22nd Feb 2008 07:00
Lloyds TSB Group PLC22 February 2008 PART 1 LLOYDS TSB GROUP PLC - RESULTS 2007 CONTENTS PageKey highlights 1Summary of results 2Profit analysis by division 3Group Chief Executive's statement 4Group Finance Director's review of financial performance 7Summarised segmental analysis 13Divisional performance: 14 - UK Retail Banking 14 - Insurance and Investments 18 - Wholesale and International Banking 25Consolidated income statement - statutory 29Consolidated balance sheet - statutory 30Consolidated statement of changes in equity - statutory 31Condensed consolidated cash flow statement - statutory 32Condensed segmental analysis - statutory 33Notes 35Contacts for further information 58 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, the policies and actions of governmental and regulatoryauthorities in the UK or jurisdictions outside the UK, including other Europeancountries and the US, exposure to legal proceedings or complaints, changes incustomer preferences, competition and other factors. Please refer to the latestAnnual Report on Form 20-F filed with the US Securities and Exchange Commissionfor a discussion of such factors. The forward looking statements contained inthis announcement are made as at the date of this announcement, and the Groupundertakes no obligation to update any of its forward looking statements. KEY HIGHLIGHTS Unless otherwise stated the analysis throughout this document compares the yearto 31 December 2007 with the year to 31 December 2006 and excludes the impact ofinsurance related volatility, profit on disposal of businesses, settlement ofoverdraft claims in 2007 and the pension schemes related credit in 2006 (page36, note 2). "I am delighted to report that the Group has continued to deliver a strongtrading performance, notwithstanding the significant recent turbulence in globalfinancial markets. Our higher quality, lower risk, business model has beenclearly demonstrated in the resilience of our earnings stream. The Board remains confident in the Group's earnings outlook and, as a result,has decided to increase the final dividend by 5 per cent to 24.7 pence pershare." Sir Victor Blank Chairman • Strong financial performance with statutory earnings per shareincreased by 17 per cent to 58.3p. Economic profit increased by 21 per cent.Statutory profit before tax was 6 per cent lower at £4,000 million, largelyreflecting adverse policyholder interests volatility. • Strong underlying profit momentum. Profit before tax up 6 per centto £3,919 million notwithstanding impact of global financial markets turbulence.Excluding the impact of £280 million market dislocation, profit before taxincreased by 13 per cent to £4,199 million. • High returns maintained, with return on equity of 25.2 per cent.Improved return on risk-weighted assets, and return on Embedded Value increasedto 9.9 per cent. • Good income growth. Income growth of 5 per cent, reflecting thestrength and resilience of the Group's revenue base. Excluding the impact ofmarket dislocation and insurance grossing, income increased by 6 per cent. • Excellent cost management. Cost growth of only 1 per cent,delivering wide positive jaws. Cost:income ratio improved by 1.8 percentagepoints to 49.0 per cent. Groupwide productivity programme exceeded 2007expectations, and remains on track to deliver benefits of £250 million in 2008. • Satisfactory credit quality. Retail impairment charge lower than in2006. Based on current trends, we do not expect a significant change in theretail impairment charge in the first half of 2008, compared to the first halfof 2007. Corporate asset quality remains good. • Strong liquidity and funding position maintained throughout therecent global financial markets turbulence. • Excellent capital management. Robust capital ratios maintained.Satisfactory transition to Basel II, with tier 1 capital ratio increasing to 9.5per cent. Over £3.6 billion of capital repatriated from Scottish Widows overthe last 3 years. Page 1 of 58 SUMMARY OF RESULTS 2007 2006 Change £m £m %Results - statutoryTotal income, net of insurance claims 10,706 11,104 (4)Operating expenses 5,567 5,301 (5)Trading surplus 5,139 5,803 (11)Impairment 1,796 1,555 (15)Profit before tax 4,000 4,248 (6)Profit attributable to equity shareholders 3,289 2,803 17Economic profit (page 48, note 17) 2,238 1,855 21Earnings per share (page 48, note 18) 58.3p 49.9p 17Post-tax return on average shareholders' equity 28.2% 26.6% Results - excluding volatility, profit on sale of businesses, settlement of overdraft claims in 2007 and the pension schemes related credit in 2006Total income, net of insurance claims 11,206 10,694 5Operating expenses 5,491 5,429 (1)Trading surplus 5,715 5,265 9Impairment 1,796 1,555 (15)Profit before tax 3,919 3,710 6Profit attributable to equity shareholders 2,863 2,634 9Economic profit 1,842 1,690 9Earnings per share 50.8p 46.9p 8Post-tax return on average shareholders' equity 25.2% 25.1%Post-tax return on average risk-weighted assets 1.76% 1.72% Shareholder valueClosing market price per share (year end) 472p 571.5p (17)Total market value of shareholders' equity £26.7bn £32.2bn (17)Total shareholder return (12.1)% 24.8%Proposed dividend per share (page 57, note 24) 35.9p 34.2p 5 31 December 31 December 2007 2006 Change £m £m %Balance sheetShareholders' equity 12,141 11,155 9Net assets per share 212p 195p 9Total assets 353,346 343,598 3Risk-weighted assets (Basel I basis) 171,971 156,043 10 Loans and advances to customers 209,814 188,285 11Customer deposits 156,555 139,342 12 Risk asset ratiosTotal capital (Basel I basis) 11.0% 10.7%Tier 1 capital (Basel I basis) 8.1% 8.2% Page 2 of 58 PROFIT ANALYSIS BY DIVISION 2007 2006 Change £m £m % UK Retail Banking (page 14) 1,808 1,549 17 Insurance and Investments (page 18) 1,056 973 9 Wholesale and International Banking (page 25) - Before impact of market dislocation 1,717 1,640 5- Impact of market dislocation (280) - 1,437 1,640 (12) Central group items (382) (452) Profit before tax* 3,919 3,710 6Volatility (page 36, note 2)- Insurance (267) 84- Policyholder interests (page 37, note 2) (233) 326Profit on sale of businesses 657 -Settlement of overdraft claims (76) -Pension schemes related credit - 128Profit before tax 4,000 4,248 (6)Taxation (page 56, note 23) (679) (1,341)Profit for the year 3,321 2,907 14 Profit attributable to minority interests 32 104Profit attributable to equity shareholders 3,289 2,803 17Profit for the year 3,321 2,907 14 Earnings per share (page 48, note 18) 58.3p 49.9p 17 *Excluding volatility, profit on sale of businesses, settlement of overdraftclaims and pension schemes related credit. Page 3 of 58 GROUP CHIEF EXECUTIVE'S STATEMENT 2007 was another good year for Lloyds TSB. We delivered strong results, despitethe more challenging operating environment that we saw in the second half of theyear. Our business performance, excluding the impact of the market dislocation,continued its strong momentum as our relationship-based strategy serves us well.We believe this momentum will carry through to 2008, given we have a highquality, sustainable earnings stream, driven by the deep relationships we havewith our customers, coupled with the significant growth potential we have bothwithin our own franchise and in the UK market as a whole. As a result, weremain confident as to the Group's future outlook. Given this strong performance and confidence in our future earnings capacity,the Board has decided to increase the final dividend by 5 per cent to 24.7 penceper share. This brings the full year dividend to 35.9 pence per share, anincrease of 5 per cent over that paid for 2006. Going forward, the Boardexpects to grow the dividend over time, whilst continuing to build dividendcover. Strong momentum On an underlying basis, the Group increased profit before tax by 6 per cent to£3,919 million. Excluding the £280 million charge arising from the marketdislocation, the Group grew profits by 13 per cent from £3,710 million to £4,199million. Whilst we cannot overlook the impact of the dislocation on ourresults, these numbers are more reflective of the ongoing performance of theGroup. Our lower risk strategy limited the impact of the abrupt change in the marketsand, consequently, our charge was relatively modest in comparison to our balancesheet size, our earnings, and the charges taken by many other organisations.This is in large part due to the conscious choice to focus the Group's strategyon building deep, long-lasting relationships with our customers in order todeliver high quality, sustainable results over time. Over the last few years, the successful execution of our strategy has deliveredincreasing levels of customer recruitment and enhanced sales volumes, and in2007 we saw further progress on these leading indicators of future profit. In the Retail Bank, we attracted over one million new current accounts and wedelivered strong flows of new business, with sales volumes rising 17 per cent.We are now the number one provider of current accounts, cards and personalloans. In Insurance and Investments, we have seen good progress in the sale ofbancassurance products to our franchise customers and sales volumes rose by 20per cent, with particular success in the sale of protection products through thebranch network. In Wholesale and International Banking, we saw similar strong progress. OurCorporate Markets business is attracting growing numbers of new customers andrecorded a further 46 per cent improvement in cross-sales. Our CommercialBanking business attracted good levels of the more valuable switcher accountsand we remain the leader in terms of the share of the start-up market, at 21 percent. Key to supporting our relationship-focused strategy is the efficient managementof costs and capital, allowing us to continue to invest in the franchise anddrive future growth. Once again we have delivered a strong performance in theseareas. Page 4 of 58 Costs rose by only 1 per cent, as we continue to embed our efficiencyprogrammes, and our cost:income ratio improved to 49.0 per cent, from 50.8 percent in 2006. The extension of our lean manufacturing and sigma efficiencyprogrammes, the improvement of our procurement processes and the adoption ofend-to-end processing led to improvements in efficiency as well as better levelsof service quality. Our capital position is strong. We manage our capital to support efficientgrowth, directing capital to our higher growth and higher return business lines.We continued the capital efficiency programmes in Scottish Widows, with afurther £1.9 billion repatriated to the Group during the year. High quality sustainable business Key to sustaining our strong momentum in future years are the relationships weare building with our customers, understanding their needs and developing theproducts and services to meet those needs. As our results in recent periods show, this strategy has served us well and hasa number of benefits. A high percentage of our income is recurring customerrevenue, which is by nature more stable and sustainable. By building deeprelationships, meeting more of our customers' needs, we also benefit in that wehave a lower cost of acquiring new sales. Additionally, because we understandour customers well, we tend to have lower impairments and thus require lesscapital. Perhaps as important as the decision to pursue the relationshipstrategy, was the decision not to pursue a product-led strategy which, as wehave seen of late, results in more volatile revenues and carries a significantlyhigher risk profile. Significant growth potential The UK market represents the second largest economic profit pool for financialservices, with high levels of household financial wealth. It enjoys the lowestlevel of unemployment in the G7 economies and despite a likely slow down in2008, we are projecting good medium-term economic performance and stronglong-term savings growth. We estimate that we currently only have a 10 per cent share of the economicprofit pool, and so we have significant potential within our existing franchiseto grow by meeting more of our customers' needs as well as through adding newcustomers to our franchise. To support this growth potential we are investing in developing the supportinginfrastructure in areas such as customer data management and account planningtools. We continue to enhance our risk and financial systems and, together,these areas will ensure we have the necessary platform to safely support ourfuture growth. Outlook As we look forward to 2008, we do so against a backdrop of turbulent markets andslowing global economic growth. Despite these challenges, we are wellpositioned to deliver further growth and to take advantage of the opportunitiesthat the current environment offers. Page 5 of 58 Our relationship-focused strategy is delivering good results for all ourstakeholders. The events of the last year show that it is effective ingenerating sustainable, high quality results through the cycle. Our prudentapproach to risk ensured we experienced minimal impact from the US sub-primefall-out. We have a strong capital position and this will support the futuregrowth of the business. This has been a year of significant progress across the Group and let me expressmy thanks to all our staff for their wonderful contribution to our success.Relationship businesses thrive on great staff that understand customers and worktowards meeting their needs. In this last year, the performance of our staffhas been terrific. J Eric DanielsGroup Chief Executive Page 6 of 58 GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE In 2007 the Group delivered a strong performance against the backdrop ofsignificant turbulence in global financial markets. Statutory profitattributable to equity shareholders increased by £486 million, or 17 per cent,to £3,289 million and earnings per share increased by 17 per cent to 58.3p.Economic profit increased by 21 per cent to £2,238 million, and the post-taxreturn on equity improved from 26.6 per cent to 28.2 per cent. Profit beforetax fell by 6 per cent to £4,000 million, largely as a result of significantadverse policyholder interests volatility. To enable meaningful comparisons to be made with 2006, the income statementcommentaries below exclude insurance related volatility, the profit on sale ofbusinesses, settlement of overdraft claims in 2007 and the pension schemesrelated credit in 2006. Building strong customer relationships Lloyds TSB's strategy to build strong customer franchises and grow our businessby realising the considerable potential within those franchises continues todeliver strong results. We have continued to extend the reach and depth of ourcustomer relationships, achieving good sales growth, whilst also improvingproductivity and efficiency. The underlying performance of the business remainsstrong with revenue growth remaining well ahead of cost growth. Like many other financial institutions, the Group has been affected by therecent market dislocation; however, the relationship focus of our strategy hasmeant that the impact on the Group's profit before tax was limited to £280million in 2007 (£188 million reduction in income; £92 million increase inimpairment). Continued momentum throughout the business Profit before tax increased by £209 million, or 6 per cent, to £3,919 million,underpinned by good relationship banking momentum, notwithstanding the impact ofthe £280 million market dislocation in Corporate Markets. Revenue growth of 5per cent exceeded cost growth of 1 per cent, with each division deliveringstronger revenue growth than cost growth. Earnings per share increased by 8 percent to 50.8p and economic profit increased by 9 per cent to £1,842 million.Excluding the impact of market dislocation, Group profit before tax increased by13 per cent to £4,199 million. Good income growth Overall, income growth of 5 per cent reflects good progress in delivering ourdivisional strategies. We have increased income from both new and existingcustomers, with strong growth in both assets and liabilities, as well as asignificant increase in fee-related income. Excluding the impact of marketdislocation and insurance grossing, income increased by 6 per cent. Group net interest income, excluding insurance grossing, increased by £349million, or 7 per cent, to £5,631 million. Customer deposits increased by 12per cent to £157 billion, supported by strong growth in savings balances in theretail bank, where bank savings increased by 15 per cent and wealth managementbalances by 12 per cent. Customer deposits in our Corporate Markets, Commercialand International businesses increased by 18 per cent. Page 7 of 58 Strong levels of customer lending growth in Commercial Banking and CorporateMarkets, and good growth in mortgages and retail deposits, more than offset themarketwide experience of lower unsecured personal lending balances. Totalassets increased by 3 per cent to £353 billion, with an 11 per cent increase inloans and advances to customers. The net interest margin from our banking businesses (page 39, note 4) decreasedby 9 basis points, to 2.79 per cent, with broadly stable product margins but anadverse mix effect. Stronger growth in finer margin mortgages and flat widermargin unsecured consumer lending contributed to the negative mix effect whichaccounted for 9 basis points of margin decline. Overall product margins were 2basis points lower, reflecting competitive pressures in the mortgage and assetfinance businesses and a move to finer margin secured lending in CommercialBanking. Funding costs improved the margin by 2 basis points. During thesecond half of 2007, product margins have started to show signs of improving,with increased new business margins becoming evident in mortgages and corporatelending reflecting a marketwide trend towards more appropriate pricing for risk. Other income, net of insurance claims and excluding insurance grossing,increased by £133 million, or 2 per cent, to £5,530 million. This reflectedhigher fees and commissions receivable as a result of strong growth in addedvalue current accounts and higher insurance commissions in the retail bank. Inaddition, good levels of growth were achieved in fee based product sales tocorporate and commercial banking customers. Excellent cost management The Group continues to invest in improving processing efficiency, resulting incontinued tight control over costs. During 2007, operating expenses increasedby only 1 per cent to £5,491 million. Over the last 12 months, staff numbershave fallen by 4,552 (7 per cent) to 58,078, largely as a result of the disposalof Lloyds TSB Registrars and Dutton-Forshaw and further efficiency improvementsin back-office processing centres. These improvements in operationaleffectiveness have resulted in a further reduction in the Group cost:incomeratio from 50.8 per cent to 49.0 per cent. The Group's programme of productivity initiatives has continued to deliversignificant benefits, improving underlying cost efficiency and creating greaterheadroom for further investment in the business. During 2007 the programmedelivered net cost reductions of £145 million, exceeding the previouslyindicated net benefits of approximately £125 million, with gross benefits of£248 million and reinvestment in further programme initiatives of £103 million.The Group remains on track to deliver net benefits of approximately £250 millionin 2008. Along with a number of other UK banks, during the year the Group has received anumber of customer claims for the repayment of overdraft fees. On 27 July 2007,several banks, together with the Office of Fair Trading, asked the High Court ofEngland and Wales to clarify the legal position regarding personal currentaccount fees. The 2007 results include a charge of £76 million relating to thesettlement of claims during the year, together with related costs. Page 8 of 58 Overall credit quality remains satisfactory Impairment losses increased by 15 per cent to £1,796 million. Our impairmentcharge on loans and advances expressed as a percentage of average lending was0.82 per cent, excluding the impact of market dislocation and the 2007 FinanceAct, compared to 0.83 per cent in 2006 (page 42, note 9). Impaired assetsincreased by 8 per cent to £5,311 million, less than the rate of lending growth,and now represent 2.5 per cent of total lending, down from 2.6 per cent at 31December 2006. In UK Retail Banking, impairment losses decreased by £14 million, or 1 per cent,to £1,224 million. During 2007, we have seen a reduction in the level ofcustomer insolvencies, improvements in the Group's collections procedures andbetter than assumed recoveries. The quality of new unsecured lending hascontinued to be strong and our arrears and delinquency trends have improvedduring the year. In addition, the asset quality of our mortgage portfolio hasremained excellent. Whilst the uncertain UK macroeconomic environment andcustomer insolvency trends remain key factors in the outlook for retailimpairment, our current lead indicators are good, we are continuing to enhanceour underwriting and collections procedures and the quality of new businessremains strong. As a result, based on current trends, we do not expect asignificant change in the retail impairment charge in the first half of 2008,compared to the first half of 2007. The Wholesale and International Banking charge for impairment losses increasedby £264 million to £572 million, including a £92 million impairment chargerelating to the impact of market dislocation in the second half of 2007, and aone-off charge of £28 million relating to the impact of the 2007 Finance Act onthe Group's leasing business. The increase in the impairment charge alsoreflects a lower level of releases and recoveries in Corporate Markets and theimpact of recent double-digit growth rates in Corporate lending. Limited exposure to assets affected by current capital markets uncertainties Whilst no bank has been immune to the impact of the turbulence in globalfinancial markets in the second half of 2007, Lloyds TSB's high quality businessmodel means that the Group has relatively limited exposure to assets affected bycurrent capital markets uncertainties (page 46, note 15). US sub-prime Asset Backed Securities (ABS) and ABS Collateralised DebtObligations (CDOs) Lloyds TSB has no direct exposure to US sub-prime ABS and limited indirectexposure through ABS CDOs. During the second half of 2007, the market value ofour holdings in ABS CDOs reduced and, as a result, the Group has taken an incomestatement charge of £114 million, leaving a residual investment of £130 million,net of hedges. The write-down largely reflects junior tranches of CDOs whichhave been written down to the expected interest payments to be received withinthe next 12 months. The Group has no exposure to mezzanine ABS CDOs. TheGroup's residual investment of £130 million is stated net of credit default swap(CDS) protection totalling £470 million purchased from a 'triple A' ratedmonoline Financial Guarantor. At 31 December 2007, the underlying assetssupported by this protection had fallen in value, leaving a reliance on the CDSprotection totalling £155 million. In addition, we have £1,861 million of ABSCDOs which are fully cash collateralised by major global financial institutions. Page 9 of 58 Structured Investment Vehicle (SIV) Capital Notes At 30 June 2007 the Group's exposure to SIV Capital Notes totalled £100 million.During the second half of 2007 the Group wrote down the value of these assets by£22 million, leaving a residual exposure at 31 December 2007 of £78 million.Additionally, at 31 December 2007 the Group had commercial paper back upliquidity facilities totalling £370 million, of which £98 million had beendrawn. All of these liquidity lines are senior facilities. Since the year end,these facilities have been reduced to £208 million, of which £115 million hasbeen drawn. The Group has no SIV-Lite exposure. Trading portfolio In the second half of 2007, Corporate Markets also saw a reduction in profitbefore tax of approximately £144 million as a result of the impact ofmark-to-market adjustments in the Group's trading portfolio, to reflect themarketwide repricing of liquidity and credit. At 31 December 2007 the tradingportfolio contained £181 million of indirect exposure to US sub-prime mortgagesand ABS CDOs. This super senior exposure is protected by note subordination. Available-for-sale assets At 31 December 2007, the Group's portfolio of available-for-sale assets totalled£20,196 million (31 December 2006: £19,178 million). A significant proportionof these assets (£8.3 billion) related to the ABS in Cancara. The residualassets included £3.2 billion Student Loan ABS, predominantly guaranteed by theUS Government, £4.6 billion Government bond and short-dated bank commercialpaper and certificates of deposit and £4.1 billion major bank senior paper andhigh quality ABS. These available-for-sale assets are intended to be held tomaturity however, under IFRS, they are marked-to-market through reserves.During 2007, a net £413 million reserves adjustment, which has no impact on theGroup's capital ratios, has been made to reflect a reduction in the value ofthese assets. These assets are not impaired and we expect to obtain full valuefor them upon maturity. The Group's investment in Cancara, our hybrid Asset Backed Commercial Paperconduit, was £12.0 billion at 31 December 2007, comprising £8.3 billion ABS and£3.7 billion client receivables transactions. Cancara, which is fullyconsolidated in the Group's accounts, is managed in a very conservative manner,which is demonstrated by the quality and ratings stability of its underlyingasset portfolio. At 31 December 2007, the ABS bonds in Cancara were 100 percent Aaa/AAA rated by Moody's and Standard & Poor's respectively, and there wasno exposure either directly or indirectly to sub-prime US mortgages within theABS portfolio. Since the year end, ABS totalling £67 million have beendowngraded. At 31 December 2007 the client receivables portfolio included £115million of US sub-prime mortgage exposure. Scottish Widows has no exposure to US sub-prime ABS either directly orindirectly through CDOs. The Group holds £25 million of short-dated SIVcommercial paper through Scottish Widows. Strong capital management disciplines Capital efficiency continued to improve throughout the Group, resulting in anincrease in post-tax return on average shareholders' equity to 25.2 per cent,and in the post-tax return on average risk-weighted assets to 1.76 per cent,from 1.72 per cent. In our life assurance and investment businesses, thepost-tax return on embedded value, on a European Embedded Value (EEV) basis,increased to 9.9 per cent, from 9.3 per cent. Page 10 of 58 At the end of December 2007, the total capital ratio on a Basel I basis was 11.0per cent and the tier 1 ratio was 8.1 per cent. During the year, risk-weightedassets increased by 10 per cent to £172.0 billion, reflecting growth in ourmortgage and Corporate Markets businesses. Going forward, we expect highsingle-digit or low double-digit annual growth in risk-weighted assets,reflecting increased opportunities to continue to grow our customer lending.The Group has successfully managed the transition to Basel II and the Group'sopening capital ratios on a Basel II basis were 11.0 per cent for total capitaland 9.5 per cent for tier 1 capital (page 43, note 11). Scottish Widows remains strongly capitalised and, at the end of December 2007,the working capital ratio of the Scottish Widows Long Term Fund was an estimated19.2 per cent (page 49, note 19). During 2007, further capital repatriationtotalling £1.9 billion was made to the Group, bringing the total capitalrepatriation since the beginning of 2005 to over £3.6 billion. On 5 December2007 Standard & Poor's announced that it had re-affirmed its Scottish Widows 'AA-' debt rating and placed it on positive outlook. Maintaining a strong liquidity and funding position Throughout the recent marketwide liquidity turbulence, Lloyds TSB has maintaineda strong liquidity position for both the Group's funding requirements, which aresupported by our strong and stable retail and corporate deposit base, and thoseof its sponsored conduit, Cancara. Retail and corporate deposit inflows havebeen strong and the Group continues to benefit from its strong credit ratingsand diversity of funding sources. This has resulted in the Group continuing tofund well over the last few months. In January 2008, Moody's announced that ithad re-affirmed its 'Aaa' long-term debt rating for Lloyds TSB Bank plc. Significant reduction in the Group pension schemes' deficit The Group's defined benefit pension schemes' gross deficit at 31 December 2007improved by £1,416 million to £683 million, comprising net recognisedliabilities of £2,033 million partly offset by unrecognised actuarial gains of£1,350 million (page 42, note 10). This improvement reflects an increase in thereal discount rate used to value the schemes' liabilities and Groupcontributions to the schemes, which exceeded the cost of accruing benefits. Substantial profit on sale of non-core businesses During 2007 the Group sold a number of non-core businesses realising profits onthe disposal totalling £657 million (page 47, note 16). This has furtherstrengthened the Group's capital ratios and improved capital flexibility. In May 2007, Lloyds TSB Group agreed the sale of the business and assets ofLloyds TSB Registrars to Advent International, subject to completion and otheradjustments. The transaction was completed on 30 September 2007, followingregulatory approval, and the Group has reported a profit before tax on the saleof this business of £407 million (tax: nil). In July 2007, the Group announced an agreement to sell Abbey Life AssuranceCompany Limited (Abbey Life) to Deutsche Bank AG. This transaction was alsocompleted at the end of September 2007 and the Group has reported a profitbefore tax on the sale of this business of £272 million (tax: nil). Inaddition, a pre-sale dividend of £175 million was paid to Group in June 2007. Page 11 of 58 Taxation charge The Group's tax charge for 2007 was £679 million, which was an effective rate of17.0 per cent (2006: 31.6 per cent). The effective tax rate is below thestandard UK corporation tax rate as a result of the gains on disposals beingeither exempt from tax or covered by capital losses arising in earlier years, adeferred income tax credit following the reduction in the corporation tax rateannounced in the 2007 Finance Act, and credits arising on policyholderinterests. Under IFRS, the income statement includes a corresponding charge forpolicyholder interests within the Group's profit before tax. Excluding theseitems the Group's effective rate of tax was 28.3 per cent (page 56, note 23). The 2007 Finance Act reduction in corporation tax rate from 30 per cent to 28per cent resulted in a one-off impairment charge of £28 million before tax (£20million after tax), relating to a reduction in future rental income within theGroup's leasing business. In addition, the Group's deferred tax liabilities at31 December 2007 were reduced, resulting in a credit to the Group's tax chargeof £110 million. The net impact of these items has been to increase earningsattributable to shareholders by £90 million during the year. Delivering accelerated earnings momentum, whilst improving profitability andreturns 2007 has been a challenging year for all banks, however Lloyds TSB's highquality, more conservative business model has withstood the difficulties ofglobal financial markets turbulence. Strong earnings momentum has continued inthe UK retail banking and insurance businesses, and our relationship focusedCorporate and Commercial businesses have also continued to perform well. Thesestrong performances have resulted in a good level of income growth which,combined with excellent cost control, has resulted in strong underlying profitmomentum. The Group has also continued to maintain satisfactory asset quality.Encouragingly, this performance has not come at the expense of returns, as theGroup has continued to improve both its return on equity and return onrisk-weighted assets. As a result, the Group is well placed to maintain therecent momentum established throughout the business, and we expect to continueto perform well in 2008. Helen A WeirGroup Finance Director Page 12 of 58 SUMMARISED SEGMENTAL ANALYSIS 2007 Wholesale Group UK Insurance and Central excluding Retail and International group insurance Insurance Banking Investments** Banking items gross up gross up** Group £m £m £m £m £m £m £m Net interest income 3,783 68 2,518 (738) 5,631 461 6,092Other income 1,797 1,900 1,773 362 5,832 6,804 12,636Total income 5,580 1,968 4,291 (376) 11,463 7,265 18,728Insurance claims - (302) - - (302) (7,220) (7,522)Total income, net of 5,580 1,666 4,291 (376) 11,161 45 11,206insurance claimsOperating expenses (2,548) (636) (2,282) (6) (5,472) (19) (5,491)Trading surplus 3,032 1,030 2,009 (382) 5,689 26 5,715(deficit)Impairment (1,224) - (572) - (1,796) - (1,796)Profit (loss) before 1,808 1,030 1,437 (382) 3,893 26 3,919tax* Volatility- Insurance - (267) - - (267) - (267)- Policyholder - - - - - (233) (233)interestsProfit on sale of businesses - 272 385 - 657 - 657 Settlement of overdraft claims (76) - - - (76) - (76)Profit (loss) before 1,732 1,035 1,822 (382) 4,207 (207) 4,000tax 2006 Net interest income 3,642 56 2,177 (593) 5,282 78 5,360Other income 1,621 1,740 2,035 201 5,597 8,306 13,903Total income 5,263 1,796 4,212 (392) 10,879 8,384 19,263Insurance claims - (200) - - (200) (8,369) (8,569)Total income, net of 5,263 1,596 4,212 (392) 10,679 15 10,694insurance claimsOperating expenses (2,476) (646) (2,264) (51) (5,437) 8 (5,429)Trading surplus 2,787 950 1,948 (443) 5,242 23 5,265(deficit)Impairment (1,238) - (308) (9) (1,555) - (1,555)Profit (loss) before tax* 1,549 950 1,640 (452) 3,687 23 3,710Volatility- Insurance - 84 - - 84 - 84- Policyholder - - - - - 326 326interestsPension schemes related credit - - - 128 128 - 128Profit (loss) before 1,549 1,034 1,640 (324) 3,899 349 4,248tax *Excluding volatility, profit on sale of businesses, the settlement of overdraftclaims in 2007 and the pension schemes related credit in 2006. *\* The Group's income statement includes income and expenditure which areattributable to the policyholders of the Group's long-term assurance funds.These items have no impact upon the profit attributable to equity shareholders.In order to provide a clearer representation of the underlying trends withinthe Insurance and Investments segment, these items are shown within a separatecolumn in the segmental analysis above. Page 13 of 58 DIVISIONAL PERFORMANCE UK RETAIL BANKING 2007 2006 Change £m £m %Net interest income 3,783 3,642 4Other income 1,797 1,621 11Total income 5,580 5,263 6Operating expenses (2,548) (2,476) (3)Trading surplus 3,032 2,787 9Impairment (1,224) (1,238) 1Profit before tax, excluding settlement of overdraft claims 1,808 1,549 17Settlement of overdraft claims (76) -Profit before tax 1,732 1,549 12 Cost:income ratio* 45.7% 47.0%Post-tax return on average risk-weighted assets* 2.13% 1.76% Total assets £115.0bn £108.4bn 6Risk-weighted assets £61.7bn £59.1bn 4Customer deposits £82.1bn £75.7bn 8*Excluding settlement of overdraft claims. Key highlights • Excellent profit performance. Profit before tax increased by 17 percent to £1,808 million, excluding the settlement of overdraft claims. • Strong income momentum, up 6 per cent, supported by overall salesgrowth of 17 per cent. • Excellent progress in growing the current account customerfranchise, with over 1 million new current accounts opened, an increase of 17per cent. New Added Value Accounts increased by 79 per cent. Lloyds TSB is nowthe UK market leader in new current account customer recruitment. • Strong growth in savings deposits resulted in an 11 per centincrease in savings balances, with 15 per cent growth in bank savings. • Stabilisation in net interest margin, with net interest margin inthe second half of 2007 1 basis point higher than in the first half of 2007. • Continued good cost management, with a clear focus on investing toimprove service quality and processing efficiency. Excluding the impact of thesettlement of overdraft claims, operating expenses increased by 3 per cent andthere was a substantial improvement in the cost:income ratio to 45.7 per cent. • The quality of new lending continues to be strong. Arrears levelshave continued to improve and the impairment charge in 2007 was lower than in2006. Whilst the economic outlook for 2008 is uncertain, we do not expect toexperience a significant change in the retail impairment charge in the firsthalf of 2008, compared to the first half of 2007. • Improved return on risk-weighted assets, reflecting the impact ofdouble-digit profit growth exceeding the increase in risk-weighted assets. Page 14 of 58 UK RETAIL BANKING (continued) During 2007, UK Retail Banking continued to make substantial progress in each ofits key strategic priorities: growing income from its existing customer base;expanding its customer franchise; and improving productivity and efficiency. Ineach of these areas, a key focus has been on improving sales of recurring incomeproducts, such as current accounts and savings products which, combined withhigher lending related income, has supported the accelerating rate of revenuegrowth. Profit before tax from UK Retail Banking increased by £183 million, or 12 percent, to £1,732 million, reflecting strong levels of franchise growth, excellentcost management and a slightly reduced impairment charge. Excluding thesettlement of overdraft claims, profit before tax increased by 17 per cent to£1,808 million. Total income increased by £317 million, or 6 per cent,supported by higher income from current accounts, savings and personal lending. The adverse mix effect of strong growth in finer margin mortgages and flat widermargin unsecured personal lending led to an overall reduction in the division'snet interest margin. Product margins on a year-on-year basis fell slightlyreflecting competitive pressures in the mortgage business in the first half of2007 which more than offset an increase in retail savings margins. Towards theend of the year, new business margins in the mortgage business started toimprove and this supported a stabilisation in the UK Retail Banking net interestmargin in the second half of the year, compared to the first half. Operating expenses remained well controlled, increasing by 3 per cent, excludingthe settlement of overdraft claims. Significant improvements have been made inthe rationalisation of back office operations to improve efficiency and wecontinue to increase the proportion of front office to back office staff in thebranch network. Growing income from the customer base The Retail Bank has continued to make excellent progress, with further stronggrowth in product sales and continued good revenue growth. We continue todeliver a very strong performance in the growing savings and investment market,especially in bank savings where we have recently benefited from a significantlyimproved rate of deposit growth. Overall sales increased by 17 per cent, with improvements over a broad range ofproducts, especially current accounts, credit cards and bank savings products.Sales volumes were particularly strong in the branch network with an increase of24 per cent. This continued strong sales growth has been driven from highlevels of product innovation over the last twelve months with the successfullaunch of a number of enhanced savings products, an improved range of addedvalue current accounts and the introduction of the innovative Lloyds TSB DuoAirmiles credit card offer. Customer deposits have increased strongly, by 8 percent over the last twelve months, with particularly strong progress in growingour bank savings and wealth management deposit balances, with increases of 15per cent and 12 per cent respectively. 31 December 31 December 2007 2006 ChangeCurrent account and savings balances £m £m % Bank savings 41,976 36,417 15C&G deposits 14,861 14,621 2Wealth management 4,939 4,402 12UK Retail Banking savings 61,776 55,440 11Current accounts 20,305 20,221 -Total customer deposits 82,081 75,661 8 Page 15 of 58 UK RETAIL BANKING (continued) The Group has delivered good levels of mortgage growth, focusing on primemortgage business and seeking to maintain economic returns. However, as we havepreviously indicated, our market share of net new mortgage lending in the secondhalf of the year was below our outstanding stock position, reflecting ourcontinued focus on writing value-creating business. The Group continues tofocus on those segments of the mortgage market where value can be created whileadopting a conservative approach to credit risk. As a result of our focus onmanaging for value and the recent marketwide increase in interest spreads, newbusiness net interest margins have strengthened. Recent levels of mortgageallocations have been stronger and we expect this to translate into robustbalance growth as we move into 2008. Gross new mortgage lending for the Group totalled £29.4 billion (2006: £27.6billion). Mortgage balances outstanding increased by 7 per cent to £102.7billion and net new lending totalled £6.7 billion, resulting in a market shareof net new lending of approximately 6.2 per cent. We have maintained our market leadership position in personal loans, despitetightened credit criteria and a slowdown in consumer demand. Unsecured consumercredit balances were broadly flat with personal loan balances outstanding at 31December 2007 marginally higher at £11.2 billion, and credit card balancesslightly lower at £6.6 billion. Expanding the customer franchise In addition to the strong growth in product sales from existing customers, theGroup has continued to make progress in expanding its customer franchise.Current account recruitment increased by 17 per cent, compared with last year,supported by the range of added value current accounts, in particular the SilverAccount focusing on foreign nationals. During 2007, the Group opened more than1 million new current accounts. Wealth Management continues to make good progress with its expansion plans, andover 260 advisers have now been trained on an enhanced wealth management offercomprising private banking, open architecture portfolio management, retirementplanning, insurance and estate planning services. As a result, new InvestmentPortfolio cases increased by 42 per cent and overall wealth management clientsincreased by 11 per cent. Total new assets under management increased by 42 percent and wealth management banking deposits grew by 12 per cent. In June 2007, the Group launched the Lloyds TSB Airmiles Duo account, a new,innovative and exclusive credit card that offers a 'two in one' easy to manageaccount, with one PIN, one statement and two cards, an American Express and aMasterCard on which customers can earn Airmiles. The demand for this newproduct has been extremely strong, and over 700,000 cards have been issued to agenerally more transactional, high quality, customer segment. As a result,Lloyds TSB was the UK market leader in new credit card issuance during 2007, andnow has the largest and fastest growing loyalty credit card programme in the UK. Page 16 of 58 UK RETAIL BANKING (continued) Improving productivity and efficiency We have continued to make significant progress in reducing levels ofadministration and processing work carried out in branches and, as a result, wehave increased the number of dedicated customer facing branch network staff bysome 4,000 over the last 2 years. Over the same period, branch network stafftime spent on back office administration work has reduced from approximately 35per cent to around 5 per cent. This has enabled us to increase our focus onmeeting our customers' needs and has supported the substantially improved branchnetwork sales productivity and service efforts. These improvements have led tothe retail banking cost:income ratio, excluding the impact of the settlement ofoverdraft claims, improving to 45.7 per cent, from 47.0 per cent last year. In Telephone Banking we have continued to invest in our market leading speechrecognition technology which has supported significant growth in the number ofcustomers using our automated service. This, combined with further improvementsin the efficiency of our contact centre operations, has led to all customerservice calls now being answered from UK based centres. Impairment levels slightly decreased Impairment losses on loans and advances decreased by £14 million, or 1 per cent,to £1,224 million, largely reflecting a reduction in the level of customerinsolvencies and the quality of new lending. In addition, collectionsprocedures continue to improve, a particularly important competitive advantagein a slowing consumer environment, and we achieved better than assumedrecoveries. The impairment charge as a percentage of average lending improvedto 1.10 per cent, compared to 1.18 per cent last year. Over 99 per cent of newpersonal loans and 89 per cent of new credit cards sold during 2007 were toexisting customers, where the Group has a better understanding of an individualcustomer's total financial position. The level of arrears in the personal loanand credit card portfolios reduced during 2007, whilst overdraft arrearsremained stable. Mortgage credit quality remains excellent with the impairment charge remainingat a low level of £18 million, or 2 basis points of average mortgage lending.Arrears in the mortgage business have also fallen. In Cheltenham & Gloucester,the average indexed loan-to-value ratio on the mortgage portfolio was 43 percent, and the average loan-to-value ratio for new mortgages and further advanceswritten during 2007 was 63 per cent. At 31 December 2007, only 1.7 per cent ofbalances had an indexed loan-to-value ratio in excess of 95 per cent. Weextensively stress-test our lending to changes in macroeconomic conditions andwe remain very confident in the quality of our mortgage portfolio. Page 17 of 58 INSURANCE AND INVESTMENTS Excluding volatility and profit on disposal of businesses 2007 2006 Change £m £m %Net interest income 68 56 21Other income 1,900 1,740 9Total income 1,968 1,796 10Insurance claims (302) (200) (51)Total income, net of insurance claims 1,666 1,596 4Operating expenses (636) (646) 2Insurance grossing adjustment (page 13) 26 23 13Profit before tax 1,056 973 9 Profit before tax analysisLife, pensions and OEICsNew business profit - life and pensions 163 171 (5)New business loss - OEICs (22) (24) 8Existing business 551 384 43Expected return on shareholders' net assets 192 134 43Impact of surplus capital repatriation - 36 884 701 26General insurance 128 243 (47)Scottish Widows Investment Partnership 44 29 52Profit before tax 1,056 973 9 Present value of new business premiums (PVNBP) 10,424 9,740 7PVNBP new business margin (EEV basis) 3.1% 3.6%Post-tax return on embedded value (EEV basis, page 50, note 20) 9.9% 9.3% Key highlights • Strong profit performance. Profit before tax increased by 9 percent to £1,056 million. Adjusting for the impact of surplus capitalrepatriation, profit before tax increased by 13 per cent. • Good income growth and excellent cost control. Income, net ofinsurance claims and adjusting for the impact of surplus capital repatriation,increased by 7 per cent. Operating expenses decreased by 2 per cent. • Good sales performance. 7 per cent increase in Scottish Widows'present value of new business premiums. Strong progress in increasingbancassurance sales, up 20 per cent. Good performance in the sale of protectionproducts, corporate pensions and retirement income products. • Improved returns. On an EEV basis, the post-tax return on embeddedvalue increased to 9.9 per cent. New business margin was robust at 3.1 percent. • Robust capital position. Scottish Widows continues to deliverimproving capital efficiency and self-financing growth, and a further £1.9billion of capital was repatriated to the Group during 2007. • Increased weather related claims of £113 million, largely relatingto the severe flooding in the UK in June and July, contributed to a 47 per centreduction in profit before tax in General Insurance. • Excellent performance in Scottish Widows Investment Partnership.Profit before tax increased by 52 per cent reflecting higher margins andimproved mix of external business. Page 18 of 58 INSURANCE AND INVESTMENTS (continued) Scottish Widows life, pensions and OEICs Profit before tax increased by £183 million, or 26 per cent, to £884 million.The effect of surplus capital repatriation to the Group has been to reduceinvestment earnings by a total of £36 million in 2007. Adjusting 2006 for this,profit before tax increased by 33 per cent. Life and pensions new business profit, on an IFRS basis and excludingvolatility, reduced by 5 per cent to £163 million reflecting a change in the mixof investment products sold through the branch network towards non-embeddedvalue accounted products. Total existing business profit grew by 43 per cent to£551 million, partly reflecting increased profits from the growing OEICportfolio, improved cost management and a reduction in adverse assumptionchanges compared to 2006. The expected return on shareholders' net assetsincreased by 43 per cent to £192 million as a result of a higher volume of freeassets, driven by strong equity markets and the impact of regulatory changes in2006, and a higher expected rate of return. During 2007, Scottish Widows has continued to make strong progress in each ofits key business priorities: to maximise bancassurance success; to profitablygrow IFA sales; to improve service and operational efficiency; and to optimisecapital management. Maximising bancassurance success In 2007, the value of Scottish Widows' bancassurance new business premiumsincreased by 20 per cent, building on the success of the simplified productrange for distribution through the Lloyds TSB branch network, Commercial Bankingand Wealth Management channels. Sales of protection products were particularlystrong. A new branch network creditor insurance and protection product, whichreplaced an externally provided creditor product, has led to the significantincrease in protection sales during 2007. In addition, Scottish Widows launcheda new protection product, 'Protection for Life' towards the end of 2006, whichhas performed very well. We have continued to deliver good sales of OEICsfollowing the more than doubling of sales in 2006. Profitably growing IFA sales Sales through the IFA distribution channel increased by 2 per cent, followingrecord A-day related sales levels in 2006. Scottish Widows has continued tofocus on the more profitable business areas within the IFA market. Sales ofsavings and investment products were lower as we chose not to compete in areaswhich deliver unsatisfactory returns, although this was partly offset by goodgrowth in OEIC sales. Corporate pensions volumes remained strong followingexcellent growth last year and our managed fund business also showed goodimprovement. Page 19 of 58 INSURANCE AND INVESTMENTS (continued) Present value of new business premiums (PVNBP) 2007 2006 Change £m £m %Life and pensions:Protection 960 232 314Savings and investments 913 1,300 (30)Individual pensions 2,073 2,219 (7)Corporate and other pensions 2,141 1,961 9Retirement income 1,044 960 9Managed fund business 486 348 40Life and pensions 7,617 7,020 9OEICs 2,807 2,720 3Life, pensions and OEICs 10,424 9,740 7 Single premium business 8,375 7,321 14Regular premium business 2,049 2,419 (15)Life, pensions and OEICs 10,424 9,740 7 Bancassurance 4,096 3,421 20Independent financial advisers 5,817 5,706 2Direct 511 613 (17)Life, pensions and OEICs 10,424 9,740 7 Improving service and operational efficiency The business has made continued improvements in service and operationalefficiencies, and the benefits can be seen in a reduction of expenses by 2 percent compared to prior year, notwithstanding the introduction of a number of newproducts. In addition, customer satisfaction is at its highest ever level.Scottish Widows received a number of awards for service quality and productinnovation, including 'Best Individual Pensions Provider' at the FinancialAdviser awards whilst maintaining its top quartile position for lowest servicingand acquisition costs per policy. Optimising capital management Scottish Widows has maintained its strong focus on improving capital management.During 2007 Scottish Widows continued to deliver a more capital efficientproduct profile and improved internal rates of return. The post-tax return onembedded value, on an EEV basis, increased to 9.9 per cent, from 9.3 per centlast year. During 2007, £1.9 billion of capital was repatriated to the Group,giving a total capital repatriation of over £3.6 billion since the beginning of2005. Page 20 of 58 INSURANCE AND INVESTMENTS (continued) Results on a European Embedded Value (EEV) basis Lloyds TSB continues to report under IFRS, however, in line with industry bestpractice, the Group provides supplementary financial reporting for ScottishWidows on an EEV basis. The Group believes that EEV represents the mostappropriate measure of long-term value creation in life assurance and investmentbusinesses. 2007 2006 Life, Life, Change pensions pensions and OEICs and OEICs £m £m %New business profit 326 346 (6)Existing business- Expected return 337 403- Experience variances 78 69- Assumption changes (45) (133) 370 339 9Expected return on shareholders' net assets 207 131 58Profit before tax, adjusted for capital repatriation* 903 816 11 Impact of surplus capital repatriation to Group - 36Profit before tax* 903 852 6New business margin (PVNBP) 3.1% 3.6%Embedded value (year end) £5,365m £6,413mPost-tax return on embedded value* 9.9% 9.3% *Excluding volatility and other items (page 36, note 2). Adjusting for the impact of capital repatriation, EEV profit before tax from theGroup's life, pensions and OEICs business increased by 11 per cent to £903million. New business profit fell by £20 million, or 6 per cent, to £326 million, largelyreflecting the impact of a higher risk-free discount rate and changes in othereconomic assumptions applied to new business. This was however offset by acorresponding credit to the expected return on shareholders' net assets. Existing business profit increased by 9 per cent. Expected return decreased by16 per cent to £337 million, primarily reflecting a lower shareholder benefitthis year from the reduction in the value of realistic balance sheet liabilitiesand the impact of regulatory changes in 2006. Positive experience varianceswere driven by higher annuity profits from Abbey Life. Overall lapse experiencewas broadly in line with the Group's expectations, as higher lapse experience inthe life and pensions business was broadly offset by a favourable experience inOEICs. Assumption changes primarily reflect changes to the longer term lapseassumptions for both life and pensions business and OEICs. The expected returnon shareholders' net assets increased by £76 million, as a result of a highervolume of free assets, driven by strong equity markets and the impact ofregulatory changes in 2006, and a higher expected rate of return. Page 21 of 58 INSURANCE AND INVESTMENTS (continued) Results on a European Embedded Value (EEV) basis Overall the post-tax return on embedded value increased to 9.9 per cent from 9.3per cent. Scottish Widows maintained a strong new business margin of 3.1 percent. Individual new business product margins remained broadly stable. Theoverall new business margin fell by 50 basis points however, as a result of anadverse impact from a higher risk-free discount rate and changes in othereconomic assumptions applied to new business and the shift in product mixresulting from the insourcing of a new branch network creditor insurance andprotection product. This product generates a lower new business margin, butdelivers good levels of value for the Group. Page 22 of 58 INSURANCE AND INVESTMENTS (continued) Scottish Widows Investment Partnership Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased by52 per cent to £44 million, reflecting increased profitability resulting fromhigher margins and an improved mix of external business, a key strategicpriority for SWIP. Over the last 12 months, SWIP's assets under managementdecreased by £4.1 billion to £97.6 billion, reflecting the decision by theTrustees of the Lloyds TSB pension schemes to move £5.7 billion into externalpassive management. As a result, institutional funds under management reducedby £5.0 billion. The net movement in retail funds, net of expenses andcommissions, was an increase of £2.9 billion. Movements in funds under management The following table highlights the movement in retail and institutional fundsunder management. 2007 2006 £bn £bn Opening funds under management 105.7 97.5 Movement in Retail Funds Premiums 11.7 11.7Claims (4.8) (3.6)Surrenders (6.4) (5.4)Net inflow of business 0.5 2.7 Investment return, expenses and commission 2.4 6.0Net movement 2.9 8.7 Movement in Institutional FundsLloyds TSB pension schemes (5.7) -Other institutional funds (0.6) (1.3)Investment return, expenses and commission 1.3 1.5Net movement (5.0) 0.2 Proceeds from sale of Abbey Life 1.0 -Dividends and surplus capital repatriation (1.9) (0.7) Closing funds under management 102.7 105.7 Managed by SWIP 97.6 101.7Managed by third parties 5.1 4.0Closing funds under management 102.7 105.7 Including assets under management within our UK Wealth Management andInternational Private Banking businesses, Groupwide funds under managementdecreased by 3 per cent to £122.8 billion. Page 23 of 58 INSURANCE AND INVESTMENTS (continued) General insurance 2007 2006 Change £m £m %Commission receivable 648 629 3Commission payable (692) (664) (4)Underwriting income (net of reinsurance) 591 600 (2)Other income 37 35 6Net operating income 584 600 (3)Claims paid on insurance contracts (net of reinsurance) (302) (200) (51)Operating income, net of claims 282 400 (30) Operating expenses (154) (157) 2Profit before tax 128 243 (47) Claims ratio 49% 32%Combined ratio 93% 80% Profit before tax from our general insurance operations decreased by £115million, to £128 million, largely as a result of a £113 million increase inweather related claims, primarily reflecting severe flooding in the UK in Juneand July. Net operating income decreased by 3 per cent whilst costs werereduced by 2 per cent. Net operating income decreased by £16 million, or 3 per cent, as growth in homeand loan protection income was more than offset by lower motor insurance income,increased reinsurance costs and the run-off from the legacy health portfolio.Our continued focus on improving operational efficiency and improving theeffectiveness of our marketing spend has resulted in a £3 million, or 2 percent, reduction in operating costs, whilst also continuing to improve processingefficiency. Overall sales performance has been good with an 8 per cent increase in newbusiness gross written premiums (GWP). Home insurance sales through the branchnetwork continue to perform well with 14 per cent growth in new business GWP.We have, however, scaled back our participation in the distribution of homeinsurance through direct channels, as a result of the increasingly competitivepricing in that area of the market. During the year we continued to invest inproduct development, with loan protection and home insurance products bothsecuring industry leading external quality ratings. Income, net of claims, was £118 million lower, largely as a result of theincreased extreme weather related claims, following a benign period in 2006. Asa result, overall claims increased by £102 million, and key underwriting ratioswere significantly affected with an increase in the claims ratio to 49 per cent,and an increase in the combined ratio to 93 per cent. Adjusting for the extremeweather related claims, the claims ratio improved, reflecting both a favourableclaims experience in our home insurance underwriting and the impact of recentinvestment in improving the efficiency of our claims processing. The business continues to invest in the development of its Corporate Partnershipdistribution arrangements and the performance of the Pearl business acquired in2006 has exceeded our initial expectations. Page 24 of 58 WHOLESALE AND INTERNATIONAL BANKING Excluding profit on disposal of businesses 2007 2006 Change £m £m %Net interest income 2,518 2,177 16Other income 1,773 2,035 (13)Total income 4,291 4,212 2Operating expenses (2,282) (2,264) (1)Trading surplus 2,009 1,948 3Impairment (572) (308) (86)Profit before tax 1,437 1,640 (12) Cost:income ratio 53.2% 53.8%Cost:income ratio, excluding market dislocation 50.9% 53.8%Post-tax return on average risk-weighted assets 1.13% 1.38% Total assets £163.3bn £147.8bn 10Risk-weighted assets £105.1bn £91.8bn 14Customer deposits £72.3bn £61.2bn 18 Profit before tax by business unitCorporate Markets- Before impact of market dislocation 1,132 1,030 10- Impact of market dislocation (280) - 852 1,030 (17)Commercial Banking 451 398 13Asset Finance 60 113 (47)International Banking and other businesses 74 99 (25) 1,437 1,640 (12) Key highlights • Overall profits impacted by turbulence in global financial markets.Whilst the division has limited exposure to assets affected by current capitalmarket uncertainties, the impact of recent market dislocation has been to reduceprofit before tax in 2007 by £280 million. • Continued relationship banking momentum. Excluding the impact ofmarket dislocation, profit before tax increased by 5 per cent. • Further good progress in expanding our Corporate Markets business,with an 18 per cent increase in Corporate Markets income supporting a 10 percent increase in profit before tax, excluding the impact of market dislocation.Cross-selling income in Corporate Markets increased by 35 per cent. • Continued strong franchise growth in Commercial Banking, with an 8per cent growth in income and a 13 per cent growth in profit before tax. LloydsTSB has retained its leading position as the bank of choice for start-upbusinesses. • Continued tight credit control in Asset Finance, and a slowdown indemand in the consumer lending portfolio, led to a 47 per cent reduction inprofit before tax. • Strong risk management and good asset quality, despite a rise of£264 million in impairment losses, largely as a result of the £92 million impactof market dislocation, a £28 million provision reflecting the impact of the 2007Finance Act on the division's leasing business, and a lower level of corporatereleases and recoveries during the year. Page 25 of 58 WHOLESALE AND INTERNATIONAL BANKING (continued) In Wholesale and International Banking, the Group has continued to makesignificant progress in its strategy to develop the Group's strong corporate andsmall to medium business customer franchises and, in doing so, become the bestUK mid-market focused wholesale bank. The division has continued to makesubstantial progress in its relationship banking businesses. In CommercialBanking, strong growth in business volumes, further customer franchiseimprovements and good progress in improving operational efficiency have resultedin continued strong profit growth. In Corporate Markets, further good progresshas been made in developing our relationship banking franchise supported by astrong cross-selling performance. Overall, the division's profit before tax decreased by 12 per cent, to £1,437million, reflecting the £280 million reduction in profits as a result of marketdislocation. Excluding this impact, profit before tax increased by 5 per cent,with a continued strong performance in our relationship banking businesses.This has generated overall income growth of 6 per cent, driven by strongCorporate Markets and Commercial Banking income growth of 18 per cent and 8 percent respectively. This exceeded cost growth of 1 per cent, leading to areduction in the cost:income ratio to 50.9 per cent, from 53.8 per cent lastyear. Trading surplus, excluding the impact of market dislocation, increasedby £249 million, or 13 per cent, to £2,197 million. The charge for impairment losses on loans and advances increased by £264 millionto £572 million, largely as a result of the £92 million impact of marketdislocation, a one-off £28 million impairment charge reflecting a reduction inrental income from operating lease activities following the corporation tax ratechange included in the 2007 Finance Act, a lower level of releases andrecoveries during the year and the impact of recent strong growth in thecorporate lending portfolio. Overall corporate and SME asset quality remainsgood although we continue to expect some normalisation in the impairment chargeover the next few years. We do believe, however, that we remain relatively wellpositioned as a result of our prudent credit management policy. Page 26 of 58 WHOLESALE AND INTERNATIONAL BANKING (continued) Corporate Markets 2007 2006 Change £m £m %Net interest income 1,104 806 37Other income- Before market dislocation 808 821 (2)- Market dislocation (188) - 620 821 (24)Total income 1,724 1,627 6Operating expenses (632) (615) (3)Trading surplus 1,092 1,012 8Impairment- Before market dislocation (148) 18- Market dislocation (92) - (240) 18Profit before tax 852 1,030 (17) In Corporate Markets, profit before tax fell by 17 per cent, however, excludingthe impact of market dislocation and the 2007 Finance Act, profit before taxincreased by 13 per cent. On this basis, income increased by 18 per cent,supported by continued high levels of cross-selling income, up 35 per cent,strong growth in corporate lending and a higher level of income from venturecapital investments. The strong growth in lending was supported by an increaseof £4.7 billion in Group lending to property companies, to £17.6 billion.Two-thirds of this lending portfolio is commercial property lending supportingour existing customer franchise and reflects a well-spread nationwide portfolio.We adopt conservative credit criteria and the indexed loan-to-value of theportfolio is approximately 62 per cent. One third of the portfolio isresidential lending, over half of which is to local authority backed publichousing. Operating expenses increased by 3 per cent to £632 million, reflecting furtherinvestment in people to support ongoing business growth. The trading surplus,excluding market dislocation, increased by 26 per cent. The impairment chargeof £240 million includes £92 million from the impact of market dislocation andthe £28 million one-off charge relating to the impact of the 2007 Finance Act onthe division's leasing business. Excluding these items, the underlying increasein the impairment charge reflects lower levels of releases and recoveries,recent strong growth in corporate customer lending and impairments relating totwo special situations. Page 27 of 58 WHOLESALE AND INTERNATIONAL BANKING (continued) Commercial Banking 2007 2006 Change £m £m %Net interest income 890 821 8Other income 429 397 8Total income 1,319 1,218 8Operating expenses (769) (727) (6)Trading surplus 550 491 12Impairment (99) (93) (6)Profit before tax 451 398 13 Profit before tax in Commercial Banking grew by £53 million, or 13 per cent,reflecting strong growth in business volumes, further improvements in growingthe Commercial Banking customer franchise and progress in improving operationalefficiency. Income increased by 8 per cent to £1,319 million, reflecting stronggrowth in lending and deposit balances, whilst costs were 6 per cent higher, asa result of increased investment to improve the operating platform. CommercialBanking continued to develop and grow its customer franchise strongly, withcustomer recruitment of 120,000 during 2007, reflecting its market-leadingposition in the start-up market with a market share of 21 per cent. We alsomade good progress in continuing to attract customers 'switching' from otherfinancial services providers. Lloyds TSB Commercial Finance has continued toimprove its strong market position, with a market share of approximately 20 percent, measured by client numbers. Asset quality in the Commercial Bankingportfolios remains good with impairment charges as a percentage of averagelending reducing by 7 basis points to 0.60 per cent, partly reflecting our moveto increase levels of secured lending. Asset Finance 2007 2006 Change £m £m %Net interest income 299 331 (10)Other income 472 529 (11)Total income 771 860 (10)Operating expenses (483) (508) 5Trading surplus 288 352 (18)Impairment (228) (239) 5Profit before tax 60 113 (47) Profit before tax in Asset Finance decreased by 47 per cent to £60 million,largely reflecting continued tight credit criteria and a slowdown in demand inthe consumer lending portfolio which has led to a reduction in the level of newbusiness underwritten. As a result, income decreased by £89 million, or 10 percent. Costs were 5 per cent lower and the impairment charge decreased by £11million to £228 million, reflecting the recent tightening of credit criteria,improved collections procedures and lower balances outstanding, which offset anincrease in arrears. Conditions in the Motor Finance business remainchallenging. New business volumes have reduced, reflecting the marketwideslowdown in consumer demand, and we have sought to avoid the structuralcontraction in interest margins. In Personal Finance, new business volumes haverisen modestly in a fiercely competitive market. Our Contract Hire business,Autolease, has performed well by continuing to leverage its strong marketposition and efficient operation. Page 28 of 58 CONSOLIDATED INCOME STATEMENT - STATUTORY 2007 2006 £m £mInterest and similar income 16,874 14,108Interest and similar expense (10,775) (8,779)Net interest income 6,099 5,329Fee and commission income 3,224 3,116Fee and commission expense (600) (638)Net fee and commission income 2,624 2,478Net trading income 3,123 6,341Insurance premium income 5,430 4,719Other operating income 952 806Other income 12,129 14,344Total income 18,228 19,673Insurance claims (7,522) (8,569)Total income, net of insurance claims 10,706 11,104Operating expenses (5,567) (5,301)Trading surplus 5,139 5,803Impairment (1,796) (1,555)Profit on sale of businesses 657 -Profit before tax 4,000 4,248Taxation (679) (1,341)Profit for the year 3,321 2,907 Profit attributable to minority interests 32 104Profit attributable to equity shareholders 3,289 2,803Profit for the year 3,321 2,907 Basic earnings per share 58.3p 49.9pDiluted earnings per share 57.9p 49.5p Dividend per share for the year* 35.9p 34.2pDividend for the year* £2,026m £1,928m \* The total dividend for the year represents the interim dividend paid in October2007 and the final dividend which will be paid and accounted for in May 2008. Page 29 of 58 CONSOLIDATED BALANCE SHEET - STATUTORY 31 December 31 December 2007 2006Assets £m £mCash and balances at central banks 4,330 1,898Items in course of collection from banks 1,242 1,431Trading and other financial assets at fair value through profit or loss 57,911 67,695Derivative financial instruments 8,659 5,565Loans and advances to banks 34,845 40,638Loans and advances to customers 209,814 188,285Available-for-sale financial assets 20,196 19,178Investment property 3,722 4,739Goodwill 2,358 2,377Value of in-force business 2,218 2,723Other intangible assets 149 138Tangible fixed assets 2,839 4,252Other assets 5,063 4,679Total assets 353,346 343,598 Equity and liabilitiesDeposits from banks 39,091 36,394Customer accounts 156,555 139,342Items in course of transmission to banks 668 781Trading and other liabilities at fair value through profit or loss 3,206 1,184Derivative financial instruments 7,582 5,763Debt securities in issue 51,572 54,118Liabilities arising from insurance contracts andparticipating investment contracts 38,063 41,445Liabilities arising from non-participatinginvestment contracts 18,197 24,370Unallocated surplus within insurance businesses 554 683Other liabilities 9,690 10,985Retirement benefit obligations 2,144 2,462Current tax liabilities 484 817Deferred tax liabilities 948 1,416Other provisions 209 259Subordinated liabilities 11,958 12,072Total liabilities 340,921 332,091 EquityShare capital 1,432 1,429Share premium account 1,298 1,266Other reserves (60) 336Retained profits 9,471 8,124Shareholders' equity 12,141 11,155Minority interests 284 352Total equity 12,425 11,507 Total equity and liabilities 353,346 343,598 Page 30 of 58 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - STATUTORY Attributable to equity shareholders Share capital Other Retained Minority and premium reserves profits interests Total £m £m £m £m £mBalance at 1 January 2006 2,590 395 7,210 435 10,630 Movements in available-for-salefinancial assets, net of tax:- change in fair value - (10) - - (10)- transferred to income statement in - (21) - - (21)respect of disposalsMovement in cash flow hedges, net of - 1 - - 1taxCurrency translation differences - (29) - (4) (33)Net income recognised directly in - (59) - (4) (63)equityProfit for the year - - 2,803 104 2,907Total recognised income for the year - (59) 2,803 100 2,844Dividends - - (1,919) (32) (1,951)Purchase/sale of treasury shares - - (35) - (35)Employee share option schemes:- value of employee services - - 65 - 65- proceeds from shares issued 105 - - - 105Repayment of capital to minority - - - (151) (151)shareholders Balance at 31 December 2006 2,695 336 8,124 352 11,507 Movements in available-for-salefinancial assets, net of tax:- change in fair value - (436) - - (436)- transferred to income statement in - (5) - - (5)respect of disposals- transferred to income statement in - 49 - - 49respect of impairment- disposal of businesses - (6) - - (6)Movement in cash flow hedges, net of - (15) - - (15)taxCurrency translation differences - 17 _ - (1) 16Net income recognised directly in - (396) - (1) (397)equityProfit for the year - - 3,289 32 3,321Total recognised income for the year - (396) 3,289 31 2,924Dividends - - (1,957) (19) (1,976)Purchase/sale of treasury shares - - (1) - (1)Employee share option schemes:- value of employee services - - 16 - 16- proceeds from shares issued 35 - - - 35Repayment of capital to minority - - - (80) (80)shareholders Balance at 31 December 2007 2,730 (60) 9,471 284 12,425 Page 31 of 58 CONDENSED CONSOLIDATED CASH FLOW STATEMENT - STATUTORY 2007 2006 £m £mProfit before tax 4,000 4,248 Adjustments for:Change in operating assets (16,982) (31,995)Change in operating liabilities 21,541 33,069Non-cash and other items 2,784 1,555Tax paid (859) (798)Net cash provided by operating activities 10,484 6,079 Cash flows from investing activitiesPurchase of available-for-sale financial assets (21,667) (23,448)Proceeds from sale and maturity of available-for-sale financial assets 19,468 18,106Purchase of fixed assets (1,334) (1,724)Proceeds from sale of fixed assets 982 1,257Acquisition of businesses, net of cash acquired (8) (20)Disposal of businesses, net of cash disposed 1,476 936Net cash used in investing activities (1,083) (4,893) Cash flows from financing activitiesDividends paid to equity shareholders (1,957) (1,919)Dividends paid to minority interests (19) (32)Interest paid on subordinated liabilities (709) (713)Proceeds from issue of subordinated liabilities - 1,116Proceeds from issue of ordinary shares 35 105Repayment of subordinated liabilities (300) (759)Repayment of capital to minority shareholders (80) (151)Net cash used in financing activities (3,030) (2,353)Effects of exchange rate changes on cash and cash equivalents 82 (148)Change in cash and cash equivalents 6,453 (1,315)Cash and cash equivalents at beginning of year 25,438 26,753Cash and cash equivalents at end of year 31,891 25,438 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 32 of 58 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) Lloyds TSB Group is a leading UK-based financial services group, providing awide range of banking and financial services in the UK and in certain locationsoverseas. The Group's activities are organised into three segments: UK RetailBanking, Insurance and Investments and Wholesale and International Banking.Central group items includes the funding cost of certain acquisitions lessearnings on capital, central costs and accruals for payment to the Lloyds TSBFoundations. Services provided by UK Retail Banking encompass the provision of banking andother financial services to personal customers, private banking and mortgages.Insurance and Investments offers life assurance, pensions and savings products,general insurance and asset management services. Wholesale and InternationalBanking provides banking and related services for major UK and multinationalcompanies, banks and financial institutions, and small and medium-sized UKbusinesses. It also provides asset finance to personal and corporate customers,manages the Group's activities in financial markets and provides banking andfinancial services overseas. Year ended UK General Life, Insurance Wholesale Central31 December 2007 Retail insurance pensions and and group Banking and asset Investments International items* management Banking Total £m £m £m £m £m £m £mInterest and similar income* 8,018 23 1,040 1,063 9,834 (2,041) 16,874Interest and similar (4,235) - (527) (527) (7,316) 1,303 (10,775)expense*Net interest income 3,783 23 513 536 2,518 (738) 6,099Other income (net of fee 1,797 554 7,643 8,197 1,773 362 12,129and commission expense)Total income 5,580 577 8,156 8,733 4,291 (376) 18,228Insurance claims - (302) (7,220) (7,522) - - (7,522)Total income, net of 5,580 275 936 1,211 4,291 (376) 10,706insurance claimsOperating expenses (2,624) (154) (501) (655) (2,282) (6) (5,567)Trading surplus (deficit) 2,956 121 435 556 2,009 (382) 5,139Impairment (1,224) - - - (572) - (1,796)Profit on sale of - - 272 272 385 - 657businessesProfit (loss) before tax 1,732 121 707 828 1,822 (382) 4,000 External revenue 9,132 1,235 8,854 10,089 10,082 300 29,603Inter-segment revenue* 1,012 49 181 230 1,559 (2,801) -Segment revenue 10,144 1,284 9,035 10,319 11,641 (2,501) 29,603 *Central group items on this and the following page includes inter-segment consolidation adjustments withininterest and similar income and within interest and similar expense as follows: interest and similar income £(3,138) million (2006: £(3,241) million); interest and similar expense £3,138 million (2006: £3,241 million).There is no impact on net interest income. Similarly, Central group items includes inter-segment revenueadjustments of £(4,103) million (2006: £(4,102) million). Page 33 of 58 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) Year ended UK General Life, Insurance Wholesale Central31 December 2006 Retail Insurance pensions and and group Banking and asset Investments International items* management Banking Total £m £m £m £m £m £m £mInterest and similar income* 6,913 24 820 844 8,598 (2,247) 14,108Interest and similar (3,271) - (741) (741) (6,421) 1,654 (8,779)expense*Net interest income 3,642 24 79 103 2,177 (593) 5,329Other income (net of feeand commission expense) 1,621 594 9,893 10,487 2,035 201 14,344Total income 5,263 618 9,972 10,590 4,212 (392) 19,673Insurance claims - (200) (8,369) (8,569) - - (8,569)Total income, net of 5,263 418 1,603 2,021 4,212 (392) 11,104insurance claimsOperating expenses (2,476) (157) (481) (638) (2,264) 77 (5,301)Trading surplus (deficit) 2,787 261 1,122 1,383 1,948 (315) 5,803Impairment (1,238) - - - (308) (9) (1,555)Profit (loss) before tax 1,549 261 1,122 1,383 1,640 (324) 4,248 External revenue 8,136 1,249 10,888 12,137 8,659 158 29,090Inter-segment revenue* 698 19 199 218 2,276 (3,192) -Segment revenue 8,834 1,268 11,087 12,355 10,935 (3,034) 29,090 Page 34 of 58 This information is provided by RNS The company news service from the London Stock ExchangeMORE TO FOLLOWRelated Shares:
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