Final Results

23rd Feb 2007 07:03

Lloyds TSB Group PLC23 February 2007 LLOYDS TSB GROUP PLC - 2006 RESULTS PRESENTATION OF RESULTS The impact of the implementation of International Financial Reporting Standards(IFRS) in 2005, and in particular the increased use of fair values, has led togreater earnings volatility than was previously the case under UK GAAP. Inorder to provide a more comparable representation of underlying businessperformance, this volatility has been separately analysed for the Group'sinsurance and banking businesses (page 35, note 2). In addition, the profit andloss on the sale and closure of businesses in 2005 has been separately analysedin the Group's results. A reconciliation of this basis of presentation to thestatutory profit before tax is shown on page 1. Certain commentaries separatelyanalyse the impact in 2006 of the one-off pension schemes related credit and, in2005, of customer redress provisions and the strengthening of reserves forannuitant mortality. For 2006, the Group has introduced supplementary financial reporting relating toScottish Widows Group using European Embedded Value ('EEV') Principles aspublished by the Chief Financial Officers Forum in 2004. The Group has alsoaligned the accounting for insurance products which are recognised on anembedded value basis under IFRS to a basis consistent with relevant EEVPrinciples. Unless otherwise stated the analysis throughout this document compares the yearended 31 December 2006 to the year ended 31 December 2005. FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to thebusiness, strategy and plans of the Lloyds TSB Group, its current goals andexpectations relating to its future financial condition and performance. Bytheir nature, forward looking statements involve risk and uncertainty becausethey relate to events and depend on circumstances that will occur in the future. The Group's actual future results may differ materially from the resultsexpressed or implied in these forward looking statements as a result of avariety of factors, including UK domestic and global economic and businessconditions, risks concerning borrower credit quality, market related risks suchas interest rate risk and exchange rate risk in its banking business and equityrisk in its insurance businesses, changing demographic trends, unexpectedchanges to regulation or regulatory actions, changes in customer preferences,competition and other factors. Please refer to the latest Annual Report on Form20-F filed with the US Securities and Exchange Commission for a discussion ofsuch factors. The forward looking statements contained in this announcement aremade as at the date of this announcement, and the Group undertakes no obligationto update any of its forward looking statements. CONTENTS PageProfit analysis by division 1Assets by division 1Performance highlights 2Summary of results 3Group Chief Executive's statement 4Summarised segmental analysis 8Group Finance Director's review of financial performance 9Divisional performance: 13 - UK Retail Banking 13 - Insurance and Investments 17 - Wholesale and International Banking 23Consolidated income statement - statutory 27Consolidated balance sheet - statutory 28Consolidated statement of changes in equity - statutory 29Consolidated cash flow statement - statutory 30Condensed segmental analysis - statutory 31Notes 33Contacts for further information 52 PROFIT ANALYSIS BY DIVISION 2006 2005 Change £m £m %UK Retail Banking (page 13) - Before provisions for customer redress 1,549 1,470 5- Provisions for customer redress - (150) 1,549 1,320 17Insurance and Investments (page 17) - Before strengthening of reserves for mortality 973 880 11- Strengthening of reserves for mortality - (155) 973 725 34Wholesale and International Banking (page 23) 1,640 1,524 8 Central group items - Before pension schemes related credit (449) (424) (6)- Pension schemes related credit 128 - (321) (424) 24Profit before tax - excluding volatility and 3,841 3,145 22 profit on sale and closure of businessesVolatility (page 35, note 2)- Banking (3) (124)- Insurance 84 438- Policyholder interests 326 311Profit on sale and closure of businesses (page 43, note 13) - 50Profit before tax 4,248 3,820 11Taxation (1,341) (1,265)Profit for the year 2,907 2,555 14 Profit attributable to minority interests 104 62Profit attributable to equity shareholders 2,803 2,493 12Profit for the year 2,907 2,555 Earnings per share (page 44, note 15) 49.9p 44.6p 12 ASSETS BY DIVISION 31 December 31 December 2006 2005 Change £m £m %UK Retail Banking 108,381 102,945 5 Insurance and Investments 86,074 80,148 7Wholesale and International Banking 147,836 124,044 19Central group items 1,307 2,617Total assets 343,598 309,754 11 Page 1 of 52 PERFORMANCE HIGHLIGHTS Commenting on the results Lloyds TSB Group chairman, Sir Victor Blank said:- "I am delighted to report that the Group has delivered another strongperformance in 2006 - building on the improved earnings momentum that has beenachieved over the last few years. We have a high quality, balanced set ofbusinesses, demonstrating increased trading momentum and I believe Lloyds TSB isin great shape for 2007 and beyond." Results - statutory • Profit before tax increased by £428 million, or 11 per cent, to £4,248 million. • Profit attributable to equity shareholders increased by 12 per cent to £2,803 million. • Earnings per share increased by 12 per cent to 49.9p. • Post-tax return on average shareholders' equity increased to 26.6 per cent, from 25.6 per cent. • Total capital ratio 10.7 per cent, tier 1 capital ratio 8.2 per cent. • Final dividend of 23.5p per share, making a total of 34.2p for the year. Results - excluding volatility, pension schemes related credit and, in 2005,profit on sale and closure of businesses, customer redress provisions andstrengthening of reserves for mortality • Income growth of 6 per cent exceeded cost growth of 2 per cent. Cost:income ratio improved to 50.8 per cent, from 52.8 per cent. • Trading surplus increased by £519 million, or 11 per cent, to £5,268 million. • Profit before tax increased by £263 million, or 8 per cent, to £3,713 million. • Earnings per share increased by 6 per cent to 46.9p. • Economic profit increased by 6 per cent to £1,692 million. • Post-tax return on average shareholders' equity was broadly stable at 25.1 per cent. Key operating highlights • Balanced and continuing trading momentum with income up 6 per cent and trading surplus up 11 per cent. All divisions showing good growth. • Excellent cost control. Income growth exceeded cost growth of 2 per cent, delivering widened positive jaws. Group-wide productivity improvement programme ahead of schedule. In 2008, the net annual benefits of this programme are expected to increase to £250 million. • Strong second half performance. Income growth of 7 per cent exceeded cost growth of 3 per cent, compared to the second half of 2005. • Accelerating income momentum in UK Retail Banking, with a more balanced sales mix. Overall product sales up 16 per cent. Income up 4 per cent, costs reduced by 2 per cent resulting in trading surplus increasing by 10 per cent. Second half income growth accelerated to 6 per cent. • Excellent growth in Scottish Widows with a 24 per cent increase in the present value of new business premiums. Insurance and Investments profit before tax, adjusting for the impact of capital repatriation in 2005 and insurance grossing, increased by 15 per cent. • Continued strong trading momentum in Wholesale and International Banking supported by a 46 per cent increase in cross-selling income. Income growth of 8 per cent exceeded cost growth of 4 per cent; trading surplus increased by 14 per cent. • Overall credit quality remains satisfactory. Strong corporate asset quality continues; retail impairment charge lower in the second half of 2006, compared to the first half. Rate of growth in unsecured retail lending impairment charge in 2007 expected to be significantly lower than in 2006. Page 2 of 52 SUMMARY OF RESULTS 2006 2005 Change £m £m % Results - statutoryTotal income, net of insurance claims 11,104 10,540 5Operating expenses 5,301 5,471 3Trading surplus 5,803 5,069 14Impairment losses on loans and advances 1,555 1,299 (20)Profit before tax 4,248 3,820 11Economic profit (page 44, note 14) 1,855 1,616 15Profit attributable to equity shareholders 2,803 2,493 12Earnings per share (page 44, note 15) 49.9p 44.6p 12Post-tax return on average shareholders' equity 26.6% 25.6% Results - excluding volatility, pension schemes related credit and, in 2005, profit on sale and closure ofbusinesses, customer redress provisions and strengthening of reserves for mortalityTotal income, net of insurance claims 10,697 10,070 6Operating expenses 5,429 5,321 (2)Trading surplus 5,268 4,749 11Impairment losses on loans and advances 1,555 1,299 (20)Profit before tax 3,713 3,450 8Economic profit 1,692 1,601 6Earnings per share 46.9p 44.2p 6Post-tax return on average shareholders' equity 25.1% 25.5% Shareholder valueClosing market price per share (year end) 571.5p 488.5p 17Total market value of shareholders' equity £32.2bn £27.4bn 18Proposed dividend per share (page 51, note 20) 34.2p 34.2pTotal shareholder return 24.8% 10.9% 31 December 31 December 2006 2005 Change £m £m %Balance sheet - statutoryShareholders' equity 11,155 10,195 9Net assets per share (pence) 195 180 8Total assets 343,598 309,754 11Loans and advances to customers 188,285 174,944 8Customer deposits 139,342 131,070 6 Risk asset ratiosTotal capital 10.7% 10.9%Tier 1 capital 8.2% 7.9% Page 3 of 52 GROUP CHIEF EXECUTIVE'S STATEMENT+ 2006 was another strong year for the Group as we continued to make progressagainst our strategic plan and delivered both good growth and high returns. Weare reporting a growth in profits of 8 per cent and a 25.1 per cent return onequity, building on the momentum established in recent years. We also achieveda total return for shareholders of 24.8 per cent, which compares very favourablyto our peers. The results reflect a strong performance across each of our three divisions, aswe delivered good profitable growth in each, and once again we deliveredpositive jaws as the rate of growth in income exceeded that of costs. Our business model is based on building long lasting relationships with ourcustomers, meeting more of their financial needs and thereby generatingsustainable, high quality earnings growth. Our success is reflected in highercustomer satisfaction scores, rising levels of customer recruitment and asignificant increase in sales. We are continuing to grow strong customerfranchises that support our future development. We have established a strong track record of driving efficiency improvements andI am pleased that in 2006 we improved our cost:income ratio to 50.8 per cent,from 52.8 per cent in 2005. This was achieved by our continued commitment to arange of quality improvement programmes such as lean manufacturing, which enableus to enhance the service we deliver to our customers at a lower cost. We haveextended our Groupwide efficiency programme that is also allowing us tostructurally reduce our cost base. As we continue to improve our efficiency andeffectiveness, we are creating additional capacity for further investment tosupport our future growth plans. As we expected, we have seen signs of stabilisation in the unsecured consumerportfolio, which resulted in a reduction in retail impairments in the secondhalf of the year. This reflects our long established focus on lending toexisting customers, where we have better information, and tightening in ourcredit criteria in previous periods. Our secured consumer portfolios remain ingood shape, reflecting our traditional emphasis on the prime mortgagemarketplace. In the Corporate sector, asset quality has remained strong, withthe increase in impairments reflecting a reduction in recoveries, compared tolast year. One of the cornerstones of our business model is engaging our staff as webelieve this is critical to driving customer satisfaction. I am pleased that weagain achieved record employee engagement scores in 2006. These scores matchthose achieved by other high performing companies, and reflect the focus weplace on developing our people in support of our strategy. We have alsocontinued to strengthen the broader management team, which is enhancing ourability to grow the business in a sustainable fashion. I am pleased with the progress we made during the year. In line with the secondphase of our strategic plan, we are building strong customer franchises,improving our product capabilities, enhancing our processing efficiency andworking our capital harder. We have made considerable progress across each ofthe divisions. The Retail Bank delivered a 5 per cent improvement in profit before tax, as therate of revenue growth accelerated from 3 per cent in the first half to 6 percent in the second. The strong growth in the trading surplus, up 10 per cent,was underpinned by positive jaws of 6 percentage points as income growth of 4per cent was accompanied by productivity improvements that led to costs beingreduced by 2 per cent. + see footnote on page 7 Page 4 of 52 The Retail Bank has made considerable progress against its key priorities. Byenhancing our customer service, re-engineering processes and developing a seriesof new and innovative products and services, we are able to offer customerscompelling reasons to choose Lloyds TSB. The success is reflected, for instance, in increased levels of new targetcurrent account customer recruitment, which rose 59 per cent year on year. Inaddition, total sales volumes in the Retail Bank grew by 16 per cent, led by a30 per cent increase in branch sales. Of particular note has been the change inthe sales mix and the development of better quality, more annuity-like revenuestreams through increased volumes of savings and bancassurance products. In Insurance and Investments, profit before tax on a like-for-like basisincreased by 15 per cent. We have excellent income growth, of 12 per cent, andfirm cost control, which resulted in positive jaws of 6 percentage points. Eachof the businesses within the division performed strongly and we saw goodprofitable growth through both the branch network and IFA distribution channels. Scottish Widows delivered another very good performance, with sales rising 24per cent on the prior year and we increased our new business profit by 36 percent. We continue to deliver on our bancassurance performance, with a 62 percent increase in sales, supported by our simplified product range and newcustomer offers. In the IFA channel, our emphasis is on growing the businessprofitably and we saw an increase in sales of 14 per cent. Scottish Widows remains very well capitalised and in addition to the payment ofa £206 million regular dividend to the Group in March 2006, a further £540million distribution was made in December 2006. We continue to explore a numberof opportunities to repatriate further surplus capital from Scottish Widows in2007. Our General Insurance business continued to grow successfully, delivering a 16per cent growth in profits. The results particularly reflect the growth insales to our franchise customers in retail and Business Banking, as well ascontinued investment in enhancing our service performance and claims processingcapacity. In Wholesale and International Banking, we made further excellent progress inour core businesses with the division delivering an 8 per cent increase inprofit before tax. This has been built on our two key franchises, CorporateMarkets and Business Banking, and they again delivered excellent levels ofprofitable growth. Whilst we are continuing to invest in these franchises tosupport our growth ambitions, this was achieved within our discipline ofpositive jaws with income growth of 8 per cent whilst costs grew by 4 per cent.The division also includes the Asset Finance business, which was affected by themarket-wide slowdown in consumer lending and increased impairments in its retailportfolios. Our Corporate Markets business delivered another excellent performance, with a13 per cent improvement in profits, supported by a 48 per cent increase incross-selling income. The improvement in profitability reflects the success ofour strategy of integrating our product and relationship businesses to meet ourcustomers' needs. We are continuing to receive external recognition for ourachievements and we were especially pleased to be awarded the CBI Corporate Bankof the Year Award for the second year running in 2006. We are maintaining ourfocus on building relationships and this is helping us to sustain strong assetquality performance in this portfolio. Page 5 of 52 The performance in Business Banking is again underpinned by a very goodperformance in sales, as we continue to attract a market leading share ofbusiness start-ups. We are delivering on our strategy of building deepercustomer relationships, with good levels of growth in customer lending anddeposits, as well as continuing to raise the level of fee income. This helpedto drive growth in profits of 26 per cent. Outlook Turning to 2007, we are well positioned to drive further growth as we continueto embed our business model. Whilst we are likely to face challenges in termsof the slower rate of growth in the unsecured consumer credit market and theincreasing cost of regulation, each of the divisions has now established astrong track record for delivering enhanced customer satisfaction and animproved sales performance, which is resulting in profitable business growth.We will also continue to deliver on our productivity programmes across thebusiness. In addition to improving our efficiency and effectiveness, these alsoresult in better customer satisfaction and enhance our ability to fund increasedinvestment for future growth. We are a customer focused organisation, and our improved customer satisfactionscores are an important factor in our continued success. In 2007, we willimplement a further range of new products and services that meet the needs ofour customers, which are underpinned by our 'treating customers fairly'principles and that reinforce our strategy of developing deep, long-lastingcustomer relationships. Over the past few years, we have developed a strongrisk and control infrastructure and this plays an important role in enabling usto drive profitable growth in a controlled and sustainable fashion. The Group's key market place is the UK, in the retail and corporate banking, andinsurance sectors. Retail banking markets have shown strong rates of growth inrecent years, notably in unsecured consumer borrowing but the combination ofhigher interest rates and higher living costs have started to normalise futuregrowth expectations. We forecasted this change last year and have increasinglyfocused our strategies towards non-lending related product sales and have madegood progress in growing current account, bank savings and bancassurance productsales. The markets for mortgage lending, bank savings and life, pensions andinvestment products are expected to continue to show good rates of growth overthe next few years and this will support our growth plans. Wholesale markets have shown strong growth over the past several years, andcyclically low levels of bad debt. Our opportunities in these markets centre ondeepening our customer relationships and cross-selling more fee-based productsto our corporate and small business customers. Over the last few years, we haveincreased cross-selling income substantially, and we believe there is still agreat opportunity. In the competitive financial services market, and with customers able toexercise choice amongst alternative providers, shareholder and customer valuecreation are closely linked. Shareholder value is created by attracting andretaining customers and winning a greater share of their financial servicesbusiness. We have a significant opportunity to leverage our customerrelationships to build market share in other products. We have significantstrengths, in our portfolio of high quality brands, our customer franchises, ourmulti-channel distribution capability, our high levels of customer satisfactionand our knowledge and understanding of our customers. Our growth will come fromleveraging these key strengths. We believe that successful banks benefit from operating in a vibrant and healthysociety. Many thousands of our staff participate in activities that make asignificant contribution to the communities in which they live and work. Inaddition, the four Lloyds TSB Foundations have played a significant role insupporting a broad range of charities, across the United Kingdom, and make acritical difference to many thousands of people. Page 6 of 52 Summary In summary, 2006 was another strong year for the Group. We have delivered agood financial performance whilst continuing to build our customer franchises tosupport future earnings growth. We will continue to extend the reach and depthof our customer relationships whilst improving productivity and efficiency in2007 and beyond. In doing so, I believe that we can deliver sustaineddouble-digit economic profit growth over time. Finally, let me again express my continued thanks to all of the staff who workfor the Lloyds TSB Group. They deliver great service for our customers andtheir wonderful efforts drive our growing success. Many thousands of our staffare also shareholders in the Group, and I am delighted that they continue toparticipate in the success of the company. J Eric Daniels Group Chief Executive + to enable meaningful comparisons to be made with 2005, the commentaries inthis statement exclude volatility, the 2006 pension schemes related credit and,in 2005, profit on sale and closure of businesses, customer redress provisionsand the strengthening of reserves for annuitant mortality. Page 7 of 52 SUMMARISED SEGMENTAL ANALYSIS 2006 Wholesale Group UK Insurance and Central excluding Retail and International group insurance Insurance Banking Investments** Banking items gross up gross up** Group £m £m £m £m £m £m £m Net interest income 3,642 56 2,385 (457) 5,626 78 5,704Other income 1,621 1,740 1,827 68 5,256 8,306 13,562Total income 5,263 1,796 4,212 (389) 10,882 8,384 19,266Insurance claims - (200) - - (200) (8,369) (8,569)Total income, net of 5,263 1,596 4,212 (389) 10,682 15 10,697 insurance claimsOperating expenses (2,476) (646) (2,264) (51) (5,437) 8 (5,429)Trading surplus (deficit) 2,787 950 1,948 (440) 5,245 23 5,268Impairment losses on loans (1,238) - (308) (9) (1,555) - (1,555)and advancesProfit (loss) before tax+ 1,549 950 1,640 (449) 3,690 23 3,713Pension schemes relatedcredit - - - 128 128 - 128Profit (loss) before tax* 1,549 950 1,640 (321) 3,818 23 3,841Volatility- Banking - - - (3) (3) - (3)- Insurance - 84 - - 84 - 84- Policyholder interests - - - - - 326 326Profit (loss) before tax 1,549 1,034 1,640 (324) 3,899 349 4,248 2005 Net interest income 3,483 79 2,265 (393) 5,434 310 5,744Other income 1,574 1,587 1,628 39 4,828 11,684 16,512Total income 5,057 1,666 3,893 (354) 10,262 11,994 22,256Insurance claims - (197) - - (197) (11,989) (12,186)Total income, net of 5,057 1,469 3,893 (354) 10,065 5 10,070 insurance claimsOperating expenses (2,522) (607) (2,181) (24) (5,334) 13 (5,321)Trading surplus (deficit) 2,535 862 1,712 (378) 4,731 18 4,749Impairment losses on (1,065) - (188) (46) (1,299) - (1,299)loans and advancesProfit (loss) before tax+ 1,470 862 1,524 (424) 3,432 18 3,450Customer redress (150) - - - (150) - (150)provisionsStrengthening of reservesfor mortality - (155) - - (155) - (155)Profit (loss) before tax* 1,320 707 1,524 (424) 3,127 18 3,145Volatility- Banking - - - (124) (124) - (124)- Insurance - 438 - - 438 - 438- Policyholder interests - - - - - 311 311Profit (loss) on sale and - - (6) 56 50 - 50closure of businessesProfit (loss) before tax 1,320 1,145 1,518 (492) 3,491 329 3,820 * excluding volatility and, in 2005, profit (loss) on sale and closure ofbusinesses; + also excludes pension schemes related credit and, in 2005,customer redress provisions and the strengthening of reserves for mortality. ** the Group's income statement includes substantial amounts of income andexpenditure which are attributable to the policyholders of the Group's long-termassurance funds. These items have no impact upon the profit attributable toequity shareholders and are separately analysed within the segmental analysis inorder to provide a clearer representation of the underlying trends within theInsurance and Investments segment. In the summarised segmental analysis above, the results of the Goldfishbusiness, which was sold in December 2005, are included in Central group items. Page 8 of 52 GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE In 2006, statutory profit before tax was £4,248 million, an increase of £428million, or 11 per cent, compared to £3,820 million in 2005. Profitattributable to equity shareholders increased by £310 million, or 12 per cent,to £2,803 million and earnings per share increased by 12 per cent to 49.9p. To enable meaningful comparisons to be made with 2005, the income statementcommentaries below exclude volatility, the 2006 pension schemes related creditand, in 2005, profit on sale and closure of businesses, customer redressprovisions and the strengthening of reserves for annuitant mortality. Continued earnings momentum Profit before tax increased by £263 million, or 8 per cent, to £3,713 million,underpinned by continued momentum in all divisions. Revenue growth of 6 percent exceeded cost growth of 2 per cent, with each division delivering strongeryear-on-year revenue growth than cost growth. Our strategy to deepen customerrelationships at the same time as improving productivity has led to stronglevels of trading surplus growth in each division. Earnings per share increasedby 6 per cent to 46.9p and economic profit also increased by 6 per cent to£1,692 million. The post-tax return on average shareholders' equity remainsstrong at 25.1 per cent. Balanced income growth Overall income growth of 6 per cent reflects good progress in delivering ourstrategies of increasing income from both new and existing customers, with goodgrowth in both assets and liabilities, as well as increased fee income. Group net interest income, excluding insurance grossing, increased by £192million, or 4 per cent. Strong levels of customer lending growth in BusinessBanking and Corporate Markets, and good growth in mortgages, more than offsetthe expected slowdown in the rate of growth in unsecured personal lending.Total assets increased by 11 per cent to £344 billion, with an 8 per centincrease in loans and advances to customers. Customer deposits increased by 6per cent to £139 billion, supported by good growth in current account creditbalances and savings balances in the retail bank. The net interest margin from our banking businesses (page 37, note 4) decreasedby 11 basis points, from 3.11 per cent in 2005 to 3.00 per cent in 2006. Whilstindividual product margins were broadly stable, stronger growth in finer marginmortgage and corporate lending led to a negative mix effect which accounted for8 basis points of the margin decline. Other income, net of insurance claims and excluding insurance grossing,increased by £425 million, or 9 per cent, to £5,056 million. This reflected animprovement in fees and commissions receivable as a result of higher income fromstrong growth in added value current accounts and private banking fees, and anincrease in Open-ended Investment Company (OEIC) sales. In addition, goodgrowth was achieved in cross-selling income from sales and structuring, and debtcapital markets activities within Corporate Markets. Page 9 of 52 Excellent cost control The Group continues to make significant investment in improving levels ofservice quality and processing efficiency, the benefits of which are seen in anexcellent cost performance. During 2006, operating expenses increased by only 2per cent to £5,429 million. Over the last 12 months, staff numbers have fallenby 4,167 (6 per cent) to 62,630, largely as a result of greater efficiency inback office processing centres, where the unit costs of transaction processingcontinue to fall, and the increased automation of administration carried out inthe branch network. These improvements in operational effectiveness haveresulted in a Group cost:income ratio which is 2 percentage points lower at 50.8per cent. The Group's programme of productivity improvement initiatives has exceeded its2006 target, delivering net benefits of £47 million, largely reflecting earlierthan expected procurement benefits. In 2006 we invested £95 million in a numberof initiatives, and delivered benefits of £142 million. During 2007, we expectnet benefits to total approximately £125 million and, in 2008, the Group expectsto increase the net annual benefits of the programme to circa £250 million. Satisfactory asset quality Impairment losses on loans and advances increased by 20 per cent to £1,555million. Our impairment charge expressed as a percentage of average lending was0.83 per cent, compared to 0.76 per cent in 2005 (page 40, note 9). Impairedassets were 3 per cent lower at £4,006 million, and now represent 2.0 per centof total lending, down from 2.3 per cent at 31 December 2005. In UK Retail Banking, impairment losses on loans and advances increased by £173million, or 16 per cent, to £1,238 million, reflecting more customers withhigher levels of indebtedness experiencing repayment difficulties, as well ashigher levels of customer insolvency. As a result of tightening our creditcriteria the quality of new business written over the last two years hasimproved. This, as well as improvements in the Group's collection proceduresand better than assumed recoveries, has resulted in a reduction in the retailimpairment charge in the second half of 2006, compared to the first half. Towards the end of 2006 we experienced some signs of stabilisation in the rateof our customers filing for bankruptcy and a slowdown in the rate of growth inIndividual Voluntary Arrangements (IVAs). In addition, the increased sharing ofindustry-wide customer data, particularly with regard to credit card use, hasimproved our customer understanding further and this has led to a reduction in anumber of credit limits. Whilst the rate of growth in the number of customersfiling for bankruptcy and IVAs remains a key factor in the outlook for retailimpairment, we expect that the rate of growth in the unsecured retail lendingimpairment charge in 2007 will be significantly lower than that experienced in2006. As expected, the Wholesale and International Banking charge for impairmentlosses on loans and advances increased by £120 million to £308 million,reflecting lower levels of releases and recoveries in Corporate Markets than in2005, and a higher level of consumer finance lending impairment in the AssetFinance business. Overall asset quality remains good and the level of newcorporate provisions remained at a low level in 2006, although we expect areturn to more normal levels of impairment over time. Page 10 of 52 Capital position remains robust At the end of December 2006, the total capital ratio was 10.7 per cent and thetier 1 ratio 8.2 per cent. During the year, risk-weighted assets increased by 8per cent to £156.0 billion, as strong growth in our mortgage and CorporateMarkets businesses was partly offset by the impact of the Group's newsecuritisation programme. The Board has decided to maintain the final dividendat 23.5p per share, to make a total for the year of 34.2p. This represents adividend yield for shareholders of 6 per cent, calculated using the 31 December2006 share price of 571.5p. Over the last 12 months, we have significantly improved our capital flexibilitythrough the initiation of our securitisation programme and the repatriation offurther capital from Scottish Widows to the Group. We have also increased thevariety and flexibility of our capital raising programme, with the issuance ofboth sterling and US dollar preference shares, resulting in a more balancedcapital structure. During 2006, we completed two mortgage securitisationtransactions totalling over £10 billion as well as a £1 billion syntheticsecuritisation of commercial banking loans. Over the next few years, we expectto expand our securitisation programme to include a broader range of assetclasses. Scottish Widows remains strongly capitalised and, at the end of December 2006,the working capital ratio of the Scottish Widows Long Term Fund was an estimated18.9 per cent (page 45, note 16) and the risk capital margin was covered over 17times. In the second half of 2006, an additional capital repatriation of £540million was made to the Group, bringing the total for the year to approximately£750 million. This is in addition to capital repatriation of £1 billion in2005. We continue to examine opportunities to improve our capital efficiencyand have work under way that we believe will allow Scottish Widows to repatriatefurther capital to the Group in 2007, whilst maintaining a strong capitalposition. The Group is making good progress in its preparations for the introduction ofBasel 2. We commenced parallel running at the end of 2006, and our credit riskwaiver application was submitted in December 2006. Whilst our work is welladvanced, some uncertainty remains with regard to the regulatory treatment ofcertain issues for capital purposes. The Group expects to maintain satisfactorycapital ratios throughout the transition to Basel 2 in 2008, and continues toexpect no deduction of investments in insurance subsidiaries from tier 1 capitaluntil at least 2012. Introduction of EEV reporting Under IFRS, only insurance policies and discretionary participating investmentbusiness are accounted for on an embedded value basis. In 2006, this basis hasbeen revised to be consistent with relevant EEV Principles. Although there isno impact on the 2005 income statement, the impact on the 2006 income statementis to reduce profit before tax, excluding volatility, by £18 million (page 34,note 1). In line with industry best practice, the Group has introducedsupplementary disclosures which show life, pension and OEIC products accountedfor on an EEV basis, as we believe that EEV reporting provides for increasedclarity, transparency and comparability of financial information. On an IFRS basis, Scottish Widows' 2006 profit before tax, excluding volatility,totalled £730 million, whilst on an EEV basis, 2006 profit before tax, excludingvolatility and other non-recurring items, was £852 million. Similarly, theembedded value on an EEV basis at 31 December 2006 was £6,413 million (2005:£6,386 million), compared to the embedded value on an IFRS basis of £5,368million (2005: £5,478 million). Page 11 of 52 Improved Group pension schemes position The Group's defined benefit pension schemes' gross deficit at 31 December 2006improved by £1,195 million to £2,099 million, comprising net recognisedliabilities of £2,362 million partly offset by unrecognised actuarial gains of£263 million (page 41, note 10). This improvement largely reflects continuedstrong returns from the schemes' assets, Group contributions to the schemes andan increase in the real discount rate used to value the schemes' liabilities.The decision to stop augmenting the pension entitlement of employees takingearly retirement reduced the pension deficit by £129 million. In 2006, the Group reached agreement with the Trustees of the Group's twoprincipal pension schemes to fund the schemes' actuarial funding deficits ofapproximately £1.5 billion, as at 30 June 2005, over a period of ten years. TheGroup also indicated that it expected to continue making additional voluntarycontributions to the schemes. Further interim actuarial valuations of theschemes were carried out on behalf of the schemes' Trustees as at 30 June 2006;these valuations showed a significant reduction in the deficits to approximately£0.3 billion. Delivering strong and balanced trading momentum During 2006, the Group has delivered strong and balanced trading momentum, withgood sales growth, across all of the divisions. Substantial improvements inproductivity and operational efficiency have resulted in excellent cost controland widened positive jaws. Asset quality remains satisfactory, our post-taxreturn on equity remains high, economic profit continues to increase and we havea robust capital position. Helen A Weir Group Finance Director Page 12 of 52 DIVISIONAL PERFORMANCE UK RETAIL BANKING 2006 2005 Change £m £m %Net interest income 3,642 3,483 5Other income 1,621 1,574 3Total income 5,263 5,057 4Operating expenses (2,476) (2,522) 2Trading surplus 2,787 2,535 10Impairment losses on loans and advances (1,238) (1,065) (16)Profit before tax, before provisions for customer redress 1,549 1,470 5Provisions for customer redress - (150) Profit before tax* 1,549 1,320 17*excluding profit on sale and closure of businesses Cost:income ratio, before provisions for customer redress 47.0% 49.9% 31 December 31 December 2006 2005Total assets £108.4bn £102.9bn 5Risk-weighted assets - post securitisation £59.1bn £60.4bn (2)Risk-weighted assets - pre securitisation £64.2bn £60.4bn 6Customer deposits £75.7bn £71.0bn 7 Key highlights • Good income growth of 4 per cent, supported by a second half acceleration to 6 per cent. • Strong sales growth in each key distribution channel beginning to drive higher revenue growth. Overall sales up 16 per cent. Significant progress in the rebalancing of sales mix towards a broader set of products, with a continued focus on non-lending related revenue streams. • Excellent progress in growing the current account customer franchise, with a 59 per cent increase in target customer current account recruitment. • Excellent cost control, with a clear focus on improving processing efficiency and service quality. 2006 costs 2 per cent lower than in 2005. Positive jaws widened. Substantial improvement in cost:income ratio. • Rate of growth in impairment charge expected to slow significantly in 2007. Impairment charge up 16 per cent, reflecting marketwide deterioration in retail credit quality, however second half charge lower than that in the first half. • Continued improvements in levels of customer satisfaction. Page 13 of 52 UK RETAIL BANKING (continued) Profit before tax from UK Retail Banking, before provisions for customerredress, increased by £79 million, or 5 per cent, to £1,549 million, as stronglevels of business growth were partly offset by the impact of higher impairmentlosses. Increased income from the Group's mortgage lending and customer depositportfolios more than offset the impact of lower levels of unsecured consumerlending and related insurance products. Total income increased by £206 million,or 4 per cent, notwithstanding a significant decrease in income from creditorinsurance, whilst costs fell by 2 per cent. As a result, the trading surplusincreased by 10 per cent. Product net interest banking margins remained broadly stable as lower personalloan margins were offset by improved deposit and credit card margins. Theadverse mix effect of finer margin mortgages growing faster than unsecuredpersonal lending led to a slight overall reduction in the divisional margin. Operating expenses, excluding provisions for customer redress, remained verywell controlled, decreasing by 2 per cent. The significant improvements made inthe rationalisation of back office operations to improve efficiency have beencombined with a substantial improvement in the levels of customer service andsatisfaction. We continue to increase the proportion of front office to backoffice staff in the branch network and have substantially improved our salesproductivity. During 2006, UK Retail Banking has made substantial progress in each of its keystrategic priorities: growing income from its existing customer base; expandingits customer franchise; and improving productivity and efficiency. In each ofthese areas, a key focus has been on improving sales of recurring incomeproducts, such as savings and bancassurance products. This has started togenerate a better quality, more annuity-like, revenue stream and has supportedthe accelerating rate of revenue growth in the second half of 2006, compared tothat in the first half of the year. Growing income from the customer base Overall sales increased by 16 per cent, with strong performance improvements ineach key distribution channel and over a broad range of products, particularlycurrent accounts, bank savings and OEICs. This growth has been supported byhigher levels of new product innovation during the year with the launch, forexample, of enhanced regular savings products. In addition, a number ofimproved service initiatives, such as the introduction of instant cheque valueand the recent 'Save the Change' launch, have been made. These have improvedboth customer value and our brand perception and will, we believe, createfurther shareholder value over time. Over the last 12 months, substantial progress has been made in re-balancing thesales mix towards an increasing focus on non-lending related income streams,with a significant year-on-year increase in the sale of added value currentaccounts, bank savings products, bancassurance products and in the level ofretail bank customer introductions to the Group's wealth management business.Our wider savings product range has led to an improved market share of banksavings and an increase in savings margins. Credit balances on current accountsand savings and investment accounts increased by 7 per cent to £75.7 billion,supported by good growth in Wealth Management and bank savings. Branch networksales rose by 30 per cent and product sales via the internet and telephoneincreased by 33 per cent as customers increasingly choose to buy through directchannels as well as through our branches. These increases were offset by a 15per cent reduction in sales from direct mail, following a significant reductionin our direct mailing activity, particularly in the credit card market. Page 14 of 52 UK RETAIL BANKING (continued) The Group has also continued to deliver good levels of growth in the mortgagebusiness, particularly focusing on better quality, prime mortgage business andseeking to maintain economic returns in what, in 2006, was a competitive market.Gross new mortgage lending for the Group totalled £27.6 billion (2005: £26.0billion). Mortgage balances outstanding increased by 8 per cent to £95.3billion and net new lending totalled £6.9 billion, resulting in a market shareof net new lending of approximately 10 per cent of the prime mortgage market and6.3 per cent of the overall mortgage market. In unsecured consumer lending, tightening of credit criteria over the last twoyears, together with the slowdown in consumer demand, has led to unsecuredconsumer credit balances remaining at broadly the same level as last year end.Personal loan balances outstanding at the year end were £11.1 billion, anincrease of 1 per cent, and credit card balances totalled £6.9 billion, adecrease of 5 per cent. Expanding the customer franchise In addition to growing product sales from existing customers, the Group has madeexcellent progress in expanding its customer franchise. Target customer currentaccount recruitment increased by 59 per cent, compared with last year. With arenewed focus on the student and graduate market, the Group has also madeconsiderable progress, and this has led to a 133 per cent increase in studentaccount recruitment and a doubling of market share in this market. Wealth Management continues to make strong progress. The Investment PortfolioService (IPS), launched in 2005, continues to attract both existing and newclients. Approximately two thirds of our existing clients have now moved acrossto IPS whilst new client recruitment is up 86 per cent and new funds undermanagement have grown by 88 per cent. Wealth protection sales have also seengood growth and banking deposits are up 16 per cent. This trend is expected tocontinue as we roll out further expansion plans, which include making morePrivate Bankers accessible to customers in key locations and reducing thecomplexity and cost of our private banking offers. Improving productivity and efficiency During 2006 we have made significant progress in reducing levels ofadministration and processing work carried out in branches, and increasing thenumber of branch network staff in customer facing areas and activities. Thishas resulted in a significant increase in sales and service resource, a higherlevel of product sales and a reduction of approximately 1,900 branch back-officeadministration roles. In addition, substantial progress has been made inimproving and streamlining sales processes leading to a significant increase inseller effectiveness, with more product sales per customer interview, andsignificant reductions in the time taken to, for example, open a current accountor transfer an account to us from another banking provider. Page 15 of 52 UK RETAIL BANKING (continued) Impairment growth expected to slow significantly in 2007 Impairment losses on loans and advances increased by £173 million, or 16 percent, to £1,238 million, reflecting the impact of more customers with higherlevels of indebtedness experiencing repayment difficulties, and higher levels ofbankruptcies and IVAs. The impairment charge as a percentage of average lendingwas 1.18 per cent, compared to 1.09 per cent last year. Over 99 per cent of newpersonal loans and 84 per cent of new credit cards sold during 2006 were toexisting customers, where the Group has a better understanding of an individualcustomer's total financial position. Mortgage credit quality remains good and,as a result, the impairment charge was £5 million lower at £8 million for theyear. The rate of growth in the number of our customers filing for bankruptcy and IVAsremains a key factor in the outlook for retail impairment. Towards the end of2006 we experienced some signs of stabilisation in the rate of customerbankruptcies and a slowdown in the rate of growth in IVAs. As a result, webelieve that the rate of growth in the retail lending impairment charge in 2007will be significantly lower than that experienced in 2006. Page 16 of 52 INSURANCE AND INVESTMENTS Excluding volatility 2006 2005 Change £m £m %Net interest income 56 79 (29)Other income 1,740 1,587 10Total income 1,796 1,666 8Insurance claims (200) (197) (2)Total income, net of insurance claims 1,596 1,469 9Operating expenses (646) (607) (6)Insurance grossing adjustment (see page 8) 23 18Profit before tax, before strengthening of reserves for 973 880 11mortalityStrengthening of reserves for mortality - (155)Profit before tax 973 725 34 Profit before tax analysisLife, pensions and OEICs* 701 655 7General insurance 243 209 16Scottish Widows Investment Partnership 29 16 81Profit before tax* 973 880 11 Present value of new business premiums (PVNBP) 9,740 7,842 24PVNBP new business margin (EEV basis) 3.6% 3.2% *excluding, in 2005, strengthening of reserves for mortality Key highlights • Significantly improved profit performance. Profit before tax, excluding strengthening of reserves for mortality, increased by 11 per cent to £973 million. On a like-for-like basis, adjusting for the impact of the £800 million capital repatriation in December 2005, profit before tax increased by 15 per cent. • Good income growth. On a similar like-for-like basis, income, net of insurance claims, increased by 12 per cent, exceeding cost growth of 6 per cent. • Excellent sales performance. 24 per cent increase in Scottish Widows' present value of new business premiums. - Excellent progress in increasing bancassurance sales, up 62 per cent, with OEIC sales more than doubled. - Good momentum maintained in sales through Independent Financial Advisers. Sales increased by 14 per cent, reflecting excellent growth in the sales of corporate pension products. • Improved profitability. Life, pensions and OEICs new business profit in Scottish Widows increased by 36 per cent and the post-tax return on embedded value increased to 9.3 per cent. Good improvement in new business margin, on an EEV basis, to 3.6 per cent. • Excellent capital position of Scottish Widows maintained. Scottish Widows continues to deliver improving capital efficiency and self-financing growth, and a further £540 million of capital was repatriated to the Group in the second half of 2006. Good progress with General Insurance's strategy to develop its manufacturingbusiness and build distribution capability. Clear focus on improvingunderwriting, supply chain efficiency and claims management contributed toprofit before tax increasing by 16 per cent. Page 17 of 52 INSURANCE AND INVESTMENTS (continued) Scottish Widows Life, Pensions and OEICs Profit before tax increased by £46 million, or 7 per cent, to £701 million. InDecember 2005, Scottish Widows repatriated £800 million of surplus capital tothe Group as part of a capital restructuring programme. This capitalrepatriation has the effect of reducing investment earnings and increasingfunding charges by a total of £38 million in 2006. Adjusting 2005 for thisimpact, profit before tax increased by 14 per cent. During 2006 Scottish Widows has made strong progress in each of its key businesspriorities: to maximise bancassurance success; to profitably grow IFA sales; toimprove service and operational efficiency and to optimise capital management. Maximising bancassurance success In 2006, Scottish Widows' bancassurance sales increased by 62 per cent, buildingon the success of the simplified product range for distribution through theLloyds TSB branch network, Business Banking and Wealth Management channels.Sales of OEICs were particularly strong, more than doubling year on year throughthe bancassurance channel. Towards the end of 2006, Scottish Widows launched anew protection product platform 'Protection for Life', which is expected toresult in an increase in protection sales during 2007. In addition, in early2007 a new protected OEIC product was launched in the bancassurance market tosupport sales of savings and investment products. Profitably growing IFA sales Sales through the IFA distribution channel increased by 14 per cent, largelyreflecting the introduction of improved product and service offerings forcorporate pensions which, together with increased promotional activity, resultedin excellent growth in corporate pension sales via the IFA channel, and goodlevels of post A-Day growth in retirement income products. Scottish Widows hasalso developed a new pensions platform for launch in early 2007 to supportfuture pre and post retirement sales, and continues to increase its segmentalfocus on the IFA market to ensure maximum value is obtained from this market. Improving service and operational efficiency Operational efficiencies have continued to improve during 2006, and expensegrowth has been controlled to significantly below the rate of income growth.Scottish Widows' customer satisfaction levels continued to improve, as didlevels of IFA satisfaction. Scottish Widows has again won a significant numberof awards for service quality. Optimising capital management Scottish Widows' strong capital management has been reinforced by continuing todeliver improving capital efficiency and self-financing growth, a more capitalefficient product profile, and improved internal rates of return and newbusiness margins. As a result, the post-tax return on embedded value increasedto 9.3 per cent, from 8.0 per cent last year. During 2006, surplus capitalgenerated, excluding volatility and non-recurring items, in excess of theregular annual dividend totalled £227 million. £540 million of capital wasrepatriated to Lloyds TSB in December 2006, giving a total capital repatriationto the Group of over £1.7 billion over the last two years. We continue toexplore a number of opportunities to repatriate surplus capital from ScottishWidows, in order to further improve capital efficiency. Page 18 of 52 INSURANCE AND INVESTMENTS (continued) Industry practice has historically been to measure new business sales on aweighted Annual Premium Equivalent (APE) basis, where APE is calculated as thevalue of regular premium sales plus 10 per cent of single premium sales (page50, note 18). Industry practice is moving towards an alternative basis ofcalculation - Present Value of New Business Premiums (PVNBP). This iscalculated as the value of single premiums plus the discounted present value offuture expected regular premiums. An analysis of new business sales on a PVNBPbasis can be found in the following table. Present value of new business premiums (PVNBP) 2006 2005 Change £m £m %Life and pensions:Savings and investments 1,300 1,465 (11)Protection 232 255 (9)Individual pensions 2,219 2,197 1Corporate and other pensions 1,961 1,517 29Retirement income 960 658 46Managed fund business 348 535 (35)Life and pensions 7,020 6,627 6OEICs 2,720 1,215 124Life, pensions and OEICs 9,740 7,842 24 Single premium business 7,321 5,636 30Regular premium business 2,419 2,206 10Life, pensions and OEICs 9,740 7,842 24 Bancassurance 3,421 2,114 62Independent financial advisers 5,358 4,698 14Direct 613 495 24Managed fund business 348 535 (35)Life, pensions and OEICs 9,740 7,842 24 New business margin (PVNBP) 3.6% 3.2% Overall, sales in 2006 increased by 24 per cent reflecting, in particular,strong growth in the sales of OEICs and corporate pension products.Bancassurance sales improved significantly and were 62 per cent higher at £3,421 million, including excellent growth in the sales of OEICs through the branchnetwork and to Lloyds TSB private banking clients. IFA sales grew 14 per centto £5,358 million, supported by significant product and service enhancements inpensions and retirement income. Sales of savings and investment productsdeclined during the year, following the limiting of investment in the PropertyFund in June 2006, but this reduction was more than offset by a significantincrease in the sale of OEIC and pension products. Page 19 of 52 INSURANCE AND INVESTMENTS (continued) Results on a European Embedded Value (EEV) basis In May 2004, the Chief Financial Officers Forum ('CFO Forum') published itsEuropean Embedded Value Principles and Guidance which set out a series of agreedstandards for embedded value reporting. These EEV Principles establish aconsistent treatment for the financial information provided for insurance andinvestment contracts and, in our view, allow a fuller recognition of theeconomic value being created. Compared with traditional embedded value, EEVPrinciples also provide a more appropriate valuation of in-force businesswhich explicitly takes into account the cost of financial options andguarantees, and required capital, as well as non-market risks, such asmortality. Lloyds TSB continues to report under IFRS, however, in line with industry bestpractice, the Group has introduced supplementary financial reporting relating toScottish Widows on an EEV basis. The following EEV supplementary results havebeen prepared in accordance with the CFO Forum's EEV Principles and Guidance. Full details of the Group's adoption of EEV Principles are available on theGroup's website at www.investorrelations.lloydstsb.com Page 20 of 52 INSURANCE AND INVESTMENTS (continued) 2006 2005 Life and OEICS Total Life and Total Change Pensions Pensions OEICS % £m £m £m £m £m £mNew business profit 287 59 346 231 23 254 36Existing business- Expected return 361 42 403 330 31 361 12- Experience variances 35 34 69 5 7 12- Assumption changes (129) (4) (133) (147) - (147) 267 72 339 188 38 226 50Expected return on 160 7 167 202 7 209 (20)shareholders' net assetsProfit before tax, 714 138 852 621 68 689 24adjusted for capitalrepatriation*Impact of £800 million - - - 38 - 38capital repatriation toGroupProfit before tax* 714 138 852 659 68 727 17 New business margin (PVNBP) 4.1% 2.2% 3.6% 3.5% 1.9% 3.2% Post-tax return on 9.3% 8.0%embedded value* *excluding volatility, other items and, in 2005, the strengthening of reserves for mortality. Adjusting for the impact of last year's capital repatriation, EEV profit beforetax from the Group's life, pensions and OEICs business increased by 24 per centto £852 million. The Group's strategy to improve its returns by focusing onmore profitable, less capital intensive, business whilst constantly seeking toimprove process and distribution efficiency has led to a 36 per cent increase innew business profit to £346 million. As a result of improvements in keyindividual product margins and strong sales of corporate pensions and OEICs thenew business margin increased to 3.6 per cent, compared with 3.2 per cent for2005. Existing business profit increased by 50 per cent. Expected return hasincreased by 12 per cent to £403 million reflecting higher earnings on thelarger value of in-force business at the start of the year. Positive experiencevariances were driven by lower than expected take-up rates on guaranteed annuityoptions in Life and Pensions and by favourable lapse experience in OEICs. Thesewere more than offset by negative assumption changes, primarily in respect oflapse assumptions in Life and Pensions, and resulted in an overall net chargefor experience variances and assumption changes, on an EEV basis, of £64million. The equivalent net charge on an IFRS basis was £7 million. Theexpected return on shareholders' net assets has decreased, largely as a resultof lower assumed rates of return on free assets. Overall the post-tax return on embedded value increased to 9.3 per cent from 8.0 per cent. Scottish Widows Investment Partnership Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased to£29 million, compared with £16 million in 2005, reflecting increased revenuesfrom higher funds under management throughout the period. SWIP's assets undermanagement increased by 7 per cent to £102 billion, and Groupwide funds undermanagement increased by 4 per cent to £126 billion. Page 21 of 52 INSURANCE AND INVESTMENTS (continued) General insurance 2006 2005 Change £m £m %Commission receivable 629 681 (8)Commission payable (664) (695) 4Underwriting income (net of reinsurance) 600 562 7Other income 35 18Net operating income 600 566 6Claims paid on insurance contracts (net of reinsurance) (200) (197) (2)Operating income, net of claims 400 369 8 Operating expenses (157) (160) 2Profit before tax 243 209 16 Claims ratio 32% 34%Combined ratio 80% 81% Profit before tax from our general insurance operations increased by £34million, or 16 per cent, to £243 million. Operating income, net of claims,increased by 8 per cent whilst costs fell by 2 per cent. Good progresscontinues to be made in implementing new platforms for underwriting and claimsprocesses. Net operating income improved by £34 million, or 6 per cent, as 7 per centgrowth in underwriting income was offset by a reduction in broking commissions,particularly relating to creditor insurance, and associated profit sharingcommissions. The Group's corporate partnering capability was further extendedduring 2006 with new distribution agreements secured with Argos and Pearl Group. Excluding the impact of lower creditor insurance business, new sales through theUK Retail Bank have been robust, with a 42 per cent increase in home insurancegross written premiums. Our presence in the small business insurance marketcontinues to improve with an increase of 10 per cent in new business grosswritten premiums. Internet sales are becoming increasingly important and nowrepresent 33 per cent of direct sales volumes. Whilst claims increased slightly to £200 million, the claims ratio improved to32 per cent (2005: 34 per cent), as further progress in re-engineering theclaims process and improvements in the cost effectiveness of the claims supplychain offset the impact of higher subsidence related claims. The combined ratiorelating to the underwriting business improved to 80 per cent. Page 22 of 52 WHOLESALE AND INTERNATIONAL BANKING 2006 2005 Change £m £m %Net interest income 2,385 2,265 5Other income 1,827 1,628 12Total income 4,212 3,893 8Operating expenses (2,264) (2,181) (4)Trading surplus 1,948 1,712 14Impairment losses on loans and advances (308) (188) (64)Profit before tax 1,640 1,524 8 Cost:income ratio 53.8% 56.0% 31 December 31 December 2006 2005Total assets £147.8bn £124.0bn 19Risk-weighted assets - post securitisation £91.8bn £80.1bn 15Risk-weighted assets - pre securitisation £92.6bn £80.1bn 16Customer deposits £61.2bn £57.9bn 6 Profit before tax by business unitCorporate Markets 1,105 976 13Business Banking 247 196 26Asset Finance 190 219 (13)International Banking and other businesses 98 133 (26) 1,640 1,524 8 Key highlights • Continued strong trading momentum. Substantial increase in trading surplus, up 14 per cent, to £1,948 million, and an 8 per cent increase in profit before tax. • Strong income growth, up 8 per cent, supported by a 46 per cent increase in cross-selling income and higher Corporate Markets and Business Banking volumes. • Widening of positive jaws. Income growth exceeded cost growth of 4 per cent. Improving business momentum has led to an accelerated investment in people and systems to support new product capabilities. • Corporate asset quality remains strong, despite a rise of £120 million in impairment losses, as a result of the high level of corporate releases and recoveries in 2005 not being repeated, and higher levels of impairment in the Asset Finance consumer portfolios. • Further good progress in building our Corporate Markets business, with a 19 per cent increase in Corporate Markets trading surplus. • Continued strong franchise growth in Business Banking, with 23 per cent growth in trading surplus, and 26 per cent growth in profit before tax. Lloyds TSB has retained its leading position as the bank of choice for start-up businesses. Page 23 of 52 WHOLESALE AND INTERNATIONAL BANKING (continued) In Wholesale and International Banking, the Group has continued to makesignificant progress in its strategy to leverage the Group's strong corporateand small business customer franchises and, in doing so, become the best UKmid-market focused wholesale bank. We have continued to develop new productrevenue streams, particularly in areas such as securitisation, structured creditand credit loan trading which, coupled with a strong focus on targeted corporatecustomer segments and Corporate Markets' cross-selling income growth remainingstrong, has supported good levels of overall income growth. Revenue growth hascontinued to exceed cost growth notwithstanding significant investment beingmade in the enhancement of our product and distribution capabilities,particularly in the Corporate Markets business. Profit before tax increased by £116 million, or 8 per cent, to £1,640 million.Good trading momentum has continued and has generated strong income growth of 8per cent, driven by Corporate Markets income growth of 15 per cent. Thisexceeded cost growth of 4 per cent, leading to a reduction in the cost:incomeratio to 53.8 per cent, from 56.0 per cent last year. Trading surplus increasedby £236 million, or 14 per cent, to £1,948 million. Net interest income increased by £120 million, or 5 per cent, reflecting higherincome from strong growth in customer lending and customer deposits. Thebanking net interest margin reduced, largely reflecting the mix effect of slowergrowth in the wider margin Asset Finance business, and lower Corporate Marketsand Business Banking margins reflecting a higher proportion of finer marginsecured lending being written. Other income increased by £199 million, or 12per cent, as a result of good levels of growth in financial markets productsales and credit structuring. In addition, fee and other transactional incomethroughout the division benefited from volume growth across a broad range ofcustomer activity. Costs were 4 per cent higher at £2,264 million, reflectinghigher staff costs resulting from the continuing investment in people, processesand systems, as the Group builds up its Corporate Markets product capability andexpertise. This increased investment was mitigated by operational efficienciesachieved in Business Banking and Asset Finance. As expected, the charge for impairment losses on loans and advances increased by£120 million to £308 million, as a result of the high level of releases andrecoveries in Corporate Markets in 2005 which were not repeated in 2006, and ahigher level of consumer finance lending impairment in the Asset Financebusiness. Whilst overall corporate and small business asset quality remainsstrong and the level of new corporate provisions remained at a low level in2006, we continue to expect some normalisation in the impairment charge over thenext few years. Page 24 of 52 WHOLESALE AND INTERNATIONAL BANKING (continued) Corporate Markets 2006 2005 Change £m £m %Net interest income 891 777 15Other income 923 807 14Total income 1,814 1,584 15Operating expenses (722) (665) (9)Trading surplus 1,092 919 19Net impairment credit on loans and advances 13 57 (77)Profit before tax 1,105 976 13 In Corporate Markets, profit before tax grew by 13 per cent, driven by stronglevels of income growth. Income increased by 15 per cent, supported bysignificantly higher levels of cross-selling income. By building new productrevenue streams in areas such as structured products and debt capital markets,and targeting and developing relationships in selected corporate customersegments, Corporate Markets has created a broader, more diversified stream ofrevenues to underpin future revenue growth. There has also been significantprogress in the delivery of our strategy focused on improved origination anddistribution capabilities in the mid-sized corporate business. Operatingexpenses increased by 9 per cent to £722 million, reflecting further investmentin people, premises and systems to support ongoing business growth. The tradingsurplus increased by 19 per cent. The net impairment credit reduced to £13million, reflecting the lower level of releases and recoveries. Business Banking 2006 2005 Change £m £m %Net interest income 596 551 8Other income 255 248 3Total income 851 799 7Operating expenses (517) (527) 2Trading surplus 334 272 23Impairment losses on loans and advances (87) (76) (14)Profit before tax 247 196 26 Profit before tax in Business Banking grew by £51 million, or 26 per cent,reflecting strong growth in business volumes, further improvements in growingthe Business Banking customer franchise and progress in improving operationalefficiency. Strong income growth combined with tight cost control led to animprovement of over 5 percentage points in the cost:income ratio. Costs remaintightly controlled and were 2 per cent lower. Business Banking continued todevelop and grow its customer franchise strongly, with customer recruitment ofsome 118,000 during 2006, reflecting a market-leading position in the start-upmarket. Asset quality in the Business Banking portfolios remains strong. Theimpairment charge increased by £11 million to £87 million, largely reflecting alower level of releases and recoveries than in 2005. Page 25 of 52 WHOLESALE AND INTERNATIONAL BANKING (continued) Asset Finance 2006 2005 Change £m £m %Net interest income 600 640 (6)Other income 418 366 14Total income 1,018 1,006 1Operating expenses (583) (582) -Trading surplus 435 424 3Impairment losses on loans and advances (245) (205) (20)Profit before tax 190 219 (13) Profit before tax in Asset Finance decreased by 13 per cent to £190 million,reflecting higher levels of consumer finance impairment losses. Incomeincreased by £12 million, or 1 per cent, as good fee income growth in theconsumer lending business and growth in the asset backed lending and contracthire businesses, was largely offset by the impact of the tightening of lendingcredit criteria in the consumer lending portfolios. Lloyds TSB CommercialFinance has continued to be a major presence in its market, with a 19 per centmarket share measured by client numbers, and the motor and leisure businesscontinues to be the largest independent lender in the UK motor and leisurepoint-of-sale market with a share of 15 per cent. Costs were held flat, leadingto a 3 per cent growth in the trading surplus. The impairment charge increasedby £40 million to £245 million, reflecting the ongoing impact of higher levelsof retail consumers experiencing repayment difficulties. Page 26 of 52 CONSOLIDATED INCOME STATEMENT - STATUTORY 2006 2005 £m £mInterest and similar income 14,316 12,589Interest and similar expense (8,779) (6,918)Net interest income 5,537 5,671Fee and commission income 3,116 2,990Fee and commission expense (846) (842)Net fee and commission income 2,270 2,148Net trading income 6,341 9,298Insurance premium income 4,719 4,469Other operating income 806 1,140Other income 14,136 17,055Total income 19,673 22,726Insurance claims (8,569) (12,186)Total income, net of insurance claims 11,104 10,540Operating expenses (5,301) (5,471)Trading surplus 5,803 5,069Impairment losses on loans and advances (1,555) (1,299)Profit on sale and closure of businesses - 50Profit before tax 4,248 3,820Taxation (1,341) (1,265)Profit for the year 2,907 2,555 Profit attributable to minority interests 104 62Profit attributable to equity shareholders 2,803 2,493Profit for the year 2,907 2,555 Basic earnings per share 49.9p 44.6pDiluted earnings per share 49.5p 44.2p Total dividend per share for the year* 34.2p 34.2pTotal dividend for the year* £1,927m £1,915m *total dividend for the year represents the interim dividend paid in October 2006 and the final dividend which willbe paid and accounted for in May 2007. Page 27 of 52 CONSOLIDATED BALANCE SHEET - STATUTORY 31 December 31 December 2006 2005Assets £m £mCash and balances at central banks 1,898 1,156Items in course of collection from banks 1,431 1,310Trading securities and other financialassets at fair value through profit or loss 67,695 60,374Derivative financial instruments 5,565 5,878Loans and advances to banks 40,638 31,655Loans and advances to customers 188,285 174,944Available-for-sale financial assets 19,178 14,940Investment property 4,739 4,260Goodwill 2,377 2,373Value of in-force business 2,723 2,922Other intangible assets 138 50Tangible fixed assets 4,252 4,291Other assets 4,679 5,601Total assets 343,598 309,754 Equity and liabilitiesDeposits from banks 36,394 31,527Customer accounts 139,342 131,070Items in course of transmission to banks 781 658Trading and other liabilities at fair value through profit or loss 1,184 -Derivative financial instruments 5,763 6,396Debt securities in issue 54,118 39,346Liabilities arising from insurance contracts andparticipating investment contracts 41,445 40,550Liabilities arising from non-participatinginvestment contracts 24,370 21,839Unallocated surplus within insurance businesses 683 518Other liabilities 10,985 9,843Retirement benefit obligations 2,462 2,910Current tax liabilities 817 552Deferred tax liabilities 1,416 1,145Other provisions 259 368Subordinated liabilities 12,072 12,402Total liabilities 332,091 299,124 EquityShare capital 1,429 1,420Share premium account 1,266 1,170Other reserves 355 383Retained profits 8,105 7,222Shareholders' equity 11,155 10,195Minority interests 352 435Total equity 11,507 10,630 Total equity and liabilities 343,598 309,754 Page 28 of 52 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - STATUTORY Attributable to equity shareholders Share capital Other Retained Minority and premium reserves profits interests Total £m £m £m £m £mBalance at 1 January 2005 2,564 371 6,554 81 9,570Movement in available-for-sale - 8 - - 8financial assets, net of taxMovement in cash flow hedges, - 11 - - 11net of taxCurrency translation differences - (7) 24 - 17Net income recognised directly in equity - 12 24 - 36Profit for the year - - 2,493 62 2,555Total recognised income for the year - 12 2,517 62 2,591Dividends - - (1,914) (37) (1,951)Purchase/sale of treasury shares - - 18 - 18Employee share option schemes:- value of employee services - - 47 - 47- proceeds from shares issued 26 - - - 26Capital invested by minority - - - 329 329shareholdersBalance at 31 December 2005 2,590 383 7,222 435 10,630Movement in available-for-sale - (31) - - (31)financial assets, net of taxMovement in cash flow hedges, net of tax - 1 - - 1Currency translation differences - 2 (31) (4) (33)Net income recognised directly in equity - (28) (31) (4) (63)Profit for the year - - 2,803 104 2,907Total recognised income for the year - (28) 2,772 100 2,844Dividends - - (1,919) (32) (1,951)Purchase/sale of treasury shares - - (35) - (35)Employee share option schemes:- value of employee services - - 65 - 65- proceeds from shares issued 105 - - - 105Repayment of capital to minority - - - (151) (151)shareholdersBalance at 31 December 2006 2,695 355 8,105 352 11,507 Page 29 of 52 CONSOLIDATED CASH FLOW STATEMENT - STATUTORY 2006 2005 £m £m Profit before tax 4,248 3,820 Adjustments for: Change in operating assets (31,995) (17,158) Change in operating liabilities 33,069 10,039 Non-cash and other items 1,555 4,364 Tax paid (798) (708) Net cash provided by operating activities 6,079 357 Cash flows from investing activitiesPurchase of available-for-sale financial assets (23,448) (10,108)Proceeds from sale and maturity of available-for-sale financial 18,106 10,266assetsPurchase of fixed assets (1,724) (1,843)Proceeds from sale of fixed assets 1,257 1,073Acquisition of businesses, net of cash acquired (20) (27)Disposal of businesses, net of cash disposed 936 (4)Net cash used in investing activities (4,893) (643) Cash flows from financing activitiesDividends paid to equity shareholders (1,919) (1,914)Dividends paid to minority interests (32) (37)Interest paid on subordinated liabilities (713) (668)Proceeds from issue of subordinated liabilities 1,116 1,361Proceeds from issue of ordinary shares 105 26Repayment of subordinated liabilities (759) (232)Capital element of finance lease rental payments - (2)Capital invested by minority shareholders - 329Repayment of capital to minority shareholders (151) -Net cash used in financing activities (2,353) (1,137)Effects of exchange rate changes on cash and cash equivalents (148) (20)Change in cash and cash equivalents (1,315) (1,443)Cash and cash equivalents at beginning of year 26,753 28,196Cash and cash equivalents at end of year 25,438 26,753 Cash and cash equivalents comprise cash and balances at central banks (excludingmandatory deposits) and amounts due from banks with a maturity of less thanthree months. Page 30 of 52 CONDENSED SEGMENTAL ANALYSIS - STATUTORY Lloyds TSB Group is a leading UK-based financial services group, whosebusinesses provide a wide range of banking and financial services in the UK andin certain locations overseas. The Group's activities are organised into threesegments: UK Retail Banking, Insurance and Investments and Wholesale andInternational Banking. Central group items includes the funding cost of certainacquisitions less earnings on capital, central costs and accruals for payment tothe Lloyds TSB Foundations. Services provided by UK Retail Banking encompass the provision of banking andother financial services to personal customers, private banking, stockbrokingand mortgages. Insurance and Investments offers life assurance, pensions andsavings products, general insurance and asset management services. Wholesaleand International Banking provides banking and related services for major UK andmultinational companies, banks and financial institutions, and small andmedium-sized UK businesses. It also provides asset finance to personal andcorporate customers, manages the Group's activities in financial markets andprovides banking and financial services overseas. During 2006, the bases adopted for allocating income and costs between thedifferent segments were consistent with those used in 2005 and set out in the2005 Annual Report and Accounts. Year ended UK General Life, Insurance Wholesale Central31 December 2006 Retail Insurance pensions and and group Banking and asset Investments International items* management Banking Total £m £m £m £m £m £m £mInterest and similar income 6,913 24 820 844 8,806 (2,247) 14,316*Interest and similar (3,271) - (741) (741) (6,421) 1,654 (8,779)expense*Net interest income 3,642 24 79 103 2,385 (593) 5,537Other income (net of feeand commission expense) 1,621 594 9,893 10,487 1,827 201 14,136Total income 5,263 618 9,972 10,590 4,212 (392) 19,673Insurance claims - (200) (8,369) (8,569) - - (8,569)Total income, net of 5,263 418 1,603 2,021 4,212 (392) 11,104insurance claimsOperating expenses (2,476) (157) (481) (638) (2,264) 77 (5,301)Trading surplus (deficit) 2,787 261 1,122 1,383 1,948 (315) 5,803Impairment losses on loans (1,238) - - - (308) (9) (1,555)and advancesProfit (loss) before tax 1,549 261 1,122 1,383 1,640 (324) 4,248External revenue 8,136 1,249 10,888 12,137 8,867 158 29,298Inter-segment revenue* 698 19 199 218 2,276 (3,192) -Segment revenue 8,834 1,268 11,087 12,355 11,143 (3,034) 29,298 *Central group items on this and the following page includes inter-segment consolidation adjustments withininterest and similar income and within interest and similar expense as follows: interest and similar income £(3,241) million (2005: £(2,975) million); interest and similar expense £3,241million (2005: £2,975 million).There is no impact on net interest income. Similarly, Central group items includes inter-segment revenueadjustments of £(4,102) million (2005: £(3,951) million). Page 31 of 52 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (continued) Year ended UK General Life, Insurance Wholesale Central31 December 2005 Retail Insurance pensions and and group Banking and asset Investments International items* management Banking Total £m £m £m £m £m £m £mInterest and similar income 6,652 27 850 877 6,944 (1,884) 12,589*Interest and similar (3,131) (4) (478) (482) (4,679) 1,374 (6,918)expense* Net interest income 3,521 23 372 395 2,265 (510) 5,671Other income (net of feeand commission expense) 1,605 571 13,288 13,859 1,628 (37) 17,055Total income 5,126 594 13,660 14,254 3,893 (547) 22,726Insurance claims - (197) (11,989) (12,186) - - (12,186)Total income, net of 5,126 397 1,671 2,068 3,893 (547) 10,540insurance claimsOperating expenses (2,697) (160) (434) (594) (2,181) 1 (5,471)Trading surplus (deficit) 2,429 237 1,237 1,474 1,712 (546) 5,069Impairment losses on loans (1,111) - - - (188) - (1,299)and advancesProfit (loss) on sale and 76 - - - (6) (20) 50closure of businessesProfit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820External revenue 7,833 1,272 14,127 15,399 7,283 (29) 30,486Inter-segment revenue* 744 16 330 346 1,686 (2,776) -Segment revenue 8,577 1,288 14,457 15,745 8,969 (2,805) 30,486 Page 32 of 52 NOTES Page1 Accounting policies, presentation and estimates 342 Volatility 353 Mortgage lending 364 Group net interest income 375 Other income 386 General insurance income 387 Operating expenses 398 Number of employees (full-time equivalent) 399 Impairment losses on loans and advances 4010 Retirement benefit obligations 4111 Capital ratios 4212 Balance sheet information 4313 Profit on sale and closure of businesses 4314 Economic profit 4415 Earnings per share 4416 Scottish Widows - realistic balance sheet information 4517 European Embedded Value reporting - results for year ended 31 December 2006 4618 Scottish Widows - weighted sales 5019 Taxation 5020 Dividend 5121 Other information 51 Page 33 of 52 1. Accounting policies, presentation and estimates The 2006 results have been prepared in accordance with International FinancialReporting Standards ('IFRS') as adopted by the European Union (EU). Except asnoted below, the accounting policies adopted in the preparation of these resultsare unchanged from those disclosed in the Group's consolidated financialstatements for the year ended 31 December 2005 copies of which can be found onthe Group's website at www.investorrelations.lloydstsb.com/ir/company_reports_page.asp or are available on request from the CompanySecretary's Department, Lloyds TSB Group plc, 25 Gresham Street, London EC2V7HN. The following IFRS pronouncements relevant to the Group for the first time havebeen adopted in preparing these results: (i) Amendment to IAS 19 Actuarial Gains and Losses, Group Plans andDisclosures. The Group has not changed its accounting policy for therecognition of actuarial gains and losses as a result of this amendment; theadditional disclosures required will be provided in the Group's consolidatedfinancial statements for the year ended 31 December 2006. (ii) Amendment to IAS 39 Financial Instruments: Recognition and Measurement- The Fair Value Option. This amendment, which was effective from 1 January2006, changed the criteria for financial assets to be designated at fair valuethrough profit or loss and permitted financial liabilities meeting certaincriteria to be designated at fair value for the first time. The adoption ofthese requirements had no effect upon the classification or valuation of thosefinancial assets that were designated at fair value through profit or loss priorto 1 January 2006; at 31 December 2006, £1.2 billion of financial liabilitieshad been designated at inception into this category during the year. Thischange has had no material effect upon the Group's income statement. (iii) Amendment to IAS 39 Financial Instruments: Recognition and Measurementand IFRS 4 Insurance Contracts - Financial Guarantee Contracts. Since 1 January2006, all of the Group's financial guarantee contracts have been accounted foras financial instruments. This change has had no material effect upon theGroup's financial statements. (iv) IFRIC Interpretation 4 Determining Whether an Arrangement Contains aLease. The Group has reviewed the terms of all contracts potentially affectedby this interpretation; its adoption has had no material effect upon the Group'sfinancial statements. For 2006, the Group has also introduced supplementary financial reportingrelating to Scottish Widows Group using European Embedded Value ('EEV')Principles as published by the Chief Financial Officers Forum ('CFO Forum') in2004. The Group has also aligned the accounting for insurance products whichare recognised on an embedded value basis under IFRS to a basis consistent withrelevant EEV Principles. The impact of this change has been to reduce profitbefore tax for the year ended 31 December 2006 by £18 million. Page 34 of 52 2. Volatility Banking volatility In accordance with IFRS, it is the Group's policy to recognise all derivativesat fair value. The banking businesses manage their interest rate and othermarket risks primarily through the use of intra-Group derivatives, with theresulting net positions managed centrally using external derivatives. IFRS doesnot, however, permit the intra-Group derivatives to be used in a hedgerelationship for reporting purposes. Although fair value accounting can have asignificant impact on reported earnings, it does not impact on the businessfundamentals or cash flows of the businesses. The Group has, therefore,implemented an internal pricing arrangement whereby divisions transfer toCentral group items the volatility associated with marking to market derivativesheld for risk management purposes where, as far as possible, the effect isminimised by establishing IAS 39 compliant hedge accounting relationships. Thenet result is separately disclosed as banking volatility. During 2006, profit before tax included banking volatility of £(3) million,being a charge of £136 million to net interest income and a credit of £133million to other income, (2005: £(124) million, being a charge of £79 million tonet interest income and a charge of £45 million to other income). Thesignificant reduction in this source of volatility reflects the beneficialeffect of rising interest rates which has had the result of changing the way inwhich the gradual unwind of the Group's fair value hedging relationships hasimpacted the income statement. Insurance volatility The Group's insurance businesses have liability products that are supported bysubstantial holdings of investments, including equities, property and fixedinterest investments, all of which have a volatile fair value. The liabilitiesand supporting investments do not move exactly in line as the fair value ofinvestments changes, yet IFRS requires that the changes in both the value of theliabilities and investments be reflected within the income statement. As theseinvestments are substantial and movements in their fair value can have asignificant impact on the profitability of the Insurance and Investmentsdivision, management believes that it is appropriate to disclose the division'sresults on the basis of an expected return in addition to the actual return.The difference between the actual return on these investments and the expectedreturn based upon economic assumptions made at the beginning of the period isincluded within insurance volatility. Changes in market variables also affect the realistic valuation of theguarantees and options embedded within products written in the Scottish WidowsWith Profit Fund, the value of the in-force business and the value ofshareholders' funds. Fluctuations in these values caused by changes in marketvariables are also included within insurance volatility. The expected investment returns used to determine the normalised profit of thebusiness, which are based on prevailing market rates and published research intohistoric investment return differentials are set out below: 2007 2006 2005 % % %Gilt yields (gross) 4.62 4.12 4.57Equity returns (gross) 7.62 6.72 7.17Dividend yield 3.00 3.00 3.00Property return (gross) 7.62 6.72 7.17Corporate bonds (gross) 5.22 4.72 5.17 Page 35 of 52 2. Volatility (continued) During 2006, profit before tax included positive insurance volatility of £84million, being a credit of £2 million to net interest income and a credit of £82 million to other income (2005: £438 million, being a credit of £6 million tonet interest income and a credit of £432 million to other income). Returns in2005 benefited from rising stock markets and rising gilt values. Althoughequity values continued to rise in 2006, this was less marked than in 2005 andthe effect was partly offset by falling gilt values and a charge following thechange in the economic assumptions used to calculate the value of in-forcebusiness at 31 December 2006. Policyholder interests volatility As a result of the requirement contained in IFRS to consolidate the Group's lifeand pensions businesses on a line by line basis, the Group's income statementincludes 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 inthe Group's tax charge rather than being offset against the related income, asit is in actual distributions made to policyholders. The impact is, therefore,to either increase or decrease profit before tax with a corresponding change inthe tax charge. Other items classified within policyholder interests volatilityinclude the effects of investment vehicles which are only majority owned by thelong-term assurance funds. In the case of these vehicles, the Group's profitfor the year includes the minorities' share of the profits earned. As theseamounts do not accrue to the equity holders, management believes a clearerrepresentation of the underlying performance of the Group's life and pensionsbusinesses is presented by excluding policyholder interests volatility. During 2006, profit before tax included positive policyholder interestsvolatility of £326 million, being a charge of £33 million to net interest incomeand a credit of £359 million to other income (2005: £311 million, being a creditto other income). The increase reflects an improved return from a propertypartnership majority owned by the policyholders, which more than offset areduction in the policyholder tax charge as a result of a fall in the capitalvalues of gilts and bonds and a smaller rise in equity markets. 3. Mortgage lending 2006 2005 Gross new mortgage lending £27.6bn £26.0bnMarket share of gross new mortgage lending 8.0% 9.0%Redemptions £20.7bn £17.7bnMarket share of redemptions 8.8% 9.0%Net new mortgage lending £6.9bn £8.3bnMarket share of net new mortgage lending 6.3% 9.1%Mortgages outstanding (period-end)* £95.3bn £88.4bnMarket share of mortgages outstanding 8.8% 9.1% *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 themortgage portfolio was 44 per cent (31 December 2005: 43 per cent), and theaverage loan-to-value ratio for new mortgages and further advances writtenduring 2006 was 64 per cent (2005: 64 per cent). At 31 December 2006, only 0.6per cent of balances had an indexed loan-to-value ratio in excess of 95 per cent(31 December 2005: 0.6 per cent). Page 36 of 52 4. Group net interest income 2006 2005 £m £mBanking margin - new basisNet interest income 5,122 4,904Average interest-earning assets, excluding reverse repos 170,743 157,455Net interest margin 3.00% 3.11% Banking margin - previous basis Net interest income 5,662 5,398Average interest-earning assets, excluding reverse repos 217,076 194,264Net interest margin 2.61% 2.78% Statutory basisNet interest income 5,537 5,671Average interest-earning assets, excluding reverse repos 226,990 201,813Net interest margin 2.44% 2.81% The Group's net interest income includes certain amounts attributable to policyholders, in addition to the interestearnings on shareholders' funds held in the Group's insurance businesses. In addition, the introduction of IFRS hassignificantly affected the Group net interest margin with regard to the accounting treatment of a number of FinancialMarkets, Structured Finance and other products, principally those where funding costs are treated as an interestexpense and related revenues are recognised within other income. In order to enhance comparability in the Group'sbanking net interest margin these items have been excluded from the previous reporting basis in determining both netinterest income and average interest-earning assets on the new basis. A reconciliation of banking net interest income to Group net interest incomefollows: 2006 2005 £m £mBanking net interest income - new basis 5,122 4,904Products and Markets, and other 540 494Banking net interest income - previous basis 5,662 5,398Volatility (167) (73)Insurance grossing adjustment 78 310Other (36) 36Group net interest income 5,537 5,671 Page 37 of 52 5. Other income 2006 2005 £m £mExcluding volatilityFees and commissions receivable: UK current account fees 652 593 Other UK fees and commissions 1,210 1,041 Insurance broking 629 681 Card services 493 545 International fees and commissions 132 130 3,116 2,990Fees and commissions payable (846) (842)Net fees and commissions income 2,270 2,148Net trading income 5,848 8,859Insurance premium income 4,719 4,469Other operating income 725 881Total other income* 13,562 16,357Insurance claims (8,569) (12,186)Total other income, net of insurance claims* 4,993 4,171Volatility- Banking 133 (45)- Insurance 82 432- Policyholder interests 359 311Total other income, net of insurance claims 5,567 4,869 *excluding volatility. For statutory reporting purposes, volatility totalling £574 million in 2006 (2005: £698million) is included in total other income; comprising net trading income of £493 million (2005: £439 million) andother operating income of £81 million (2005: £259 million). 6. General insurance income 2006 2005 £m £m Premium income from underwritingCreditor 180 127Home 424 441Health 13 16Reinsurance premiums (17) (22) 600 562Commissions from insurance brokingCreditor 377 396Home 47 49Health 13 15Other 192 221 629 681 Page 38 of 52 7. Operating expenses 2006 2005 £m £m Administrative expenses: Staff: Salaries 2,117 2,068 National insurance 161 154 Pensions - Before pension schemes related credit 293 308 - Pension schemes related credit (128) - 165 308 Other staff costs 298 325 2,741 2,855Premises and equipment: Rent and rates 310 305 Hire of equipment 15 13 Repairs and maintenance 165 136 Other 149 152 639 606Other expenses: Communications and external data processing 499 467 Advertising and promotion 184 207 Professional fees 231 216 Provisions for customer redress - 150 Other 388 325 1,302 1,365Administrative expenses 4,682 4,826Depreciation and amortisation 619 639Impairment of goodwill - 6Total operating expenses 5,301 5,471 Cost:income ratio - statutory basis* 47.7% 51.9% Cost:income ratio - excluding volatility, provisions for customer 50.8% 52.8%redress, the strengthening of reserves for mortality and pensionschemes related credit**total operating expenses divided by total income, net of insurance claims. 8. Number of employees (full-time equivalent) 2006 2005 UK Retail Banking 30,903 33,253Insurance and Investments 5,837 6,131Wholesale and International Banking 19,260 19,716Other, largely IT and Operations 9,499 10,678 65,499 69,778Agency staff (FTE) (2,869) (2,981)Total number of employees (full-time equivalent) 62,630 66,797 Page 39 of 52 9. Impairment losses on loans and advances 2006 2005 £m £mImpairment losses on loans and advances (see below) 1,560 1,302Other credit risk provisions (5) (3) 1,555 1,299Impairment losses on loans and advancesUK Retail Banking Personal loans/overdrafts 740 656 Credit cards 490 396 Mortgages 8 13 1,238 1,065 Wholesale and International Banking 313 191 Central group items 9 46 Total charge 1,560 1,302 Charge as % of average lending: % % Personal loans/overdrafts 5.85 5.33 Credit cards 6.99 5.80 Mortgages 0.01 0.02UK Retail Banking 1.18 1.09Wholesale and International Banking 0.39 0.28Total charge 0.83 0.76 In the analysis of impairment losses set out above, the losses attributable tothe Goldfish business, which was sold in December 2005, have been transferredinto Central group items in order to allow a meaningful comparison of theresults of UK Retail Banking. Page 40 of 52 10. Retirement benefit obligations The amounts recognised in the balance sheet are as follows: 31 December 31 December 2006 2005 £m £m Defined benefit pension schemesPresent value of scheme liabilities 17,378 17,320Fair value of scheme assets (15,279) (14,026)Net defined benefit scheme deficit 2,099 3,294Unrecognised actuarial gains (losses) 263 (485)Net recognised defined benefit scheme deficit 2,362 2,809Other post-retirement benefit schemes 100 101Net recognised liability 2,462 2,910Deferred tax (739) (873)Recognised liability after tax 1,723 2,037 The Group's defined benefit pension schemes' gross deficit at 31 December 2006improved by £1,195 million to £2,099 million, comprising net recognisedliabilities of £2,362 million partly offset by unrecognised actuarial gains of£263 million. This improvement largely reflects continued strong returns fromthe schemes' assets, Group contributions to the schemes and an increase in thereal discount rate used to value the schemes' liabilities, which exceeded thecost of accruing benefits. The decision to stop augmenting the pensionentitlement of employees taking early retirement reduced the pension deficit by£129 million. In 2006, the Group reached agreement with the trustees of the Group's twoprincipal pension schemes to fund the schemes' actuarial funding deficits ofapproximately £1.5 billion, as at 30 June 2005, over a period of ten years. TheGroup also indicated that it expected to continue making additional voluntarycontributions to the schemes. Further interim actuarial valuations of theschemes were carried out on behalf of the schemes' Trustees as at 30 June 2006;these valuations showed a significant reduction in the deficits to approximately£0.3 billion. The Group's contributions to its pension schemes are as follows: 2006 2005 £m £m Normal service contributions 242 195Past service costs 32 15Agreed deficit contributions 195 65Additional voluntary contributions 81 144 550 419 Page 41 of 52 11. Capital ratios 31 December 31 December 2006 2005Capital £m £m Tier 1 Share capital and reserves 11,155 10,195Less: AFS revaluation reserve and cash flow hedging reserve (12) (40) Regulatory post-retirement benefit adjustments 1,041 1,372 Core tier 1 capital instruments 1,610 577 Innovative tier 1 capital instruments 1,372 1,905 Less: restriction in amount eligible - (183) Goodwill (2,377) (2,373) Other items 39 25 Total tier 1 capital 12,828 11,478 Tier 2 Undated loan capital 4,390 4,551 Dated loan capital 3,624 3,903 Innovative capital restricted from tier 1 - 183 Collectively assessed provisions 1,951 1,782 AFS revaluation reserve in respect of equities - 28 Total tier 2 capital 9,965 10,447 22,793 21,925 Supervisory deductions Life and pensions businesses (5,368) (5,478) Other deductions (790) (682) Total supervisory deductions (6,158) (6,160) Total capital 16,635 15,765 Risk-weighted assets £bn £bnUK Retail Banking 59.1 60.4Insurance and Investments 3.1 2.6Wholesale and International Banking 91.8 80.1Central group items 2.0 1.8Total risk-weighted assets 156.0 144.9 Risk asset ratios Total capital 10.7% 10.9%Tier 1 8.2% 7.9% 2006 2005Post-tax return on average risk-weighted assets 1.89% 1.81%Post-tax return on average risk-weighted assets* 1.72% 1.77% *excluding volatility, pension schemes related credit and, in 2005, profit on sale and closure ofbusinesses, customer redress provisions and strengthening of reserves for mortality. Page 42 of 52 12. Balance sheet information 31 December 31 December 2006 2005 £m £m Deposits - customer accountsSterling:Non-interest bearing current accounts 3,739 3,604Interest bearing current accounts 40,906 37,976Savings and investment accounts 64,380 60,522Other customer deposits 19,134 16,809Total sterling 128,159 118,911Currency 11,183 12,159Total deposits - customer accounts 139,342 131,070 Loans and advances to customers Domestic:Agriculture, forestry and fishing 2,905 2,451Energy and water supply 2,024 1,592Manufacturing 7,513 7,923Construction 2,332 2,222Transport, distribution and hotels 10,490 9,465Postal and communications 831 546Property companies 12,896 8,713Financial, business and other services 22,999 21,261Personal : mortgages 95,601 88,895 : other 23,025 23,280Lease financing 4,802 5,815Hire purchase 5,060 4,853 190,478 177,016Allowance for impairment losses on loans and advances (2,193) (2,072)Total loans and advances to customers 188,285 174,944 Total loans and advances to customers in our international businesses totalled£5,589 million (2005: £4,819 million). 13. Profit on sale and closure of businesses In December 2005, the Group announced the disposal of its Goldfish credit cardbusiness and this, together with additional costs incurred in relation tobusiness closures or previous disposals, led to a net profit of £50 millionbeing recognised in the income statement for the year ended 31 December 2005. Page 43 of 52 14. Economic profit 2006 2005 £m £m Statutory basis Average shareholders' equity 10,531 9,747 Profit attributable to equity shareholders 2,803 2,493 Less: notional charge (948) (877) Economic profit 1,855 1,616 Excluding volatility, profit on sale and closure of businesses, customerredress provisions, strengthening of reserves for mortality and pensionschemes related creditAverage shareholders' equity 10,490 9,716 Profit attributable to equity shareholders 2,636 2,475 Less: notional charge (944) (874) Economic profit 1,692 1,601 Economic profit represents the difference between the earnings on the equityinvested in a business and the cost of the equity. The notional charge has beencalculated by multiplying average shareholders' equity by the cost of equityused by the Group of 9 per cent (2005: 9 per cent). 15. Earnings per share Statutory basis 2006 2005 BasicProfit attributable to equity shareholders £2,803m £2,493mWeighted average number of ordinary shares in issue 5,616m 5,595mEarnings per share 49.9p 44.6p Fully diluted Profit attributable to equity shareholders £2,803m £2,493mWeighted average number of ordinary shares in issue 5,667m 5,639mEarnings per share 49.5p 44.2p Excluding volatility, profit on sale and closure of businesses,customer redress provisions, strengthening of reserves for mortalityand pension schemes related creditProfit attributable to equity shareholders £2,636m £2,475mWeighted average number of ordinary shares in issue 5,616m 5,595mEarnings per share 46.9p 44.2p Page 44 of 52 16. Scottish Widows - realistic balance sheet information Financial Services Authority (FSA) returns for large with-profits companies nowinclude realistic balance sheet information. The information included in FSAreturns concentrates on the position of the With Profits Fund. However, underthe Scottish Widows demutualisation structure, which was court approved, thefund is underpinned by certain assets outside the With Profits Fund and it ismore appropriate to consider the long-term fund position as a whole to measurethe realistic capital position of Scottish Widows. The estimated position at 31December 2006, allowing for a proposed transfer of £750 million from theLong-Term Fund to the Shareholder Fund, is shown below, together with the actualposition at 31 December 2005. 31 December 2006 (estimated) With Profit Long Term Fund Fund £bn £bn Available assets, including support account 19.3 22.3Realistic value of liabilities (18.2) (18.1)Working capital for fund 1.1 4.2 Working capital ratio 5.8% 18.9% Risk capital margin cover 5.3 times 17.4 times 31 December 2005 With Profit Long Term Fund Fund £bn £bn Available assets, including support account 20.4 23.2Realistic value of liabilities (19.3) (19.1)Working capital for fund 1.1 4.1 Working capital ratio 5.5% 17.7% Risk capital margin cover 3.6 times 11.9 times Page 45 of 52 17. European Embedded Value reporting - results for year ended 31 December2006 This section provides further details of the Scottish Widows' EEV financialinformation. Composition of EEV balance sheet 2006 2005 £m £m Value of in-force business (certainty 3,220 3,466equivalent)Value of financial options and guarantees (56) (193)Cost of capital (248) (262)Non-market risk (75) (70)Total value of in-force business 2,841 2,941Shareholders' net assets 3,572 3,445Total EEV of covered business 6,413 6,386 Reconciliation of opening EEV balance sheet to closing EEV balance sheet oncovered business Value of Shareholders' in-force net assets business Total £m £m £m As at 1 January 2005 3,880 2,581 6,461Total profit after tax 565 360 925Dividends (1,000) - (1,000)As at 31 December 2005 3,445 2,941 6,386Total profit after tax 873 (100) 773Dividends (746) - (746)As at 31 December 2006 3,572 2,841 6,413 During 2006, Scottish Widows adopted the FSA's Policy Statement 06/14 whichamends the reserving requirements for non with-profits business written by lifecompanies. This has increased shareholders' net assets and reduced the value ofin-force business by approximately £400 million. Analysis of shareholders' net assets on an EEV basis on covered business Required Free Shareholders' capital surplus net assets £m £m £m As at 1 January 2005 3,058 822 3,880Total profit after tax (105) 670 565Debt issued (560) 560 -Dividends - (1,000) (1,000)As at 31 December 2005 2,393 1,052 3,445Total profit after tax (186) 1,059 873Dividends - (746) (746)As at 31 December 2006 2,207 1,365 3,572 Page 46 of 52 17. European Embedded Value reporting - results for year ended 31 December2006 (continued) 2006 summary income statement on an EEV basis 2006 2005 £m £m New business profit 346 254Existing business profit- Expected return 403 390- Experience variances 69 12- Assumption changes (133) (147)Expected return on shareholders' net assets 167 218Profit before tax, excluding volatility and other items 852 727Volatility 176 584Strengthening of annuitant mortality reserves - (162)Other items* 76 172Total profit before tax 1,104 1,321Attributed shareholder tax (331) (396)Total profit after tax 773 925 *other items represent amounts not considered attributable to the underlyingperformance of the business. The figure in 2006 represents the benefits of theFSA's Policy Statement 06/14 and an intra-Group transfer of a portfolio ofOEICs. The figure in 2005 represents a similar intra-Group transfer of OEICs,the capitalisation impact of a lower cost of capital following debt issuance,and an increase in the value of deferred tax assets. Page 47 of 52 17. European Embedded Value reporting - results for year to 31 December 2006(continued) Economic assumptions A bottom up approach is used to determine the economic assumptions for valuingthe business in order to determine a market consistent valuation. The risk-free rate assumed in valuing in-force business is 10 basis points overthe 15 year gilt yield. In valuing financial options and guarantees therisk-free rate is derived from gilt yields plus 10 basis points, in line withScottish Widows' FSA realistic balance sheet assumptions. The table below showsthe range of resulting yields and other key assumptions. 31 December 31 December 2006 2005 % % Risk-free rate (value of in-force) 4.72 4.22Risk-free rate (financial options and guarantees) 3.91 to 5.41 3.9 to 4.3Retail price inflation 3.23 2.89Expense inflation 4.13 3.79 Non-market risk An allowance for non-market risk is made through the choice of best estimateassumptions based upon experience, which generally will give the mean expectedfinancial outcome for shareholders and hence no further allowance for non-marketrisk is required. However, in the case of operational risk and the with-profitsfund these are asymmetric in the range of potential outcomes for which anexplicit allowance is made. Non-economic assumptions Future mortality, morbidity, lapse and paid-up rate assumptions are reviewedeach year and are based on an analysis of past experience and on management'sview of future experience. These assumptions are intended to represent a bestestimate of future experience as at 31 December 2006. For OEIC business, the lapse assumption is based on experience which has beencollected over a 20 month period. To recognise that this is a shorter periodthan that normally available for life and pensions business, and that thisperiod has coincided with favourable investment conditions, management have useda best estimate of the long-term lapse assumption which is higher than indicatedby this 20 month experience. In management's view, the approach and lapseassumption are both reasonable. Page 48 of 52 17. European Embedded Value reporting - results for year to 31 December 2006(continued) Sensitivity analysis The table below shows the sensitivity of the EEV and the new business profitbefore tax to movements in some of the key assumptions. The impact of a changein the assumption has only been shown in one direction. The impact can beassumed to be reasonably symmetrical. Impact on new Impact business profit on EEV before tax £m £m2006 EEV/new business profit before tax 6,413 346 (1) 100 basis points reduction in risk-free rates 237 10(2) 10% reduction in market values of equity and property assets (228) n/a(3) 10% reduction in expenses 82 35(4) 10% reduction in lapses 95 21(5) 5% reduction in annuitant mortality (88) (5)(6) 5% reduction in mortality and morbidity (excluding annuitants) 28 3(7) 100 basis points increase in equity and property returns nil nil (1) In this sensitivity the impact takes into account the change in the valueof in-force business, financial options and guarantee costs, statutory reservesand asset values. (2) The reduction in market values is assumed to have no corresponding changein dividend or rental yields. The impact on EEV of £(228) million comprises a£177 million reduction in the value of in-force business and a £51 millionreduction in the shareholders' net assets. (3) This sensitivity shows the impact of reducing new business and maintenanceexpenses to 90 per cent of the expected rate. (4) This sensitivity shows the impact of reducing lapse and surrender rates to90 per cent of the expected rate. (5) This sensitivity shows the impact on our annuity and deferred annuitybusiness of reducing mortality rates to 95 per cent of the expected rate. (6) This sensitivity shows the impact of reducing mortality rates onnon-annuity business to 95 per cent of the expected rate. (7) Under a market consistent valuation, changes in assumed equity andproperty returns have no impact on the EEV. In scenarios (3) to (6) assumptions have been flexed on the basis used tocalculate the value of in-force business and the realistic and the statutoryreserving bases. A change in risk discount rates is not relevant as the riskdiscount rate is not an input to a market consistent valuation. Page 49 of 52 18. Scottish Widows - weighted sales 2006 2005 ChangeWeighted sales (regular + 1/10 single) £m £m % Life and pensions:Savings and investments 128 144 (11)Protection 49 57 (14)Individual pensions 270 271 -Corporate and other pensions 322 214 50Retirement income 98 68 44Managed fund business 35 50 (30) Life and pensions 902 804 12 OEICs 290 148 96Life, pensions and OEICs 1,192 952 25 Bancassurance 403 274 47Independent financial advisers 679 562 21Direct 75 66 14Managed fund business 35 50 (30) Life, pensions and OEICs 1,192 952 25 New business margin (life and pensions) 31.8% 28.7% 19. Taxation Under IFRS the Group is required to include in income tax expense the taxattributable to UK life insurance policyholder earnings and its interests inOpen-ended Investment Companies (OEICs). The effective tax rate of the Group, excluding the gross policyholder and OEICinterests from profit before tax and the tax charge, was 28.0 per cent (2005:27.0 per cent) compared to the standard UK corporation tax rate of 30 per cent. The effective tax rate including policyholder and OEIC interests was 31.6 percent, compared to 33.1 per cent in 2005. A reconciliation of the charge that would result from applying the standard UKcorporation tax rate to profit before tax to the tax charge, includingpolicyholder and OEIC interests, is given below: 2006 2005 £m £m Profit before tax 4,248 3,820Tax charge thereon at UK corporation tax rate of 30% 1,274 1,146Factors affecting charge:Disallowed and non-taxable items (8) (47)Overseas tax rate differences (2) (1)Net tax effect of disposals and unrealised gains (78) (59)Policyholder and OEIC interests 139 223Other items 16 3Tax charge 1,341 1,265 Page 50 of 52 20. Dividend A final dividend for 2006 of 23.5p (2005: 23.5p) will be paid on 2 May 2007,making a total for the year of 34.2p (2005: 34.2p). Shareholders who have already joined the dividend reinvestment plan willautomatically receive shares instead of the cash dividend. Key dates for thepayment of the dividend are: Shares quoted ex-dividend 7 March 2007Record date 9 March 2007Final date for joining or leaving the dividend reinvestment plan 4 April 2007Final dividend paid 2 May 2007Annual general meeting 9 May 2007 21. Other information The financial information included in this news release does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.Statutory accounts for the year ended 31 December 2006 were approved by thedirectors on 22 February 2007 and will be delivered to the Registrar ofCompanies following publication on 31 March 2007. The auditors' report on theseaccounts was unqualified and did not include a statement under sections 237(2)(accounting records or returns inadequate or accounts not agreeing with recordsand returns) or 237(3) (failure to obtain necessary information andexplanations) of the Companies Act 1985. Page 51 of 52 contacts For further information please contact:- Michael Oliver Director of Investor Relations Lloyds TSB Group plc 020 7356 2167 Email: [email protected] Sarah Pollard Senior Manager, Investor Relations Lloyds TSB Group plc 020 7356 1571 Email: [email protected] Mary Walsh Director of Corporate Relations Lloyds TSB Group plc 020 7356 2121 Email: [email protected] Copies of this news release may be obtained from Investor Relations, Lloyds TSBGroup plc, 25 Gresham Street, London EC2V 7HN. The full news release can alsobe found on the Group's website - www.lloydstsb.com. A copy of the Group's corporate responsibility report may be obtained by writingto Corporate Responsibility, Lloyds TSB Group plc, 25 Gresham Street, LondonEC2V 7HN. This information together with the Group's code of business conductis 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 52 of 52 This information is provided by RNS The company news service from the London Stock Exchange

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