility - - Insurance - 84 - - 84 - 84 - - Policyholder - - - - - 326 326 interests Pension schemes related credit - - - 128 128 - 128 Profit (loss) before 1,549 1,034 1,640 (324) 3,899 349 4,248 tax *Excluding volatility, profit on sale of businesses, the settlement of overdraft claims in 2007 and the pension schemes related credit in 2006. **The Group's income statement includes income and expenditure which are attributable to the policyholders of the Group's long-term assurance funds. These items have no impact upon the profit attributable to equity shareholders. In order to provide a clearer representation of the underlying trends within the Insurance and Investments segment, these items are shown within a separate column in the segmental analysis above. Page 13 of 58 DIVISIONAL PERFORMANCE UK RETAIL BANKING 2007 2006 Change GBPm GBPm % Net interest income 3,783 3,642 4 Other income 1,797 1,621 11 Total income 5,580 5,263 6 Operating expenses (2,548) (2,476) (3) Trading surplus 3,032 2,787 9 Impairment (1,224) (1,238) 1 Profit before tax, excluding settlement of overdraft claims 1,808 1,549 17 Settlement of overdraft claims (76) - Profit before tax 1,732 1,549 12 Cost:income ratio* 45.7% 47.0% Post-tax return on average risk-weighted assets* 2.13% 1.76% Total assets GBP115.0bn GBP108.4bn 6 Risk-weighted assets GBP61.7bn GBP59.1bn 4 Customer deposits GBP82.1bn GBP75.7bn 8 *Excluding settlement of overdraft claims.
Key highlights - - Excellent profit performance. Profit before tax increased by 17 per cent to GBP1,808 million, excluding the settlement of overdraft claims. - - Strong income momentum, up 6 per cent, supported by overall sales growth of 17 per cent. - - Excellent progress in growing the current account customer franchise, with over 1 million new current accounts opened, an increase of 17 per cent. New Added Value Accounts increased by 79 per cent. Lloyds TSB is now the UK market leader in new current account customer recruitment. - - Strong growth in savings deposits resulted in an 11 per cent increase in savings balances, with 15 per cent growth in bank savings. - - Stabilisation in net interest margin, with net interest margin in the second half of 2007 1 basis point higher than in the first half of 2007. - - Continued good cost management, with a clear focus on investing to improve service quality and processing efficiency. Excluding the impact of the settlement of overdraft claims, operating expenses increased by 3 per cent and there was a substantial improvement in the cost:income ratio to 45.7 per cent. - - The quality of new lending continues to be strong. Arrears levels have continued to improve and the impairment charge in 2007 was lower than in 2006. Whilst the economic outlook for 2008 is uncertain, we do not expect to experience a significant change in the retail impairment charge in the first half of 2008, compared to the first half of 2007. - - Improved return on risk-weighted assets, reflecting the impact of double-digit profit growth exceeding the increase in risk-weighted assets. Page 14 of 58 UK RETAIL BANKING (continued) During 2007, UK Retail Banking continued to make substantial progress in each of its key strategic priorities: growing income from its existing customer base; expanding its customer franchise; and improving productivity and efficiency. In each of these areas, a key focus has been on improving sales of recurring income products, such as current accounts and savings products which, combined with higher lending related income, has supported the accelerating rate of revenue growth. Profit before tax from UK Retail Banking increased by GBP183 million, or 12 per cent, to GBP1,732 million, reflecting strong levels of franchise growth, excellent cost management and a slightly reduced impairment charge. Excluding the settlement of overdraft claims, profit before tax increased by 17 per cent to GBP1,808 million. Total income increased by GBP317 million, or 6 per cent, supported by higher income from current accounts, savings and personal lending. The adverse mix effect of strong growth in finer margin mortgages and flat wider margin unsecured personal lending led to an overall reduction in the division's net interest margin. Product margins on a year-on-year basis fell slightly reflecting competitive pressures in the mortgage business in the first half of 2007 which more than offset an increase in retail savings margins. Towards the end of the year, new business margins in the mortgage business started to improve and this supported a stabilisation in the UK Retail Banking net interest margin in the second half of the year, compared to the first half. Operating expenses remained well controlled, increasing by 3 per cent, excluding the settlement of overdraft claims. Significant improvements have been made in the rationalisation of back office operations to improve efficiency and we continue to increase the proportion of front office to back office staff in the branch network. Growing income from the customer base The Retail Bank has continued to make excellent progress, with further strong growth in product sales and continued good revenue growth. We continue to deliver a very strong performance in the growing savings and investment market, especially in bank savings where we have recently benefited from a significantly improved rate of deposit growth. Overall sales increased by 17 per cent, with improvements over a broad range of products, especially current accounts, credit cards and bank savings products. Sales volumes were particularly strong in the branch network with an increase of 24 per cent. This continued strong sales growth has been driven from high levels of product innovation over the last twelve months with the successful launch of a number of enhanced savings products, an improved range of added value current accounts and the introduction of the innovative Lloyds TSB Duo Airmiles credit card offer. Customer deposits have increased strongly, by 8 per cent over the last twelve months, with particularly strong progress in growing our bank savings and wealth management deposit balances, with increases of 15 per cent and 12 per cent respectively.
31 December 31 December 2007 2006 Change Current account and savings balances GBPm GBPm % Bank savings 41,976 36,417 15 C&G deposits 14,861 14,621 2 Wealth management 4,939 4,402 12 UK Retail Banking savings 61,776 55,440 11 Current accounts 20,305 20,221 - Total customer deposits 82,081 75,661 8
Page 15 of 58 UK RETAIL BANKING (continued) The Group has delivered good levels of mortgage growth, focusing on prime mortgage business and seeking to maintain economic returns. However, as we have previously indicated, our market share of net new mortgage lending in the second half of the year was below our outstanding stock position, reflecting our continued focus on writing value-creating business. The Group continues to focus on those segments of the mortgage market where value can be created while adopting a conservative approach to credit risk. As a result of our focus on managing for value and the recent marketwide increase in interest spreads, new business net interest margins have strengthened. Recent levels of mortgage allocations have been stronger and we expect this to translate into robust balance growth as we move into 2008. Gross new mortgage lending for the Group totalled GBP29.4 billion (2006: GBP27.6 billion). Mortgage balances outstanding increased by 7 per cent to GBP102.7 billion and net new lending totalled GBP6.7 billion, resulting in a market share of net new lending of approximately 6.2 per cent. We have maintained our market leadership position in personal loans, despite tightened credit criteria and a slowdown in consumer demand. Unsecured consumer credit balances were broadly flat with personal loan balances outstanding at 31 December 2007 marginally higher at GBP11.2 billion, and credit card balances slightly lower at GBP6.6 billion. Expanding the customer franchise In addition to the strong growth in product sales from existing customers, the Group has continued to make progress in expanding its customer franchise. Current account recruitment increased by 17 per cent, compared with last year, supported by the range of added value current accounts, in particular the Silver Account focusing on foreign nationals. During 2007, the Group opened more than 1 million new current accounts. Wealth Management continues to make good progress with its expansion plans, and over 260 advisers have now been trained on an enhanced wealth management offer comprising private banking, open architecture portfolio management, retirement planning, insurance and estate planning services. As a result, new Investment Portfolio cases increased by 42 per cent and overall wealth management clients increased by 11 per cent. Total new assets under management increased by 42 per cent and wealth management banking deposits grew by 12 per cent. In June 2007, the Group launched the Lloyds TSB Airmiles Duo account, a new, innovative and exclusive credit card that offers a 'two in one' easy to manage account, with one PIN, one statement and two cards, an American Express and a MasterCard on which customers can earn Airmiles. The demand for this new product has been extremely strong, and over 700,000 cards have been issued to a generally more transactional, high quality, customer segment. As a result, Lloyds TSB was the UK market leader in new credit card issuance during 2007, and now has the largest and fastest growing loyalty credit card programme in the UK. Page 16 of 58 UK RETAIL BANKING (continued) Improving productivity and efficiency We have continued to make significant progress in reducing levels of administration and processing work carried out in branches and, as a result, we have increased the number of dedicated customer facing branch network staff by some 4,000 over the last 2 years. Over the same period, branch network staff time spent on back office administration work has reduced from approximately 35 per cent to around 5 per cent. This has enabled us to increase our focus on meeting our customers' needs and has supported the substantially improved branch network sales productivity and service efforts. These improvements have led to the retail banking cost:income ratio, excluding the impact of the settlement of overdraft claims, improving to 45.7 per cent, from 47.0 per cent last year. In Telephone Banking we have continued to invest in our market leading speech recognition technology which has supported significant growth in the number of customers using our automated service. This, combined with further improvements in the efficiency of our contact centre operations, has led to all customer service calls now being answered from UK based centres. Impairment levels slightly decreased Impairment losses on loans and advances decreased by GBP14 million, or 1 per cent, to GBP1,224 million, largely reflecting a reduction in the level of customer insolvencies and the quality of new lending. In addition, collections procedures continue to improve, a particularly important competitive advantage in a slowing consumer environment, and we achieved better than assumed recoveries. The impairment charge as a percentage of average lending improved to 1.10 per cent, compared to 1.18 per cent last year. Over 99 per cent of new personal loans and 89 per cent of new credit cards sold during 2007 were to existing customers, where the Group has a better understanding of an individual customer's total financial position. The level of arrears in the personal loan and credit card portfolios reduced during 2007, whilst overdraft arrears remained stable. Mortgage credit quality remains excellent with the impairment charge remaining at a low level of GBP18 million, or 2 basis points of average mortgage lending. Arrears in the mortgage business have also fallen. In Cheltenham & Gloucester, the average indexed loan-to-value ratio on the mortgage portfolio was 43 per cent, and the average loan-to-value ratio for new mortgages and further advances written during 2007 was 63 per cent. At 31 December 2007, only 1.7 per cent of balances had an indexed loan-to-value ratio in excess of 95 per cent. We extensively stress-test our lending to changes in macroeconomic conditions and we remain very confident in the quality of our mortgage portfolio. Page 17 of 58
INSURANCE AND INVESTMENTS Excluding volatility and profit on disposal of businesses 2007 2006 Change GBPm GBPm % Net interest income 68 56 21 Other income 1,900 1,740 9 Total income 1,968 1,796 10 Insurance claims (302) (200) (51) Total income, net of insurance claims 1,666 1,596 4 Operating expenses (636) (646) 2 Insurance grossing adjustment (page 13) 26 23 13 Profit before tax 1,056 973 9 Profit before tax analysis Life, pensions and OEICs New business profit - life and pensions 163 171 (5) New business loss - OEICs (22) (24) 8 Existing business 551 384 43 Expected return on shareholders' net assets 192 134 43 Impact of surplus capital repatriation - 36 884 701 26 General insurance 128 243 (47) Scottish Widows Investment Partnership 44 29 52 Profit before tax 1,056 973 9 Present value of new business premiums (PVNBP) 10,424 9,740 7 PVNBP new business margin (EEV basis) 3.1% 3.6% Post-tax return on embedded value (EEV basis, page 50, note 20) 9.9% 9.3%
Key highlights - - Strong profit performance. Profit before tax increased by 9 per cent to GBP1,056 million. Adjusting for the impact of surplus capital repatriation, profit before tax increased by 13 per cent. - - Good income growth and excellent cost control. Income, net of insurance claims and adjusting for the impact of surplus capital repatriation, increased by 7 per cent. Operating expenses decreased by 2 per cent. - - Good sales performance. 7 per cent increase in Scottish Widows' present value of new business premiums. Strong progress in increasing bancassurance sales, up 20 per cent. Good performance in the sale of protection products, corporate pensions and retirement income products. - - Improved returns. On an EEV basis, the post-tax return on embedded value increased to 9.9 per cent. New business margin was robust at 3.1 per cent. - - Robust capital position. Scottish Widows continues to deliver improving capital efficiency and self-financing growth, and a further GBP1.9 billion of capital was repatriated to the Group during 2007. - - Increased weather related claims of GBP113 million, largely relating to the severe flooding in the UK in June and July, contributed to a 47 per cent reduction in profit before tax in General Insurance. - - Excellent performance in Scottish Widows Investment Partnership. Profit before tax increased by 52 per cent reflecting higher margins and improved mix of external business. Page 18 of 58 INSURANCE AND INVESTMENTS (continued) Scottish Widows life, pensions and OEICs Profit before tax increased by GBP183 million, or 26 per cent, to GBP884 million. The effect of surplus capital repatriation to the Group has been to reduce investment earnings by a total of GBP36 million in 2007. Adjusting 2006 for this, profit before tax increased by 33 per cent. Life and pensions new business profit, on an IFRS basis and excluding volatility, reduced by 5 per cent to GBP163 million reflecting a change in the mix of investment products sold through the branch network towards non-embedded value accounted products. Total existing business profit grew by 43 per cent to GBP551 million, partly reflecting increased profits from the growing OEIC portfolio, improved cost management and a reduction in adverse assumption changes compared to 2006. The expected return on shareholders' net assets increased by 43 per cent to GBP192 million as a result of a higher volume of free assets, driven by strong equity markets and the impact of regulatory changes in 2006, and a higher expected rate of return. During 2007, Scottish Widows has continued to make strong progress in each of its key business priorities: to maximise bancassurance success; to profitably grow IFA sales; to improve service and operational efficiency; and to optimise capital management. Maximising bancassurance success In 2007, the value of Scottish Widows' bancassurance new business premiums increased by 20 per cent, building on the success of the simplified product range for distribution through the Lloyds TSB branch network, Commercial Banking and Wealth Management channels. Sales of protection products were particularly strong. A new branch network creditor insurance and protection product, which replaced an externally provided creditor product, has led to the significant increase in protection sales during 2007. In addition, Scottish Widows launched a new protection product, 'Protection for Life' towards the end of 2006, which has performed very well. We have continued to deliver good sales of OEICs following the more than doubling of sales in 2006. Profitably growing IFA sales Sales through the IFA distribution channel increased by 2 per cent, following record A-day related sales levels in 2006. Scottish Widows has continued to focus on the more profitable business areas within the IFA market. Sales of savings and investment products were lower as we chose not to compete in areas which deliver unsatisfactory returns, although this was partly offset by good growth in OEIC sales. Corporate pensions volumes remained strong following excellent growth last year and our managed fund business also showed good improvement. Page 19 of 58
INSURANCE AND INVESTMENTS (continued) Present value of new business premiums (PVNBP) 2007 2006 Change GBPm GBPm % Life and pensions: Protection 960 232 314 Savings and investments 913 1,300 (30) Individual pensions 2,073 2,219 (7) Corporate and other pensions 2,141 1,961 9 Retirement income 1,044 960 9 Managed fund business 486 348 40 Life and pensions 7,617 7,020 9 OEICs 2,807 2,720 3 Life, pensions and OEICs 10,424 9,740 7 Single premium business 8,375 7,321 14 Regular premium business 2,049 2,419 (15) Life, pensions and OEICs 10,424 9,740 7 Bancassurance 4,096 3,421 20 Independent financial advisers 5,817 5,706 2 Direct 511 613 (17) Life, pensions and OEICs 10,424 9,740 7
Improving service and operational efficiency The business has made continued improvements in service and operational efficiencies, and the benefits can be seen in a reduction of expenses by 2 per cent compared to prior year, notwithstanding the introduction of a number of new products. In addition, customer satisfaction is at its highest ever level. Scottish Widows received a number of awards for service quality and product innovation, including 'Best Individual Pensions Provider' at the Financial Adviser awards whilst maintaining its top quartile position for lowest servicing and acquisition costs per policy. Optimising capital management Scottish Widows has maintained its strong focus on improving capital management. During 2007 Scottish Widows continued to deliver a more capital efficient product profile and improved internal rates of return. The post-tax return on embedded value, on an EEV basis, increased to 9.9 per cent, from 9.3 per cent last year. During 2007, GBP1.9 billion of capital was repatriated to the Group, giving a total capital repatriation of over GBP3.6 billion since the beginning of 2005. Page 20 of 58 INSURANCE AND INVESTMENTS (continued) Results on a European Embedded Value (EEV) basis Lloyds TSB continues to report under IFRS, however, in line with industry best practice, the Group provides supplementary financial reporting for Scottish Widows on an EEV basis. The Group believes that EEV represents the most appropriate measure of long-term value creation in life assurance and investment businesses.
2007 2006 Life, Life, Change pensions pensions and OEICs and OEICs GBPm GBPm % New business profit 326 346 (6) Existing business - - Expected return 337 403 - - Experience variances 78 69 - - Assumption changes (45) (133) 370 339 9 Expected return on shareholders' net assets 207 131 58 Profit before tax, adjusted for capital repatriation* 903 816 11 Impact of surplus capital repatriation to Group - 36 Profit before tax* 903 852 6 New business margin (PVNBP) 3.1% 3.6% Embedded value (year end) GBP5,365m GBP6,413m Post-tax return on embedded value* 9.9% 9.3% *Excluding volatility and other items (page 36, note 2).
Adjusting for the impact of capital repatriation, EEV profit before tax from the Group's life, pensions and OEICs business increased by 11 per cent to GBP903 million. New business profit fell by GBP20 million, or 6 per cent, to GBP326 million, largely reflecting the impact of a higher risk-free discount rate and changes in other economic assumptions applied to new business. This was however offset by a corresponding credit to the expected return on shareholders' net assets. Existing business profit increased by 9 per cent. Expected return decreased by 16 per cent to GBP337 million, primarily reflecting a lower shareholder benefit this year from the reduction in the value of realistic balance sheet liabilities and the impact of regulatory changes in 2006. Positive experience variances were driven by higher annuity profits from Abbey Life. Overall lapse experience was broadly in line with the Group's expectations, as higher lapse experience in the life and pensions business was broadly offset by a favourable experience in OEICs. Assumption changes primarily reflect changes to the longer term lapse assumptions for both life and pensions business and OEICs. The expected return on shareholders' net assets increased by GBP76 million, as a result of a higher volume of free assets, driven by strong equity markets and the impact of regulatory changes in 2006, and a higher expected rate of return. Page 21 of 58 INSURANCE AND INVESTMENTS (continued) Results on a European Embedded Value (EEV) basis Overall the post-tax return on embedded value increased to 9.9 per cent from 9.3 per cent. Scottish Widows maintained a strong new business margin of 3.1 per cent. Individual new business product margins remained broadly stable. The overall new business margin fell by 50 basis points however, as a result of an adverse impact from a higher risk-free discount rate and changes in other economic assumptions applied to new business and the shift in product mix resulting from the insourcing of a new branch network creditor insurance and protection product. This product generates a lower new business margin, but delivers good levels of value for the Group. Page 22 of 58 INSURANCE AND INVESTMENTS (continued) Scottish Widows Investment Partnership Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased by 52 per cent to GBP44 million, reflecting increased profitability resulting from higher margins and an improved mix of external business, a key strategic priority for SWIP. Over the last 12 months, SWIP's assets under management decreased by GBP4.1 billion to GBP97.6 billion, reflecting the decision by the Trustees of the Lloyds TSB pension schemes to move GBP5.7 billion into external passive management. As a result, institutional funds under management reduced by GBP5.0 billion. The net movement in retail funds, net of expenses and commissions, was an increase of GBP2.9 billion. Movements in funds under management The following table highlights the movement in retail and institutional funds under management.
2007 2006 GBPbn GBPbn Opening funds under management 105.7 97.5 Movement in Retail Funds Premiums 11.7 11.7 Claims (4.8) (3.6) Surrenders (6.4) (5.4) Net inflow of business 0.5 2.7 Investment return, expenses and commission 2.4 6.0 Net movement 2.9 8.7 Movement in Institutional Funds Lloyds TSB pension schemes (5.7) - Other institutional funds (0.6) (1.3) Investment return, expenses and commission 1.3 1.5 Net movement (5.0) 0.2 Proceeds from sale of Abbey Life 1.0 - Dividends and surplus capital repatriation (1.9) (0.7) Closing funds under management 102.7 105.7 Managed by SWIP 97.6 101.7 Managed by third parties 5.1 4.0 Closing funds under management 102.7 105.7 Including assets under management within our UK Wealth Management and International Private Banking businesses, Groupwide funds under management decreased by 3 per cent to GBP122.8 billion. Page 23 of 58 INSURANCE AND INVESTMENTS (continued) General insurance 2007 2006 Change GBPm GBPm % Commission receivable 648 629 3 Commission payable (692) (664) (4) Underwriting income (net of reinsurance) 591 600 (2) Other income 37 35 6 Net operating income 584 600 (3) Claims paid on insurance contracts (net of reinsurance) (302) (200) (51) Operating income, net of claims 282 400 (30) Operating expenses (154) (157) 2 Profit before tax 128 243 (47) Claims ratio 49% 32% Combined ratio 93% 80%
Profit before tax from our general insurance operations decreased by GBP115 million, to GBP128 million, largely as a result of a GBP113 million increase in weather related claims, primarily reflecting severe flooding in the UK in June and July. Net operating income decreased by 3 per cent whilst costs were reduced by 2 per cent. Net operating income decreased by GBP16 million, or 3 per cent, as growth in home and loan protection income was more than offset by lower motor insurance income, increased reinsurance costs and the run-off from the legacy health portfolio. Our continued focus on improving operational efficiency and improving the effectiveness of our marketing spend has resulted in a GBP3 million, or 2 per cent, reduction in operating costs, whilst also continuing to improve processing efficiency. Overall sales performance has been good with an 8 per cent increase in new business gross written premiums (GWP). Home insurance sales through the branch network continue to perform well with 14 per cent growth in new business GWP. We have, however, scaled back our participation in the distribution of home insurance through direct channels, as a result of the increasingly competitive pricing in that area of the market. During the year we continued to invest in product development, with loan protection and home insurance products both securing industry leading external quality ratings. Income, net of claims, was GBP118 million lower, largely as a result of the increased extreme weather related claims, following a benign period in 2006. As a result, overall claims increased by GBP102 million, and key underwriting ratios were significantly affected with an increase in the claims ratio to 49 per cent, and an increase in the combined ratio to 93 per cent. Adjusting for the extreme weather related claims, the claims ratio improved, reflecting both a favourable claims experience in our home insurance underwriting and the impact of recent investment in improving the efficiency of our claims processing. The business continues to invest in the development of its Corporate Partnership distribution arrangements and the performance of the Pearl business acquired in 2006 has exceeded our initial expectations. Page 24 of 58
WHOLESALE AND INTERNATIONAL BANKING Excluding profit on disposal of businesses 2007 2006 Change GBPm GBPm % Net interest income 2,518 2,177 16 Other income 1,773 2,035 (13) Total income 4,291 4,212 2 Operating expenses (2,282) (2,264) (1) Trading surplus 2,009 1,948 3 Impairment (572) (308) (86) Profit before tax 1,437 1,640 (12) Cost:income ratio 53.2% 53.8% Cost:income ratio, excluding market dislocation 50.9% 53.8% Post-tax return on average risk-weighted assets 1.13% 1.38% Total assets GBP163.3bn GBP147.8bn 10 Risk-weighted assets GBP105.1bn GBP91.8bn 14 Customer deposits GBP72.3bn GBP61.2bn 18 Profit before tax by business unit Corporate Markets - - Before impact of market dislocation 1,132 1,030 10 - - Impact of market dislocation (280) - 852 1,030 (17) Commercial Banking 451 398 13 Asset Finance 60 113 (47) International Banking and other businesses 74 99 (25) 1,437 1,640 (12)
Key highlights - - Overall profits impacted by turbulence in global financial markets. Whilst the division has limited exposure to assets affected by current capital market uncertainties, the impact of recent market dislocation has been to reduce profit before tax in 2007 by GBP280 million. - - Continued relationship banking momentum. Excluding the impact of market dislocation, profit before tax increased by 5 per cent. - - Further good progress in expanding our Corporate Markets business, with an 18 per cent increase in Corporate Markets income supporting a 10 per cent increase in profit before tax, excluding the impact of market dislocation. Cross-selling income in Corporate Markets increased by 35 per cent. - - Continued strong franchise growth in Commercial Banking, with an 8 per cent growth in income and a 13 per cent growth in profit before tax. Lloyds TSB has retained its leading position as the bank of choice for start-up businesses. - - Continued tight credit control in Asset Finance, and a slowdown in demand in the consumer lending portfolio, led to a 47 per cent reduction in profit before tax. - - Strong risk management and good asset quality, despite a rise of GBP264 million in impairment losses, largely as a result of the GBP92 million impact of market dislocation, a GBP28 million provision reflecting the impact of the 2007 Finance Act on the division's leasing business, and a lower level of corporate releases and recoveries during the year. Page 25 of 58 WHOLESALE AND INTERNATIONAL BANKING (continued) In Wholesale and International Banking, the Group has continued to make significant progress in its strategy to develop the Group's strong corporate and small to medium business customer franchises and, in doing so, become the best UK mid-market focused wholesale bank. The division has continued to make substantial progress in its relationship banking businesses. In Commercial Banking, strong growth in business volumes, further customer franchise improvements and good progress in improving operational efficiency have resulted in continued strong profit growth. In Corporate Markets, further good progress has been made in developing our relationship banking franchise supported by a strong cross-selling performance. Overall, the division's profit before tax decreased by 12 per cent, to GBP1,437 million, reflecting the GBP280 million reduction in profits as a result of market dislocation. Excluding this impact, profit before tax increased by 5 per cent, with a continued strong performance in our relationship banking businesses. This has generated overall income growth of 6 per cent, driven by strong Corporate Markets and Commercial Banking income growth of 18 per cent and 8 per cent respectively. This exceeded cost growth of 1 per cent, leading to a reduction in the cost:income ratio to 50.9 per cent, from 53.8 per cent last year. Trading surplus, excluding the impact of market dislocation, increased by GBP249 million, or 13 per cent, to GBP2,197 million. The charge for impairment losses on loans and advances increased by GBP264 million to GBP572 million, largely as a result of the GBP92 million impact of market dislocation, a one-off GBP28 million impairment charge reflecting a reduction in rental income from operating lease activities following the corporation tax rate change included in the 2007 Finance Act, a lower level of releases and recoveries during the year and the impact of recent strong growth in the corporate lending portfolio. Overall corporate and SME asset quality remains good although we continue to expect some normalisation in the impairment charge over the next few years. We do believe, however, that we remain relatively well positioned as a result of our prudent credit management policy. Page 26 of 58 WHOLESALE AND INTERNATIONAL BANKING (continued)
Corporate Markets 2007 2006 Change GBPm GBPm % Net interest income 1,104 806 37 Other income - - Before market dislocation 808 821 (2) - - Market dislocation (188) - 620 821 (24) Total income 1,724 1,627 6 Operating expenses (632) (615) (3) Trading surplus 1,092 1,012 8 Impairment - - Before market dislocation (148) 18 - - Market dislocation (92) - (240) 18 Profit before tax 852 1,030 (17) In Corporate Markets, profit before tax fell by 17 per cent, however, excluding the impact of market dislocation and the 2007 Finance Act, profit before tax increased by 13 per cent. On this basis, income increased by 18 per cent, supported by continued high levels of cross-selling income, up 35 per cent, strong growth in corporate lending and a higher level of income from venture capital investments. The strong growth in lending was supported by an increase of GBP4.7 billion in Group lending to property companies, to GBP17.6 billion. Two-thirds of this lending portfolio is commercial property lending supporting our existing customer franchise and reflects a well-spread nationwide portfolio. We adopt conservative credit criteria and the indexed loan-to-value of the portfolio is approximately 62 per cent. One third of the portfolio is residential lending, over half of which is to local authority backed public housing. Operating expenses increased by 3 per cent to GBP632 million, reflecting further investment in people to support ongoing business growth. The trading surplus, excluding market dislocation, increased by 26 per cent. The impairment charge of GBP240 million includes GBP92 million from the impact of market dislocation and the GBP28 million one-off charge relating to the impact of the 2007 Finance Act on the division's leasing business. Excluding these items, the underlying increase in the impairment charge reflects lower levels of releases and recoveries, recent strong growth in corporate customer lending and impairments relating to two special situations. Page 27 of 58 WHOLESALE AND INTERNATIONAL BANKING (continued) Commercial Banking 2007 2006 Change GBPm GBPm % Net interest income 890 821 8 Other income 429 397 8 Total income 1,319 1,218 8 Operating expenses (769) (727) (6) Trading surplus 550 491 12 Impairment (99) (93) (6) Profit before tax 451 398 13 Profit before tax in Commercial Banking grew by GBP53 million, or 13 per cent, reflecting strong growth in business volumes, further improvements in growing the Commercial Banking customer franchise and progress in improving operational efficiency. Income increased by 8 per cent to GBP1,319 million, reflecting strong growth in lending and deposit balances, whilst costs were 6 per cent higher, as a result of increased investment to improve the operating platform. Commercial Banking continued to develop and grow its customer franchise strongly, with customer recruitment of 120,000 during 2007, reflecting its market-leading position in the start-up market with a market share of 21 per cent. We also made good progress in continuing to attract customers 'switching' from other financial services providers. Lloyds TSB Commercial Finance has continued to improve its strong market position, with a market share of approximately 20 per cent, measured by client numbers. Asset quality in the Commercial Banking portfolios remains good with impairment charges as a percentage of average lending reducing by 7 basis points to 0.60 per cent, partly reflecting our move to increase levels of secured lending. Asset Finance 2007 2006 Change GBPm GBPm % Net interest income 299 331 (10) Other income 472 529 (11) Total income 771 860 (10) Operating expenses (483) (508) 5 Trading surplus 288 352 (18) Impairment (228) (239) 5 Profit before tax 60 113 (47) Profit before tax in Asset Finance decreased by 47 per cent to GBP60 million, largely reflecting continued tight credit criteria and a slowdown in demand in the consumer lending portfolio which has led to a reduction in the level of new business underwritten. As a result, income decreased by GBP89 million, or 10 per cent. Costs were 5 per cent lower and the impairment charge decreased by GBP11 million to GBP228 million, reflecting the recent tightening of credit criteria, improved collections procedures and lower balances outstanding, which offset an increase in arrears. Conditions in the Motor Finance business remain challenging. New business volumes have reduced, reflecting the marketwide slowdown in consumer demand, and we have sought to avoid the structural contraction in interest margins. In Personal Finance, new business volumes have risen modestly in a fiercely competitive market. Our Contract Hire business, Autolease, has performed well by continuing to leverage its strong market position and efficient operation. Page 28 of 58 CONSOLIDATED INCOME STATEMENT - STATUTORY 2007 2006 GBPm GBPm Interest and similar income 16,874 14,108 Interest and similar expense (10,775) (8,779) Net interest income 6,099 5,329 Fee and commission income 3,224 3,116 Fee and commission expense (600) (638) Net fee and commission income 2,624 2,478 Net trading income 3,123 6,341 Insurance premium income 5,430 4,719 Other operating income 952 806 Other income 12,129 14,344 Total income 18,228 19,673 Insurance claims (7,522) (8,569) Total income, net of insurance claims 10,706 11,104 Operating expenses (5,567) (5,301) Trading surplus 5,139 5,803 Impairment (1,796) (1,555) Profit on sale of businesses 657 - Profit before tax 4,000 4,248 Taxation (679) (1,341) Profit for the year 3,321 2,907 Profit attributable to minority interests 32 104 Profit attributable to equity shareholders 3,289 2,803 Profit for the year 3,321 2,907 Basic earnings per share 58.3p 49.9p Diluted earnings per share 57.9p 49.5p Dividend per share for the year* 35.9p 34.2p Dividend for the year* GBP2,026m GBP1,928m *The total dividend for the year represents the interim dividend paid in October 2007 and the final dividend which will be paid and accounted for in May 2008. Page 29 of 58 CONSOLIDATED BALANCE SHEET - STATUTORY 31 December 31 December 2007 2006 Assets GBPm GBPm Cash and balances at central banks 4,330 1,898 Items in course of collection from banks 1,242 1,431 Trading and other financial assets at fair value through profit or loss 57,911 67,695 Derivative financial instruments 8,659 5,565 Loans and advances to banks 34,845 40,638 Loans and advances to customers 209,814 188,285 Available-for-sale financial assets 20,196 19,178 Investment property 3,722 4,739 Goodwill 2,358 2,377 Value of in-force business 2,218 2,723 Other intangible assets 149 138 Tangible fixed assets 2,839 4,252 Other assets 5,063 4,679 Total assets 353,346 343,598 Equity and liabilities Deposits from banks 39,091 36,394 Customer accounts 156,555 139,342 Items in course of transmission to banks 668 781 Trading and other liabilities at fair value through profit or loss 3,206 1,184 Derivative financial instruments 7,582 5,763 Debt securities in issue 51,572 54,118 Liabilities arising from insurance contracts and participating investment contracts 38,063 41,445 Liabilities arising from non-participating investment contracts 18,197 24,370 Unallocated surplus within insurance businesses 554 683 Other liabilities 9,690 10,985 Retirement benefit obligations 2,144 2,462 Current tax liabilities 484 817 Deferred tax liabilities 948 1,416 Other provisions 209 259 Subordinated liabilities 11,958 12,072 Total liabilities 340,921 332,091 Equity Share capital 1,432 1,429 Share premium account 1,298 1,266 Other reserves (60) 336 Retained profits 9,471 8,124 Shareholders' equity 12,141 11,155 Minority interests 284 352 Total equity 12,425 11,507 Total equity and liabilities 353,346 343,598
Page 30 of 58
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 2006 2,590 395 7,210 435 10,630 Movements in available-for-sale financial assets, net of tax: - - change in fair value - (10) - - (10) - - transferred to income statement in - (21) - - (21) respect of disposals Movement in cash flow hedges, net of - 1 - - 1 tax Currency translation differences - (29) - (4) (33) Net income recognised directly in - (59) - (4) (63) equity Profit for the year - - 2,803 104 2,907 Total recognised income for the year - (59) 2,803 100 2,844 Dividends - - (1,919) (32) (1,951) Purchase/sale of treasury shares - - (35) - (35) Employee share option schemes: - - value of employee services - - 65 - 65 - - proceeds from shares issued 105 - - - 105 Repayment of capital to minority - - - (151) (151) shareholders Balance at 31 December 2006 2,695 336 8,124 352 11,507 Movements in available-for-sale financial assets, net of tax: - - change in fair value - (436) - - (436) - - transferred to income statement in - (5) - - (5) respect of disposals - - transferred to income statement in - 49 - - 49 respect of impairment - - disposal of businesses - (6) - - (6) Movement in cash flow hedges, net of - (15) - - (15) tax Currency translation differences - 17 _ - (1) 16 Net income recognised directly in - (396) - (1) (397) equity Profit for the year - - 3,289 32 3,321 Total recognised income for the year - (396) 3,289 31 2,924 Dividends - - (1,957) (19) (1,976) Purchase/sale of treasury shares - - (1) - (1) Employee share option schemes: - - value of employee services - - 16 - 16 - - proceeds from shares issued 35 - - - 35 Repayment of capital to minority - - - (80) (80) shareholders Balance at 31 December 2007 2,730 (60) 9,471 284 12,425 Page 31 of 58 CONDENSED CONSOLIDATED CASH FLOW STATEMENT - STATUTORY 2007 2006 GBPm GBPm Profit before tax 4,000 4,248 Adjustments for: Change in operating assets (16,982) (31,995) Change in operating liabilities 21,541 33,069 Non-cash and other items 2,784 1,555 Tax paid (859) (798) Net cash provided by operating activities 10,484 6,079 Cash flows from investing activities Purchase of available-for-sale financial assets (21,667) (23,448) Proceeds from sale and maturity of available-for-sale financial assets 19,468 18,106 Purchase of fixed assets (1,334) (1,724) Proceeds from sale of fixed assets 982 1,257 Acquisition of businesses, net of cash acquired (8) (20) Disposal of businesses, net of cash disposed 1,476 936 Net cash used in investing activities (1,083) (4,893) Cash flows from financing activities Dividends paid to equity shareholders (1,957) (1,919) Dividends paid to minority interests (19) (32) Interest paid on subordinated liabilities (709) (713) Proceeds from issue of subordinated liabilities - 1,116 Proceeds from issue of ordinary shares 35 105 Repayment of subordinated liabilities (300) (759) Repayment of capital to minority shareholders (80) (151) Net cash used in financing activities (3,030) (2,353) Effects of exchange rate changes on cash and cash equivalents 82 (148) Change in cash and cash equivalents 6,453 (1,315) Cash and cash equivalents at beginning of year 25,438 26,753 Cash and cash equivalents at end of year 31,891 25,438 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 32 of 58 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) Lloyds TSB Group is a leading UK-based financial services group, providing a wide range of banking and financial services in the UK and in certain locations overseas. The Group's activities are organised into three segments: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Central group items includes the funding cost of certain acquisitions less earnings on capital, central costs and accruals for payment to the Lloyds TSB Foundations. Services provided by UK Retail Banking encompass the provision of banking and other financial services to personal customers, private banking and mortgages. Insurance and Investments offers life assurance, pensions and savings products, general insurance and asset management services. Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks and financial institutions, and small and medium-sized UK businesses. It also provides asset finance to personal and corporate customers, manages the Group's activities in financial markets and provides banking and financial services overseas. Year ended UK General Life, Insurance Wholesale Central 31 December 2007 Retail insurance pensions and and group Banking and asset Investments International items* management Banking Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Interest and similar income* 8,018 23 1,040 1,063 9,834 (2,041) 16,874 Interest and similar (4,235) - (527) (527) (7,316) 1,303 (10,775) expense* Net interest income 3,783 23 513 536 2,518 (738) 6,099 Other income (net of fee 1,797 554 7,643 8,197 1,773 362 12,129 and commission expense) Total income 5,580 577 8,156 8,733 4,291 (376) 18,228 Insurance claims - (302) (7,220) (7,522) - - (7,522) Total income, net of 5,580 275 936 1,211 4,291 (376) 10,706 insurance claims Operating expenses (2,624) (154) (501) (655) (2,282) (6) (5,567) Trading surplus (deficit) 2,956 121 435 556 2,009 (382) 5,139 Impairment (1,224) - - - (572) - (1,796) Profit on sale of - - 272 272 385 - 657 businesses Profit (loss) before tax 1,732 121 707 828 1,822 (382) 4,000 External revenue 9,132 1,235 8,854 10,089 10,082 300 29,603 Inter-segment revenue* 1,012 49 181 230 1,559 (2,801) - Segment revenue 10,144 1,284 9,035 10,319 11,641 (2,501) 29,603 *Central group items on this and the following page includes inter-segment consolidation adjustments within interest and similar income and within interest and similar expense as follows: interest and similar income GBP(3,138) million (2006: GBP(3,241) million); interest and similar expense GBP3,138 million (2006: GBP3,241 million). There is no impact on net interest income. Similarly, Central group items includes inter-segment revenue adjustments of GBP(4,103) million (2006: GBP(4,102) million). Page 33 of 58 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) Year ended UK General Life, Insurance Wholesale Central 31 December 2006 Retail Insurance pensions and and group Banking and asset Investments International items* management Banking Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm Interest and similar income* 6,913 24 820 844 8,598 (2,247) 14,108 Interest and similar (3,271) - (741) (741) (6,421) 1,654 (8,779) expense* Net interest income 3,642 24 79 103 2,177 (593) 5,329 Other income (net of fee and commission expense) 1,621 594 9,893 10,487 2,035 201 14,344 Total income 5,263 618 9,972 10,590 4,212 (392) 19,673 Insurance claims - (200) (8,369) (8,569) - - (8,569) Total income, net of 5,263 418 1,603 2,021 4,212 (392) 11,104 insurance claims Operating expenses (2,476) (157) (481) (638) (2,264) 77 (5,301) Trading surplus (deficit) 2,787 261 1,122 1,383 1,948 (315) 5,803 Impairment (1,238) - - - (308) (9) (1,555) Profit (loss) before tax 1,549 261 1,122 1,383 1,640 (324) 4,248 External revenue 8,136 1,249 10,888 12,137 8,659 158 29,090 Inter-segment revenue* 698 19 199 218 2,276 (3,192) - Segment revenue 8,834 1,268 11,087 12,355 10,935 (3,034) 29,090 Page 34 of 58 NOTES Page 1 Accounting policies, presentation and estimates 36 2 Volatility 36 3 Mortgage lending 38 4 Group net interest income 39 5 Other income 40 6 General insurance income 40 7 Operating expenses 41 8 Number of employees (full-time equivalent) 41 9 Impairment losses by division 42 10 Retirement benefit obligations 42 11 Capital ratios 43 12 Total assets by division 44 13 Balance sheet information 44 14 Loans and advances to customers 45 15 Credit market positions in Corporate Markets 46 16 Profit on sale of businesses 47 17 Economic profit 48 18 Earnings per share 48 19 Scottish Widows - realistic balance sheet information 49 20 European Embedded Value reporting - results for the year ended 31 December 2007 50 21 Scottish Widows - weighted sales (Annual Premium Equivalent) 55 22 Legal and regulatory matters 55 23 Taxation 56 24 Dividend 57 25 Other information 57
Page 35 of 58 1. Accounting policies, presentation and estimates The 2007 results have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The accounting policies adopted in the preparation of these results are unchanged from those disclosed in the Group's consolidated financial statements as at and for the year ended 31 December 2006 ('2006 Annual Report and Accounts') copies of which can be found on the Group's website at www.investorrelations.lloydstsb.com/ir/company_reports_page.asp or are available upon request from the Company Secretary's Department, Lloyds TSB Group plc, 25 Gresham Street, London EC2V 7HN. The following pronouncements relevant to the Group are applicable for the year ended 31 December 2007:
Pronouncement Nature of change Effective date IFRS 7 Financial Instruments: Consolidates financial instruments Annual periods beginning on or after disclosures into a single standard and 1 January 2007 Disclosures requires more detailed qualitative and quantitative disclosures about exposure to risks arising from financial instruments. Amendment to IAS 1 Presentation Introduces additional disclosures of Annual periods beginning on or after of Financial Statements - Capital the objectives, policies and processes 1 January 2007 Disclosures for managing capital, quantitative data about what the entity regards as capital, and compliance with capital requirements.
The relevant disclosures are included in the Group's consolidated financial statements for the year ended 31 December 2007. 2. Volatility Banking volatility Since the introduction of IFRS in 2005, in order to provide a clearer view of the underlying performance of the business, the Group has separately disclosed within Central group items the effects of marking-to-market derivatives held for risk management purposes. This amount, net of the effect of the Group's IAS 39 compliant hedge accounting relationships, was previously disclosed as banking volatility. The use of fair values in financial reporting is now more widespread and there is a better understanding of their effects; consequently, in line with evolving best practice, the Group no longer considers it appropriate to disclose banking volatility separately. Divisions will continue to transfer, through the Group's internal transfer pricing arrangements, to Group Corporate Treasury (included in Central group items) the movements in the market value of hedging derivatives where the impact is not locally managed. Page 36 of 58 2. Volatility (continued) Insurance volatility The Group's insurance businesses have liability products that are supported by substantial holdings of investments, including equities, property and fixed interest investments, all of which have a volatile fair value. The value of the liabilities does not move exactly in line with changes in the fair value of the investments, yet IFRS requires that the changes in both the value of the liabilities and investments be reflected within the income statement. As these investments are substantial and movements in their fair value can have a significant impact on the profitability of the Insurance and Investments division, management believes that it is appropriate to disclose the division's results on the basis of an expected return in addition to the actual return. The difference between the actual return on these investments and the expected return based upon economic assumptions made at the beginning of the year is included within insurance volatility. Changes in market variables also affect the realistic valuation of the guarantees and options embedded within products written in the Scottish Widows With Profit Fund, the value of the in-force business and the value of shareholders' funds. Fluctuations in these values caused by changes in market variables, including market spreads reflecting credit risk premia, are also included within insurance volatility. These market credit spreads represent the gap between the yield on corporate bonds and the yield on government bonds, and reflect the market's assessment of credit risk. Changes in the credit spreads affect the value of the in-force business asset in respect of the annuity portfolio. The expected investment returns used to determine the normalised profit of the business, which are based on prevailing market rates and published research into historic investment return differentials, are set out below:
2008 2007 2006 % % % Gilt yields (gross) 4.55 4.62 4.12 Equity returns (gross) 7.55 7.62 6.72 Dividend yield 3.00 3.00 3.00 Property return (gross) 7.55 7.62 6.72 Corporate bonds (gross) 5.15 5.22 4.72 During 2007, profit before tax included negative insurance volatility of GBP267 million, being a credit of GBP7 million to net interest income and a charge of GBP274 million to other income (2006: positive volatility of GBP84 million, being a credit of GBP2 million to net interest income and a credit of GBP82 million to other income). The effect of widening credit risk spreads and falling gilt values more than offset the favourable impact of a modest increase in equity values and changes in market consistent assumptions. During 2006 increases in equity values were partly offset by lower gilt values. Policyholder interests volatility As a result of the requirement under 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. Page 37 of 58 2. Volatility (continued) Under IFRS, tax on policyholder investment returns is required to be included in the Group's tax charge rather than being offset against the related income, as it is in actual distributions made to policyholders. The impact is, therefore, to either increase or decrease profit before tax with a corresponding change in the tax charge. Other items classified within policyholder interests volatility include the effects of investment vehicles which are only majority owned by the long-term assurance funds. In the case of these vehicles, the Group's profit for the year includes the minorities' share of the profits earned. As set out below these amounts do not accrue to the equity holders, accordingly management believes a clearer representation of the underlying performance of the Group's life and pensions businesses is presented by excluding policyholder interests volatility. 2007 2006 GBPm GBPm Net interest income - (33) Other income (233) 359 Profit before tax (233) 326 Taxation - policyholder 243 (222) Minority interests (10) (104) Profit attributable to equity shareholders - - During 2007, profit before tax included negative policyholder interests volatility of GBP233 million, being a charge to other income (2006: positive volatility of GBP326 million, being a charge of GBP33 million to net interest income and a credit of GBP359 million to other income). In 2007, substantial policyholder tax losses have been generated as a result of a fall in property, gilt and bond values. These losses reduce future policyholder tax liabilities and have led to a policyholder tax credit during the year. Profits were recognised in 2006 as a result of positive market movements combined with realised gains in the holdings in property investment vehicles majority owned by the long-term assurance funds. 3. Mortgage lending 2007 2006 Gross new mortgage lending GBP29.4bn GBP27.6bn Market share of gross new mortgage lending 8.1% 8.0% Redemptions GBP22.7bn GBP20.7bn Market share of redemptions 8.9% 8.8% Net new mortgage lending GBP6.7bn GBP6.9bn Market share of net new mortgage lending 6.2% 6.3% Mortgages outstanding (year end)* GBP102.0bn GBP95.3bn Market share of mortgages outstanding 8.5% 8.8% *Excluding the effect of IFRS related adjustments in order to conform with industry statistics. In Cheltenham & Gloucester, the average indexed loan-to-value ratio on the mortgage portfolio was 43 per cent (31 December 2006: 44 per cent), and the average loan-to-value ratio for new mortgages and further advances written during 2007 was 63 per cent (2006: 64 per cent). At 31 December 2007, only 1.7 per cent of balances had an indexed loan-to-value ratio in excess of 95 per cent. Page 38 of 58 4. Group net interest income 2007 2006 GBPm GBPm Banking margin Net interest income 5,167 4,914 Average interest-earning assets, excluding reverse repos 185,022 170,743 Net interest margin 2.79% 2.88% Statutory basis Net interest income 6,099 5,329 Average interest-earning assets, excluding reverse repos 248,233 226,990 Net interest margin 2.46% 2.35% 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 addition, the Group's net interest margin is significantly affected by the accounting treatment of a number of Products and Markets and other products, principally those where funding costs are treated as an interest expense and related revenues are recognised within other income. In order to enhance comparability in the Group's banking net interest margin these items have been excluded in determining both net interest income and average interest-earning assets. A reconciliation of banking net interest income to Group net interest income follows: 2007 2006 GBPm GBPm Banking net interest income 5,167 4,914 Products and Markets, and other products 464 368 Volatility and insurance grossing adjustment 468 47 Group net interest income 6,099 5,329 Certain fees payable by the Group's asset finance business have been reclassified from other income to interest income as part of the effective yield of the related lending; there is no impact upon profit before tax. Comparative figures have been restated accordingly. Page 39 of 58 5. Other income 2007 2006 GBPm GBPm Fee and commission income: UK current account fees 693 652 Other UK fees and commissions 1,215 1,210 Insurance broking 648 629 Card services 536 493 International fees and commissions 132 132 3,224 3,116 Fee and commission expense (600) (638) Net fee and commission income 2,624 2,478 Net trading income 3,570 5,981 Insurance premium income 5,430 4,719 Other operating income 1,012 725 Total other income* 12,636 13,903 Insurance claims (7,522) (8,569) Total other income, net of insurance claims* 5,114 5,334 Volatility - - Insurance (274) 82 - - Policyholder interests (233) 359 Total other income, net of insurance claims 4,607 5,775 *Excluding volatility. For statutory reporting purposes, volatility totalling GBP (507) million in 2007 (2006: GBP441 million); is included in total other income; comprising net trading income of GBP(447) million (2006: GBP360 million) and other operating income of GBP(60) million (2006: GBP81 million). Certain fees payable by the Group's asset finance business have been reclassified from other income to interest income as part of the effective yield of the related lending; there is no impact upon profit before tax. Comparative figures have been restated accordingly. 6. General insurance income 2007 2006 GBPm GBPm Premium income from underwriting Creditor 164 180 Home 441 424 Health 9 13 Reinsurance premiums (23) (17) 591 600 Commissions from insurance broking Creditor 394 377 Home 49 47 Health 12 13 Other 193 192 648 629 Page 40 of 58 7. Operating expenses 2007 2006 Administrative expenses: GBPm GBPm Staff: Salaries 2,127 2,117 National insurance 167 161 Pensions - Before pension schemes related credit 238 293 - Pension schemes related credit - (128) 238 165 Other staff costs 372 298 2,904 2,741 Premises and equipment: Rent and rates 304 310 Hire of equipment 16 15 Repairs and maintenance 154 165 Other 145 149 619 639 Other expenses: Communications and external data processing 462 499 Advertising and promotion 192 184 Professional fees 279 231 Settlement of overdraft claims 76 - Other 405 388 1,414 1,302 Administrative expenses 4,937 4,682 Depreciation and amortisation 630 619 Total operating expenses 5,567 5,301 Cost:income ratio - statutory basis* 52.0% 47.7% Cost:income ratio - excluding volatility, the settlement of 49.0% 50.8% overdraft claims and, in 2006, the pension schemes related credit *Total operating expenses divided by total income, net of insurance claims. 8. Number of employees (full-time equivalent) 2007 2006 UK Retail Banking 29,943 30,204 Insurance and Investments 5,276 5,685 Wholesale and International Banking 15,997 19,210 Other, largely IT and Operations 10,111 10,400 61,327 65,499 Agency staff (full-time equivalent) (3,249) (2,869) Total number of employees (full-time equivalent) 58,078 62,630 The total number of employees reduced by 4,552 to 58,078. Of this reduction 2,790 related to the impact of business disposals (Lloyds TSB Registrars 1,485, Dutton-Forshaw 1,277 and Abbey Life 28). Page 41 of 58 9. Impairment losses by division 2007 2006 GBPm GBPm Impairment losses by division UK Retail Banking Personal loans/overdrafts 679 740 Credit cards 527 490 Mortgages 18 8 1,224 1,238 Wholesale and International Banking Excluding market dislocation and 2007 Finance Act 447 313 Market dislocation 22 - 2007 Finance Act 28 - 497 313 Central group items - 9 Impairment losses on loans and advances 1,721 1,560 Other credit risk provisions 5 (5) Impairment of available-for-sale financial assets 70 - Total impairment charge 1,796 1,555 Charge as % of average lending: Personal loans/overdrafts 5.32 5.85 Credit cards 7.96 6.99 Mortgages 0.02 0.01 UK Retail Banking 1.10 1.18 Wholesale and International Banking* 0.51 0.39 Total charge* 0.82 0.83 *Excluding impact of market dislocation and 2007 Finance Act. 10. Retirement benefit obligations 2007 2006 GBPm GBPm Defined benefit pension schemes Present value of scheme liabilities 16,795 17,378 Fair value of scheme assets (16,112) (15,279) Net defined benefit scheme deficit 683 2,099 Unrecognised actuarial gains 1,350 263 Net recognised defined benefit scheme deficit 2,033 2,362 Other post-retirement benefit schemes 111 100 Net recognised liability 2,144 2,462 Deferred tax (600) (739) Recognised liability after tax 1,544 1,723 The Group's defined benefit pension schemes' gross deficit at 31 December 2007 improved by GBP1,416 million to GBP683 million, comprising net recognised liabilities of GBP2,033 million partly offset by unrecognised actuarial gains of GBP1,350 million. This improvement largely reflects an increase in the real discount rate used to value the schemes' liabilities and Group contributions to the schemes, which exceeded the cost of accruing benefits. Page 42 of 58 11. Capital ratios Basel II Basel I Basel I 31 December 31 December 31 December 2007 2007 2006 GBPm GBPm GBPm Tier 1 Share capital and reserves 12,663 12,141 11,155 Regulatory post-retirement benefit adjustments 704 704 1,041 Other items - - 39 Preference share capital 1,589 1,589 1,610 Innovative tier 1 capital instruments 1,474 1,474 1,372 Available-for-sale revaluation reserve and cash flow hedging 402 402 (12) reserve Goodwill (2,358) (2,358) (2,377) Other deductions (929) - - Total tier 1 capital 13,545 13,952 12,828 Tier 2 Undated loan capital 4,457 4,457 4,390 Dated loan capital 3,441 3,441 3,624 Collectively assessed provisions 12 2,150 1,951 Available-for-sale revaluation reserve in respect of equities 12 12 - Other deductions (928) - - Total tier 2 capital 6,994 10,060 9,965 20,539 24,012 22,793 Supervisory deductions Life and pensions businesses (4,373) (4,373) (5,368) Other deductions (491) (762) (790) Total supervisory deductions (4,864) (5,135) (6,158) Total capital 15,675 18,877 16,635 Risk-weighted assets GBPbn GBPbn GBPbn Credit risk 127.2 Market risk 5.3 Operational risk 10.1 Total risk-weighted assets 142.6 172.0 156.0 Risk asset ratios Tier 1 9.5% 8.1% 8.2% Total capital 11.0% 11.0% 10.7% Post-tax return on average risk-weighted assets 2.03% 1.89% Post-tax return on average risk-weighted assets* 1.76% 1.72% *Excluding volatility, profit on sale of businesses, settlement of overdraft claims and, in 2006, pension schemes related credit. Page 43 of 58 12. Total assets by division 31 December 31 December 2007 2006 GBPm GBPm UK Retail Banking 115,012 108,381 Insurance and Investments 73,377 86,074 Wholesale and International Banking 163,294 147,836 Central group items 1,663 1,307 Total assets 353,346 343,598 13. Balance sheet information 31 December 31 December 2007 2006 GBPm GBPm Deposits - customer accounts Sterling: Non-interest bearing current accounts 3,155 3,739 Interest bearing current accounts 42,858 40,906 Savings and investment accounts 70,003 64,380 Other customer deposits 24,671 19,134 Total sterling 140,687 128,159 Currency 15,868 11,183 Total deposits - customer accounts 156,555 139,342 Loans and advances to customers Agriculture, forestry and fishing 3,226 2,905 Energy and water supply 2,102 2,024 Manufacturing 8,385 7,513 Construction 2,871 2,332 Transport, distribution and hotels 11,573 10,490 Postal and communications 946 831 Property companies 17,576 12,896 Financial, business and other services 29,707 22,999 Personal : mortgages 102,739 95,601 : other 22,988 23,025 Lease financing 4,686 4,802 Hire purchase 5,423 5,060 212,222 190,478 Allowance for impairment losses on loans and advances (2,408) (2,193) Total loans and advances to customers 209,814 188,285 Total loans and advances to customers in our international businesses totalled GBP6,291 million (31 December 2006: GBP5,589 million). Page 44 of 58 14. Loans and advances to customers Retail - Retail - Wholesale Total Mortgages Other 31 December 2007 GBPm GBPm GBPm GBPm Neither past due nor impaired 99,828 29,850 73,475 203,153 Past due but not impaired 2,153 966 639 3,758 Impaired - no provision required 415 100 293 808 - provision held 343 3,600 560 4,503 Gross 102,739 34,516 74,967 212,222 Allowance for impairment losses (37) (2,029) (342) (2,408) Net 102,702 32,487 74,625 209,814 31 December 2006 Neither past due nor impaired 92,873 29,364 60,005 182,242 Past due but not impaired 1,943 1,005 374 3,322 Impaired - no provision required 658 92 158 908 - provision held 127 3,580 299 4,006 Gross 95,601 34,041 60,836 190,478 Allowance for impairment losses (42) (1,918) (233) (2,193) Net 95,559 32,123 60,603 188,285 The analysis of lending between retail and wholesale has been prepared based upon the type of exposure and not the business segment in which the exposure is recorded. Included within retail are exposures to personal customers and small businesses, whilst included within wholesale are exposures to corporate customers and other large institutions. Loans and advances to customers which are neither past due nor impaired Retail - Retail - Wholesale Total Mortgages Other GBPm GBPm GBPm GBPm 31 December 2007 Good quality 99,407 18,157 46,240 Satisfactory quality 378 8,964 25,013 Lower quality 1 665 2,034 Below standard, but not impaired 42 2,064 188 Total 99,828 29,850 73,475 203,153 31 December 2006 Good quality 92,472 16,940 35,659 Satisfactory quality 359 9,667 21,797 Lower quality - 663 2,249 Below standard, but not impaired 42 2,094 300 Total 92,873 29,364 60,005 182,242
Page 45 of 58 14. Loans and advances to customers (continued) The definitions of good quality, satisfactory quality, lower quality and below standard but not impaired applying to retail and wholesale are not the same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Wholesale lending has been classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower assessed default probabilities, with other classifications reflecting progressively higher default risk. Classifications of retail lending incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating models. Good quality lending includes the lower assessed default probabilities and all loans with low expected losses in the event of default, with other categories reflecting progressively higher risks and lower expected recoveries. 15. Credit market positions in Corporate Markets Lloyds TSB's high quality business model means that the Group has relatively limited exposure to assets affected by current capital markets uncertainties. The following table shows credit market positions in Corporate Markets, on both a gross and net basis.
Credit market positions - 31 December 2007 Net Gross Exposure Exposure GBPm GBPm US sub-prime ABS-direct - - ABS CDOs - - unhedged 130 130 - - monoline hedged - 470 - - major global bank cash collateralised - 1,861 Structured investment vehicles - - capital notes 78 78 - - liquidity backup facilities 370 370 Trading portfolio - - ABS trading book 474 474 - - secondary loan trading 665 863 - - other assets* 3,895 3,895 *Primarily high quality senior bank and corporate assets; also includes GBP181 million of indirect exposure to US sub-prime mortgages and ABS CDOs. This super senior exposure is protected by note subordination. Page 46 of 58 15. Credit market positions in Corporate Markets (continued) Available-for-sale assets 31 December 2007 GBPbn Cancara 8.3 - - US sub-prime - nil - - Alt-A - GBP619 million - - CMBS - GBP1,355 million (100% AAA/Aaa) Student Loan ABS 3.2 - - US Government guaranteed Treasury assets 4.6 - - Government bond and short-dated bank commercial paper Other assets 4.1 - - Major bank senior paper and high quality ABS Total - Group 20.2 16. Profit on sale of businesses During 2007, the Group disposed of its share registration business, Lloyds TSB Registrars; Abbey Life, the UK life operation which was closed to new business in 2000; and its medium-size car dealership, Dutton-Forshaw. In addition, provision has been made for payments under an indemnity given in relation to a business sold in an earlier year. A breakdown is provided below. 2007 2006 GBPm GBPm Lloyds TSB Registrars 407 - Abbey Life 272 - Other (22) - 657 - Page 47 of 58 17. Economic profit 2007 2006 GBPm GBPm Statutory basis Average shareholders' equity 11,681 10,531 Profit attributable to equity shareholders 3,289 2,803 Less: notional charge (1,051) (948) Economic profit 2,238 1,855 Excluding volatility, profit on sale of businesses, settlement of overdraft claims and, in 2006, pension schemes related credit Average shareholders' equity 11,339 10,485 Profit attributable to equity shareholders 2,863 2,634 Less: notional charge (1,021) (944) Economic profit 1,842 1,690 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 (2006: 9 per cent). 18. Earnings per share 2007 2006 Statutory basis Basic Profit attributable to equity shareholders GBP3,289m GBP2,803m Weighted average number of ordinary shares in issue 5,637m 5,616m Earnings per share 58.3p 49.9p Fully diluted Profit attributable to equity shareholders GBP3,289m GBP2,803m Weighted average number of ordinary shares in issue 5,683m 5,667m Earnings per share 57.9p 49.5p Excluding volatility, profit on sale of businesses, settlement of overdraft claims and, in 2006, pension schemes related credit Profit attributable to equity shareholders GBP2,863m GBP2,634m Weighted average number of ordinary shares in issue 5,637m 5,616m Earnings per share 50.8p 46.9p Page 48 of 58 19. Scottish Widows - realistic balance sheet information Financial Services Authority (FSA) returns for large with-profits companies include realistic balance sheet information. The information included in FSA returns concentrates on the position of the With Profit Fund. However, under the Scottish Widows demutualisation structure, which was court approved, the fund is underpinned by certain assets outside the With Profit 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. The estimated position at 31 December 2007, allowing for the proposed transfer of GBP300 million from the Long Term Fund to the Shareholder Fund, is shown below, together with the actual position at 31 December 2006. 31 December 2007 (estimated) With Profit Long Term Fund Fund GBPbn GBPbn Available assets, including support arrangement assets 17.8 20.9 Realistic value of liabilities (16.8) (16.9) Working capital for fund 1.0 4.0 Working capital ratio 5.4% 19.2% 31 December 2006 With Profit Long Term Fund Fund GBPbn GBPbn Available assets, including support arrangement assets 19.4 22.3 Realistic value of liabilities (18.3) (18.3) Working capital for fund 1.1 4.0 Working capital ratio 5.8% 17.9% The Risk Capital Margin (RCM) is the capital buffer that the FSA requires to be held to cover prescribed adverse shocks. At 31 December 2007, the RCM was estimated to be GBP62 million for the With Profit Fund and GBP96 million for the Long Term Fund (covered 15 times and 42 times respectively by the working capital for the fund). At 31 December 2006, the RCM was GBP57 million for the With Profit Fund and GBP84 million for the Long Term Fund (covered 20 times and 47 times respectively). Page 49 of 58 20. European Embedded Value reporting - results for year ended 31 December 2007 This section provides further details of the Scottish Widows EEV financial information. Composition of EEV balance sheet 2007 2006 GBPm GBPm Value of in-force business (certainty 2,779 3,220 equivalent) Value of financial options and guarantees (53) (56) Cost of capital (178) (248) Non-market risk (61) (75) Total value of in-force business 2,487 2,841 Shareholders' net assets 2,878 3,572 Total EEV of covered business 5,365 6,413 Reconciliation of opening EEV balance sheet to closing EEV balance sheet on covered business Shareholders' Value of in-force net assets business Total GBPm GBPm GBPm As at 1 January 2006 3,445 2,941 6,386 Total profit after tax 873 (100) 773 Dividends (746) - (746) As at 31 December 2006 3,572 2,841 6,413 Total profit after tax 661 107 768 Profit on disposal of Abbey Life (EEV basis) Sale proceeds 985 - 985 Assets disposed (474) (461) (935) 511 (461) 50 Dividends (1,866) - (1,866) As at 31 December 2007 2,878 2,487 5,365 Analysis of shareholders' net assets on an EEV basis on covered business Required Free Shareholders' capital surplus net assets GBPm GBPm GBPm As at 1 January 2006 2,393 1,052 3,445 Total profit after tax (186) 1,059 873 Dividends - (746) (746) As at 31 December 2006 2,207 1,365 3,572 Total (loss) profit after tax (238) 899 661 Disposal of Abbey Life (EEV basis) (232) 743 511 Dividends - (1,866) (1,866) As at 31 December 2007 1,737 1,141 2,878 Page 50 of 58 20. European Embedded Value reporting - results for year ended 31 December 2007 (continued) Summary income statement on an EEV basis 2007 2006 GBPm GBPm New business profit 326 346 Existing business profit - - Expected return 337 403 - - Experience variances 78 69 - - Assumption changes (45) (133) 370 339 Expected return on shareholders' net assets 207 167 Profit before tax, excluding volatility and other items* 903 852 Volatility (271) 176 Other items* 58 76 Total profit before tax 690 1,104 Taxation (59) (331) Impact of Corporation tax rate change 137 - Total profit after tax, excluding profit on sale of Abbey Life 768 773 Profit on sale of Abbey Life (EEV basis) 50 - Total profit after tax 818 773 *Other items represent amounts not considered attributable to the underlying performance of the business. Page 51 of 58 20. European Embedded Value reporting - results for year ended 31 December 2007 (continued) Breakdown of income statement between life and pensions, and OEICs 2007 Life and pensions OEICS Total GBPm GBPm GBPm New business profit 270 56 326 Existing business - - Expected return 286 51 337 - - Experience variances 35 43 78 - - Assumption changes (105) 60 (45) 216 154 370 Expected return on shareholders' net assets 199 8 207 Profit before tax* 685 218 903 New business margin (PVNBP) 3.5% 2.0% 3.1% Post-tax return on embedded value* 9.9% 2006 Life and pensions OEICS Total GBPm GBPm GBPm New business profit 287 59 346 Existing business - - Expected return 361 42 403 - - Experience variances 35 34 69 - - Assumption changes (129) (4) (133) 267 72 339 Expected return on shareholders' net assets 160 7 167 Profit before tax* 714 138 852 New business margin (PVNBP) 4.1% 2.2% 3.6% Post-tax return on embedded value* 9.3% *Excluding volatility and other items.
Page 52 of 58 20. European Embedded Value reporting - results for year ended 31 December 2007 (continued) Economic assumptions A bottom up approach is used to determine the economic assumptions for valuing the business in order to determine a market consistent valuation. The risk-free rate assumed in valuing in-force business is 10 basis points over the 15 year gilt yield. In valuing financial options and guarantees the risk-free rate is derived from gilt yields plus 10 basis points, in line with Scottish Widows' FSA realistic balance sheet assumptions. The table below shows the range of resulting yields and other key assumptions.
31 December 31 December 2007 2006 % % Risk-free rate (value of in-force) 4.65 4.72 Risk-free rate (financial options and guarantees) 4.28 to 4.81 3.91 to 5.41 Retail price inflation 3.28 3.23 Expense inflation 4.18 4.13
Non-market risk An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally will give the mean expected financial outcome for shareholders and hence no further allowance for non-market risk is required. However, in the case of operational risk and the With Profit Fund these are asymmetric in the range of potential outcomes for which an explicit allowance is made. Non-economic assumptions Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management's view of future experience. These assumptions are intended to represent a best estimate of future experience. For OEIC business, the lapse assumption is based on recent experience which has been collected over a period that has coincided with favourable investment conditions. Management have used a best estimate of the long-term lapse assumption which is higher than indicated by this experience. In management's view, the approach and lapse assumption are both reasonable. Page 53 of 58 20. European Embedded Value reporting - results for year ended 31 December 2007 (continued) Sensitivity analysis The table below shows the sensitivity of the EEV and the new business profit before tax to movements in some of the key assumptions. The impact of a change in the assumption has only been shown in one direction other than for risk free rate. Where the impact has been shown only in one direction it can be assumed to be reasonably symmetrical.
Impact on new Impact business profit on EEV before tax GBPm GBPm 2007 EEV/new business profit before tax 5,365 326 (1a) 100 basis points reduction in risk-free rate 161 7 (1b) 100 basis points increase in risk-free rate (115) (7) (2) 10 per cent reduction in market values of equity assets (178) n/a (3) 10 per cent reduction in market values of property assets (32) n/a (4) 10 per cent reduction in expenses 96 31 (5) 10 per cent reduction in lapses 88 19 (6) 5 per cent reduction in annuitant mortality (64) (5) (7) 5 per cent reduction in mortality and morbidity (excluding annuitants) 22 3 (8) 100 basis points increase in equity and property returns nil nil (9) 10 basis points increase in credit spreads (46) (6)
(1) In this sensitivity the impact takes into account the change in the value of in-force business, financial options and guarantee costs, statutory reserves and asset values. (2) The reduction in market values is assumed to have no corresponding impact on dividend yields. (3) The reduction in market values is assumed to have no corresponding impact on rental yields. (4) This sensitivity shows the impact of reducing new business maintenance expenses and investment expenses to 90 per cent of the expected rate. (5) This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate. (6) This sensitivity shows the impact on our annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate. (7) This sensitivity shows the impact of reducing mortality rates on non-annuity business to 95 per cent of the expected rate. (8) Under a market consistent valuation, changes in assumed equity and property returns have no impact on the EEV. (9) This sensitivity shows the impact of a 10 basis point increase in corporate bond yields and the corresponding reduction in market values. Government bond yields and the risk-free rate are assumed to be unchanged. In sensitivities (4) to (7) assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and the statutory reserving bases. A change in risk discount rates is not relevant as the risk discount rate is not an input to a market consistent valuation. Page 54 of 58
21. Scottish Widows - weighted sales (Annual Premium Equivalent) 2007 2006 GBPm GBPm Weighted sales (regular + 1/10 single) Life and pensions: Savings and investments 89 128 Protection 117 49 Individual pensions 273 270 Corporate and other pensions 352 322 Retirement income 101 98 Managed fund business 47 35 Life and pensions 979 902 OEICs 297 290 Life, pensions and OEICs 1,276 1,192 Bancassurance 458 403 Independent financial advisers 733 714 Direct 85 75 Life, pensions and OEICs 1,276 1,192
22. Legal and regulatory matters During the ordinary course of business the Group is subject to threatened or actual legal proceedings. All such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management's best estimate of the amount required to settle the obligation at the relevant balance sheet date. In some cases it will not be possible to form a view, either because the facts are unclear or because further time is needed properly to assess the merits of the case. No provisions are held against such cases; however the Group does not currently expect the final outcome of these cases to have a material adverse effect on its financial position. In the UK and elsewhere, there is continuing political and regulatory scrutiny of financial services. On 6 November 2007 the Competition Commission published its emerging thinking into the Payments Protection Inquiry and is expected to report by December 2008. The OFT is also carrying out a market study into personal current account pricing alongside its investigation into certain current account charges which are also subject to a legal test case (see below). The OFT is also investigating interchange fees charged by some card networks in parallel with the European Commission's own investigation into cross-border interchange fees. At the same time regulators are considering the review of retail distribution and UK financial stability and depositor protection proposals. It is not presently possible to assess the cost or income impact of these inquiries or any connected matters on the Group until the outcome is known. In addition, a number of EU directives, including the Unfair Commercial Practices Directive and Payment Services Directive are currently being implemented in the UK. The EU is also considering regulatory proposals for, inter alia, a Consumer Credit, Mortgage Credit, Single European Payments Area, Retail Financial Services Review and capital adequacy requirements for insurance companies (Solvency II). Page 55 of 58 22. Legal and regulatory matters (continued) On 27 July 2007, following agreement between the UK Office of Fair Trading (OFT) and a number of UK financial institutions, the OFT issued High Court legal proceedings against those institutions, including Lloyds TSB Bank plc, to determine the legal status and enforceability of certain of the charges applied to their personal customers in relation to requests for unplanned overdrafts. A preliminary issues hearing has now taken place and judgment is currently awaited. It is likely that further hearings will be required and, if appeals are pursued, the proceedings may take a number of years to conclude. Pending resolution, the Financial Services Authority has agreed, subject to certain conditions, that the handling of customer complaints on this issue can be suspended until the proceedings are concluded unless in the light of prevailing circumstances this would be inappropriate. The Group intends strongly to defend its position. Accordingly, no provision in relation to the outcome of this litigation has been made. Depending on the Court's determinations, a range of outcomes is possible, some of which could have a significant financial impact on the Group. The ultimate impact of the litigation on the Group can only be known at its conclusion. There has been increased scrutiny of the financial institutions sector, especially in the US, with respect to combating money laundering and terrorist financing and enforcing compliance with economic sanctions. The Office of Foreign Assets Control (OFAC) administers US laws and regulations in relation to US economic sanctions against designated foreign countries, nationals and others and the Group has been conducting a review of its conduct with respect to historic US dollar payments involving countries, persons or entities subject to those sanctions. The Group has provided information relating to its review of such historic payments to a number of authorities including OFAC, the US Department of Justice and the New York County District Attorney's office which, along with other authorities, have been reported to be conducting a broader review of sanctions compliance by non-US financial institutions. The Group is involved in ongoing discussions with these authorities with respect to agreeing a resolution of their investigations. No provision has been made in respect of this matter. The Group does not expect the final outcome to have a material adverse effect on its financial position. 23. Taxation The statutory effective tax rate in 2007 was 17.0 per cent, compared to 31.6 per cent in 2006. 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 rate of the Group, excluding the gross policyholder and OEIC interests from profit before tax and the tax charge and, in 2007, the profit on disposal of businesses from profit before tax and the impact on the year end deferred tax position of the UK corporation tax rate change (GBP110 million credit), was 28.3 per cent (2006: 28.0 per cent). The 2007 Finance Act reduction in the corporation tax rate from 30 per cent to 28 per cent has resulted in a one-off impairment charge relating to a reduction in future rental income within the Group's leasing business of GBP28 million, as a result of the triggering of relevant tax variation clauses. In addition, the Group's deferred tax liabilities have been remeasured resulting in a credit to the Group's tax charge of GBP110 million. The net impact of these items has been to increase shareholders' equity by GBP90 million. The future impact of the reduction in capital allowances from 25 per cent to 20 per cent will not be material for the Group. Page 56 of 58 23. Taxation (continued) A reconciliation of the charge that would result from applying the standard UK corporation tax rate to profit before tax to the tax charge is given below:
2007 2006 GBPm GBPm Profit before tax 4,000 4,248 Tax charge thereon at UK corporation tax rate of 30% 1,200 1,274 Factors affecting charge: Disallowed and non-taxable items 2 (8) Overseas tax rate differences (4) (2) Gains exempted or covered by capital losses (274) (78) Policyholder interests (173) 123 Corporation tax rate change (110) - Other items 38 32 Tax charge 679 1,341 24. Dividend A final dividend for 2007 of 24.7p (2006: 23.5p), representing an increase of 5 per cent, will be paid on 7 May 2008. The total amount of this dividend is GBP1,394 million. 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 5 March 2008 Record date 7 March 2008 Final date for joining or leaving the dividend reinvestment plan 9 April 2008 Final dividend paid 7 May 2008 Annual general meeting 8 May 2008
25. 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 2007 were approved by directors on 21 February 2008 and will be delivered to the Registrar of Companies following publication on 29 March 2008. 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. Page 57 of 58 CONTACTS For further information please contact:- Michael Oliver Director of Investor Relations Lloyds TSB Group plc 020 7356 2167 Email: michael.oliver@ltsb-finance.co.uk Mary Walsh Director of Corporate Relations Lloyds TSB Group plc 020 7356 2121 Email: mary.walsh@lloydstsb.co.uk Kirsty Clay Senior Manager, Media Relations Lloyds TSB Group plc 020 7356 1517 Email: kirsty.clay@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. Registered office: Lloyds TSB Group plc, Henry Duncan House, 120 George Street, Edinburgh, EH2 4LH. Registered in Scotland no. 95000. Page 58 of 58 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: 22 February 2008 -----END PRIVACY-ENHANCED MESSAGE-----