24th Feb 2006 07:02
Lloyds TSB Group PLC24 February 2006 Lloyds TSB Group plc 2005 Results PRESENTATION OF RESULTS Up to 31 December 2004 the Group prepared its financial statements in accordancewith UK Generally Accepted Accounting Principles (UK GAAP). With effect from 1January 2005 the Group implemented International Financial Reporting Standards(IFRS). In this document the 2004 comparative financial information has beenrestated to reflect the adoption of those IFRS standards which are required tobe applied retrospectively, but does not include the additional impacts arisingfrom first time application of IAS 32 'Financial Instruments: Disclosure andPresentation', IAS 39 'Financial Instruments: Recognition and Measurement' andIFRS 4 'Insurance Contracts' (including UK Financial Reporting Standard 27 'LifeAssurance'), which have been implemented with effect from 1 January 2005, withthe opening balance sheet at that date adjusted accordingly. Furtherinformation on the impact of implementing IFRS on comparative information waspublished in the Group's 'Transition to IFRS' announcement on 27 May 2005. The impact of IFRS, and in particular the increased use of fair values, hasresulted in greater earnings volatility. In order to provide a more comparablerepresentation of business performance this volatility has been separatelyanalysed for the Group's insurance and banking businesses (page 31, note 4). Inaddition, other IFRS related adjustments applied with effect from 1 January2005, for which comparatives are not required to be restated (page 31, note 3),and the impact on the Group's results of businesses sold in 2004, have beenseparately analysed in the Group's results. A reconciliation of this 'comparable' basis of presentation to the statutory profit before tax is shown onpage 1. 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. CONTENTS PageProfit before tax by division 1Assets by division 1Performance highlights 2Summary of results 3Group Chief Executive's statement 4Group Finance Director's review of financial performance 8Segmental analysis 11Divisional performance - UK Retail Banking 12 - Insurance and Investments 15 - Wholesale and International Banking 19Consolidated income statement - statutory 22Consolidated balance sheet - statutory 23Condensed consolidated cash flow statement - statutory 24Consolidated statement of changes in equity - statutory 25Summarised segmental analysis - statutory 26Notes 27Contacts for further information 44 PROFIT BEFORE TAX BY Division 2005 2004 Change £m £m %UK Retail Banking Before provisions for customer redress 1,681 1,739 (3) Provisions for customer redress (150) (100) 1,531 1,639 (7)Insurance and Investments Before provisions for customer redress and strengthening of 908 790 15 reserves for mortality Provisions for customer redress - (12) Strengthening of reserves for mortality (page 10) (110) - 798 778 3Wholesale and International Banking 1,504 1,253 20Central group items (page 34 note 7) (367) (350)Profit before tax - comparable basis 3,466 3,320 4Volatility (page 31, note 4)- Banking (124) -- Insurance 438 168- Policyholder interests 311 (30)Other IFRS adjustments applied from 1 January 2005(page 31, note 3)- Before strengthening of reserves for mortality (276) -- Strengthening of reserves for mortality (45) - (321) -Profit (loss) on sale of businesses (page 41, note 20) 50 (21)Trading results of discontinued operations in 2004 - 40Profit before tax 3,820 3,477 10 A more detailed reconciliation of comparable profit before tax to the Group'sprofit before tax for the year is shown in note 2 on page 29. ASSETS BY DIVISION 31 December 1 January 2005 2005 Change £m £m % UK Retail Banking 103,930 96,472 8Insurance and Investments 80,148 70,734 13Wholesale and International Banking 124,044 123,826 -Central group items 1,632 1,822 (10)Total assets 309,754 292,854 6 Page 1 of 44 PERFORMANCE HIGHLIGHTS Results - statutory • Profit before tax increased by £343 million, or 10 per cent, to £3,820 million. • Profit attributable to equity shareholders increased by 4 per cent to £2,493 million. • Earnings per share increased by 4 per cent to 44.6p. • Post-tax return on average shareholders' equity increased to 25.6 per cent, from 22.8 per cent. • Total capital ratio 10.9 per cent, tier 1 capital ratio 7.9 per cent. • Dividend maintained. Final dividend of 23.5p per share, making a total of 34.2p for the year. Dividend cover increased to 1.3 times. Results - comparable basis • Profit before tax increased by £146 million, or 4 per cent, to £3,466 million. Excluding customer redress provisions and the strengthening of reserves for mortality: • Profit before tax increased by £294 million, or 9 per cent, to £3,726 million. • Income growth of 7 per cent exceeded cost growth of 4 per cent. • Earnings per share increased by 11 per cent to 47.2p. • Economic profit increased by 14 per cent to £1,620 million. • Post-tax return on average shareholders' equity increased to 23.3 per cent, from 22.2 per cent. Key achievements • Continued good levels of earnings momentum. Improved levels of revenue growth. • Costs remain firmly under control. Income growth of 7 per cent exceeded cost growth of 4 per cent. Enhanced cost management programme announced. • Good franchise growth with customer lending up by 9 per cent to £175 billion and customer deposits up by 4 per cent to £131 billion. • Increasing signs of net interest margin stability. 5 basis points increase in the banking net interest margin in the second half of 2005, compared to the first half of 2005. • 28 per cent increase in retail banking target customer recruitment. Good levels of customer balance growth in many product areas. • 21 per cent increase in life assurance new business weighted sales (bancassurance up 13 per cent; IFA sales up 30 per cent). Significant improvement in market share to an estimated 6.2 per cent, from 5.7 per cent. 19 per cent increase in new business contribution, and higher new business margin. • Excellent progress in delivering the strategy to build an integrated Wholesale bank. 31 per cent increase in Corporate Markets profit before tax, and 35 per cent increase in Business Banking profit before tax. • Overall credit quality remains satisfactory. • Capital ratios remain robust, continued improvement in balance sheet management. Page 2 of 44 SUMMARY OF RESULTS 2005 2004 ChangeResults - statutory £m £m % Total income, net of insurance claims 10,540 9,661 9Operating expenses 5,471 5,297 3Trading surplus 5,069 4,364 16Impairment losses on loans and advances 1,299 866 50Profit before tax 3,820 3,477 10Profit attributable to equity shareholders 2,493 2,392 4Economic profit (page 40, note 17) 1,616 1,448 12Earnings per share (page 40, note 18) 44.6p 42.8p 4Post-tax return on average shareholders' equity 25.6% 22.8% Results - comparable basis (page 29, note 2)Total income, net of insurance claims 10,062 9,489 6Operating expenses 5,506 5,266 5Trading surplus 4,556 4,223 8Impairment losses on loans and advances 1,090 903 21Profit before tax 3,466 3,320 4Excluding customer redress provisions and strengtheningof reserves for mortalityTotal income, net of insurance claims 10,172 9,489 7Operating expenses 5,356 5,154 4Profit before tax 3,726 3,432 9Economic profit 1,620 1,417 14Earnings per share 47.2p 42.6p 11Post-tax return on average shareholders' equity 23.3% 22.2%Post-tax return on average risk-weighted assets 1.92% 1.98% Shareholder valueClosing market price per share (year end) 488.5p 473p 3Total shareholder return 10.9% 15.1%Total market value of shareholders' equity £27.4bn £26.5bn 3Proposed dividend per share (page 43, note 22) 34.2p 34.2p 31 December 1 January 2005 2005 £m £mBalance sheet - statutoryShareholders' equity 10,195 9,489 7Net assets per share (pence) 180 167 8Total assets 309,754 292,854 6Loans and advances to customers 174,944 161,162 9Customer deposits 131,070 126,349 4 Risk asset ratiosTotal capital 10.9% 10.1%Tier 1 capital 7.9% 8.2% Page 3 of 44 GROUP CHIEF EXECUTIVE'S STATEMENT 2005 was a good year for the Group, both in terms of our financial performanceand, as importantly, in making further progress in the development of ourorganic growth strategy. On the financial side, we increased our already high return on equity and wedelivered a total return of 10.9 per cent to our shareholders. We grew thetrading surplus in each division as the rate of growth in income exceeded thatof costs and we achieved good overall earnings growth in the face of a slowereconomic environment. In terms of delivering the Group strategy, we have established better salesmomentum and stronger levels of customer acquisition in our banking businessesand delivered good sales growth in our life assurance business over the courseof the year. Our market shares are either stable, or growing, in most of ourkey product lines. Most importantly, our customer relationship programmes arebeing effectively implemented and we are delivering higher revenues per customerin our retail and corporate banking businesses. We have significantly enhanced our productivity, as the quality programmes thatwe commenced in 2003 continue to show improving results. This is reflected inour cost:income ratio which, on a comparable basis and excluding customerredress provisions and the strengthening of reserves for mortality, improved to52.7 per cent, from 54.3 per cent in 2004, and I am pleased that we haveachieved this whilst continuing to invest substantially in the business. Ourcustomer satisfaction scores hit record highs in 2005, again reflecting theimprovement programmes established over the last couple of years, and we willcontinue to drive further improvements as we seek to differentiate our serviceperformance against that of our competitors. The risk environment remains satisfactory overall, although we have seen adeterioration in the unsecured consumer lending portfolios as a result of anincrease in the number of customers facing repayment difficulties, which hasbeen offset by a strong performance in the Corporate lending portfolios. Overtime, we expect the consumer position to stabilise in an improving economy, andfor the trend in corporate impairments to move away from the unusually benignrecent experience. Our employee engagement scores have also improved significantly during the year,indicating that our people understand and are committed to our strategy, and wehave improved our performance management processes in support of the Groupstrategy. We also strengthened our senior management team, with the addition ofkey hires in the Retail Bank. Overall, I am pleased with the progress of the Group during 2005. We deliveredon our financial plans and we also used the time to develop the franchisesuccessfully in line with our growth strategy. We have continued to make goodprogress in each of the divisions, the highlights of which are summarised below. In the Retail Bank, income grew 4 per cent whilst costs rose by just 1 per cent,on a comparable basis and excluding customer redress provisions. This led to 7per cent growth in the trading surplus which was offset by an increase in thecharge for impaired lending, reflecting an increase in customers experiencingrepayment difficulties. Profit before tax reduced by 3 per cent. To reflectthe general slowdown in the consumer credit markets, a number of actions weretaken over the course of the year to tighten credit underwriting. Page 4 of 44 It is not in the interests of the individual customer or the Group to lend moneyto a customer who cannot afford to repay. The Group takes its responsibilitiesin this regard very seriously and has a responsible lending programme, to ensurewe help our customers clearly understand the nature of the agreements they areentering into and we confirm affordability before agreeing to any borrowingrequests. Where customers do experience repayment difficulties, our staff aretrained to offer the necessary advice and support to manage their finances andwe have a Customer Support Unit, whose role it is to identify customers who areshowing early signs of financial difficulty so that we can provide early adviceand support to them. The Retail Bank is committed to achieving top performance in both effectivenessand efficiency. Effectiveness is the ability to recruit, develop and retainloyal customers who think of us first for their next financial services need.Efficiency is the ability to provide service and sales at a lower cost so thatwe can give our customers better value. We believe that in order to achieve ourgoal we must be customer rather than product centric. We continue to focus our efforts on our existing customers where we have aninformation advantage that allows us to be more effective and efficient inproviding sales and service that meet our customers' financial needs. We havealso stepped up our new customer recruitment efforts, which have helped drivegood target customer recruitment, particularly in the second half of the year,to give a 28 per cent increase over last year. We have committed ourselves to earning the right to meet 100 per cent of ourcustomers' financial services needs and helping them succeed financially. In2005, we recorded our highest ever customer satisfaction scores across all ourchannels - branch, telephone and internet banking. The improvement in customersatisfaction and the renewed focus on meeting all our customers' financialservices needs has helped to drive an improving sales performance during 2005,and has been accompanied by good balance growth in our key product lines withmortgages up 10 per cent, credit cards (excluding Goldfish) up 9 per cent andcustomer deposits 7 per cent higher. Sales through our internet and telephonechannels grew strongly by 28 per cent and 39 per cent respectively. In Insurance and Investments, profits showed significant growth, reflectingfurther success in delivering our strategies. Profit before tax, on acomparable basis and excluding the 2004 customer redress provision and thestrengthening of reserves for mortality, increased by 15 per cent, underpinnedby strong growth in both the bancassurance and IFA channels and continuedcontrol of costs. Profits grew strongly in both our life assurance and generalinsurance businesses. Scottish Widows delivered a significant increase in sales as we focused on moreprofitable and more capital efficient business lines. This led to a 19 per centincrease in new business contribution. Bancassurance sales grew by 13 per centdespite a slowdown seen in the levels of mortgage related protection business.The sales of OEICs increased by 72 per cent, building on the launch of thesimplified product suite that was introduced at the end of 2004. IFA sales grew strongly with a 30 per cent improvement in weighted sales,underpinned by product and service improvements in pensions and investments.This improved performance led to an estimated market share of 6.8 per cent in2005, compared to 5.9 per cent last year. We have also invested in the development of new pensions and life platforms, andcontinue to develop our distribution capabilities. We remain well placed tobenefit from the anticipated growth in savings and investment product sales overthe coming years. The new life platform has already supported the launch of thenew partnership with Virgin Money. Page 5 of 44 Scottish Widows remains strongly capitalised. In addition to the payment of a£200 million dividend to the Group in March 2005, Scottish Widows made a further£800 million distribution to the Group in December 2005 as part of our plans toimprove capital efficiency. A second annual dividend will be paid in March2006. Our General Insurance business continued its successful development, deliveringa 22 per cent growth in profits, supported by improvements to both the claimsand combined ratios. The results reflect continued successful cross sales tofranchise customers in both retail and business banking as well as continuedinvestment in our service performance, direct channel business and claimsprocessing. In Wholesale and International Banking, our results show excellent progress inour core businesses and the division delivered a 20 per cent improvement inprofit before tax, on a comparable basis, at the same time as improving returns. The good results were achieved by the successful implementation of ourstrategies in Business Banking and Corporate Markets and these businesses willcontinue to provide the platform for profitable growth in the division. Weagain maintained our management discipline of positive jaws, with the rate ofgrowth in income increasing by 10 per cent whilst costs grew by 7 per cent,partly reflecting the increase in investment costs necessary to fund the ongoingdevelopment of the division. In Business Banking, we have again reported strong franchise growth winningincreasing numbers of new customers both through attracting profitable 'switchers' from other banks and by cementing our position as the leader in thebusiness start-ups market with a share of 22 per cent. We have continued tobuild stronger relationships with our customers, as we satisfy more of theirneeds, and this has been reflected in good balance growth in both customerlending and deposits, as well as fee income. Corporate Markets has delivered another strong performance with a 31 per centimprovement in profits supported by a 27 per cent growth in income from thecross-sale of products. The results reflect our strategy of managing thesebusinesses in an integrated manner in support of our customers' success. Wewere pleased to receive external recognition of our efforts as we won a range ofawards including the CBI Bank of the Year Award 2005. Across the businesses,our asset quality remains very strong with impairment losses declining year onyear. We are continuing to invest within Corporate Markets, in terms of ourrelationship offers, our product range and our infrastructure, to ensure we canmeet even more of our customers' needs in a highly competitive market. Turning to 2006, our objective across each of the divisions is to continue toimprove sales performance and deepen our customer relationships, which willresult in market share growth. To support our efficiency and productivityobjectives, we will continue to focus on the centralisation andindustrialisation of our manufacturing capabilities, take the next steps in ourprocurement programme and further embed our quality approach throughout theGroup. In support of our customer objectives, we have set stretching customersatisfaction targets and will continue to develop our products, policies andprocedures in line with those targets. Our strong risk and controlinfrastructure remains an important element of our growth strategy and will befurther enhanced as we seek to develop risk into a differentiating competency.We will also continue to focus on the development of our staff, whilst aimingfor even stronger engagement scores. Page 6 of 44 In summary, 2005 was a good year for the Group. We delivered on our short-termfinancial goals whilst also investing in the long-term health of the business,which is necessary to drive sustainable future earnings growth. This is ourlast set of results under the chairmanship of Maarten van den Bergh and I wouldlike to take this opportunity to record my appreciation for his majorcontribution to the Group over the past five and a half years. We are delightedthat Sir Victor Blank will succeed him and we look forward to welcoming him tothe Group shortly. Continuing to grow a successful business is the best way for Lloyds TSB tocreate value for all our stakeholders and to contribute to the wider economy.We maintain one of the largest community investment programmes in the UK,supporting our customers and staff and making a significant contribution to thelocal communities in which we operate. Since 1997, the Lloyds TSB Foundationshave received over £250 million from the Group's pre-tax profits to distributeto community groups and in 2006 they will receive in excess of £30 million. Finally, I would like to express my continued thanks to all of the staff whowork for the Lloyds TSB Group. They remain committed to serving the needs ofour customers and their wonderful efforts are the key element to our continuedsuccess. J Eric DanielsGroup Chief Executive Page 7 of 44 GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE With effect from 1 January 2005, the Group has been using IFRS for financialreporting. Although IFRS significantly changes the timing of earningsrecognition in financial results it has no impact on our business fundamentalsand cash flows, the development of our organic growth strategies, or our capitalmanagement policies. Details of the retrospective impact of the Group's implementation of IFRS werepublished in our 'Transition to IFRS' announcement on 27 May 2005. Theincreased use in IFRS of fair values has, however, led to greater volatility inthe earnings of the Group. In order to provide a more comparable representationof our business performance this earnings volatility, together with other IFRSrelated adjustments applied with effect from 1 January 2005 and the impact onthe Group's results of businesses sold in 2004, have been separately analysed toprovide a comparable basis of presentation. In 2005 statutory profit before tax was £3,820 million, an increase of £343million, or 10 per cent (2004: £3,477 million). Profit attributable to equityshareholders increased by £101 million, or 4 per cent, to £2,493 million andearnings per share increased by 4 per cent to 44.6p. Economic profit increasedby 12 per cent to £1,616 million. On a comparable basis, profit before tax increased by £146 million, or 4 percent, to £3,466 million (2004: £3,320 million). Excluding the impact ofcustomer redress provisions and the strengthening of reserves for mortality,profit before tax increased by 9 per cent to £3,726 million. Income increasedby 7 per cent whilst costs grew by only 4 per cent. Earnings per shareincreased by 11 per cent to 47.2p. The post-tax return on shareholders' equityincreased to 23.3 per cent (2004: 22.2 per cent) and economic profit rose by 14per cent to £1,620 million. Our strategy to deepen customer relationships has led to an increase in customeradvances, particularly in mortgages, credit cards and corporate lending, and isreflected in a 9 per cent increase in loans and advances to customers to £175billion. Customer deposits increased by £5 billion, or 4 per cent, to £131billion, largely as a result of good growth in customer savings accounts in theretail business. Group net interest income, on a comparable basis, increased by £423 million, or8 per cent, compared with last year. Good levels of consumer lending growthincreased average personal lending and credit card balances by £1.7 billion andaverage mortgage balances by £7.8 billion. Customer lending growth in ourBusiness Banking and Corporate Markets franchises increased averageinterest-earning assets by £4.4 billion. The banking net interest margin (page34, note 8) decreased by 6 basis points to 2.78 per cent. Much of this margindecline has been caused by the impact of lower earnings on the Group's capitaland other interest-free liabilities and, excluding this funding impact, themargin was broadly stable year-on-year. The banking net interest margin in thesecond half of 2005 actually increased by 5 basis points to 2.80 per cent,compared with 2.75 per cent in the first half of 2005. Other income, net of insurance claims, on a comparable basis and excluding thestrengthening of reserves for mortality, increased by £260 million, or 6 percent, to £4,659 million. Fees and commissions receivable increased by 9 percent to £3,315 million as a result of higher income from the strong volumegrowth in current account fees and an increase in fees from large corporatebusiness and asset based lending, as a result of growing customer transactionvolumes. Page 8 of 44 Operating expenses continued to be tightly controlled and on a comparable basisincreased by 5 per cent to £5,506 million (page 36, note 11). Excluding theimpact of customer redress provisions, operating expenses increased by only 4per cent. Significant improvements continue to be made in processing andoperational efficiency and we have continued to expand our programme ofoffshoring a number of our processing and back office operations to India.Staff numbers reduced by 3,652 to 69,778 during the year, improving Groupproductivity. As a result of this constant focus on day-to-day operating costcontrol, the cost:income ratio, excluding customer redress provisions and thestrengthening of reserves for mortality, improved to 52.7 per cent, from 54.3per cent in 2004. Whilst the Group has demonstrated strong cost control during 2005, we have alsoidentified a number of key initiatives which collectively have the potential tosignificantly improve our cost:income ratio over the next few years whilst alsoimproving operational efficiency and speed of execution. These self-fundinginitiatives will capture significant groupwide synergies and fall broadly intothree categories:- • improve our operational efficiency and management accountabilities through organisational redesign and process re-engineering; • consolidating similar back-office operations and achieving cost reductions through standardising the way we operate and manage back-office processes across the Group; and • transforming groupwide procurement to enhance the way we manage suppliers and achieve the most efficient pricing available. This programme of efficiency improvement initiatives is expected to delivergross benefits of £275 million per annum for an initial investment of less than£200 million, of which £40 million was charged in 2005. This will continue toimprove the Group's cost:income ratio whilst allowing substantial scope tore-invest in the business. From 2007 onwards we expect the Group's profitbefore tax to be increased by approximately £100-£150 million per annum as aresult of this programme of cost saving initiatives. Overall asset quality remains satisfactory. On a comparable basis, impairmentlosses on loans and advances increased by 21 per cent to £1,090 million. Asubstantial reduction in impairment losses in the corporate franchise was morethan offset by higher retail impairments, resulting from a combination of volumerelated asset growth in personal loan and credit card lending, the absence of aprovision release in the mortgage business which totalled £39 million in 2004and more customers, with higher levels of indebtedness and therefore lowerlevels of recovery, experiencing repayment difficulties. As a result oftightening our credit underwriting criteria during 2005, the quality of newbusiness written during 2005 is good. Our impairment charge expressed as apercentage of average lending increased to 0.66 per cent, compared to 0.61 percent in 2004 (page 37, note 13). On a statutory basis, impaired assets totalled£4,122 million, compared with £3,515 million at 1 January 2005, representing 2.3per cent of total lending, up from 2.1 per cent at 1 January 2005, butunchanged from 30 June 2005. We expect a further deterioration in the retail credit environment in the firsthalf of 2006 however, as a result of the improved quality of new businesswritten in the last 12 months, we expect greater stability in the second half of2006. In Wholesale Markets, impairment levels have remained low throughout 2005and the outlook for corporate lending remains good, although we expect a returnto more normal levels of impairment over time. Page 9 of 44 Following the publication of revised annuitant mortality tables and consultationon future mortality projections by the actuarial profession's MortalityCommittee, the Group has reviewed the annuitant mortality assumptions used inits life assurance businesses. While the actuarial profession is stillconsulting on the adoption of the new projections, the Group has decided tostrengthen its mortality related reserves by £155 million (£110 million on acomparable basis). Following the introduction of time-barring, and the consequent increase inclaims, the Group has also reviewed the estimated cost of redress payments tocustomers, principally relating to past sales of mortgage endowment policiesthrough the branch network. This has led to an increased provision for customerredress of £150 million. Our capital position remains robust. At the end of December 2005, the totalcapital ratio was 10.9 per cent and the tier 1 capital ratio was 7.9 per cent.During the year, risk-weighted assets increased by 10 per cent to £144.9billion, reflecting good levels of growth in consumer lending and mortgages andstrong growth in our Corporate Markets businesses. We continue to plan forrisk-weighted asset growth of mid-to-high single digits over the next few years,and expected profit retentions remain sufficient to support this level ofrisk-weighted asset growth. We are also significantly improving our balancesheet management and capital efficiency, moving from a 'buy and hold' modeltowards an 'origination and distribution' framework. In this context we areplanning to initiate a rolling residential mortgage securitisation programme inthe second half of 2006. Scottish Widows continues to be one of the most strongly capitalised lifeassurance companies in the UK. The working capital ratio of the Scottish WidowsLong-Term Fund remained strong at an estimated 17.8 per cent at the end ofDecember 2005. The required risk capital margin was covered over 11 times. InMarch 2005, Scottish Widows paid a 2004 dividend of £200 million to Lloyds TSBreflecting the start of an expected regular dividend stream, and in December2005 a further £800 million of surplus capital was repatriated to the Group. InMarch 2006, a second annual dividend will be paid to the Group. We arecontinuing to examine opportunities to improve our capital efficiency and havework in progress that we believe will allow Scottish Widows to repatriatefurther surplus capital to the Group. The Group's pension schemes accounting deficit totalled £2,910 million at theend of December 2005 (£2,037 million net of deferred tax). During 2005 theGroup made additional voluntary contributions of £220 million to these schemesto be applied in reduction of the schemes' deficit. The Group is currently inthe process of finalising its triennial actuarial valuation of the schemes and,as part of this process, is also considering other methods of addressing theschemes' deficit. The board has decided to maintain the final dividend at 23.5p per share, to makea total for the year of 34.2p. This represents a dividend yield forshareholders of 7 per cent, calculated using the 31 December 2005 share price of488.5p. Helen A WeirGroup Finance Director Page 10 of 44 SEGMENTAL ANALYSIS Year ended 31 December 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items TotalComparable basis £m £m £m £m £m £m £mNet interest income 3,307 41 370 411 2,165 (370) 5,513Other income 1,811 525 15,295 15,820 1,710 2 19,343Total income 5,118 566 15,665 16,231 3,875 (368) 24,856Insurance claims - (197) (14,597) (14,794) - - (14,794)Total income, net of 5,118 369 1,068 1,437 3,875 (368) 10,062insurance claimsOperating expenses (2,682) (160) (479) (639) (2,186) 1 (5,506)Trading surplus (deficit) 2,436 209 589 798 1,689 (367) 4,556Impairment losses on loans (905) - - - (185) - (1,090)and advancesProfit (loss) before tax* 1,531 209 589 798 1,504 (367) 3,466Volatility- Banking - - - - - (124) (124)- Insurance - 28 410 438 - - 438- Policyholder interests - - 311 311 - - 311Other IFRS adjustments (213) - (73) (73) 20 (55) (321)applied from 1 January2005Profit (loss) on sale and 76 - - - (6) (20) 50closure of businessesProfit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820 Year ended 31 December 2004 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items TotalComparable basis £m £m £m £m £m £m £mNet interest income 3,228 44 239 283 1,986 (407) 5,090Other income 1,696 496 10,240 10,736 1,544 45 14,021Total income 4,924 540 10,479 11,019 3,530 (362) 19,111Insurance claims - (214) (9,408) (9,622) - - (9,622)Total income, net of 4,924 326 1,071 1,397 3,530 (362) 9,489insurance claimsOperating expenses (2,609) (154) (468) (622) (2,047) 12 (5,266)Trading surplus (deficit) 2,315 172 603 775 1,483 (350) 4,223Impairment losses on loans (676) - 3 3 (230) - (903)and advancesProfit (loss) before tax* 1,639 172 606 778 1,253 (350) 3,320Volatility- Insurance - 8 160 168 - - 168- Policyholder interests - - (30) (30) - - (30)Loss on sale of businesses - - - - (21) - (21)Trading results of - - - - 40 - 40discontinued operationsProfit (loss) before tax 1,639 180 736 916 1,272 (350) 3,477 *comparable basis Page11 of 44 DIVISIONAL PERFORMANCE UK RETAIL BANKING Comparable basis 2005 2004 Change £m £m % Net interest income 3,307 3,228 2Other income 1,811 1,696 7Total income 5,118 4,924 4Operating expenses (2,532) (2,509) 1Trading surplus 2,586 2,415 7Impairment losses on loans and advances (905) (676) 34Profit before tax, before provisions for customer redress 1,681 1,739 (3) Provisions for customer redress (150) (100) Profit before tax 1,531 1,639 (7) Cost:income ratio, before provisions for customer redress 49.5% 51.0% 31 December 1 January 2005 2005Total assets £103.9bn £96.5bn 8Total risk-weighted assets £60.6bn £57.2bn 6 Key achievements • Satisfactory income growth in a more challenging consumer environment, with good growth in income per customer and a 28 per cent increase in target customer current account recruitment. • Tight cost control, with a clear focus on improving efficiency. Staff reductions of 2,713 during the year resulted in lower costs in the second half of the year. • Positive jaws with income growth of 4 per cent exceeding cost growth, excluding customer redress provisions, of 1 per cent. • Good and broad customer balance growth: - Group mortgage balances increased by 10 per cent to £88.4 billion. - Credit card balances, adjusted to exclude the effect of the Goldfish disposal, increased by 9 per cent to £7.2 billion. - Personal loan balances increased by 3 per cent to £11.0 billion. - Customer deposit balances increased by 7 per cent to £71.0 billion. • Customer satisfaction levels reached their highest level in recent years during 2005. • Higher impairment charge reflecting marketwide deterioration in retail credit quality as a result of more customers, with higher levels of indebtedness, experiencing repayment difficulties. Page 12 of 44 UK RETAIL BANKING (continued) Profit before tax, on a comparable basis, from UK Retail Banking decreased by£108 million, or 7 per cent, to £1,531 million, reflecting good levels ofbusiness growth offset by higher impairment losses and customer redressprovisions. Increased income from continued growth in the Group's consumerlending and customer deposit portfolios and improved current account fee incomewas offset by a higher level of impairment losses in the Group's unsecuredlending portfolios. Total income increased by 4 per cent, notwithstanding adecrease in commissions from creditor insurance, whilst cost growth, excludingcustomer redress provisions, was 1 per cent. Other income increased by 7 percent, and now represents 35 per cent of total income. During 2005, good levels of growth were achieved in all key product areas.Gross new mortgage lending for the Group totalled £26.0 billion (2004: £26.3billion). Net new lending totalled £8.3 billion resulting in a market share ofnet new lending of 9.1 per cent, and mortgage balances outstanding increased by10 per cent to £88.4 billion. Personal loan balances outstanding at theyear-end were £11.0 billion, an increase of 3 per cent and credit card balancestotalled £7.2 billion, an increase of 9 per cent, adjusting to exclude theeffect of the Goldfish disposal. Credit balances on current accounts andsavings and investment accounts increased by 7 per cent. Income per customercontinued to improve during the year. Customers are increasingly choosing to buy through direct channels as well asthrough our branches. Towards the end of 2005 we saw improved levels of growthin branch based sales, particularly current and savings accounts, whilstcontinued investment in our direct channel capabilities has supported goodlevels of business growth. Sales through direct channels represent half oftotal sales and, during 2005, internet product sales increased by 28 per centand product sales via the telephone increased by 39 per cent. Our internet banknow has 3.7 million registered users and over 470 million transactions wereprocessed through internet banking, an increase of 40 per cent. Lloyds TSB remains a leader in the added value current account market, with over4 million customers. Target customer current account recruitment increased by28 per cent, compared with 2004. Operating expenses remained well controlled and, excluding customer redressprovisions, increased by only £23 million, or 1 per cent. This included higherlevels of restructuring costs as we continue to rationalise back officeoperations to improve efficiency. Levels of customer service and satisfactionhave also continued to improve. Impairment losses on loans and advances increased by £229 million, or 34 percent, to £905 million, reflecting a combination of volume related asset growthin personal loan and credit card lending, the absence of a mortgage provisionrelease which in 2004 totalled £39 million, and the impact of more customers,with higher levels of indebtedness, experiencing repayment difficulties. Theimpairment charge as a percentage of average lending for personal loans andoverdrafts increased to 4.76 per cent, from 4.20 per cent in 2004, while thecharge in the credit card portfolio increased to 4.01 per cent, from 3.42 percent in 2004. In the mortgage business the Group continued to experience a lowlevel of losses and as a result the mortgage impairment charge was £13 million.Overall, the provisions charge as a percentage of average lending, on acomparable basis, was 0.92 per cent, compared to 0.75 per cent in 2004. Page 13 of 44 UK RETAIL BANKING (continued) Within personal loans, key initiatives have been the increased use ofbehavioural and risk-based pricing, and leveraging our customer insightcapabilities to enable the Group to deliver more competitive pricing to betterquality customers within our existing customer base. Over 99 per cent of newpersonal loans and 77 per cent of new credit cards sold during 2005 were toexisting customers, where the Group has a better understanding of an individualcustomer's total financial position. Dynamic delinquency measures remain inline with our expectations given the slowdown in consumer spending. Cheltenham & Gloucester (C&G) continued to focus on prime lending marketsegments during 2005. The average indexed loan-to-value ratio on the C&Gmortgage portfolio was 43 per cent (31 December 2004: 41 per cent), and theaverage loan-to-value ratio for C&G new mortgages and further advances writtenduring 2005 was 64 per cent (2004: 62 per cent). At 31 December 2005, 95 percent of C&G mortgage balances had an indexed loan-to-value ratio of less than 85per cent (31 December 2004: 94 per cent) and only 0.6 per cent of balances hadan indexed loan-to-value ratio in excess of 95 per cent (31 December 2004: 0.3per cent). Page 14 of 44 INSURANCE AND INVESTMENTS 2005 2004 ChangeComparable basis £m £m % Net interest income 411 283Other income 15,820 10,736Total income 16,231 11,019Insurance claims (14,684) (9,622)Total income, net of insurance claims 1,547 1,397 11Operating expenses (639) (610) 5Trading surplus 908 787 15Impairment losses on loans and advances - 3Profit before tax, excluding customer redress provisions and 908 790 15strengthening of reserves for mortality Provisions for customer redress - (12)Strengthening of reserves for mortality (110) -Profit before tax 798 778 3 Profit before tax analysisLife, pensions and OEICs* 683 610 12General insurance 209 172 22Scottish Widows Investment Partnership 16 8 100Profit before tax* 908 790 15 *excluding customer redress provisions and strengthening of reserves for mortality Key achievements • Significantly improved profit performance. Profit before tax, on a comparable basis and excluding customer redress provisions and a significant strengthening of reserves for mortality, increased by 15 per cent to £908 million. • Strong, and improving, sales performance. 21 per cent increase in Scottish Widows' new business weighted sales, increasing the Group's market share of life, pensions and long-term savings to an estimated 6.2 per cent, from 5.7 per cent. • Excellent progress in increasing bancassurance sales, particularly in the second half of 2005 when sales grew by 23 per cent, compared with the second half of 2004. • Improved profitability. New business contribution in Scottish Widows increased by 19 per cent. Life and pensions new business margin increased to 29.7 per cent. • Good progress with General Insurance's strategy to develop its manufacturing business and increase focus on direct channels. Strong focus on improving underwriting capability, supply chain efficiency and claims management led to profit before tax, on a comparable basis, increasing by 22 per cent. • Strong capital position maintained. During 2005, Scottish Widows Group repatriated £1 billion surplus capital to the Group. Page 15 of 44 INSURANCE AND INVESTMENTS (continued) Profit before tax, on a comparable basis, increased by £20 million, or 3 percent to £798 million despite a significant strengthening of reserves formortality which, on a comparable basis, totalled £110 million. 2005 2004 ChangeScottish Widows - profit before tax analysis* £m £m % Life and pensions New business contribution 224 188 19Existing business 181 181 -Investment earnings - normalised 196 167 17Profit before tax 601 536 12OEICsProfit before tax 82 74 11Profit before tax (life, pensions and OEICs) 683 610 12 New business margin (life and pensions) 29.7% 28.6% *comparable basis, excluding customer redress provisions and the strengthening of reserves for mortality Profit before tax, excluding customer redress provisions and the strengtheningof reserves for mortality, from the Group's life, pensions and OEICs businessincreased by 12 per cent to £683 million. The Group's strategy to improve itsreturns by focusing on more profitable, less capital intensive, business whilstconstantly seeking to improve process and distribution efficiency has led to a19 per cent increase in new business contribution to £224 million. As a resultof this improved capital efficiency and strong sales of pensions and singlepremium investments, the life and pensions new business margin increased to 29.7per cent (2004: 28.6 per cent). Page 16 of 44 INSURANCE AND INVESTMENTS (continued) 2005 2004 ChangeWeighted sales (regular + 1/10 single) £m £m % Life and pensions 754 657 15OEICs 148 86 72Life, pensions and OEICs 902 743 21 Bancassurance 274 242 13Independent financial advisers 562 432 30Direct 66 69 (4)Life, pensions and OEICs 902 743 21 Overall, weighted sales in 2005 increased by 21 per cent to £902 million and asa result the Group's life, pensions and investments market share increasedsignificantly to an estimated 6.2 per cent, compared with 5.7 per cent in 2004.During 2005 the Group launched a new group pensions platform which supported thestrong growth in sales during the year. Scottish Widows is now also one of thelargest UK providers of individual pensions. IFA sales grew 30 per cent to £562 million, supported by significant product and service enhancements in pensionsand investments, and our estimated market share of the IFA market improved to6.8 per cent, from 5.9 per cent in 2004. Bancassurance sales were 13 per centhigher at £274 million. Weighted sales of OEICs were 72 per cent higher,largely through the branch network and to Lloyds TSB private banking clients.Our estimated market share through the bancassurance and direct channelsincreased to an estimated 5.5 per cent, from 5.4 per cent in 2004. In January 2006, Scottish Widows announced a new partnership with Virgin tomarket life assurance and a new cancer insurance product under the Virgin Moneybrand. This supports Scottish Widows' long-term strategy to secure a greaterbreadth of distribution for its products. Scottish Widows Investment Partnership Pre-tax profit, on a comparable basis, from Scottish Widows InvestmentPartnership (SWIP) increased to £16 million, compared with £8 million in 2004,reflecting improved market performance and increased revenues from new business.SWIP won £4.4 billion of gross new business in 2005, an increase of 110 percent on 2004, and its assets under management increased by 16 per cent to £95billion. Overall investment performance during 2005 has continued to improve.Groupwide funds under management increased by 12 per cent to £121 billion. Page 17 of 44 Insurance and Investments (continued) General insurance 2005 2004 ChangeComparable basis £m £m % Commission receivable 681 672 1Commission payable (695) (750) (7)Underwriting income (net of reinsurance) 562 554 1Other income 18 64Net operating income 566 540 5Claims paid on insurance contracts (net of reinsurance) (197) (214) (8)Operating income, net of claims 369 326 13 Operating expenses (160) (154) 4Profit before tax 209 172 22 Claims ratio 34% 37%Combined ratio 80.8% 83.2% Profit before tax, on a comparable basis, from our general insurance operationsincreased by £37 million, or 22 per cent, to £209 million. Operating income,net of claims, increased by 13 per cent compared with cost growth of 4 per cent.Good progress continues to be made in implementing new platforms forunderwriting and claims processes. Net operating income improved by £26 million as growth in income from home andmotor business was partly offset by reduced broking commission from loanprotection insurance, reflecting the slowdown in unsecured consumer lendinggrowth during 2005 (page 35, note 10) and lower health premiums following thetransfer of the Group's medical insurance business to BUPA during 2004. Goodprogress has also been made in building the Group's corporate partneringcapability with a new distribution agreement secured with MORE TH>N during 2005. Our strategy to increase investment in more cost efficient distribution throughdirect channels continues to generate earnings momentum with gross writtenpremiums from new policies sold through direct channels increasing by 9 per centin 2005. This reflected strong growth in levels of new business through theinternet, where home insurance sales increased by 39 per cent and motorinsurance sales by 12 per cent. New motor insurance sales by telephoneincreased by 15 per cent. The business has also delivered substantialimprovements in business retention reflecting higher levels of customersatisfaction and improvements in operational efficiency. Claims fell by £17 million to £197 million, and the claims ratio improved to 34per cent (2004: 37 per cent), reflecting good progress in re-engineering theclaims process and improvements in the cost effectiveness of the claims supplychain, as well as lower health claims as a result of the transfer of the Group'sprivate medical insurance business to BUPA. As a result, the combined ratiorelating to the underwriting business improved to 80.8 per cent in 2005 (2004:83.2 per cent). Page 18 of 44 WHOLESALE AND INTERNATIONAL BANKING 2005 2004 ChangeComparable basis £m £m % Net interest income 2,165 1,986 9Other income 1,710 1,544 11Total income 3,875 3,530 10Operating expenses (2,186) (2,047) 7Trading surplus 1,689 1,483 14Impairment losses on loans and advances (185) (230) (20)Profit before tax 1,504 1,253 20 Cost:income ratio 56.4% 58.0% 31 December 1 January 2005 2005Total assets £124.0bn £123.8bn -Total risk-weighted assets £80.1bn £71.0bn 13 2005 2004Profit before tax by business unit £m £mCorporate Markets 958 732 31Business Banking 206 153 35Asset Finance 219 240 (9)International Banking 133 120 11Other (12) 8 1,504 1,253 20 Key achievements • Excellent profit growth. Profit before tax, on a comparable basis, increased by 20 per cent to £1,504 million. • Strong income growth, up 10 per cent, as Corporate Markets strategy begins to deliver results. Income momentum improved during the year. • Positive jaws. Income growth of 10 per cent exceeded cost growth of 7 per cent. Continued investment in people and systems to support new product capabilities. • Low levels of impairment as a result of high corporate liquidity and a continued strong level of recoveries. Impairment charge reduced by 20 per cent. • Good progress in delivering the strategy to build an integrated wholesale bank for corporate markets. 17 per cent increase in Corporate Markets trading surplus, and 31 per cent increase in profit before tax. • Good levels of franchise growth in Business Banking. 24 per cent growth in trading surplus, and 35 per cent growth in profit before tax. • Good new business growth in Asset Finance with trading surplus up 12 per cent. However, higher levels of retail impairment resulted in a fall of 9 per cent in profit before tax. • Improved post-tax return on risk-weighted assets from 1.41 per cent to 1.50 per cent. Page 19 of 44 WHOLESALE AND INTERNATIONAL BANKING (continued) Wholesale and International Banking profit before tax, on a comparable basis,increased by £251 million, or 20 per cent, to £1,504 million. Income growth of10 per cent exceeded cost growth of 7 per cent, leading to a reduction in thecost:income ratio to 56.4 per cent. Trading surplus increased by £206 millionor 14 per cent, to £1,689 million. There was strong profit growth in CorporateMarkets, Business Banking and International Banking while Asset Finance sawstrong trading surplus growth before higher impairment losses. Overall growthin profit was ahead of growth in risk-weighted assets and has led to an increasein the post-tax return on average risk weighted assets to 1.50 per cent,compared to 1.41 per cent in 2004. Net interest income increased by £179 million, or 9 per cent, reflecting higherincome from strong growth in customer lending in Corporate Markets, BusinessBanking and Asset Finance. Other income increased by £166 million, or 11 percent. Strong growth in structured finance transactions, increased fee incomefrom relationship business products and higher levels of cross-selling activityled to an increase of 18 per cent in other income from Corporate Markets. Inaddition, other income benefited from the impact of motor dealershipacquisitions in Asset Finance and sustained customer growth in Business Banking.Costs were 7 per cent higher at £2,186 million, reflecting higher staff costsas a result of our increased investment in people, as we continue to build upour Corporate Markets product capability and expertise, and the impact of themotor dealership acquisitions within Asset Finance. The charge for impairment losses on loans and advances decreased by £45 million,or 20 per cent, to £185 million, as a result of lower provisions and a goodlevel of recoveries from the corporate lending portfolio, partially offset byhigher charges in the Asset Finance business. In Corporate Markets, profit before tax grew by 31 per cent, from £732 millionin 2004, to £958 million, driven by a combination of higher income and areduction in impairment losses. Income increased by 15 per cent, includinghigher levels of cross-selling income which increased by 27 per cent reflectingour increased customer focus and integration across the business. Income growthwas strong in both relationship and transactional business. Customerrelationships continue to be deepened, and there has been considerableinvestment in the business to broaden origination, distribution and portfoliomanagement capabilities. This has included the build up of new creditstructuring and loan trading teams and the launch of a variety of new products. Profit before tax in Business Banking grew by £53 million, or 35 per cent, to£206 million reflecting our strategy to move relationship managers back intobranches and closer to our customers. There was good growth in customer income,tight control of costs and service and operational improvements. This supporteda 4 percentage point reduction in the cost:income ratio for the business.Customer deposits rose by 4 per cent to £10.7 billion and customer lendingincreased by 11 per cent to £8.0 billion. Business Banking continued to developand grow its customer franchise, with net customer recruitment of some 13,350during 2005, reflecting a market leading position in both the overall andstart-up markets. Over 18,000 customers transferred their banking arrangementsto the Group from other banking providers. Page 20 of 44 WHOLESALE AND INTERNATIONAL BANKING (continued) Profit before tax in Asset Finance decreased by 9 per cent to £219 million,reflecting higher impairment losses, which offset the continued development ofthe motor and leisure, and contract hire businesses. Income increased by £71million, or 8 per cent, leading to a 12 per cent growth in the trading surplus.New business has increased by 7 per cent in the personal and retail financebusiness. Lloyds TSB Commercial Finance has continued to grow strongly with a19 per cent market share, measured by client numbers, and the motor and leisurebusiness continues to be the largest independent lender in the UK motor andleisure point of sale market with a market share of 18 per cent. In International Banking, profit before tax increased by £13 million, or 11 percent, to £133 million. This reflects a reduction in costs and lower impairmentprovisions which offset a £12 million, or 3 per cent, reduction in income as aresult of lower earnings on retained capital following the repatriation ofoffshore capital to the Group. Page 21 of 44 CONSOLIDATED INCOME STATEMENT - STATUTORY 2005 2004 £m £m Interest and similar income 12,589 10,707Interest and similar expense (6,918) (5,597)Net interest income 5,671 5,110Fees and commissions income 2,990 3,054Fees and commissions expense (842) (844)Net fees and commissions income 2,148 2,210Net trading income 9,298 5,036Insurance premium income 4,469 6,070Other operating income 1,140 857Other income 17,055 14,173Total income 22,726 19,283Insurance claims (12,186) (9,622)Total income, net of insurance claims 10,540 9,661Operating expenses (5,471) (5,297)Trading surplus 5,069 4,364Impairment losses on loans and advances (1,299) (866)Profit (loss) on sale and closure of businesses 50 (21)Profit before tax 3,820 3,477Taxation (1,265) (1,018)Profit for the year 2,555 2,459 Profit attributable to minority interests 62 67Profit attributable to equity shareholders 2,493 2,392Profit for the year 2,555 2,459 Basic earnings per share 44.6p 42.8pDiluted earnings per share 44.2p 42.5p Total dividend per share for the year* 34.2p 34.2pTotal dividend for the year* £1,915m £1,914m *total dividend for the year represents the interim dividend paid in October 2005 and the final dividend which will bepaid and accounted for in May 2006. Page 22 of 44 CONSOLIDATED BALANCE SHEET - STATUTORY 31 December 1 January 2005 2005 31 December 2004Assets £m £m £m Cash and balances at central banks 1,156 1,078 1,078Items in course of collection from banks 1,310 1,462 1,462Treasury bills and other eligible bills 92Trading securities and other financialassets at fair value through profit or loss 60,374 56,840Derivative financial instruments 5,878 9,263Loans and advances to banks 31,655 31,851 31,848Loans and advances to customers 174,944 161,162 155,318Debt securities 43,485Equity shares 27,310Available-for-sale financial assets 14,940 14,593Investment property 4,260 3,776 3,776Goodwill 2,373 2,469 2,469Value of in-force business 2,922 2,760 4,363Other intangible assets 50 28 28Tangible fixed assets 4,291 4,180 4,180Other assets 5,601 3,392 9,013Total assets 309,754 292,854 284,422 Equity and liabilitiesDeposits from banks 31,527 39,723 39,723Customer accounts 131,070 126,349 119,811Items in course of transmission to banks 658 631 631Derivative financial instruments andother trading liabilities 6,396 10,334Debt securities in issue 39,346 28,728 28,770Liabilities arising from insurance contracts and 40,550 36,725 52,289participating investment contractsLiabilities arising from non-participatinginvestment contracts 21,839 16,361Unallocated surplus within insurance businesses 518 426 1,362Other liabilities 10,395 8,526 14,916Retirement benefit obligations 2,910 3,075 3,075Deferred tax liabilities 1,145 925 1,704Other provisions 368 270 211Subordinated liabilities 12,402 11,211 10,252Total liabilities 299,124 283,284 272,744 EquityShare capital 1,420 1,419 1,419Share premium account 1,170 1,145 1,145Other reserves 383 371 343Retained profits 7,222 6,554 8,140Shareholders' equity 10,195 9,489 11,047Minority interests 435 81 631Total equity 10,630 9,570 11,678 Total equity and liabilities 309,754 292,854 284,422 Page 23 of 44 CONDENSED CONSOLIDATED CASH FLOW STATEMENT - STATUTORY 2005 2004 £m £m Net cash (used in) provided by operations (331) 12,214 Cash flows from investing activitiesPurchase of fixed asset investments (10,088)Proceeds from sale and maturity of fixed asset investments 9,732Purchase of available-for-sale investments (10,108)Proceeds from sale and maturity of available-for-sale investments 10,266Purchase of fixed assets (1,843) (1,565)Proceeds from sale of fixed assets 1,073 698Acquisition of businesses, net of cash acquired (27) (16)Disposal of businesses, net of cash disposed (4) (25)Net cash used in investing activities (643) (1,264) Cash flows from financing activitiesDividends paid to equity shareholders (1,914) (1,913)Dividends paid to minority interests (37) (68)Proceeds from issue of subordinated liabilities 1,361 699Proceeds from issue of ordinary shares and transactions in own shares held in 26 11respect of employee share schemesRepayment of subordinated liabilities (loan capital) (232) (764)Capital element of finance lease rental payments (2) (1)Change in minority investment in subsidiaries 329 (151)Net cash used in financing activities (469) (2,187) Change in cash and cash equivalents (1,443) 8,763Cash and cash equivalents at beginning of year 28,196 19,433Cash and cash equivalents at end of year 26,753 28,196 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 24 of 44 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - STATUTORY Attributable to equity shareholders Share capital Other Retained Minority and premium reserves profits interests Total £m £m £m £m £m Balance at 1 January 2004 2,554 343 7,646 782 11,325Currency translation differences - - (12) 1 (11)Profit for the period - - 2,392 67 2,459Total recognised income for the period - - 2,380 68 2,448Dividends - - (1,913) (68) (1,981)Purchase/sale of treasury shares - - 8 - 8Employee share option schemes:- value of employee services - - 19 - 19- proceeds from shares issued 10 - - - 10Changes in minority interests - - - (151) (151)Balance at 31 December 2004 2,564 343 8,140 631 11,678Adjustments on transition to IAS 32, - 28 (1,586) (550) (2,108)IAS 39 and IFRS 4Restated balance at 2,564 371 6,554 81 9,5701 January 2005 Movement in available-for-sale - 8 - - 8investments, net of tax Movement in cash flow hedges, net of - 11 - - 11taxCurrency translation differences - (7) 24 - 17Net income recognised directly in - 12 24 - 36equityProfit for the period - - 2,493 62 2,555Total recognised income for the period - 12 2,517 62 2,591 Dividends - - (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 - - - 26Changes in minority interests - - - 329 329Balance at 31 December 2005 2,590 383 7,222 435 10,630 Page 25 of 44 SUMMARISED SEGMENTAL ANALYSIS - STATUTORY Year ended 31 December 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total £m £m £m £m £m £m £m Net interest income 3,521 23 372 395 2,265 (510) 5,671Other income 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) 3,820 Year ended 31 December 2004 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total £m £m £m £m £m £m £m Net interest income 3,228 44 239 283 2,006 (407) 5,110Other income 1,696 504 10,370 10,874 1,558 45 14,173Total income 4,924 548 10,609 11,157 3,564 (362) 19,283Insurance claims - (214) (9,408) (9,622) - - (9,622)Total income, net of 4,924 334 1,201 1,535 3,564 (362) 9,661insurance claimsOperating expenses (2,609) (154) (468) (622) (2,078) 12 (5,297)Trading surplus (deficit) 2,315 180 733 913 1,486 (350) 4,364Impairment losses on loans (676) - 3 3 (193) - (866)and advancesLoss on sale of businesses - - - - (21) - (21)Profit (loss) before tax 1,639 180 736 916 1,272 (350) 3,477 Page 26 of 44 NOTES 1. Accounting policies and presentation Except as noted below, the accounting policies adopted in the preparation of the2005 results are unchanged from those disclosed in the Group's announcementsetting out the effects of the implementation of International FinancialReporting Standards ('IFRS') and Financial Reporting Standard 27 ('FRS 27'),published on 27 May 2005. Copies of this announcement are available on theGroup's website at www.lloydstsb.com/investorrelations. The Group recognises as an asset the value of in-force life assurance businessin respect of life assurance contracts and participating investment contracts,representing the net present value of future profits expected to accrue to theshareholder from these contracts. In the Group's first IFRS results for the sixmonths ended 30 June 2005, the asset in the consolidated balance sheet andmovements in the asset recognised in the income statement were calculated anddisclosed on a net of tax basis. Since that time accounting practice hascontinued to evolve and a consensus has emerged that the value of in-forcebusiness should be presented gross of tax. The Group has therefore changed itsaccounting policy to present movements in the value of in-force business grossof attributable tax with a consequential adjustment to the tax charge; there isno effect upon the Group's earnings or shareholders' equity. Comparativefigures have been restated accordingly. Comparative figures have also been restated to allow for deferred tax onproperties acquired as part of a business combination and for thereclassification of certain balance sheet items following revisedinterpretations of the requirements of IFRS. This has resulted in a reductionin shareholders' equity although there is no significant impact upon the Group'sincome statement. The effect of these changes is set out below. Year ended 31 December 2004 Value of Previous in-force Other basis business adjustments Restated £m £m £m £m Profit before volatility 3,348 (9) - 3,339Volatility 147 (9) - 138Profit before tax 3,495 (18) - 3,477Taxation (1,036) 18 - (1,018)Profit for the year 2,459 - - 2,459 At 1 January 2005Total assets 291,997 870 (13) 292,854Shareholders' equity 9,572 - (83) 9,489 Page 27 of 44 1. Accounting policies and presentation (continued) Half-year ended 30 June 2005 Value of Previous in-force Other basis business adjustments Restated £m £m £m £m Profit before volatility 1,723 45 - 1,768and other IFRS adjustmentsVolatility 77 10 - 87Other IFRS adjustments (124) (18) - (142)Profit before tax 1,676 37 - 1,713Taxation (472) (37) - (509)Profit for the period 1,204 - - 1,204 At 30 June 2005Total assets 305,212 907 (13) 306,106Shareholders' equity 9,475 - (83) 9,392 Year ended 31 December 2005 Value of Previous in-force Other basis business adjustments Restated £m £m £m £m Profit before volatility 3,492 24 - 3,516and other IFRS adjustmentsVolatility 548 77 - 625Other IFRS adjustments (284) (37) - (321)Profit before tax 3,756 64 - 3,820Taxation (1,201) (64) - (1,265)Profit for the year 2,555 - - 2,555 At 31 December 2005 Total assets 308,820 934 - 309,754Shareholders' equity 10,259 - (64) 10,195 Comparative information for 2004 has been restated to take into account therequirements of all the standards except for IAS 32, IAS 39 and IFRS 4(including FRS 27). As permitted by IFRS, these standards have been implementedwith effect from 1 January 2005 and the opening balance sheet at this date hasbeen adjusted accordingly. Page 28 of 44 2. Basis of presentation The Group implemented the requirements of IAS 32, IAS 39 and IFRS 4 (includingFRS 27) with effect from 1 January 2005 without restating 2004 comparativefigures and as a consequence the 2005 results are not directly comparable withthose of 2004. Therefore, in order to provide a clearer representation of theunderlying performance of the business the impact of those standards for whichcomparatives have not been restated has been separately analysed. In addition,to facilitate comparisons, volatility arising from the use of fair values in theGroup's banking and insurance businesses (page 31, note 4) together with theprofit on sale or closure of businesses have also been separately identified. A reconciliation of this 'comparable' basis of presentation to the Group'sprofit before tax for the year ended 31 December 2005 is shown below. Other IFRS related adjustments Profit on applied from sale and Comparable 1 January closure of Statutory basis Volatility 2005 businesses basis £m £m £m £m £m Net interest income 5,513 (73) 231 - 5,671Other income 19,343 698 (2,986) - 17,055Total income 24,856 625 (2,755) - 22,726Insurance claims (14,794) - 2,608 - (12,186)Total income, net of insurance 10,062 625 (147) - 10,540claimsOperating expenses (5,506) - 35 - (5,471)Trading surplus (deficit) 4,556 625 (112) - 5,069Impairment losses on loans and (1,090) - (209) - (1,299)advancesProfit on sale and closure of - - - 50 50businessesProfit (loss) before tax 3,466 625 (321) 50 3,820Taxation (941) (392) 84 (16) (1,265)Profit (loss) for the year 2,525 233 (237) 34 2,555 Profit (loss) attributable to 67 36 (41) - 62minority interestsProfit (loss) attributable to 2,458 197 (196) 34 2,493equity shareholdersProfit (loss) for the year 2,525 233 (237) 34 2,555 Earnings per share 43.9p 3.6p (3.5)p 0.6p 44.6p In the reconciliation above, no adjustment has been made to show the volatilityelement of policyholder income and insurance claims as, with the exception ofpolicyholder interests, which is included in volatility, these offset eachother. Page 29 of 44 2. Basis of presentation (continued) In 2006, the Group plans to report its results on a full IFRS basis, separatelyanalysing volatility and the profit (loss) on sale and closure of businesses.The Group's 2005 results on this basis are shown below. Half-year ended 30 June 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total £m £m £m £m £m £m £m Net interest income 1,730 10 184 194 1,084 (219) 2,789Other income 815 270 5,403 5,673 759 7 7,254Total income 2,545 280 5,587 5,867 1,843 (212) 10,043Insurance claims - (108) (5,060) (5,168) - - (5,168)Total income, net of 2,545 172 527 699 1,843 (212) 4,875insurance claimsOperating expenses (1,281) (78) (196) (274) (1,046) 22 (2,579)Trading surplus (deficit) 1,264 94 331 425 797 (190) 2,296Impairment losses on loans (568) - - - (102) - (670)and advancesProfit (loss) before tax* 696 94 331 425 695 (190) 1,626 Volatility- Banking - - - - - (73) (73)- Insurance - 7 124 131 - - 131- Policyholder interests - - 29 29 - - 29Profit (loss) before tax 696 101 484 585 695 (263) 1,713 Year ended 31 December 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total £m £m £m £m £m £m £m Net interest income 3,521 23 366 389 2,265 (431) 5,744Other income 1,605 543 12,573 13,116 1,628 8 16,357Total income 5,126 566 12,939 13,505 3,893 (423) 22,101Insurance claims - (197) (11,989) (12,186) - - (12,186)Total income, net of 5,126 369 950 1,319 3,893 (423) 9,915insurance claimsOperating expenses (2,697) (160) (434) (594) (2,181) 1 (5,471)Trading surplus (deficit) 2,429 209 516 725 1,712 (422) 4,444Impairment losses on loans (1,111) - - - (188) - (1,299)and advancesProfit (loss) before tax* 1,318 209 516 725 1,524 (422) 3,145 Volatility- Banking - - - - - (124) (124)- Insurance - 28 410 438 - - 438- Policyholder interests - - 311 311 - - 311Profit (loss) on sale and 76 - - - (6) (20) 50closure of businessesProfit (loss) before tax 1,394 237 1,237 1,474 1,518 (566) 3,820 *comparable basis Page 30 of 44 3. Impact of the adoption of IFRS Information on the effect of implementing IFRS upon the Group's 2004 results andbalance sheet at 1 January 2005 was set out in the Group's announcementpublished on 27 May 2005. Excluding volatility, the impact of those standardsapplied with effect from 1 January 2005 has been to reduce earnings largelyreflecting the application of effective interest rates, the reclassification ofcertain securities from equity to debt, and the impact of discounting on levelsof loan loss impairment. There has also been a significant reduction in otherincome, with a corresponding decrease in insurance claims, as a result of theimpact of IFRS 4 on the accounting treatment of certain insurance products. Ananalysis of the reduction in profit before tax by division is provided below. Other IFRS adjustments applied from1 January 2005 Life, pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total £m £m £m £m £m £m £m Net interest income 214 (18) (4) (22) 100 (61) 231Other income (206) 18 (2,722) (2,704) (82) 6 (2,986)Total income 8 - (2,726) (2,726) 18 (55) (2,755)Insurance claims - - 2,608 2,608 - - 2,608Total income, net of 8 - (118) (118) 18 (55) (147)insurance claimsOperating expenses (15) - 45 45 5 - 35Trading surplus (7) - (73) (73) 23 (55) (112)Impairment losses on loans (206) - - - (3) - (209)and advancesProfit (loss) before tax (213) - (73) (73) 20 (55) (321) 4. Volatility Banking volatility In accordance with IFRS, it is the Group's policy to recognise all 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 structure that allows divisions to transfer tocentral group items the volatility associated with marking to market derivativesheld for risk management purposes. 'Banking volatility' is principallycomprised of the difference between the result that would be recognised on anaccrual accounting basis for derivatives held for risk management purposes andtheir mark to market value. The Group has set up a central hedging function toreduce the impact of this volatility by establishing, where possible, accountinghedge relationships for the external derivatives. During 2005, profit before tax included a negative banking volatility of £124million. Page 31 of 44 4. Volatility (continued) Insurance volatility Changes in market variables such as the performance of equity markets and thelevel of interest rates, which are beyond the control of management, can resultin significant volatility in the profitability of the Group's insurancebusinesses. As in previous years, in order to provide a clearer representationof the underlying performance of the life and pensions and general insurancebusinesses, the effect of these changes is separately analysed within insurancevolatility. Following the implementation of the requirements of IFRS and FRS27, insurance volatility is principally comprised of the elements describedbelow. The Group's insurance businesses have substantial holdings of investments whichare accounted for at fair value with changes being reflected within the incomestatement. The difference between the actual return on these investmentsattributable to shareholders and the expected return based upon economicassumptions made at the beginning of the year is included within insurancevolatility. In addition, the calculation of the value of in-force businessmakes assumptions about future investment returns; to the extent that actualexperience is different the effect is also included within insurance volatility. The main assumptions used in the calculation of the value of in-force businessat 31 December 2005 were as follows: 31 December 31 December 2005 2004 % % Risk-adjusted discount rate (net of tax) 7.02 7.40Return on equities (gross of tax) 6.72 7.17Return on fixed interest securities (gross of tax) 4.12 4.57Expenses inflation 3.79 3.76 Changes in stock market performance also affect the realistic valuation of theguarantees and options embedded within products written in the Scottish WidowsWith-Profits Fund, which following the implementation of FRS 27 is now reflectedin the Group's balance sheet. Fluctuations in this valuation caused bymarket-related movements are also included within insurance volatility. During 2005, profit before tax included positive insurance volatility of £438million. 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 onpolicyholder investment returns is included in the Group's tax charge ratherthan being offset against the related income, either increasing or decreasingprofit before tax with a corresponding change in the tax charge. In order toprovide a clearer representation of the underlying performance of the Group'slife and pensions businesses the impact of these items upon pre-tax profit hasbeen separately identified within volatility. During 2005, profit before tax included positive policyholder interestsvolatility of £311 million. Page 32 of 44 5. Insurance grossing adjustments IFRS requires line-by-line consolidation for all items of income and expenditureand, as a result, the Group can no longer report the results of its lifeassurance businesses as a single line item; in addition certain investmentvehicles which were previously off-balance sheet are now consolidated. Theincome statement therefore now includes premiums receivable from policyholdersand the returns on investments held within the life funds and OEICs which areshown within total income, and related deductions within interest expense andinsurance claims. Whilst this represents a significant presentational change,there is no material impact upon the Group's profitability. The followingtables show the impact on the comparable income statement of these grossingadjustments: Insurance and Investments Year ended 31 December 2005 Comparable Insurance Comparable basis gross-up basis* £m £m £m Net interest income 411 310 101Other income 15,820 14,337 1,483Insurance claims (14,794) (14,597) (197)Total income, net of insurance claims 1,437 50 1,387Operating expenses (639) (32) (607)Profit before tax 798 18 780*comparable basis, excluding insurance grossing adjustment Year ended 31 December 2004 Comparable Insurance Comparable basis gross-up basis* £m £m £m Net interest income 283 189 94Other income 10,736 9,270 1,466Insurance claims (9,622) (9,408) (214)Total income, net of insurance claims 1,397 51 1,346Operating expenses (622) (37) (585)Impairment losses 3 - 3Profit before tax 778 14 764 *comparable basis, excluding insurance grossing adjustment Page 33 of 44 6. Mortgage lending 2005 2004 Gross new mortgage lending £26.0bn £26.3bnMarket share of gross new mortgage lending 9.0% 9.0%Net new mortgage lending £8.3bn £9.3bnMarket share of net new mortgage lending 9.1% 9.2%Mortgages outstanding (year-end)* £88.4bn £80.1bnMarket share of mortgages outstanding 9.1% 9.1%*excluding the effect of IFRS related adjustments 7. Central group items* 2005 2004 £m £m Lloyds TSB Foundations (34) (31)Funding cost of acquisitions less earnings on capital (325) (317)Central costs and other unallocated items (8) (2) (367) (350)*comparable basis The four independent Lloyds TSB Foundations support registered charitiesthroughout the UK that enable people, particularly disabled and disadvantaged,to play a fuller role in society. The Foundations receive 1 per cent of theLloyds TSB Group's pre-tax profit after adjusting for gains and losses on thedisposal of businesses and pre-tax minority interests, averaged over threeyears, instead of a dividend on their shareholdings. In 2005, £34 million wasaccrued for payment to registered charities. 8. Group net interest income 2005 2004Statutory basis £m £m Net interest income 5,671 5,110Average interest-earning assets, excluding reverse repos 201,813 178,887Net interest margin 2.81% 2.86% Banking margin - comparable basis* Net interest income 5,149 4,847Average interest-earning assets, excluding reverse repos 185,468 170,438Net interest margin 2.78% 2.84% *As a result of the implementation of IFRS, the Group's net interest incomeincludes certain amounts attributable to policyholders, in addition to theinterest earnings on shareholders' funds held in the Group's insurancebusinesses. In order to maintain the comparability of the Group's banking netinterest margin these amounts, together with the related averageinterest-earning assets, have been excluded from the comparable basiscalculation. Page 34 of 44 9. Other income 2005 2004Comparable basis £m £mFees and commissions receivable: UK current account fees 754 637 Other UK fees and commissions 1,201 1,087 Insurance broking 681 672 Card services 545 515 International fees and commissions 134 131 3,315 3,042Fees and commissions payable (918) (842)Net fees and commissions income 2,397 2,200Net trading income 8,749 4,886Insurance premium income 7,201 6,070Other operating income 996 865Total other income* 19,343 14,021Insurance claims (14,794) (9,622)Total other income, net of insurance claims* 4,549 4,399Volatility- Banking (45) -- Insurance 432 168- Policyholder interests 311 (30)Other IFRS adjustments applied from 1 January 2005 (378) -Discontinued operations - 14Total other income, net of insurance claims 4,869 4,551 *comparable basis 10. General insurance income 2005 2004 £m £mPremium income from underwritingCreditor 127 114Home 441 442Health 16 27Reinsurance premiums (22) (29) 562 554Commissions from insurance brokingCreditor 396 442Home 49 45Health 15 20Other 221 165 681 672 Page 35 of 44 11. Operating expenses 2005 2004Comparable basis £m £m Administrative expenses: Staff: Salaries 2,068 1,961 National insurance 154 142 Pensions 308 307 Other staff costs 325 280 2,855 2,690Premises and equipment: Rent and rates 305 293 Hire of equipment 13 16 Repairs and maintenance 136 128 Other 152 130 606 567Other expenses: Communications and external data processing 452 446 Advertising and promotion 207 205 Professional fees 216 222 Provisions for customer redress 150 112 Other 375 387 1,400 1,372Administrative expenses 4,861 4,629Depreciation 639 637Impairment of goodwill 6 -Total operating expenses - comparable basis 5,506 5,266Discontinued operations - 31Other IFRS adjustments applied from 1 January 2005 (35) -Total operating expenses 5,471 5,297Cost:income ratio - comparable basis* 52.7% 54.3%Cost:income ratio - statutory basis* 51.9% 54.8% *total operating expenses divided by total income, net of insurance claims. The cost:income ratio on acomparable basis also excludes provisions for customer redress and the strengthening of reserves formortality. Page 36 of 44 12. Number of employees (full-time equivalent) 31 December 31 December 2005 2004 UK Retail Banking 33,593 36,306Insurance and Investments 6,283 5,944Wholesale and International Banking 19,763 19,554Other, largely IT and Operations 10,139 11,626 69,778 73,430Agency staff (FTE) (2,981) (3,445)Total number of employees (full-time equivalent) 66,797 69,985 13. Impairment losses on loans and advances 2005 2004 £m £m Impairment losses on loans and advances (see below) 1,302 866Other credit risk provisions (3) - 1,299 866Impairment losses and loans and advances - comparable basisUK Retail Banking Personal loans/overdrafts 585 473 Credit cards 307 242 Mortgages 13 (39) 905 676 Insurance and Investments - (3) Wholesale and International Banking 188 230 Total charge - comparable basis 1,093 903 Discontinued operations - (37) Other IFRS adjustments applied from 1 January 2005 209 - Total charge 1,302 866 % % Charge as % of average lending: Personal loans/overdrafts 4.76 4.20 Credit cards 4.01 3.42 Mortgages 0.02 (0.05)UK Retail Banking 0.92 0.75Insurance and Investments - (0.10)Wholesale and International Banking 0.31 0.43Total charge - comparable basis 0.66 0.61Discontinued operations - (13.11) Other IFRS adjustments applied from 1 January 2005 n/a - Total charge 0.76 0.59 Page 37 of 44 14. Capital ratios 31 December 1 January 2005 2005 £m £mCapital Tier 1 11,478 10,753Tier 2 10,447 8,767 21,925 19,520 Supervisory deductions (6,160) (6,219) Total capital 15,765 13,301 Risk-weighted assets £bn £bn UK Retail Banking 60.6 57.2Insurance and Investments 2.6 1.9Wholesale and International Banking 80.1 71.0Central group items 1.6 1.7Total risk-weighted assets 144.9 131.8 Risk asset ratios Total capital 10.9% 10.1%Tier 1 7.9% 8.2% 2005 2004 Post-tax return on average risk-weighted assets 1.81% 1.99%Post-tax return on average risk-weighted assets* 1.92% 1.98% *comparable basis, excluding customer redress provisions and strengthening of reserves for mortality 15. Retirement benefit obligations The amounts recognised in the balance sheet are as follows: 31 December 31 December 2005 2004Defined benefit schemes £m £m Present value of scheme liabilities 17,320 14,866Fair value of scheme assets (14,026) (11,648)Net defined benefit scheme deficit 3,294 3,218Unrecognised actuarial losses (485) (237)Net recognised defined benefit scheme deficit 2,809 2,981 Other retirement benefit schemes 101 94Net recognised liability 2,910 3,075 Page 38 of 44 15. Retirement benefit obligations (continued) The net recognised liability has reduced by £165 million from £3,075 million to£2,910 million at 31 December 2005, as cash contributions to the Group's definedbenefit schemes exceeded the regular cost, partly reflecting the additionalvoluntary contributions of £220 million made during the year. However,unrecognised actuarial losses increased by £248 million to £485 million; areduction in the discount rate used to value the schemes' liabilities, as aresult of the fall in corporate bond yield (£1.6bn), and an increased allowancefor mortality (£0.2bn) more than offset the effect of a stronger than expectedreturn from the schemes' assets (£1.4bn). Overall, therefore, the net definedbenefit scheme deficit is little changed from 2004 at £3,294 million before tax(£2,306 million net of tax). 16. Balance sheet information 31 December 1 January 2005 2005Deposits - customer accounts £m £mSterling:Non-interest bearing current accounts 3,604 3,300Interest bearing current accounts 37,976 35,863Savings and investment accounts 60,522 57,255Other customer deposits 16,809 17,058Total sterling 118,911 113,476Currency 12,159 12,873Total deposits - customer accounts 131,070 126,349 Loans and advances to customers Domestic:Agriculture, forestry and fishing 2,299 2,083Manufacturing 5,983 4,622Construction 2,059 2,147Transport, distribution and hotels 7,649 7,063Property companies 8,267 5,943Financial, business and other services 16,272 16,862Personal : mortgages 88,528 80,282 : other 22,776 22,841Lease financing 5,815 6,227Hire purchase 4,853 4,828Other 7,696 5,930Total domestic 172,197 158,828 International:Latin America 173 125United States of America 1,984 2,028Europe 1,927 1,583Rest of the world 735 516Total international 4,819 4,252 177,016 163,080Impairment provisions for loans and advances (2,072) (1,918)Total loans and advances to customers 174,944 161,162 Page 39 of 44 17. Economic profit 2005 2004Comparable basis, excluding customer redress provisions and £m £mstrengthening of reserves for mortalityAverage shareholders' equity 11,331 10,735Profit attributable to equity shareholders 2,640 2,383Less: notional charge (1,020) (966)Economic profit 1,620 1,417 Statutory basisAverage shareholders' equity 9,747 10,493Profit attributable to equity shareholders 2,493 2,392Less: notional charge (877) (944)Economic profit 1,616 1,448 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 (2004: 9 per cent). 18. Earnings per share 2005 2004Comparable basis, excluding customer redress provisions and strengthening ofreserves for mortality Profit attributable to equity shareholders £2,640m £2,383mWeighted average number of ordinary shares in issue 5,595m 5,590mEarnings per share 47.2p 42.6p Statutory basisBasicProfit attributable to equity shareholders £2,493m £2,392mWeighted average number of ordinary shares in issue 5,595m 5,590mEarnings per share 44.6p 42.8pFully dilutedProfit attributable to equity shareholders £2,493m £2,392mWeighted average number of ordinary shares in issue 5,639m 5,625mEarnings per share 44.2p 42.5p Page 40 of 44 19. Tax Under IFRS the Group is required to include in income tax expense the taxattributable to UK life insurance policyholder earnings and its interests inOpen Ended Investment Companies (OEICs). The effective tax rate of the Group, excluding gross policyholder tax charge andOEIC interests from profit before tax and the tax charge, was 27.0 per cent(2004: 28.3 per cent) compared to the standard UK corporation tax rate of 30 percent. The effective tax rate including policyholder tax and OEIC interests was 33.1per cent, compared to 29.3 per cent in 2004. A reconciliation of the charge that would result from applying the standard UKcorporation tax rate to profit before tax to the tax charge, includingpolicyholder tax and OEIC interests, is given below: 2005 2004 £m £m Profit before tax 3,820 3,477Tax charge thereon at UK corporation tax rate of 30% 1,146 1,043Factors affecting charge:Disallowed and non-taxable items (47) (32)Overseas tax rate differences (1) (14)Net tax effect of disposals and unrealised gains (59) (2)Tax deductible coupons on non-equity minority interests - (12)Policyholder tax and OEIC interests 223 33Other items 3 2Tax charge 1,265 1,018 20. Profit/loss on sale 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, has led to a net profit of £50 millionbeing recognised in the income statment. During 2004, the Group disposed of anumber of its businesses in Latin America and a net loss of £21 million wasrecognised in the income statement. Page 41 of 44 21. Scottish Widows - realistic balance sheet information Financial Services Authority (FSA) returns for large with-profits companies 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. Estimated positions at 31December 2005 are shown below, together with the actual position at 31 December2004. 31 December 2005 (estimated) With-profits Long-term fund fund £bn £bn Available assets, including support account 20.1 23.2Realistic value of liabilities (19.2) (19.1)Working capital for fund 0.9 4.1 Working capital ratio 4.4% 17.8% Risk capital margin cover 2.7 times 11.5 times 31 December 2004 With-profits Long-term fund fund £bn £bn Available assets, including support account 19.1 22.0Realistic value of liabilities (18.1) (17.8)Working capital for fund 1.0 4.2 Working capital ratio 5.1% 19.0% Risk capital margin cover 2.4 times 9.3 times Page 42 of 44 22. Dividend A final dividend for 2005 of 23.5p per share (2004: 23.5p) will be paid on 3 May2006, making a total for the year of 34.2p (2004: 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 8 March Record date 10 March Final date for joining or leaving the dividend reinvestment plan 5 April Final dividend paid 3 May Annual general meeting 11 May 23. Other information The financial information included in this news release does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.Statutory accounts for the year ended 31 December 2005 were approved by thedirectors on 23 February 2006 and will be delivered to the registrar ofcompanies following publication on 1 April 2006. 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. A report on Form 20-F will be filed with the Securities and Exchange Commissionin the United States. Page 43 of 44 CONTACTS For further information please contact:- Michael Oliver Director of Investor Relations Lloyds TSB Group plc 020 7356 2167 E-mail: [email protected] Mary Walsh Director of Corporate Relations Lloyds TSB Group plc 020 7356 2121 E-mail: [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. Page 44 of 44 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Lloyds