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
31 July, 2007
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 31 July, 2007
re: Interim Results
Lloyds TSB Group plc
Results for half-year
to 30 June 2007
CONTENTS
Page
Key operating 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 11
Divisional performance: 13
- UK Retail Banking 13
- Insurance and Investments 16
- Wholesale and International Banking 22
Consolidated interim income statement - statutory 26
Consolidated interim balance sheet - statutory 27
Consolidated interim statement of changes in equity - statutory 28
Condensed consolidated interim cash flow statement - statutory 29
Condensed segmental analysis - statutory 30
Notes 32
Contacts for further information 50
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, 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 OPERATING HIGHLIGHTS
Unless otherwise stated the analysis throughout this document compares the
half-year to 30 June 2007 with the half-year to 30 June 2006 and excludes the
impact of volatility (page 34, note 2).
"I am delighted to report that the Group has again delivered an excellent
trading performance, with broad based revenue and earnings growth. Each
division has delivered a strong increase in profit before tax, building on the
demonstrable progress made in recent years.
The Board is increasingly confident in the Group's earnings prospects for 2007
and beyond and, as a result, has decided to increase the interim dividend by 5
per cent to 11.2p per share."
Sir Victor Blank
Chairman
- Accelerating profit momentum with improved returns: profit before tax up 15
per cent to GBP2,010 million, whilst post-tax return on equity increased
to 27.0 per cent. All divisions showing strong profit growth. Statutory profit
before tax increased by 12 per cent to GBP1,993 million.
- Improved income growth. Income growth of 9 per cent reflected
strong performances from all divisions.
- Excellent cost management. Cost growth of 6 per cent, delivering
wide positive jaws. Significant cost:income ratio improvement. Groupwide
productivity improvement programme remains on track to deliver substantial
further benefits.
- Satisfactory credit quality. Strong corporate asset quality
continues; retail impairment charge broadly flat. Group impairment charge as a
percentage of average lending down.
- Strong capital management. Robust capital ratios maintained.
- Interim dividend increased by 5 per cent. First increase for five
years.
- Excellent income momentum in UK Retail Banking. Overall product
sales up 16 per cent, with 23 per cent growth in the branch network. Income up
6 per cent with profit before tax increasing by 13 per cent.
- Continued strong performance in Scottish Widows with an 8 per cent
increase in new business sales. Insurance and Investments profit before tax,
adjusting for the impact of surplus capital repatriation and insurance grossing,
increased by 11 per cent.
- Continued strong trading momentum in Wholesale and International
Banking driven by a 26 per cent increase in Corporate Markets income. Income
growth of 10 per cent exceeded cost growth of 5 per cent; profit before tax
increased by 12 per cent.
Page 1 of 50
SUMMARY OF RESULTS
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Results - statutory
Total income, net of insurance claims 5,590 5,189 8 5,915
Operating expenses 2,760 2,610 (6) 2,691
Trading surplus 2,830 2,579 10 3,224
Impairment losses on loans and advances 837 800 (5) 755
Profit before tax 1,993 1,779 12 2,469
Economic profit (page 42, note 14) 1,027 749 37 1,106
Profit attributable to equity shareholders 1,540 1,214 27 1,589
Earnings per share (page 43, note 15) 27.3p 21.7p 26 28.2p
Post-tax return on average shareholders' 27.0% 23.5% 29.6%
equity
Results - excluding volatility*
Total income, net of insurance claims 5,607 5,160 9 5,534
Operating expenses 2,760 2,610 (6) 2,819
Trading surplus 2,847 2,550 12 2,715
Impairment losses on loans and advances 837 800 (5) 755
Profit before tax 2,010 1,750 15 1,960
Economic profit 1,008 772 31 918
Earnings per share 26.9p 22.1p 22 24.8p
Post-tax return on average shareholders' 27.0% 24.0% 26.2%
equity
Post-tax return on average risk-weighted 1.93% 1.66% 1.78%
assets
Shareholder value
Closing market price per share (period end) 556p 531.5p 5 571.5p
Total market value of shareholders' equity GBP31.4bn GBP29.9bn 5 GBP32.2bn
Proposed dividend per share (page 49, note 11.2p 10.7p 5 23.5p
20)
30 June 30 June Change 31 December
2007 2006 2006
GBPm GBPm GBPm
Balance sheet %
Shareholders' equity 11,373 10,157 12 11,155
Net assets per share (pence) 199 178 12 195
Total assets 353,095 325,767 8 343,598
Loans and advances to customers 200,181 182,157 10 188,285
Customer deposits 144,654 136,465 6 139,342
Risk asset ratios
Total capital 10.4% 10.3% 10.7%
Tier 1 capital 8.1% 7.4% 8.2%
*results for the half-year to 31 December 2006 also exclude the GBP128 million
pension schemes related credit.
Page 2 of 50
PROFIT ANALYSIS BY DIVISION
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
UK Retail Banking (page 13)
- Before settlement of overdraft claims 839 713 18 836
- Settlement of overdraft claims (36) - -
803 713 13 836
Insurance and Investments (page 16) 499 466 7 507
Wholesale and International Banking (page 22) 863 768 12 872
Central group items
- Before pension schemes related credit (155) (197) (255)
- Pension schemes related credit - - 128
(155) (197) (127)
Profit before tax - excluding volatility 2,010 1,750 15 2,088
Volatility (page 34, note 2)
- Insurance 41 (61) 145
- Policyholder interests (58) 90 236
Profit before tax 1,993 1,779 12 2,469
Taxation (433) (543) (798)
Profit for the period 1,560 1,236 26 1,671
Profit attributable to minority interests 20 22 82
Profit attributable to equity shareholders 1,540 1,214 27 1,589
Profit for the period 1,560 1,236 26 1,671
Page 3 of 50
GROUP CHIEF EXECUTIVE'S STATEMENT
During the first half of 2007, the Group has continued to make strong progress
and we have again delivered good growth and high returns. We are reporting a
growth in profits of 15 per cent, excluding volatility, and have achieved a 27
per cent return on equity, as we continue the successful realisation of our
growth strategy.
Over the last few years, the Group has established good earnings momentum, and
this has been clearly evident in our recent results. We have delivered improved
levels of revenue growth, whilst continuing to enhance our productivity and this
is creating increased capacity for investment in building the business. Our
capital management is strong and the Group's capital ratios remain robust.
As a result of its increasing confidence in the Group's future earnings
performance, the Board has decided to increase the 2007 interim dividend by 5
per cent to 11.2p per share. Going forward, the Board expects to grow the
dividend, whilst continuing to build dividend cover.
As I have stated previously, when developing our strategy, we identified that
our best opportunity was to grow our business by realising the considerable
potential within our existing franchises. We also believed there were
significant opportunities to improve our productivity, and we could better
manage our capital to fund our growth. By making progress against these
opportunities, we could accelerate the levels of earnings growth from our core
businesses and maintain our high returns. Our results over the past several
periods, and especially during the first half of the year, validate that we are
working on the right strategy, confirm that the core processes are in place and
give us greater confidence for the future.
Our business model is based on developing deep, long-lasting relationships with
our customers that allow us to generate a sustainable flow of high quality
earnings. Our commitment to customers is reflected not only in our improved
levels of customer satisfaction over the past several years and the development
of a range of new customer offers, but also in the way we seek to make a real
difference to customers. For instance, during the recent severe flooding in the
UK, our staff have worked proactively with customers to help and reassure them
during what has been a particularly challenging period.
In the past few years, the Group has delivered a consistently improving
performance, whilst maintaining our strong returns. In the first half of 2007,
we have made further progress against our objectives and, excluding volatility,
profit before tax rose by 15 per cent, whilst economic profit rose by 31 per
cent. The performance was underpinned by an improved rate of income growth,
which rose to 9 per cent. Costs were again well controlled, up 6 per cent,
supporting good levels of business investment, and this led to an increase in
the trading surplus of 12 per cent. Asset quality remains in very good shape.
We have a long standing track record of improving the Group's efficiency and I
am pleased that we have again made further progress as the cost:income ratio,
excluding volatility and the settlement of overdraft claims, improved to 48.6
per cent, from 50.6 per cent in the first half of 2006. We are achieving this
through the delivery of Groupwide initiatives such as centralising operations in
Group Manufacturing, applying Lean and Sigma techniques to all our processes,
and we are getting much smarter at leveraging our scale to reduce our
procurement costs. The efficiency benefits are creating greater capacity for
investment to underpin our future success.
Page 4 of 50
We have further enhanced our capital management programmes in support of our
business objectives. Our redirection of capital towards more profitable
business and asset distribution initiatives are successfully supporting our
Wholesale growth strategy, and we have continued our mortgage securitisation
programme. We are managing our capital within Scottish Widows more effectively
and, in addition to the GBP0.6 billion repatriated in the first half of 2007, we
expect to identify further opportunities to repatriate additional capital.
The level of income and profit growth across each of the three operating
divisions indicates that we have made good progress in building stronger
relationships with our customers. This is also reflected in the improved
customer satisfaction scores, the stronger level of new customer recruitment to
the Group, and the good sales growth as we are able to satisfy more of our
customers' financial services needs.
In the Retail Bank, profit before tax grew by 13 per cent, underpinned by 6 per
cent growth in income. Costs continue to be well managed, rising just 2 per
cent before the impact of the settlement of overdraft claims, and this allowed
us to deliver good positive jaws. Our focus on improving the quality of our new
lending, enhancements to our collections processes and better than assumed
recoveries, has resulted in the charge for impairments falling by 1 per cent.
The Retail Bank has made substantial progress against its objectives this year.
We continue to focus on improving the quality of service received by our
customers, across all our distribution channels, and we are further extending
the range of products and services we offer. During 2007, we introduced a
number of innovative offerings, including the extension of our Added Value
Account range and the more recent launch of our Duo credit cards.
We have had considerable success in our efforts to build the retail franchise,
and saw good growth in both assets, up 7 per cent, and liabilities, up 8 per
cent. This was underpinned by excellent results in our leading indicators, such
as the increase in current account openings, up 25 per cent, and the growth in
sales volumes of 16 per cent, as we seek to win a greater share of our
customers' financial services spend.
In Insurance and Investments, profit before tax, adjusted for the impact of
surplus capital repatriation and excluding volatility and insurance grossing,
rose by 11 per cent and this was driven by income growth of 8 per cent. We have
continued to invest in sales and service platforms and, thanks to continued
productivity improvements, the cost increase was maintained at 4 per cent, which
again allowed us to deliver wide positive jaws.
One of the major successes of this business has been its relationship with the
distribution arms of the Retail Bank and Commercial Banking. In recent years,
we have delivered strong growth in Scottish Widows sales to our franchise
customers and this year I am again pleased that we are reporting a further
increase of 16 per cent in our sales of bancassurance products. In the IFA
channel, sales increased by 1 per cent, following record sales levels in the
first half of last year.
As a result of our continued focus on managing the efficient use of capital in
the business, we saw a further improvement in the new business margin as we
continued to develop more capital efficient products to meet the needs of our
customers. Scottish Widows remains well capitalised, notwithstanding the
payment of more than GBP2.3 billion of dividends to Group over the past three
years.
Page 5 of 50
Wholesale and International Banking delivered another strong performance, with
income up 10 per cent and profit before tax up 12 per cent, as we continue to
build our key businesses: Corporate Markets and Commercial Banking. We continue
to invest for future growth in both these areas and notwithstanding the 5 per
cent increase in costs, we again delivered positive jaws. We maintain robust
management controls over our asset portfolio, and wholesale asset quality
remains strong.
Our Corporate Markets business continues to perform very strongly and delivered
a 23 per cent improvement in profit before tax. We have continued to invest in
this business in recent years, to allow us to develop the services and product
range for our Corporate Banking clients, and this was rewarded with a 26 per
cent increase in income, a significant (32 per cent) increase in cross-sales
income and strong growth from Lloyds TSB Development Capital. We will be
sustaining this investment programme to ensure we can meet more of our
customers' needs and to build on the broader revenue streams that have been
established. We were once again delighted to be named the CBI Corporate Bank of
the Year, for the third year in succession, and we were recently named best UK
Bank in the Euromoney Awards.
The Commercial Banking performance was also strong, with profit before tax
increasing by 11 per cent, reflecting increased business volumes. We continue
to attract new customers, cementing our market-leading position in the start-up
market and, in addition, we continue to attract higher numbers of the valuable
switcher accounts from competitors. The recent restructuring brought Commercial
Finance, our factoring and invoice discounting unit, into the business and this
is now providing a co-ordinated market-leading approach for our customers.
Whilst we have made considerable progress in building the business in recent
years, we also recognise that part of our success depends on the strength of the
communities in which we operate. The Group has a long-established corporate
responsibility programme, which incorporates the Lloyds TSB Foundations. The
Foundations make a substantial difference to the many thousands of people they
support through their donations, and in 2007 they received some GBP37 million
from the Group to continue their work.
In March of this year, the Group was also delighted to announce it was to be the
official banking and insurance partner to the London 2012 Olympic Games. This
marks a major sponsorship programme for the Group and will provide substantial
business opportunities for us, working with communities throughout the country,
in the lead up to the Games.
Summary
Lloyds TSB has a clear objective of developing strong customer franchises which
we will successfully grow in the coming years by providing great value for our
customers, and that in turn will allow us to deliver strong returns to our
shareholders.
By putting the processes that support the business model in place, we are
delivering improved results in the face of a more difficult operating
environment. When taken together with our advances in areas such as risk
management, our customer data analysis and the development of our people, we are
building a framework to allow us to deliver higher performance both now and over
the longer term.
Finally, let me again take this opportunity to express my sincere thanks to all
our staff throughout the Group, who continue to deliver for our customers.
Their commitment to our success is key to the Group, and our growing reputation
reflects very strongly their wonderful contribution.
J Eric Daniels
Group Chief Executive
Page 6 of 50
GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE
In the first half of 2007 the Group delivered a strong performance. Statutory
profit before tax was GBP1,993 million, an increase of GBP214 million, or 12 per
cent. Profit attributable to equity shareholders increased by GBP326 million, or
27 per cent, to GBP1,540 million and earnings per share increased by 26 per cent
to 27.3p. Economic profit increased by 37 per cent to GBP1,027 million, and the
post-tax return on equity improved from 23.5 per cent to 27.0 per cent.
Accelerating earnings momentum
Profit before tax, excluding volatility, increased by GBP260 million, or 15 per
cent, to GBP2,010 million, underpinned by strong profit momentum in all
divisions, and notwithstanding the impact of a GBP28 million impairment charge
relating to a change in the rate of corporation tax and a GBP36 million cost
relating to the settlement of overdraft claims. An improved rate of revenue
growth of 9 per cent exceeded cost growth of 6 per cent, with each division
delivering stronger half-on-half revenue growth than cost growth. Earnings per
share, excluding volatility, increased by 22 per cent to 26.9p and economic
profit increased by 31 per cent to GBP1,008 million. Capital efficiency
continued to improve throughout the Group, resulting in the post-tax return on
average shareholders' equity increasing to 27.0 per cent, and the post-tax
return on average risk-weighted assets increasing to 1.93 per cent, from 1.66
per cent. In our Insurance business, the post-tax return on embedded value, on
an EEV basis, increased to 10.7 per cent, from 9.5 per cent.
Improved rate of income growth
Overall income growth of 9 per cent, excluding volatility, reflects a
significant improvement on recent reporting periods and good progress in
delivering our divisional strategies of increasing income from both new and
existing customers, with good growth in both assets and liabilities, as well as
significant increases in other income. Excluding the impact of insurance
grossing adjustments, income increased by 8 per cent to GBP5,585 million.
Group net interest income, excluding volatility and insurance grossing,
increased by GBP53 million. Strong levels of customer lending growth in
Commercial Banking and Corporate Markets, and good growth in mortgages and
retail deposits, more than offset lower unsecured personal lending balances.
Total assets increased by 8 per cent to GBP353 billion, with a 10 per cent
increase in loans and advances to customers. Customer deposits increased by 6
per cent to GBP145 billion, supported in particular by good growth in savings
balances in the retail bank.
The net interest margin from our banking businesses (page 36, note 4) decreased
by 16 basis points, to 2.87 per cent. Stronger growth in finer margin mortgages
and a reduction in wider margin unsecured consumer lending contributed to a
negative mix effect which accounted for 7 basis points of the margin decline,
and funding costs accounted for 2 basis points. Overall product margins were 7
basis points lower, largely reflecting competitive pressures in the mortgage and
asset finance businesses and a move to finer margin secured lending in
Commercial Banking, which were partly offset by an increase in retail savings
margins.
Other income, net of insurance claims and excluding volatility and insurance
grossing, increased significantly, by GBP380 million, or 16 per cent, to
GBP2,773 million. This reflected an improvement in 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, particularly
strong growth was achieved in cross-selling income from sales and structuring,
and debt capital markets activities within Corporate Markets, which supported a
33 per cent increase in Corporate Markets other income.
Page 7 of 50
General insurance weather related claims increased by GBP57 million, of which
GBP45 million related to severe flooding in the UK in June 2007. Further severe
flooding in the UK during July 2007 is likely to result in additional
exceptional claims in the second half of 2007 (page 21).
In addition to reporting under IFRS, the Group provides supplemental financial
information relating to Scottish Widows on a European Embedded Value (EEV)
basis. We believe that EEV represents the most appropriate measure of long-term
value creation in life assurance and investment businesses. On an IFRS basis,
Scottish Widows' 2007 first half profit before tax, excluding volatility,
totalled GBP419 million, whilst on an EEV basis profit before tax, excluding
volatility, was GBP482 million. Similarly, the embedded value on an IFRS basis
at 30 June 2007 was GBP5,165 million, compared to embedded value on an EEV
basis of GBP6,362 million.
Excellent cost management
The Group continues to make significant investment in improving processing
efficiency, the benefits of which are seen in a strong cost performance. During
the first half of 2007, operating expenses increased by 6 per cent to GBP2,760
million. However, excluding the settlement of overdraft claims, costs rose by 4
per cent. Over the last 12 months, staff numbers have fallen by 2,251 (3 per
cent) to 66,012, largely as a result of greater efficiency in back office
processing centres. These improvements in operational effectiveness have
resulted in a Group cost:income ratio, excluding volatility and the impact of
the settlement of overdraft claims, which is 2.0 percentage points lower at 48.6
per cent.
The Group's programme of productivity initiatives has continued to deliver
significant benefits. In the first half of the year the programme delivered net
benefits of GBP72 million, with gross benefits of GBP114 million and
reinvestment in further programme initiatives of GBP42 million. The Group
remains on track to deliver net annual benefits of approximately GBP125 million
in 2007, and GBP250 million in 2008.
Along with a number of other UK banks, during the first half of 2007 the Group
has experienced a number of customer claims for the repayment of overdraft fees.
On 27 July, a number of banks, together with the Office of Fair Trading (OFT),
asked the UK High Court to clarify the legal position regarding these fees. It
is unclear how long the case will last but, in the meanwhile, the handling of
customer complaints on this issue has been suspended pending a decision by the
court. The first half results include a charge of GBP36 million relating to the
settlement of claims during the first half of the year, together with related
costs.
Satisfactory asset quality
Impairment losses on loans and advances increased by 5 per cent to GBP837
million. Our impairment charge expressed as a percentage of average lending was
0.84 per cent, compared to 0.88 per cent in the first half of last year (page
39, note 9). Impaired assets were broadly unchanged at GBP4,049 million, and
now represent 2.0 per cent of total lending, down from 2.1 per cent at 30 June
2006.
In UK Retail Banking, impairment losses on loans and advances decreased by GBP5
million, or 1 per cent, to GBP627 million. During the first half of 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 remained satisfactory. In addition, the asset quality
in our mortgage portfolio has remained excellent. The retail impairment charge
for 2007 is currently expected to be no higher than that in 2006.
Page 8 of 50
The Wholesale and International Banking charge for impairment losses on loans
and advances increased by GBP51 million to GBP210 million, including a one-off
charge of GBP28 million relating to the impact of the 2007 Finance Act on the
Group's leasing business and, as expected, lower levels of releases and
recoveries in Corporate Markets and Commercial Banking. Overall asset quality
remains strong and the level of new corporate provisions remains at a low level.
Strong capital management disciplines
At the end of June 2007, the total capital ratio was 10.4 per cent and the tier
1 ratio was 8.1 per cent. During the half-year, risk-weighted assets increased
by 3 per cent to GBP161 billion, as strong growth in our mortgage and Corporate
Markets businesses was partly offset by the impact of the Group's securitisation
programme, which reduced risk-weighted assets by GBP1.9 billion.
Scottish Widows remains strongly capitalised and, at the end of June 2007, the
working capital ratio of the Scottish Widows Long Term Fund was an estimated
19.1 per cent (page 43, note 16). In the first half of 2007, further capital
repatriation totalling GBP0.6 billion was made to the Group, bringing the total
capital repatriation since the beginning of 2005 to GBP2.3 billion. We continue
to examine opportunities to improve our capital efficiency and have work under
way that we believe will allow Scottish Widows to further repatriate in excess
of GBP1 billion capital to the Group, whilst maintaining a strong capital
position.
The Group has continued to make good progress in its preparations for the
introduction of Basel II and we plan to move to the Internal Ratings Based
approach from January 2008. Our final regulatory capital assessment is not
expected until the fourth quarter of 2007, however we expect to maintain
satisfactory capital ratios throughout the transition. No deduction of
investments in insurance subsidiaries is expected to be made from tier 1 capital
until at least 2012.
During the first half of the year, the Group's pension schemes accounting
deficit reduced by GBP130 million, to GBP2,332 million, as cash contributions to
the Group's defined benefit schemes exceeded the regular cost. A review of the
position at 30 June 2007 in the Group's two principal pension schemes, which
will be formally updated at the year-end, has indicated that the deficit had
reduced by approximately GBP1.6 billion since 31 December 2006 before taking
into account the effect of the IAS19 corridor approach, largely reflecting the
impact of rising corporate bond yields. This is not reflected in the Group's
half-year results.
Impact of 2007 Finance Act
The effective tax rate of the Group, excluding policyholder and OEIC interests
and the impact of a tax credit arising from the UK corporation tax rate change,
was 28.3 per cent (page 48, note 19). 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, relating to a reduction in future
rental income within the Group's leasing business. In addition, the Group's
deferred tax liabilities have reduced, resulting in a credit to the Group's tax
charge of GBP89 million. The net impact of these items has been to increase
earnings attributable to shareholders by GBP70 million during the first half of
the year.
Sale of Lloyds TSB Registrars
In May 2007, Lloyds TSB agreed the sale of the business and assets of Lloyds TSB
Registrars to Advent International for a total cash consideration of GBP550
million, subject to completion and other adjustments. The transaction is
expected to be completed in the second half of 2007 and remains subject to
regulatory approval. Subject to completion and other adjustments, it is
expected that a profit before tax of circa GBP440 million (tax: nil) will be
recognised in the income statement of Lloyds TSB Group for the year ending 31
December 2007.
Page 9 of 50
Delivering accelerated earnings momentum, whilst improving profitability and
returns
For the first time in recent years, the Group has delivered double-digit growth
in profit before tax, earnings per share and economic profit. This is a very
strong performance, in what has been a competitive environment, and is driven by
an improved rate of revenue growth, excellent cost management and satisfactory
asset quality. Encouragingly, this growth has not come at the expense of
returns as the Group has substantially improved both its return on equity and
return on risk-weighted assets. As a result, we expect 2007 to be another good
year for the Group.
Helen A Weir
Group Finance Director
Page 10 of 50
SUMMARISED SEGMENTAL ANALYSIS
Half-year to Wholesale Group
30 June 2007 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 1,844 27 1,275 (334) 2,812 126 2,938
Other income 883 937 923 182 2,925 3,865 6,790
Total income 2,727 964 2,198 (152) 5,737 3,991 9,728
Insurance claims - (152) - - (152) (3,969) (4,121)
Total income, net of 2,727 812 2,198 (152) 5,585 22 5,607
insurance claims
Operating expenses (1,297) (325) (1,125) (3) (2,750) (10) (2,760)
Trading surplus (deficit) 1,430 487 1,073 (155) 2,835 12 2,847
Impairment losses on loans (627) - (210) - (837) - (837)
and advances
Profit (loss) before tax* 803 487 863 (155) 1,998 12 2,010
Volatility
- Insurance - 41 - - 41 - 41
- Policyholder interests - - - - - (58) (58)
Profit (loss) before tax 803 528 863 (155) 2,039 (46) 1,993
Half-year to
30 June 2006
Net interest income 1,794 28 1,194 (257) 2,759 35 2,794
Other income 783 832 805 68 2,488 2,517 5,005
Total income 2,577 860 1,999 (189) 5,247 2,552 7,799
Insurance claims - (95) - - (95) (2,544) (2,639)
Total income, net of 2,577 765 1,999 (189) 5,152 8 5,160
insurance claims
Operating expenses (1,232) (312) (1,072) 1 (2,615) 5 (2,610)
Trading surplus (deficit) 1,345 453 927 (188) 2,537 13 2,550
Impairment losses on loans (632) - (159) (9) (800) - (800)
and advances
Profit (loss) before tax* 713 453 768 (197) 1,737 13 1,750
Volatility
- Insurance - (61) - - (61) - (61)
- Policyholder interests - - - - - 90 90
Profit (loss) before tax 713 392 768 (197) 1,676 103 1,779
* excluding volatility.
**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 11 of 50
SUMMARISED SEGMENTAL ANALYSIS (continued)
Half-year to Wholesale Group
31 December 2006 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 1,848 28 1,191 (336) 2,731 43 2,774
Other income 838 908 1,022 133 2,901 5,789 8,690
Total income 2,686 936 2,213 (203) 5,632 5,832 11,464
Insurance claims - (105) - - (105) (5,825) (5,930)
Total income, net of 2,686 831 2,213 (203) 5,527 7 5,534
insurance claims
Operating expenses (1,244) (334) (1,192) (52) (2,822) 3 (2,819)
Trading surplus (deficit) 1,442 497 1,021 (255) 2,705 10 2,715
Impairment losses on loans (606) - (149) - (755) - (755)
and advances
Profit (loss) before tax+ 836 497 872 (255) 1,950 10 1,960
Pension schemes related - - - 128 128 - 128
credit
Profit (loss) before tax* 836 497 872 (127) 2,078 10 2,088
Volatility
- Insurance - 145 - - 145 - 145
- Policyholder interests - - - - - 236 236
Profit (loss) before tax 836 642 872 (127) 2,223 246 2,469
* excluding volatility. +also excludes pension schemes related credit.
**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 12 of 50
DIVISIONAL PERFORMANCE
UK RETAIL BANKING
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Net interest income 1,844 1,794 3 1,848
Other income 883 783 13 838
Total income 2,727 2,577 6 2,686
Operating expenses
- Before settlement of overdraft claims (1,261) (1,232) (2) (1,244)
- Settlement of overdraft claims (36) - -
(1,297) (1,232) (5) (1,244)
Trading surplus 1,430 1,345 6 1,442
Impairment losses on loans and advances (627) (632) 1 (606)
Profit before tax 803 713 13 836
Cost:income ratio, excluding settlement of overdraft 46.2% 47.8% 46.3%
claims
Post-tax return on average risk-weighted assets 1.89% 1.65% 1.87%
Total assets GBP112.7bn GBP105.7bn 7 GBP108.4bn
Risk-weighted assets GBP59.6bn GBP61.6bn (3) GBP59.1bn
Customer deposits GBP78.0bn GBP72.5bn 8 GBP75.7bn
Key highlights
- Strong income momentum, up 6 per cent, supporting 13 per cent growth
in profit before tax. Excluding the settlement of overdraft claims, profit
before tax increased by 18 per cent to GBP839 million.
- Strong sales growth with overall sales up 16 per cent, with 23 per
cent growth in the branch network.
- Further good progress in growing the current account customer
franchise, with a 25 per cent increase in current account recruitment, including
a 73 per cent increase in new added value current accounts.
- Excellent cost management, with a clear focus on improving
processing efficiency and service quality. Excluding the impact of the
settlement of overdraft claims, operating expenses increased by 2 per cent and
there was a substantial improvement in the cost:income ratio.
- The quality of new lending continues to be strong. Impairment
charge broadly flat. The retail impairment charge for 2007 is currently
expected to be no higher than that in 2006.
- Improved return on risk-weighted assets, reflecting the impact of
double-digit profit growth and a reduction in risk-weighted assets following
mortgage securitisations.
Page 13 of 50
UK RETAIL BANKING (continued)
Profit before tax from UK Retail Banking increased by GBP90 million, or 13 per
cent, to GBP803 million, reflecting strong levels of franchise growth, excellent
cost management and a broadly flat impairment charge. Total income increased by
GBP150 million, or 6 per cent, supported by higher income from current accounts,
savings and personal lending, whilst costs remain well controlled. Excluding
the settlement of overdraft claims, profit before tax increased by 18 per cent
to GBP839 million.
The adverse mix effect of stronger growth in finer margin mortgages and a
reduction in wider margin unsecured personal lending led to an overall reduction
in the division's net interest margin. Product margins also fell slightly
reflecting competitive pressures in the mortgage business which more than offset
an increase in retail savings margins.
Operating expenses remained well controlled, increasing by 2 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.
During the first half of 2007, UK Retail Banking has made 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 savings and bancassurance products which,
combined with higher lending related income, has supported the accelerating rate
of revenue growth.
Growing income from the customer base
Overall sales increased by 16 per cent, with improvements over a broad range of
products, particularly current accounts, bank savings and bancassurance
products. This improved sales growth has benefited from higher levels of new
product innovation over the last twelve months with the successful launch, for
example, of a number of enhanced savings products, an improved range of added
value current accounts and the introduction of the innovative Lloyds TSB Duo
credit card offer. Customer deposits have increased by 8 per cent over the last
12 months, with strong progress in growing our bank savings and wealth
management deposit balances.
30 June 30 June 31 December
2007 2006 Change 2006
Current account and savings balances GBPm GBPm % GBPm
Bank savings 38,062 34,181 11 36,417
C&G deposits 14,502 14,151 2 14,621
Wealth management 4,737 4,014 18 4,402
UKRB savings 57,301 52,346 9 55,440
Current accounts 20,684 20,115 3 20,221
Total customer deposits 77,985 72,461 8 75,661
The Group has delivered good levels of growth in the mortgage business, focusing
on prime mortgage business and seeking to maintain economic returns in what
continues to be a fiercely competitive market. Gross new mortgage lending for
the Group totalled GBP16.0 billion (2006 first half: GBP13.0 billion). Mortgage
balances outstanding increased by 9 per cent to GBP100.1 billion and net new
lending totalled GBP4.8 billion, resulting in a market share of net new lending
of approximately 8.9 per cent, broadly in line with our stock position.
Page 14 of 50
UK RETAIL BANKING (continued)
In unsecured consumer lending, tightened credit criteria over the last two
years, together with the slowdown in consumer demand, has led to unsecured
consumer credit balances falling slightly during the half-year. Personal loan
balances outstanding at 30 June 2007 were flat at GBP11.1 billion, and credit
card balances totalled GBP6.6 billion, a decrease of 7 per cent, although these
balances showed signs of stabilisation during the second quarter of 2007.
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 25 per cent, compared with the first
half of last year, supported by the new range of added value current accounts,
in particular the Silver Account focusing on foreign nationals.
Wealth Management continues to make good progress with its expansion plans, and
over 240 advisers have now been trained on an improved wealth management offer
comprising private banking, open architecture portfolio management, retirement
planning, insurance and estate planning services. In the first half of 2007,
total new assets under management increased by 15 per cent and wealth management
banking deposits grew by 18 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 initial demand for this
new product has been extremely strong. By the middle of July, approximately
140,000 applications had been received from a generally more transactional, high
quality, customer segment.
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 twelve months. Over the last 2 years, 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 46.2 per cent, from
47.8 per cent last year.
Impairment levels slightly decreased
Impairment losses on loans and advances decreased by GBP5 million, or 1 per
cent, to GBP627 million, largely reflecting a reduction in the level of customer
insolvencies and the strong quality of new lending. In addition, collections
procedures continue to improve and we achieved better than assumed recoveries.
The impairment charge as a percentage of average lending improved to 1.15 per
cent, compared to 1.23 per cent in the first half of last year. Over 99 per cent
of new personal loans and over 80 per cent of new credit cards sold during the
first half of 2007 were to existing customers, where the Group has a better
understanding of an individual customer's total financial position. Mortgage
credit quality remains good and, as a result, the impairment charge fell by GBP1
million to GBP5 million. Arrears in the mortgage business have also fallen
during the first half of the year. In Cheltenham & Gloucester, the average
indexed loan-to-value ratio on the mortgage portfolio was 44 per cent, and the
average loan-to-value ratio for new mortgages and further advances written
during the first half of 2007 was 63 per cent. Whilst customer insolvency and
interest rate trends remain key factors in the outlook for retail impairment,
the retail impairment charge for 2007 is currently expected to be no higher than
that in 2006.
Page 15 of 50
INSURANCE AND INVESTMENTS
Half-year to Half-year to Half-year to
30 June 30 June 31 December
Excluding volatility 2007 2006 Change 2006
GBPm GBPm % GBPm
Net interest income 27 28 (4) 28
Other income 937 832 13 908
Total income 964 860 12 936
Insurance claims (152) (95) (60) (105)
Total income, net of insurance claims 812 765 6 831
Operating expenses (325) (312) (4) (334)
Insurance grossing adjustment (page 11) 12 13 10
Profit before tax 499 466 7 507
Profit before tax analysis
Life, pensions and OEICs
New business profit - life and pensions 80 71 13 100
New business profit - OEICs (12) (12) - (12)
Existing business 248 188 32 196
Expected return on shareholders' net assets 103 73 41 67
Impact of surplus capital repatriation - 15 15
419 335 25 366
General insurance 59 114 (48) 129
Scottish Widows Investment Partnership 21 17 24 12
Profit before tax 499 466 7 507
Present value of new business premiums (PVNBP) 5,372 4,969 8 4,771
PVNBP new business margin (EEV basis) 3.4% 3.3% 3.8%
Post-tax return on embedded value 10.7% 9.5% 9.1%
(EEV basis, page 46, note 17)
Key highlights
- Strong profit performance. Profit before tax increased by 7 per cent to
GBP499 million. Adjusting for the impact of surplus capital repatriation,
profit before tax increased by 11 per cent.
- Good income growth. Income, net of insurance claims and adjusting
for the impact of surplus capital repatriation, increased by 8 per cent,
exceeding cost growth of 4 per cent.
- Good sales performance. 8 per cent increase in Scottish Widows'
present value of new business premiums. Strong progress in increasing
bancassurance sales, up 16 per cent, with a good performance in the sale of
protection products.
- Strong new business profitability. On an EEV basis, life, pensions
and OEICs new business profit in Scottish Widows increased by 9 per cent and the
post-tax return on embedded value increased to 10.7 per cent. New business
margin remained robust at 3.4 per cent.
- Strong capital position of Scottish Widows maintained. Scottish
Widows continues to deliver improving capital efficiency and self-financing
growth, and a further GBP0.6 billion of capital was repatriated to the Group in
the first half of 2007.
- Increased weather related claims of GBP57 million, GBP45 million
relating to the severe flooding in the UK in June, contributed to a 48 per cent
reduction in profit before tax in General insurance.
Page 16 of 50
INSURANCE AND INVESTMENTS (continued)
Scottish Widows Life, pensions and OEICs
Profit before tax increased by GBP84 million, or 25 per cent, to GBP419 million.
The effect of surplus capital repatriation to the Group has been to reduce
investment earnings by a total of GBP15 million in the first half of 2007.
Adjusting for this impact, profit before tax increased by 31 per cent.
Life and pensions new business profit grew by 13 per cent to GBP80 million
reflecting higher sales volumes and an improved business mix. Total existing
business profit grew by 32 per cent to GBP248 million, partly reflecting higher
annuity profits from the closed Abbey Life business, and the absence of adverse
assumption changes. The expected return on shareholders' net assets increased
by 41 per cent to GBP103 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 the first half of 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 the first half of 2007, the value of Scottish Widows' bancassurance new
business premiums increased by 16 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. Towards the end of 2006, Scottish Widows launched a
new protection product, 'Protection for Life', and this, together with 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 the first half of 2007. OEICs sales were 11 per cent
lower in the first half of 2007, but this was a good performance following the
more than doubling of sales in 2006.
Profitably growing IFA sales
Sales through the IFA distribution channel increased by 1 per cent, following
record sales levels in the first half of 2006. Our strategy remains to write
profitable business, as Scottish Widows has continued to increase its focus on
the more profitable business areas within the IFA market. Sales of savings and
investment products were lower as a result of the partial closure to new
business last year of the Property Fund. This has now been re-opened for new
business. Sales of corporate pensions products remained strong following
excellent growth last year. A new pensions proposition was launched in the
first quarter of 2007 to support pre-retirement sales.
Improving service and operational efficiency
Operational efficiencies have continued to improve during the first half of
2007, and expense growth has been restricted to 4 per cent, despite significant
investment in new products and platforms and increased sales volumes throughout
the division. External operational cost benchmarking indicates that Scottish
Widows is in the top quartile for servicing costs per policy. Customer
satisfaction levels continued to improve and Scottish Widows has again won a
significant number of awards for service quality.
Page 17 of 50
INSURANCE AND INVESTMENTS (continued)
Optimising capital management
Scottish Widows has maintained its strong focus on improving capital management.
During the first half of 2007 Scottish Widows continued to deliver a more
capital efficient product profile, improved internal rates of return and an
increased new business margin. The post-tax return on embedded value, on an EEV
basis, increased to 10.7 per cent, from 9.5 per cent in the first half of last
year. In the first half of 2007, GBP0.6 billion of capital was repatriated to
the Group, giving a total capital repatriation of over GBP2.3 billion since the
beginning of 2005. We continue to explore a number of opportunities to
repatriate in excess of GBP1 billion of further capital from Scottish Widows in
order to further improve capital efficiency.
Present value of new business premiums (PVNBP) Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Life and pensions:
Savings and investments 499 728 (31) 572
Protection 488 111 340 121
Individual pensions 1,092 1,152 (5) 1,067
Corporate and other pensions 928 894 4 1,067
Retirement income 516 397 30 563
Managed fund business 344 184 87 164
Life and pensions 3,867 3,466 12 3,554
OEICs 1,505 1,503 1,217
Life, pensions and OEICs 5,372 4,969 8 4,771
Single premium business 4,378 3,779 16 3,542
Regular premium business 994 1,190 (16) 1,229
Life, pensions and OEICs 5,372 4,969 8 4,771
Bancassurance 2,138 1,841 16 1,580
Independent financial advisers 2,950 2,929 1 2,777
Direct 284 199 43 414
Life, pensions and OEICs 5,372 4,969 8 4,771
New business margin (PVNBP) 3.4% 3.3% 3.8%
Overall, sales in the first half of 2007 increased by 8 per cent reflecting, in
particular, strong growth in the sale of protection and retirement income
products. Bancassurance sales improved significantly and were 16 per cent
higher at GBP2,138 million, including good growth in the sale of protection
products through both the branch network and our general insurance business.
IFA sales were 1 per cent higher at GBP2,950 million, following record sales in
the first half of last year. OEIC sales through the IFA channel were 75 per
cent higher whilst sales of savings and investment products were lower as a
result of the partial closure to new business last year of the Property Fund.
Managed fund business benefited from higher levels of external client business.
Good growth in retirement income products led to a 43 per cent increase in sales
through the direct channels.
Page 18 of 50
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.
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
Life, Life, Change Life,
pensions pensions pensions
and OEICs and OEICs and OEICs
GBPm GBPm % GBPm
New business profit 180 165 9 181
Existing business
- Expected return 174 206 (16) 197
- Experience variances 23 (5) 74
- Assumption changes (3) (20) (113)
194 181 7 158
Expected return on shareholders' net assets 108 69 57 68
Profit before tax, adjusted 482 415 16 407
for capital repatriation*
Impact of surplus capital repatriation to Group - 15 15
Profit before tax* 482 430 12 422
New business margin (PVNBP) 3.4% 3.3% 3.8%
Embedded value (period-end) GBP6,362m GBP6,436m GBP6,413m
Post-tax return on embedded value* 10.7% 9.5% 9.1%
*excluding volatility and other items (page 46, note 17)
Adjusting for the impact of capital repatriation, EEV profit before tax from the
Group's life, pensions and OEICs business increased by 16 per cent to GBP482
million, reflecting the Group's continuing focus on the more profitable business
areas and distribution channels.
The Group's strategy to improve its returns by focusing on more profitable, less
capital intensive, business whilst constantly seeking to improve process and
distribution efficiency has led to a 9 per cent increase in new business profit
to GBP180 million. As a result of growth in higher margin products in the
bancassurance distribution channel, the new business margin remained robust at
3.4 per cent.
Existing business profit increased by 7 per cent. Expected return decreased by
16 per cent to GBP174 million, primarily reflecting a lower shareholder benefit
this half-year from the reduction in the value of realistic balance sheet
liabilities. Positive experience variances were driven by lower than expected
take-up rates on guaranteed annuity options in Life and pensions. In the first
half of 2007, overall lapse experience was broadly in line with the Group's
expectations. Lapse rates in life and pensions business were slightly higher
than expected whilst there was a favourable lapse experience in OEICs. The
expected return on shareholders' net assets increased by GBP39 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.
Overall the post-tax return on embedded value increased to 10.7 per cent from
9.5 per cent.
Page 19 of 50
INSURANCE AND INVESTMENTS (continued)
Scottish Widows Investment Partnership
Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased by
24 per cent to GBP21 million, reflecting increased profitability resulting from
an improved mix in external business, a key strategic priority for SWIP. Over
the last 12 months, SWIP's assets under management increased by GBP0.5 billion
to GBP97.8 billion.
Movements in funds under management
The following table highlights the movement in retail and institutional funds
under management.
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPbn GBPbn GBPbn
Opening funds under management 105.7 97.5 100.4
Movement in Retail Funds
Premiums 6.2 5.9 5.8
Claims (2.1) (1.8) (1.8)
Surrenders (2.8) (2.5) (2.9)
Net inflow of business 1.3 1.6 1.1
Investment return, expenses and commission 1.7 0.8 5.2
Net movement 3.0 2.4 6.3
Movement in Institutional Funds
Lloyds TSB Pension Scheme (5.7) - -
Other institutional funds (0.3) 0.4 (1.7)
Investment return, expenses and commission 0.5 0.3 1.2
Net movement (5.5) 0.7 (0.5)
Dividends and surplus capital repatriation (0.6) (0.2) (0.5)
Closing funds under management 102.6 100.4 105.7
Managed by SWIP 97.8 97.3 101.7
Managed by third parties 4.8 3.1 4.0
Closing funds under management 102.6 100.4 105.7
During the first half of 2007, the net movement in retail funds, net of expenses
and commissions, remained strong at GBP3.0 billion as a result of strong premium
growth and higher investment returns. Institutional funds under management
reduced as a result of the decision by the Trustees of the Lloyds TSB pension
schemes to move GBP5.7 billion into external passive management.
Including assets under management within our UK Wealth Management and
International Private Banking businesses, Groupwide funds under management
increased by 1 per cent to GBP122 billion.
Page 20 of 50
INSURANCE AND INVESTMENTS (continued)
General insurance
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Commission receivable 335 293 14 336
Commission payable (353) (328) (8) (336)
Underwriting income (net of reinsurance) 294 302 (3) 298
Other income 14 20 (30) 15
Net operating income 290 287 1 313
Claims paid on insurance contracts (net of reinsurance) (152) (95) (60) (105)
Operating income, net of claims 138 192 (28) 208
Operating expenses (79) (78) (1) (79)
Profit before tax 59 114 (48) 129
Claims ratio 50% 30% 34%
Combined ratio 96% 78% 82%
Profit before tax from our general insurance operations decreased by GBP55
million, to GBP59 million, as a result of a GBP57 million increase in weather
related claims, of which GBP45 million related to severe flooding in the UK in
June. Net operating income increased by 1 per cent whilst costs also increased
by 1 per cent.
Sales performance has been robust with 10 per cent growth in new business gross
written premiums (GWP). Home insurance sales through the UK Retail Bank
continue to perform well with 10 per cent growth in new business GWP. Our
presence in the small business insurance market continues to improve with an
increase of 12 per cent in new business GWP from our general liability product.
Net operating income improved by GBP3 million, or 1 per cent, as growth in loan
protection income was largely offset by lower motor insurance income and the
run-off from the legacy health portfolio. Good income growth from our main home
insurance product and the migration of the Pearl home insurance portfolio was
partly offset by lower renewal income within our existing home insurance
portfolio.
Income, net of claims, was GBP54 million lower, largely as a result of the
increased extreme weather related claims in the first half of 2007, following a
benign period in the first half of last year. As a result, overall claims
increased by GBP57 million, and key underwriting ratios were significantly
affected with an increase in the claims ratio to 50 per cent, and an increase in
the combined ratio to 96 per cent. Further severe flooding in the UK during
July is likely to result in additional exceptional claims in the second half of
2007. Although it is early in terms of our assessment of the eventual cost of
these additional claims, it is likely that the level of claims will be similar
to that experienced as a result of the June floods.
The business continues to invest in the development of its Corporate Partnering
capability. Integration of the Pearl general insurance business acquired in
July 2006 has progressed well. Notwithstanding the impact of recent weather
related claims, performance of the Pearl business is in line with initial
expectations.
Page 21 of 50
WHOLESALE AND INTERNATIONAL BANKING
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Net interest income 1,275 1,194 7 1,191
Other income 923 805 15 1,022
Total income 2,198 1,999 10 2,213
Operating expenses (1,125) (1,072) (5) (1,192)
Trading surplus 1,073 927 16 1,021
Impairment losses on loans and advances (210) (159) (32) (149)
Profit before tax 863 768 12 872
Cost:income ratio 51.2% 53.6% 53.9%
Post-tax return on average risk-weighted assets 1.60% 1.31% 1.45%
Total assets GBP151.4bn GBP136.2bn 11 GBP147.8bn
Risk-weighted assets GBP96.1bn GBP86.5bn 11 GBP91.8bn
Customer deposits GBP64.4bn GBP61.6bn 5 GBP61.2bn
Profit before tax by business unit
Corporate Markets 565 461 23 569
Commercial Banking 216 195 11 203
Asset Finance 33 63 (48) 50
International Banking and other businesses 49 49 - 50
863 768 12 872
Key highlights
- Continued strong trading momentum. Substantial increase in trading surplus,
up 16 per cent to GBP1,073 million, and a 12 per cent increase in profit
before tax.
- Strong income growth, up 10 per cent, supported by broader revenue
streams in Corporate Markets and higher volumes in Commercial Banking.
- Strong risk management and asset quality, despite a rise of GBP51
million in impairment losses as a result of a lower level of corporate releases
and recoveries in the first half of the year and a GBP28 million provision
reflecting the impact of the 2007 Finance Act on the division's leasing
business. Gross provisions remained at a low level, reflecting the high overall
quality of our lending.
- Improving capital efficiency. Post-tax return on average
risk-weighted assets increased to 1.60 per cent, from 1.31 per cent.
- Wide positive jaws. Income growth exceeded cost growth of 5 per
cent, and led to a substantial improvement in the cost:income ratio,
notwithstanding continued investment in our front-line capabilities and
infrastructure.
- Further good progress in expanding our Corporate Markets business,
with a 26 per cent increase in Corporate Markets income supporting a 23 per cent
growth in profit before tax. Cross selling income in Corporate Markets
increased by 32 per cent.
- Continued strong franchise growth in Commercial Banking, with an 8
per cent growth in income and 11 per cent growth in profit before tax. Lloyds
TSB has retained its leading position as the bank of choice for start-up
businesses.
- Tightened credit criteria in Asset Finance, and a slowdown in demand
in the consumer lending portfolio, led to a 48 per cent reduction in profit
before tax.
Page 22 of 50
WHOLESALE AND INTERNATIONAL BANKING (continued)
In Wholesale and International Banking, the Group has continued to make
significant progress in its strategy to leverage 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. We have continued to develop new
product revenue streams, particularly in areas such as securitisation,
structured credit and credit loan trading which, coupled with a strong focus on
targeted corporate customer segments and Corporate Markets' cross-selling income
growth remaining strong, has supported good levels of overall income growth.
Revenue growth has continued to exceed cost growth notwithstanding significant
investment being made in the enhancement of our product and distribution
capabilities and operating platforms, particularly in the Corporate Markets and
Commercial Banking businesses.
We have recently re-aligned the Wholesale and International Banking
organisational structure to better meet customer needs and improve efficiency.
Customers with turnover between GBP2 million and GBP15 million per annum have
moved from Corporate Markets to Business Banking, which has been renamed
Commercial Banking. Lloyds TSB Commercial Finance, our asset-backed lending
business which serves customers from start-ups to major international
corporates, is now also part of Commercial Banking.
Profit before tax increased by GBP95 million, or 12 per cent, to GBP863 million.
Good trading momentum has continued and has generated strong income growth of 10
per cent, driven by Corporate Markets income growth of 26 per cent. This
exceeded cost growth of 5 per cent, leading to a reduction in the cost:income
ratio to 51.2 per cent, from 53.6 per cent last year. Trading surplus increased
by GBP146 million, or 16 per cent, to GBP1,073 million.
Net interest income increased by GBP81 million, or 7 per cent, reflecting higher
income from strong growth in customer lending and customer deposits. The
banking net interest margin reduced, largely reflecting the mix effect of a
reduction in the wider margin Asset Finance business and lower Commercial
Banking margins reflecting a higher proportion of finer margin secured lending
being written. Other income increased by GBP118 million, or 15 per cent, as a
result of good levels of growth in financial markets product sales, structured
finance and income from venture capital investments. In addition, other
transactional income throughout the division benefited from volume growth across
a broad range of customer activity. Costs were 5 per cent higher at GBP1,125
million, reflecting higher costs resulting from the continuing investment in
people, processes and systems, as the Group builds up its Corporate Markets
product capability and Commercial Banking business.
As expected, the charge for impairment losses on loans and advances increased by
GBP51 million to GBP210 million, as a result of the lower level of releases and
recoveries in the first half of 2007, and the impact of 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. Overall corporate and SME asset quality remains strong and the
level of new corporate provisions remains at a low level. We continue to expect
some normalisation in the impairment charge over the next few years, but believe
we remain relatively well positioned as a result of our prudent credit
management policy.
Page 23 of 50
WHOLESALE AND INTERNATIONAL BANKING (continued)
Corporate Markets
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Net interest income 500 413 21 393
Other income 419 314 33 507
Total income 919 727 26 900
Operating expenses (303) (271) (12) (344)
Trading surplus 616 456 35 556
Impairment (losses)/credit on loans and advances
- Before 2007 Finance Act impact (23) 5 13
- 2007 Finance Act impact (28) - -
(51) 5 13
Profit before tax 565 461 23 569
In Corporate Markets, profit before tax grew by 23 per cent, driven by excellent
levels of income growth. Income increased by 26 per cent, supported by continued
high levels of cross-selling income and a higher level of income from venture
capital investments. By building new product revenue streams in areas such as
structured products and debt capital markets, and targeting and developing
relationships in selected corporate customer segments, Corporate Markets has
created a broader, more diversified stream of revenues to underpin future
revenue growth. There has also been significant progress in the delivery of our
strategy focused on improved origination and distribution capabilities in the
mid-sized corporate business. Operating expenses increased by 12 per cent to
GBP303 million, reflecting further investment in people, premises and systems to
support ongoing business growth. The trading surplus increased by 35 per cent.
The impairment charge of GBP51 million reflects the lower level of releases and
recoveries and the GBP28 million one-off charge relating to the impact of the
2007 Finance Act on the division's leasing business.
Page 24 of 50
WHOLESALE AND INTERNATIONAL BANKING (continued)
Commercial Banking
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Net interest income 430 398 8 423
Other income 208 193 8 204
Total income 638 591 8 627
Operating expenses (375) (349) (7) (378)
Trading surplus 263 242 9 249
Impairment losses on loans and advances (47) (47) (46)
Profit before tax 216 195 11 203
Profit before tax in Commercial Banking grew by GBP21 million, or 11 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 GBP638 million, reflecting strong
growth in lending and deposit balances, whilst costs were 7 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 more than 60,000 during the first half of 2007,
reflecting its market-leading position in the start-up market. 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 strong, and the impairment
charge was unchanged at GBP47 million.
Asset Finance
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 Change 2006
GBPm GBPm % GBPm
Net interest income 234 275 (15) 264
Other income 158 153 3 168
Total income 392 428 (8) 432
Operating expenses (248) (250) 1 (258)
Trading surplus 144 178 (19) 174
Impairment losses on loans and advances (111) (115) 3 (124)
Profit before tax 33 63 (48) 50
Profit before tax in Asset Finance decreased by 48 per cent to GBP33 million,
reflecting tightened 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 GBP36 million, or 8 per cent.
Costs were slightly lower and the impairment charge decreased by GBP4 million to
GBP111 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 market-wide 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 25 of 50
CONSOLIDATED INTERIM INCOME STATEMENT - STATUTORY (unaudited)
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Interest and similar income 8,076 6,756 7,560
Interest and similar expense (5,136) (3,962) (4,817)
Net interest income 2,940 2,794 2,743
Fee and commission income 1,597 1,518 1,598
Fee and commission expense (395) (430) (416)
Net fee and commission income 1,202 1,088 1,182
Net trading income 2,366 1,194 5,147
Insurance premium income 2,535 2,329 2,390
Other operating income 668 423 383
Other income 6,771 5,034 9,102
Total income 9,711 7,828 11,845
Insurance claims (4,121) (2,639) (5,930)
Total income, net of insurance claims 5,590 5,189 5,915
Operating expenses (2,760) (2,610) (2,691)
Trading surplus 2,830 2,579 3,224
Impairment losses on loans and advances (837) (800) (755)
Profit before tax 1,993 1,779 2,469
Taxation (433) (543) (798)
Profit for the period 1,560 1,236 1,671
Profit attributable to minority interests 20 22 82
Profit attributable to equity shareholders 1,540 1,214 1,589
Profit for the period 1,560 1,236 1,671
Basic earnings per share 27.3p 21.7p 28.2p
Diluted earnings per share 27.1p 21.5p 28.0p
Dividend per share for the period* 11.2p 10.7p 23.5p
Dividend for the period* GBP632m GBP603m GBP1,325m
*the dividend for the half-year to 30 June 2007 represents the interim dividend
for 2007 which will be paid and accounted for on 3 October 2007 (the dividends
shown for the half-year to 30 June 2006 and the half-year to 31 December 2006
represent the interim and final dividends for 2006 which were paid and accounted
for on 4 October 2006 and 2 May 2007 respectively).
Page 26 of 50
CONSOLIDATED INTERIM BALANCE SHEET - STATUTORY (unaudited)
30 June 30 June 31 December
2007 2006 2006
Assets GBPm GBPm GBPm
Cash and balances at central banks 1,255 1,294 1,898
Items in course of collection from banks 1,727 1,814 1,431
Trading and other financial
assets at fair value through profit or loss 68,424 60,803 67,695
Derivative financial instruments 6,640 5,032 5,565
Loans and advances to banks 33,599 34,927 40,638
Loans and advances to customers 200,181 182,157 188,285
Available-for-sale financial assets 21,994 20,221 19,178
Investment property 5,177 4,856 4,739
Goodwill 2,377 2,377 2,377
Value of in-force business 2,890 2,929 2,723
Other intangible assets 141 50 138
Tangible fixed assets 3,220 4,281 4,252
Other assets 5,470 5,026 4,679
Total assets 353,095 325,767 343,598
Equity and liabilities
Deposits from banks 40,017 39,466 36,394
Customer accounts 144,654 136,465 139,342
Items in course of transmission to banks 727 707 781
Trading and other liabilities at fair value through 2,866 1,543 1,184
profit or loss
Derivative financial instruments 6,890 6,068 5,763
Debt securities in issue 49,812 39,703 54,118
Liabilities arising from insurance contracts and
participating investment contracts 41,985 40,215 41,445
Liabilities arising from non-participating
investment contracts 25,609 22,489 24,370
Unallocated surplus within insurance businesses 628 573 683
Other liabilities 12,072 11,360 10,985
Retirement benefit obligations 2,332 2,799 2,462
Current tax liabilities 946 449 817
Deferred tax liabilities 1,236 1,337 1,416
Other provisions 233 307 259
Subordinated liabilities 11,378 11,693 12,072
Total liabilities 341,385 315,174 332,091
Equity
Share capital 1,430 1,427 1,429
Share premium account 1,284 1,243 1,266
Other reserves 371 397 355
Retained profits 8,288 7,090 8,105
Shareholders' equity 11,373 10,157 11,155
Minority interests 337 436 352
Total equity 11,710 10,593 11,507
Total equity and liabilities 353,095 325,767 343,598
Page 27 of 50
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY - STATUTORY (unaudited)
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 2,590 383 7,222 435 10,630
Movement in available-for-sale - 2 - - 2
financial assets, net of tax
Movement in cash flow hedges, net of tax - 11 - - 11
Currency translation differences - 1 (11) - (10)
Net income recognised directly in equity - 14 (11) - 3
Profit for the period - - 1,214 22 1,236
Total recognised income for the period - 14 1,203 22 1,239
Dividends - - (1,316) (17) (1,333)
Purchase/sale of treasury shares - - (41) - (41)
Employee share option schemes:
- value of employee services - - 22 - 22
- proceeds from shares issued 80 - - - 80
Repayment of capital to minority - - - (4) (4)
shareholders
Balance at 30 June 2006 2,670 397 7,090 436 10,593
Movement in available-for-sale - (33) - - (33)
financial assets, net of tax
Movement in cash flow hedges, net of tax - (10) - - (10)
Currency translation differences - 1 (20) (4) (23)
Net income recognised directly in equity - (42) (20) (4) (66)
Profit for the period - - 1,589 82 1,671
Total recognised income for the period - (42) 1,569 78 1,605
Dividends - - (603) (15) (618)
Purchase/sale of treasury shares - - 6 - 6
Employee share option schemes:
- value of employee services - - 43 - 43
- proceeds from shares issued 25 - - - 25
Repayment of capital to minority - - - (147) (147)
shareholders
Balance at 31 December 2006 2,695 355 8,105 352 11,507
Movement in available-for-sale - 13 - - 13
financial assets, net of tax
Movement in cash flow hedges, net of tax - (2) - - (2)
Currency translation differences - 5 (1) (1) 3
Net income recognised directly in equity - 16 (1) (1) 14
Profit for the period - - 1,540 20 1,560
Total recognised income for the period - 16 1,539 19 1,574
Dividends - - (1,325) (4) (1,329)
Purchase/sale of treasury shares - - (36) - (36)
Employee share option schemes:
- value of employee services - - 5 - 5
- proceeds from shares issued 19 - - - 19
Repayment of capital to minority - - - (30) (30)
shareholders
Balance at 30 June 2007 2,714 371 8,288 337 11,710
Page 28 of 50
CONDENSED CONSOLIDATED INTERIM CASH FLOW STATEMENT - STATUTORY (unaudited)
Half-year to Half-year to Half-year to 31
30 June 2007 30 June 2006 December 2006
GBPm GBPm GBPm
Profit before tax 1,993 1,779 2,469
Adjustments for:
Change in operating assets (4,602) (10,873) (21,122)
Change in operating liabilities 9,888 17,458 15,611
Non-cash and other items 1,081 (233) 1,788
Tax paid (394) (426) (372)
Net cash from (used in) operating activities 7,966 7,705 (1,626)
Cash flows from investing activities
Purchase of available-for-sale financial assets (12,133) (12,306) (11,142)
Proceeds from sale and maturity of available-for-sale financial 8,946 6,661 11,445
assets
Purchase of fixed assets (874) (723) (1,001)
Proceeds from sale of fixed assets 388 170 1,087
Acquisition of businesses, net of cash acquired (5) (20) -
Disposal of businesses, net of cash disposed (26) 936 -
Net cash (used in) from investing activities (3,704) (5,282) 389
Cash flows from financing activities
Dividends paid to equity shareholders (1,325) (1,316) (603)
Dividends paid to minority interests (4) (17) (15)
Interest paid on subordinated liabilities (342) (341) (372)
Proceeds from issue of subordinated liabilities - - 1,116
Proceeds from issue of ordinary shares 19 80 25
Repayment of subordinated liabilities (300) (250) (509)
Repayment of capital to minority shareholders (30) - (151)
Net cash used in financing activities (1,982) (1,844) (509)
Effects of exchange rate changes on cash and cash equivalents (9) (39) (109)
Change in cash and cash equivalents 2,271 540 (1,855)
Cash and cash equivalents at beginning of period 25,438 26,753 27,293
Cash and cash equivalents at end of period 27,709 27,293 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 29 of 50
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.
Half-year to UK General Life, Insurance Wholesale Central
30 June 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 3,755 10 459 469 4,744 (892) 8,076
income*
Interest and similar (1,911) - (314) (314) (3,469) 558 (5,136)
expense*
Net interest income 1,844 10 145 155 1,275 (334) 2,940
Other income (net of fee 883 286 4,497 4,783 923 182 6,771
and commission expense)
Total income 2,727 296 4,642 4,938 2,198 (152) 9,711
Insurance claims - (152) (3,969) (4,121) - - (4,121)
Total income, net of 2,727 144 673 817 2,198 (152) 5,590
insurance claims
Operating expenses (1,297) (79) (256) (335) (1,125) (3) (2,760)
Trading surplus (deficit) 1,430 65 417 482 1,073 (155) 2,830
Impairment losses on loans (627) - - - (210) - (837)
and advances
Profit (loss) before tax 803 65 417 482 863 (155) 1,993
External revenue 4,361 639 5,037 5,676 5,089 116 15,242
Inter-segment revenue* 441 22 97 119 915 (1,475) -
Segment revenue 4,802 661 5,134 5,795 6,004 (1,359) 15,242
*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 (1,397) million
(2006H1: GBP(1,542) million; 2006H2: GBP(1,699) million); interest and similar
expense GBP1,397 million (2006H1: GBP1,542 million: 2006 H2: GBP1,699 million).
There is no impact on net interest income. Similarly, Central group items
includes inter-segment revenue adjustments of GBP(1,913) million (2006 H1:
GBP(1,665) million: 2006 H2: GBP(2,437) million).
Page 30 of 50
CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited)
Half-year to UK General Life, Insurance Wholesale Central
30 June 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* 3,365 12 386 398 3,895 (902) 6,756
Interest and similar (1,571) - (335) (335) (2,701) 645 (3,962)
expense*
Net interest income 1,794 12 51 63 1,194 (257) 2,794
Other income (net of fee 783 280 3,098 3,378 805 68 5,034
and commission expense)
Total income 2,577 292 3,149 3,441 1,999 (189) 7,828
Insurance claims - (95) (2,544) (2,639) - - (2,639)
Total income, net of 2,577 197 605 802 1,999 (189) 5,189
insurance claims
Operating expenses (1,232) (78) (229) (307) (1,072) 1 (2,610)
Trading surplus (deficit) 1,345 119 376 495 927 (188) 2,579
Impairment losses on loans (632) - - - (159) (9) (800)
and advances
Profit (loss) before tax 713 119 376 495 768 (197) 1,779
External revenue 3,978 601 3,620 4,221 3,852 169 12,220
Inter-segment revenue* 319 10 44 54 826 (1,199) -
Segment revenue 4,297 611 3,664 4,275 4,678 (1,030) 12,220
Half-year to 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* 3,548 12 434 446 4,911 (1,345) 7,560
Interest and similar (1,700) - (406) (406) (3,720) 1,009 (4,817)
expense*
Net interest income 1,848 12 28 40 1,191 (336) 2,743
Other income (net of fee 838 314 6,795 7,109 1,022 133 9,102
and commission expense)
Total income 2,686 326 6,823 7,149 2,213 (203) 11,845
Insurance claims - (105) (5,825) (5,930) - - (5,930)
Total income, net of 2,686 221 998 1,219 2,213 (203) 5,915
insurance claims
Operating expenses (1,244) (79) (252) (331) (1,192) 76 (2,691)
Trading surplus (deficit) 1,442 142 746 888 1,021 (127) 3,224
Impairment losses on loans (606) - - - (149) - (755)
and advances
Profit (loss) before tax 836 142 746 888 872 (127) 2,469
External revenue 4,158 648 7,268 7,916 5,015 (11) 17,078
Inter-segment revenue* 379 9 155 164 1,450 (1,993) -
Segment revenue 4,537 657 7,423 8,080 6,465 (2,004) 17,078
Page 31 of 50
NOTES
Page
1 Accounting policies, presentation and estimates 33
2 Volatility 34
3 Mortgage lending 35
4 Group net interest income 36
5 Other income 37
6 General insurance income 37
7 Operating expenses 38
8 Number of employees (full-time equivalent) 38
9 Impairment losses on loans and advances 39
10 Retirement benefit obligations 39
11 Capital ratios 40
12 Balance sheet information 41
13 Total assets by division 42
14 Economic profit 42
15 Earnings per share 43
16 Scottish Widows - realistic balance sheet information 43
17 European Embedded Value reporting - results for half-year to 30 June 2007 44
18 Scottish Widows - weighted sales (Annual Premium Equivalent) 48
19 Taxation 48
20 Dividend 49
21 Other information 49
Page 32 of 50
1. Accounting policies, presentation and estimates
These condensed consolidated interim financial statements as at and for the
half-year to 30 June 2007 have been prepared in accordance with International
Financial Reporting Standard IAS 34 Interim Financial Reporting. They do not
include all of the information required for full annual financial statements,
and should be read in conjunction with 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_report_and_accounts.asp or are
available upon request from the Company Secretary's Department, Lloyds TSB Group
plc, 25 Gresham Street, London EC2V 7HN.
The accounting policies, significant judgements made by management in applying
them, and key sources of estimation uncertainty applied by the Group in these
condensed consolidated interim financial statements are the same as those
applied by the Group in its 2006 Annual Report and Accounts. The preparation of
interim financial statements requires management to make judgements, estimates
and assumptions that impact the application of accounting policies and the
reported amounts of assets, liabilities, income and expense. Actual results may
differ from these estimates. There have been no significant changes in the
bases upon which estimates have been determined, compared to those applied at 31
December 2006. The Group has reviewed the valuation of its pension schemes and
has concluded that no adjustment is required at 30 June 2007. In accordance
with IAS 19, the valuations will be formally updated at the year-end. Goodwill
held in the Group's balance sheet is tested (at least) annually for impairment
in the second half of the year. No circumstances have arisen during the
half-year to 30 June 2007 to require additional impairment testing.
The Group has had no material or unusual related party or share-based payment
transactions during the half-year to 30 June 2007. Related party and
share-based transactions for the half-year to 30 June 2007 are similar in nature
to those for the year ended 31 December 2006. No significant events, other than
those disclosed within this document, have occurred between 30 June 2007 and the
date of approval of these interim results. A variety of contingent liabilities
and commitments arise in the ordinary course of the Group's banking business;
there has been no significant change in the volume or nature of such
transactions during the half-year to 30 June 2007. Full details of the Group's
related party transactions for the year to 31 December 2006, share-based payment
schemes and contingent liabilities and commitments can be found in the Group's
2006 Annual Report and Accounts.
The following pronouncements relevant to the Group are applicable for the year
ending 31 December 2007; these pronouncements do not apply to interim financial
statements and have not been applied in preparing these financial statements but
will be applied in the financial statements for the year ending 31 December
2007.
Pronouncement Nature of change Effective date
IFRS 7 Financial Instruments: Consolidates the current financial Annual periods beginning on or after
instruments disclosures into a single 1 January 2007
Disclosures standard and 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.
Page 33 of 50
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 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.
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 period 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 are also included within insurance volatility.
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:
2007 2006
% %
Gilt yields (gross) 4.62 4.12
Equity returns (gross) 7.62 6.72
Dividend yield 3.00 3.00
Property return (gross) 7.62 6.72
Corporate bonds (gross) 5.22 4.72
During the six months to 30 June 2007, profit before tax included positive
insurance volatility of GBP41 million, being a credit of GBP2 million to net
interest income and a credit of GBP39 million to other income (2006H1: negative
volatility of GBP61 million, being a charge to other income; 2006H2: positive
volatility of GBP145 million, being a credit of GBP2 million to net interest
income and a credit of GBP143 million to other income). Although equity values
continued to rise in the first half of 2007, this was less marked than in the
second half of last year.
Page 34 of 50
2. Volatility (continued)
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.
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 period includes the minorities' share of the profits earned. As these
amounts do not accrue to the equity holders, management believes a clearer
representation of the underlying performance of the Group's life and pensions
businesses is presented by excluding policyholder interests volatility.
During the six months to 30 June 2007, profit before tax included negative
policyholder interests volatility of GBP58 million, being a charge to other
income (2006H1: positive volatility of GBP90 million, being a credit to other
income; 2006H2: positive volatility of GBP236 million, being a charge of GBP33
million to net interest income and a credit of GBP269 million to other income).
In the first half of 2007, substantial policyholder tax losses have been
generated as a result of a fall in gilt and bond values. These losses reduce
future policyholder tax liabilities and have led to a policyholder tax credit
during the period.
3. Mortgage lending
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
Gross new mortgage lending GBP16.0bn GBP13.0bn GBP14.6bn
Market share of gross new mortgage lending 9.0% 8.1% 7.9%
Redemptions GBP11.2bn GBP9.6bn GBP11.1bn
Market share of redemptions 9.1% 8.8% 8.8%
Net new mortgage lending GBP4.8bn GBP3.4bn GBP3.5bn
Market share of net new mortgage lending 8.9% 6.7% 5.9%
Mortgages outstanding (period-end)* GBP100.1bn GBP91.8bn GBP95.3bn
Market share of mortgages outstanding 8.8% 9.0% 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 44 per cent (31 December 2006: 44 per cent), and the
average loan-to-value ratio for new mortgages and further advances written
during the first half of 2007 was 63 per cent (2006 first half: 64 per cent).
At 30 June 2007, only 0.6 per cent of balances had an indexed loan-to-value
ratio in excess of 95 per cent (31 December 2006: 0.6 per cent).
Page 35 of 50
4. Group net interest income
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Banking margin
Net interest income 2,572 2,519 2,603
Average interest-earning assets, excluding reverse 180,891 167,610 173,825
repos
Net interest margin 2.87% 3.03% 2.97%
Statutory basis
Net interest income 2,940 2,794 2,743
Average interest-earning assets, excluding reverse 244,463 220,710 233,168
repos
Net interest margin 2.43% 2.55% 2.33%
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:
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Banking net interest income 2,572 2,519 2,603
Products and Markets, and other products 240 240 128
Volatility 2 - (31)
Insurance grossing adjustment 126 35 43
Group net interest income 2,940 2,794 2,743
Page 36 of 50
5. Other income
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Fee and commission income:
UK current account fees 345 320 332
Other UK fees and commissions 602 590 620
Insurance broking 335 293 336
Card services 250 247 246
International fees and commissions 65 68 64
1,597 1,518 1,598
Fee and commission expense (395) (430) (416)
Net fee and commission income 1,202 1,088 1,182
Net trading income 2,408 1,187 4,794
Insurance premium income 2,535 2,329 2,390
Other operating income 645 401 324
Total other income* 6,790 5,005 8,690
Insurance claims (4,121) (2,639) (5,930)
Total other income, net of insurance claims* 2,669 2,366 2,760
Volatility
- Insurance 39 (61) 143
- Policyholder interests (58) 90 269
Total other income, net of insurance claims 2,650 2,395 3,172
*excluding volatility. For statutory reporting purposes, volatility totalling
GBP(19) million in the first half of 2007 (2006H1: GBP29 million; 2006H2: GBP412
million) is included in total other income; comprising net trading income of
GBP(42) million (2006H1: GBP7 million; 2006H2: GBP353 million) and other
operating income of GBP23 million (2006H1: GBP22 million; 2006H2: GBP59
million).
6. General insurance income
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Premium income from underwriting
Creditor 84 92 88
Home 216 213 211
Health 5 7 6
Reinsurance premiums (11) (10) (7)
294 302 298
Commissions from insurance broking
Creditor 219 163 214
Home 22 21 26
Health 7 6 7
Other 87 103 89
335 293 336
Page 37 of 50
7. Operating expenses
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
Administrative expenses: GBPm GBPm GBPm
Staff:
Salaries 1,049 1,030 1,087
National insurance 84 80 81
Pensions
- Before pension schemes related credit 125 140 153
- Pension schemes related credit - - (128)
125 140 25
Other staff costs 160 156 142
1,418 1,406 1,335
Premises and equipment:
Rent and rates 154 154 156
Hire of equipment 7 7 8
Repairs and maintenance 79 78 87
Other 74 70 79
314 309 330
Other expenses:
Communications and external data processing 247 232 267
Advertising and promotion 104 89 95
Professional fees 122 100 131
Settlement of overdraft claims 36 - -
Other 207 171 217
716 592 710
Administrative expenses 2,448 2,307 2,375
Depreciation and amortisation 312 303 316
Total operating expenses 2,760 2,610 2,691
Cost:income ratio - statutory basis* 49.4% 50.3% 45.5%
Cost:income ratio - excluding volatility and the 48.6% 50.6% 50.9%
settlement of overdraft claims*
*total operating expenses divided by total income, net of insurance claims. The
ratio excluding volatility for the half-year to 31 December 2006 also excludes
the GBP128 million pension schemes related credit.
8. Number of employees (full-time equivalent)
30 June 30 June 31 December
2007 2006 2006
UK Retail Banking 30,528 31,609 30,204
Insurance and Investments 5,879 6,009 5,714
Wholesale and International Banking 19,145 19,356 19,210
Other, largely IT and Operations 10,460 11,289 10,371
66,012 68,263 65,499
Agency staff (full time equivalent)) (3,681) (3,096) (2,869)
Total number of employees (full time equivalent) 62,331 65,167 62,630
Page 38 of 50
9. Impairment losses on loans and advances
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Impairment losses on loans and advances (see below) 839 801 759
Other credit risk provisions (2) (1) (4)
837 800 755
Impairment losses on loans and advances
UK Retail Banking
Personal loans/overdrafts 352 387 353
Credit cards 270 239 251
Mortgages 5 6 2
627 632 606
Wholesale and International Banking 212 160 153
Central group items - 9 -
Total charge 839 801 759
Charge as % of average lending (annualised):
Personal loans/overdrafts 5.60 6.18 5.52
Credit cards 8.14 6.78 7.20
Mortgages 0.01 0.01 -
UK Retail Banking 1.15 1.23 1.13
Wholesale and International Banking 0.50 0.43 0.36
Total charge 0.84 0.88 0.77
10. Retirement benefit obligations
The recognised liability has reduced by GBP130 million, from GBP2,462 million at 31
December 2006 to GBP2,332 million at 30 June 2007, as contributions to the Group's
defined benefit schemes exceeded the regular cost.
Page 39 of 50
11. Capital ratios
30 June 30 June 31 December
2007 2006 2006
Capital GBPm GBPm GBPm
Core tier 1
Share capital and reserves 11,373 10,157 11,155
Regulatory post-retirement benefit adjustments 977 1,294 1,041
Other items 64 66 39
Perpetual non-cumulative preference shares
Preference share capital 1,588 538 1,610
Innovative tier 1
Innovative tier 1 capital instruments+ 1,374 1,921 1,372
Less: restriction in amount eligible - (223) -
Deductions from tier 1
Available-for-sale revaluation reserve and cash flow hedging (28) (54) (12)
reserve
Goodwill (2,377) (2,377) (2,377)
Total tier 1 capital 12,971 11,322 12,828
Tier 2
Undated loan capital 4,364 4,480 4,390
Dated loan capital 3,453 3,787 3,624
Innovative capital restricted from tier 1 - 223 -
Collectively assessed provisions 2,009 1,911 1,951
Available-for-sale revaluation reserve in respect of equities 11 29 -
Total tier 2 capital 9,837 10,430 9,965
22,808 21,752 22,793
Supervisory deductions
Life and pensions businesses (5,165) (5,441) (5,368)
Other deductions (922) (633) (790)
Total supervisory deductions (6,087) (6,074) (6,158)
Total capital 16,721 15,678 16,635
Risk-weighted assets GBPbn GBPbn GBPbn
UK Retail Banking 59.6 61.6 59.1
Insurance and Investments 3.1 3.2 3.1
Wholesale and International Banking 96.1 86.5 91.8
Central group items 1.9 1.6 2.0
Total risk-weighted assets 160.7 152.9 156.0
Risk asset ratios
Total tier 1 8.1% 7.4% 8.2%
Total tier 1, excluding innovative capital instruments+ 7.2% 6.3% 7.3%
Total capital 10.4% 10.3% 10.7%
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
Post-tax return on average risk-weighted assets 1.98% 1.65% 2.11%
Post-tax return on average risk-weighted assets* 1.93% 1.66% 1.78%
*excluding volatility and, in the second half of 2006, pension schemes related
credit.
+a firm is permitted to include innovative tier 1 capital in its tier 1 capital
resources for the purposes of GENPRU1.2 (adequacy of financial resources) but is
required to exclude these amounts from tier 1 for the purposes of meeting the
main BIPRU firm Pillar 1 rules. Accordingly, the Group has provided its tier 1
capital ratio both including and excluding these amounts.
Page 40 of 50
12. Balance sheet information
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Deposits - customer accounts
Sterling:
Non-interest bearing current accounts 3,610 3,651 3,739
Interest bearing current accounts 42,426 40,687 40,906
Savings and investment accounts 66,436 62,322 64,380
Other customer deposits 19,059 16,808 19,134
Total sterling 131,531 123,468 128,159
Currency 13,123 12,997 11,183
Total deposits - customer accounts 144,654 136,465 139,342
Loans and advances to customers
Agriculture, forestry and fishing 2,928 2,297 2,905
Energy and water supply 2,258 1,905 2,024
Manufacturing 8,023 7,421 7,513
Construction 2,548 2,407 2,332
Transport, distribution and hotels 10,970 10,706 10,490
Postal and communications 924 753 831
Property companies 16,062 11,043 12,896
Financial, business and other services 26,082 21,741 22,999
Personal : mortgages 100,140 92,029 95,601
: other 22,473 22,980 23,025
Lease financing 4,948 5,879 4,802
Hire purchase 5,063 5,160 5,060
202,419 184,321 190,478
Allowance for impairment losses on loans and (2,238) (2,164) (2,193)
advances
Total loans and advances to customers 200,181 182,157 188,285
Total loans and advances to customers in our international businesses totalled
GBP5,635 million (30 June 2006: GBP5,494 million; 31 December 2006: GBP5,589 million).
Page 41 of 50
13. Total assets by division
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
UK Retail Banking 112,705 105,726 108,381
Insurance and Investments 88,183 82,636 86,074
Wholesale and International Banking 151,371 136,157 147,836
Central group items 836 1,248 1,307
Total assets 353,095 325,767 343,598
14. Economic profit
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Statutory basis
Average shareholders' equity 11,504 10,417 10,643
Profit attributable to equity shareholders 1,540 1,214 1,589
Less: notional charge (513) (465) (483)
Economic profit 1,027 749 1,106
Excluding volatility and, in the second half of 2006, pension
schemes related credit
Average shareholders' equity 11,305 10,390 10,578
Profit attributable to equity shareholders 1,513 1,236 1,398
Less: notional charge (505) (464) (480)
Economic profit 1,008 772 918
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).
Page 42 of 50
15. Earnings per share
Half-year to Half-year to Half-year to
30 June 30 June 31 December
Statutory basis 2007 2006 2006
Basic
Profit attributable to equity shareholders GBP1,540m GBP1,214m GBP1,589m
Weighted average number of ordinary shares in issue 5,634m 5,602m 5,630m
Earnings per share 27.3p 21.7p 28.2p
Fully diluted
Profit attributable to equity shareholders GBP1,540m GBP1,214m GBP1,589m
Weighted average number of ordinary shares in issue 5,685m 5,655m 5,679m
Earnings per share 27.1p 21.5p 28.0p
Excluding volatility and, in the second half of 2006, pension
schemes related credit
Profit attributable to equity shareholders GBP1,513m GBP1,236m GBP1,398m
Weighted average number of ordinary shares in issue 5,634m 5,602m 5,630m
Earnings per share 26.9p 22.1p 24.8p
16. 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 30
June 2007 is shown below, together with the actual position at 31 December 2006.
30 June 2007 (estimated) With Profit Long Term
Fund Fund
GBPbn GBPbn
Available assets, including support arrangement assets 18.8 21.9
Realistic value of liabilities (17.6) (17.7)
Working capital for fund 1.2 4.2
Working capital ratio 6.2% 19.1%
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 30 June 2007, the RCM was estimated
to be GBP53 million for the With Profit Fund and GBP79 million for the Long Term
Fund (covered 22 times and 53 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 43 of 50
17. European Embedded Value reporting - results for half-year to 30 June
2007
This section provides further details of the Scottish Widows EEV financial
information.
Composition of EEV balance sheet
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Value of in-force business (certainty equivalent) 3,512 3,489 3,220
Value of financial options and guarantees (57) (149) (56)
Cost of capital (244) (293) (248)
Non-market risk (80) (72) (75)
Total value of in-force business 3,131 2,975 2,841
Shareholders' net assets 3,231 3,461 3,572
Total EEV of covered business 6,362 6,436 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 222 34 256
Dividends (206) - (206)
As at 30 June 2006 3,461 2,975 6,436
Total profit (loss) after tax 651 (134) 517
Dividends (540) - (540)
As at 31 December 2006 3,572 2,841 6,413
Total profit after tax 247 290 537
Dividends (588) - (588)
As at 30 June 2007 3,231 3,131 6,362
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 56 166 222
Dividends - (206) (206)
As at 30 June 2006 2,449 1,012 3,461
Total profit (loss) after tax (242) 893 651
Dividends - (540) (540)
As at 31 December 2006 2,207 1,365 3,572
Total profit (loss) after tax (12) 259 247
Dividends - (588) (588)
As at 30 June 2007 2,195 1,036 3,231
Page 44 of 50
17. European Embedded Value reporting - results for half-year to 30 June
2007 (continued)
Summary income statement on an EEV basis
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
New business profit 180 165 181
Existing business profit
- Expected return 174 206 197
- Experience variances 23 (5) 74
- Assumption changes (3) (20) (113)
194 181 158
Expected return on shareholders' net assets 108 84 83
Profit before tax, excluding volatility and other items* 482 430 422
Volatility 44 (78) 254
Other items* 38 14 62
Total profit before tax 564 366 738
Attributed shareholder tax (169) (110) (221)
Impact of Corporation tax rate change 142 - -
Total profit after tax 537 256 517
*other items represent amounts not considered attributable to the underlying
performance of the business; primarily intra-Group transfers of OEICs together
with, in the second half of 2006, the benefits of the FSA's Policy Statement 06/
14.
Page 45 of 50
17. European Embedded Value reporting - results for half-year to 30 June
2007 (continued)
Breakdown of income statement between life and pensions, and OEICs
Half-year to 30 June 2007 Life and pensions OEICS Total
GBPm GBPm GBPm
New business profit 141 39 180
Existing business
- Expected return 150 24 174
- Experience variances 11 12 23
- Assumption changes (40) 37 (3)
121 73 194
Expected return on shareholders' net assets 104 4 108
Profit before tax* 366 116 482
New business margin (PVNBP) 3.6% 2.6% 3.4%
Post-tax return on embedded value* 10.7%
Half-year to 30 June 2006 Life and pensions OEICS Total
GBPm GBPm GBPm
New business profit 130 35 165
Existing business
- Expected return 181 25 206
- Experience variances (22) 17 (5)
- Assumption changes (28) 8 (20)
131 50 181
Expected return on shareholders' net assets 80 4 84
Profit before tax* 341 89 430
New business margin (PVNBP) 3.8% 2.3% 3.3%
Post-tax return on embedded value* 9.5%
Half-year to 31 December 2006 Life and pensions OEICS Total
GBPm GBPm GBPm
New business profit 157 24 181
Existing business
- Expected return 180 17 197
- Experience variances 57 17 74
- Assumption changes (101) (12) (113)
136 22 158
Expected return on shareholders' net assets 80 3 83
Profit before tax* 373 49 422
New business margin (PVNBP) 4.4% 2.0% 3.8%
Post-tax return on embedded value* 9.1%
*excluding volatility and other items.
Page 46 of 50
17. European Embedded Value reporting - results for half-year to 30 June
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.
30 June 30 June 31 December
2007 2006 2006
% % %
Risk-free rate (value of in-force) 5.44 4.77 4.72
Risk-free rate (financial options and guarantees) 4.39 to 6.29 4.11 to 4.94 3.91 to 5.41
Retail price inflation 3.44 3.08 3.23
Expense inflation 4.34 3.98 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 experience which has been
collected over a 20 month period. To recognise that this is a shorter period
than that normally available for life and pensions business, and that this
period 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 20 month experience. In management's view, the approach and lapse
assumption are both reasonable.
Page 47 of 50
18. Scottish Widows - weighted sales (Annual Premium Equivalent)
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
Weighted sales (regular + 1/10 single) GBPm GBPm GBPm
Life and pensions:
Savings and investments 50 73 55
Protection 60 24 25
Individual pensions 143 139 131
Corporate and other pensions 167 157 165
Retirement income 51 41 57
Managed fund business 34 18 17
Life and pensions 505 452 450
OEICs 160 162 128
Life, pensions and OEICs 665 614 578
Bancassurance 239 210 193
Independent financial advisers 370 369 345
Direct 56 35 40
Life, pensions and OEICs 665 614 578
19. Taxation
Under IFRS the Group is required to include in income tax expense the tax
attributable to UK life insurance policyholder earnings and its interests in
Open-ended Investment Companies (OEICs).
The effective tax rate of the Group, excluding the gross policyholder and OEIC
interests from profit before tax and the tax charge and, in 2007, excluding the
GBP89 million credit arising from the UK corporation tax rate change from the
tax charge, was 28.3 per cent (2006 first half: 27.7 per cent) compared to the
standard UK corporation tax rate of 30 per cent. The effective tax rate
including policyholder and OEIC interests and, in 2007, the GBP89 million credit
arising from the UK corporation tax rate change was 21.7 per cent, compared to
30.5 per cent in the first half of 2006.
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 GBP89 million. Both of these are one-off adjustments
in the income statement in 2007 and give rise to a net increase in shareholders'
equity of GBP70 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 48 of 50
19. 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, including
policyholder and OEIC interests and, in 2007, the GBP89 million credit arising
from the UK corporation tax rate change, is given below:
Half-year to Half-year to Half-year to
30 June 30 June 31 December
2007 2006 2006
GBPm GBPm GBPm
Profit before tax 1,993 1,779 2,469
Tax charge thereon at UK corporation tax rate of 30% 598 534 740
Factors affecting charge:
Disallowed and non-taxable items (3) (30) 22
Overseas tax rate differences (5) (8) 6
Net tax effect of disposals and unrealised gains (36) (11) (67)
Policyholder and OEIC interests (42) 49 90
Corporation tax rate change (89) - -
Other items 10 9 7
Tax charge 433 543 798
20. Dividend
An interim dividend for 2007 of 11.2p (2006: 10.7p), representing an increase of
5 per cent, will be paid on 3 October 2007. The total amount of this dividend
is GBP632 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 8 August 2007
Record date 10 August 2007
Final date for joining or leaving the dividend reinvestment plan 5 September 2007
Interim dividend paid 3 October 2007
On 2 May 2007, a final dividend for 2006 of 23.5p per share was paid to
shareholders. This dividend totalled GBP1,325 million.
21. 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 2006 were delivered to the
Registrar of Companies following publication on 31 March 2007. 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 49 of 50
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
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 50 of 50
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: 31 July, 2007