22nd Feb 2008 07:00
Lloyds TSB Group PLC22 February 2008 PART 2 NOTES Page1 Accounting policies, presentation and estimates 362 Volatility 363 Mortgage lending 384 Group net interest income 395 Other income 406 General insurance income 407 Operating expenses 418 Number of employees (full-time equivalent) 419 Impairment losses by division 4210 Retirement benefit obligations 4211 Capital ratios 4312 Total assets by division 4413 Balance sheet information 4414 Loans and advances to customers 4515 Credit market positions in Corporate Markets 4616 Profit on sale of businesses 4717 Economic profit 4818 Earnings per share 4819 Scottish Widows - realistic balance sheet information 4920 European Embedded Value reporting - results for the year ended 31 December 2007 5021 Scottish Widows - weighted sales (Annual Premium Equivalent) 5522 Legal and regulatory matters 5523 Taxation 5624 Dividend 5725 Other information 57 Page 35 of 58 1. Accounting policies, presentation and estimates The 2007 results have been prepared in accordance with International FinancialReporting Standards (IFRS) as adopted by the European Union (EU). Theaccounting policies adopted in the preparation of these results are unchangedfrom those disclosed in the Group's consolidated financial statements as at andfor the year ended 31 December 2006 ('2006 Annual Report and Accounts') copiesof which can be found on the Group's website atwww.investorrelations.lloydstsb.com/ir/company_reports_page.asp or are availableupon request from the Company Secretary's Department, Lloyds TSB Group plc, 25Gresham Street, London EC2V 7HN. The following pronouncements relevant to the Group are applicable for the yearended 31 December 2007: Pronouncement Nature of change Effective date IFRS 7 Financial Instruments: Consolidates financial instruments Annual periods beginning on or after disclosures into a single standard and 1 January 2007Disclosures requires more detailed qualitative and quantitative disclosures about exposure to risks arising from financial instruments. Amendment to IAS 1 Presentation Introduces additional disclosures of Annual periods beginning on or afterof Financial Statements - Capital the objectives, policies and processes 1 January 2007Disclosures for managing capital, quantitative data about what the entity regards as capital, and compliance with capital requirements. The relevant disclosures are included in the Group's consolidated financialstatements for the year ended 31 December 2007. 2. Volatility Banking volatility Since the introduction of IFRS in 2005, in order to provide a clearer view ofthe underlying performance of the business, the Group has separately disclosedwithin Central group items the effects of marking-to-market derivatives held forrisk management purposes. This amount, net of the effect of the Group's IAS 39compliant hedge accounting relationships, was previously disclosed as bankingvolatility. The use of fair values in financial reporting is now more widespread and thereis a better understanding of their effects; consequently, in line with evolvingbest practice, the Group no longer considers it appropriate to disclose bankingvolatility separately. Divisions will continue to transfer, through the Group'sinternal transfer pricing arrangements, to Group Corporate Treasury (included inCentral group items) the movements in the market value of hedging derivativeswhere the impact is not locally managed. Page 36 of 58 2. Volatility (continued) Insurance volatility The Group's insurance businesses have liability products that are supported bysubstantial holdings of investments, including equities, property and fixedinterest investments, all of which have a volatile fair value. The value of theliabilities does not move exactly in line with changes in the fair value of theinvestments, yet IFRS requires that the changes in both the value of theliabilities and investments be reflected within the income statement. As theseinvestments are substantial and movements in their fair value can have asignificant impact on the profitability of the Insurance and Investmentsdivision, management believes that it is appropriate to disclose the division'sresults on the basis of an expected return in addition to the actual return.The difference between the actual return on these investments and the expectedreturn based upon economic assumptions made at the beginning of the year isincluded within insurance volatility. Changes in market variables also affect the realistic valuation of theguarantees and options embedded within products written in the Scottish WidowsWith Profit Fund, the value of the in-force business and the value ofshareholders' funds. Fluctuations in these values caused by changes in marketvariables, including market spreads reflecting credit risk premia, are alsoincluded within insurance volatility. These market credit spreads represent thegap between the yield on corporate bonds and the yield on government bonds, andreflect the market's assessment of credit risk. Changes in the credit spreadsaffect the value of the in-force business asset in respect of the annuityportfolio. The expected investment returns used to determine the normalised profit of thebusiness, which are based on prevailing market rates and published research intohistoric investment return differentials, are set out below: 2008 2007 2006 % % %Gilt yields (gross) 4.55 4.62 4.12Equity returns (gross) 7.55 7.62 6.72Dividend yield 3.00 3.00 3.00Property return (gross) 7.55 7.62 6.72Corporate bonds (gross) 5.15 5.22 4.72 During 2007, profit before tax included negative insurance volatility of £267million, being a credit of £7 million to net interest income and a charge of£274 million to other income (2006: positive volatility of £84 million, being acredit of £2 million to net interest income and a credit of £82 million to otherincome). The effect of widening credit risk spreads and falling gilt valuesmore than offset the favourable impact of a modest increase in equity values andchanges in market consistent assumptions. During 2006 increases in equityvalues were partly offset by lower gilt values. Policyholder interests volatility As a result of the requirement under IFRS to consolidate the Group's life andpensions 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. Page 37 of 58 2. Volatility (continued) Under IFRS, tax on policyholder investment returns is required to be included inthe Group's tax charge rather than being offset against the related income, asit is in actual distributions made to policyholders. The impact is, therefore,to either increase or decrease profit before tax with a corresponding change inthe tax charge. Other items classified within policyholder interests volatilityinclude the effects of investment vehicles which are only majority owned by thelong-term assurance funds. In the case of these vehicles, the Group's profitfor the year includes the minorities' share of the profits earned. As set outbelow these amounts do not accrue to the equity holders, accordingly managementbelieves a clearer representation of the underlying performance of the Group'slife and pensions businesses is presented by excluding policyholder interestsvolatility. 2007 2006 £m £m Net interest income - (33)Other income (233) 359Profit before tax (233) 326Taxation - policyholder 243 (222)Minority interests (10) (104)Profit attributable to equity shareholders - - During 2007, profit before tax included negative policyholder interestsvolatility of £233 million, being a charge to other income (2006: positivevolatility of £326 million, being a charge of £33 million to net interest incomeand a credit of £359 million to other income). In 2007, substantialpolicyholder tax losses have been generated as a result of a fall in property,gilt and bond values. These losses reduce future policyholder tax liabilitiesand have led to a policyholder tax credit during the year. Profits wererecognised in 2006 as a result of positive market movements combined withrealised gains in the holdings in property investment vehicles majority owned bythe long-term assurance funds. 3. Mortgage lending 2007 2006Gross new mortgage lending £29.4bn £27.6bnMarket share of gross new mortgage lending 8.1% 8.0%Redemptions £22.7bn £20.7bnMarket share of redemptions 8.9% 8.8%Net new mortgage lending £6.7bn £6.9bnMarket share of net new mortgage lending 6.2% 6.3%Mortgages outstanding (year end)* £102.0bn £95.3bnMarket share of mortgages outstanding 8.5% 8.8% *Excluding the effect of IFRS related adjustments in order to conform with industry statistics. In Cheltenham & Gloucester, the average indexed loan-to-value ratio on themortgage portfolio was 43 per cent (31 December 2006: 44 per cent), and theaverage loan-to-value ratio for new mortgages and further advances writtenduring 2007 was 63 per cent (2006: 64 per cent). At 31 December 2007, only 1.7per cent of balances had an indexed loan-to-value ratio in excess of 95 percent. Page 38 of 58 4. Group net interest income 2007 2006 £m £mBanking marginNet interest income 5,167 4,914Average interest-earning assets, excluding reverse repos 185,022 170,743Net interest margin 2.79% 2.88% Statutory basisNet interest income 6,099 5,329Average interest-earning assets, excluding reverse repos 248,233 226,990Net interest margin 2.46% 2.35% The Group's net interest income includes certain amounts attributable topolicyholders, in addition to the interest earnings on shareholders' funds heldin the Group's insurance businesses. In addition, the Group's net interestmargin is significantly affected by the accounting treatment of a number ofProducts and Markets and other products, principally those where funding costsare treated as an interest expense and related revenues are recognised withinother income. In order to enhance comparability in the Group's banking netinterest margin these items have been excluded in determining both net interestincome and average interest-earning assets. A reconciliation of banking net interest income to Group net interest incomefollows: 2007 2006 £m £mBanking net interest income 5,167 4,914Products and Markets, and other products 464 368Volatility and insurance grossing adjustment 468 47Group net interest income 6,099 5,329 Certain fees payable by the Group's asset finance business have beenreclassified from other income to interest income as part of the effective yieldof the related lending; there is no impact upon profit before tax. Comparativefigures have been restated accordingly. Page 39 of 58 5. Other income 2007 2006 £m £mFee and commission income: UK current account fees 693 652 Other UK fees and commissions 1,215 1,210 Insurance broking 648 629 Card services 536 493 International fees and commissions 132 132 3,224 3,116Fee and commission expense (600) (638)Net fee and commission income 2,624 2,478Net trading income 3,570 5,981Insurance premium income 5,430 4,719Other operating income 1,012 725Total other income* 12,636 13,903Insurance claims (7,522) (8,569)Total other income, net of insurance claims* 5,114 5,334Volatility- Insurance (274) 82- Policyholder interests (233) 359Total other income, net of insurance claims 4,607 5,775 *Excluding volatility. For statutory reporting purposes, volatility totalling £(507) million in 2007 (2006: £441 million); is included in total other income;comprising net trading income of £(447) million (2006: £360 million) and otheroperating income of £(60) million (2006: £81 million). Certain fees payable by the Group's asset finance business have beenreclassified from other income to interest income as part of the effective yieldof the related lending; there is no impact upon profit before tax. Comparativefigures have been restated accordingly. 6. General insurance income 2007 2006 £m £mPremium income from underwritingCreditor 164 180Home 441 424Health 9 13Reinsurance premiums (23) (17) 591 600Commissions from insurance brokingCreditor 394 377Home 49 47Health 12 13Other 193 192 648 629 Page 40 of 58 7. Operating expenses 2007 2006Administrative expenses: £m £mStaff: Salaries 2,127 2,117 National insurance 167 161 Pensions - Before pension schemes related credit 238 293 - Pension schemes related credit - (128) 238 165 Other staff costs 372 298 2,904 2,741Premises and equipment: Rent and rates 304 310 Hire of equipment 16 15 Repairs and maintenance 154 165 Other 145 149 619 639Other expenses: Communications and external data processing 462 499 Advertising and promotion 192 184 Professional fees 279 231 Settlement of overdraft claims 76 - Other 405 388 1,414 1,302Administrative expenses 4,937 4,682Depreciation and amortisation 630 619Total operating expenses 5,567 5,301Cost:income ratio - statutory basis* 52.0% 47.7%Cost:income ratio - excluding volatility, the settlement of 49.0% 50.8%overdraft claims and, in 2006, the pension schemes related credit \* Total operating expenses divided by total income, net of insurance claims. 8. Number of employees (full-time equivalent) 2007 2006 UK Retail Banking 29,943 30,204Insurance and Investments 5,276 5,685Wholesale and International Banking 15,997 19,210Other, largely IT and Operations 10,111 10,400 61,327 65,499Agency staff (full-time equivalent) (3,249) (2,869)Total number of employees (full-time equivalent) 58,078 62,630 The total number of employees reduced by 4,552 to 58,078. Of this reduction2,790 related to the impact of business disposals (Lloyds TSB Registrars 1,485,Dutton-Forshaw 1,277 and Abbey Life 28). Page 41 of 58 9. Impairment losses by division 2007 2006 £m £mImpairment losses by divisionUK Retail Banking Personal loans/overdrafts 679 740 Credit cards 527 490 Mortgages 18 8 1,224 1,238 Wholesale and International Banking Excluding market dislocation and 2007 Finance Act 447 313 Market dislocation 22 - 2007 Finance Act 28 - 497 313 Central group items - 9Impairment losses on loans and advances 1,721 1,560Other credit risk provisions 5 (5)Impairment of available-for-sale financial assets 70 -Total impairment charge 1,796 1,555 Charge as % of average lending: Personal loans/overdrafts 5.32 5.85 Credit cards 7.96 6.99 Mortgages 0.02 0.01UK Retail Banking 1.10 1.18Wholesale and International Banking* 0.51 0.39Total charge* 0.82 0.83*Excluding impact of market dislocation and 2007 Finance Act. 10. Retirement benefit obligations 2007 2006 £m £mDefined benefit pension schemesPresent value of scheme liabilities 16,795 17,378Fair value of scheme assets (16,112) (15,279)Net defined benefit scheme deficit 683 2,099Unrecognised actuarial gains 1,350 263Net recognised defined benefit scheme deficit 2,033 2,362Other post-retirement benefit schemes 111 100Net recognised liability 2,144 2,462Deferred tax (600) (739)Recognised liability after tax 1,544 1,723 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. This improvement largely reflects an increase in the realdiscount rate used to value the schemes' liabilities and Group contributions tothe schemes, which exceeded the cost of accruing benefits. Page 42 of 58 11. Capital ratios Basel II Basel I Basel I 31 December 31 December 31 December 2007 2007 2006 £m £m £m Tier 1Share capital and reserves 12,663 12,141 11,155Regulatory post-retirement benefit adjustments 704 704 1,041Other items - - 39Preference share capital 1,589 1,589 1,610Innovative tier 1 capital instruments 1,474 1,474 1,372Available-for-sale revaluation reserve and cash flow hedging 402 402 (12)reserveGoodwill (2,358) (2,358) (2,377)Other deductions (929) - -Total tier 1 capital 13,545 13,952 12,828 Tier 2 Undated loan capital 4,457 4,457 4,390Dated loan capital 3,441 3,441 3,624Collectively assessed provisions 12 2,150 1,951Available-for-sale revaluation reserve in respect of equities 12 12 -Other deductions (928) - -Total tier 2 capital 6,994 10,060 9,965 20,539 24,012 22,793 Supervisory deductions Life and pensions businesses (4,373) (4,373) (5,368)Other deductions (491) (762) (790)Total supervisory deductions (4,864) (5,135) (6,158)Total capital 15,675 18,877 16,635 Risk-weighted assets £bn £bn £bn Credit risk 127.2Market risk 5.3Operational risk 10.1Total risk-weighted assets 142.6 172.0 156.0 Risk asset ratios Tier 1 9.5% 8.1% 8.2%Total capital 11.0% 11.0% 10.7% Post-tax return on average risk-weighted assets 2.03% 1.89%Post-tax return on average risk-weighted assets* 1.76% 1.72% *Excluding volatility, profit on sale of businesses, settlement of overdraftclaims and, in 2006, pension schemes related credit. Page 43 of 58 12. Total assets by division 31 December 31 December 2007 2006 £m £mUK Retail Banking 115,012 108,381Insurance and Investments 73,377 86,074Wholesale and International Banking 163,294 147,836Central group items 1,663 1,307Total assets 353,346 343,598 13. Balance sheet information 31 December 31 December 2007 2006 £m £mDeposits - customer accountsSterling:Non-interest bearing current accounts 3,155 3,739Interest bearing current accounts 42,858 40,906Savings and investment accounts 70,003 64,380Other customer deposits 24,671 19,134Total sterling 140,687 128,159Currency 15,868 11,183Total deposits - customer accounts 156,555 139,342 Loans and advances to customers Agriculture, forestry and fishing 3,226 2,905Energy and water supply 2,102 2,024Manufacturing 8,385 7,513Construction 2,871 2,332Transport, distribution and hotels 11,573 10,490Postal and communications 946 831Property companies 17,576 12,896Financial, business and other services 29,707 22,999Personal : mortgages 102,739 95,601 : other 22,988 23,025Lease financing 4,686 4,802Hire purchase 5,423 5,060 212,222 190,478Allowance for impairment losses on loans and advances (2,408) (2,193)Total loans and advances to customers 209,814 188,285 Total loans and advances to customers in our international businesses totalled£6,291 million (31 December 2006: £5,589 million). Page 44 of 58 14. Loans and advances to customers Retail - Retail - Wholesale Total Mortgages Other31 December 2007 £m £m £m £m Neither past due nor impaired 99,828 29,850 73,475 203,153Past due but not impaired 2,153 966 639 3,758Impaired - no provision required 415 100 293 808 - provision held 343 3,600 560 4,503 Gross 102,739 34,516 74,967 212,222Allowance for impairment losses (37) (2,029) (342) (2,408)Net 102,702 32,487 74,625 209,814 31 December 2006 Neither past due nor impaired 92,873 29,364 60,005 182,242Past due but not impaired 1,943 1,005 374 3,322Impaired - no provision required 658 92 158 908 - provision held 127 3,580 299 4,006 Gross 95,601 34,041 60,836 190,478Allowance for impairment losses (42) (1,918) (233) (2,193) Net 95,559 32,123 60,603 188,285 The analysis of lending between retail and wholesale has been prepared basedupon the type of exposure and not the business segment in which the exposure isrecorded. Included within retail are exposures to personal customers and smallbusinesses, whilst included within wholesale are exposures to corporatecustomers and other large institutions. Loans and advances to customers which are neither past due nor impaired Retail - Retail - Wholesale Total Mortgages Other £m £m £m £m 31 December 2007 Good quality 99,407 18,157 46,240Satisfactory quality 378 8,964 25,013Lower quality 1 665 2,034Below standard, but not impaired 42 2,064 188 Total 99,828 29,850 73,475 203,153 31 December 2006 Good quality 92,472 16,940 35,659Satisfactory quality 359 9,667 21,797Lower quality - 663 2,249Below standard, but not impaired 42 2,094 300 Total 92,873 29,364 60,005 182,242 Page 45 of 58 14. Loans and advances to customers (continued) The definitions of good quality, satisfactory quality, lower quality and belowstandard but not impaired applying to retail and wholesale are not the same,reflecting the different characteristics of these exposures and the way they aremanaged internally, and consequently totals are not provided. Wholesale lendinghas been classified using internal probability of default rating models mappedso that they are comparable to external credit ratings. Good quality lendingcomprises the lower assessed default probabilities, with other classificationsreflecting progressively higher default risk. Classifications of retail lendingincorporate expected recovery levels for mortgages, as well as probabilities ofdefault assessed using internal rating models. Good quality lending includesthe lower assessed default probabilities and all loans with low expected lossesin the event of default, with other categories reflecting progressively higherrisks and lower expected recoveries. 15. Credit market positions in Corporate Markets Lloyds TSB's high quality business model means that the Group has relativelylimited exposure to assets affected by current capital markets uncertainties.The following table shows credit market positions in Corporate Markets, on botha gross and net basis. Credit market positions - 31 December 2007 Net Gross Exposure Exposure £m £m US sub-prime ABS-direct - - ABS CDOs - unhedged 130 130- monoline hedged - 470- major global bank cash collateralised - 1,861 Structured investment vehicles - capital notes 78 78- liquidity backup facilities 370 370 Trading portfolio - ABS trading book 474 474- secondary loan trading 665 863- other assets* 3,895 3,895 *Primarily high quality senior bank and corporate assets; also includes £181 million of indirect exposure toUS sub-prime mortgages and ABS CDOs. This super senior exposure is protected by note subordination. Page 46 of 58 15. Credit market positions in Corporate Markets (continued) Available-for-sale assets 31 December 2007 £bn Cancara 8.3 - US sub-prime - nil- Alt-A - £619 million- CMBS - £1,355 million (100% AAA/Aaa) Student Loan ABS 3.2 - US Government guaranteed Treasury assets 4.6 - Government bond and short-dated bank commercial paper Other assets 4.1- Major bank senior paper and high quality ABSTotal - Group 20.2 16. Profit on sale of businesses During 2007, the Group disposed of its share registration business, Lloyds TSBRegistrars; Abbey Life, the UK life operation which was closed to new businessin 2000; and its medium-size car dealership, Dutton-Forshaw. In addition,provision has been made for payments under an indemnity given in relation to abusiness sold in an earlier year. A breakdown is provided below. 2007 2006 £m £mLloyds TSB Registrars 407 -Abbey Life 272 -Other (22) - 657 - Page 47 of 58 17. Economic profit 2007 2006 £m £mStatutory basisAverage shareholders' equity 11,681 10,531 Profit attributable to equity shareholders 3,289 2,803Less: notional charge (1,051) (948)Economic profit 2,238 1,855 Excluding volatility, profit on sale of businesses, settlement of overdraft claimsand, in 2006, pension schemes related creditAverage shareholders' equity 11,339 10,485 Profit attributable to equity shareholders 2,863 2,634Less: notional charge (1,021) (944)Economic profit 1,842 1,690 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 (2006: 9 per cent). 18. Earnings per share 2007 2006Statutory basis BasicProfit attributable to equity shareholders £3,289m £2,803mWeighted average number of ordinary shares in issue 5,637m 5,616mEarnings per share 58.3p 49.9p Fully diluted Profit attributable to equity shareholders £3,289m £2,803mWeighted average number of ordinary shares in issue 5,683m 5,667mEarnings per share 57.9p 49.5p Excluding volatility, profit on sale of businesses, settlement of overdraft claimsand, in 2006, pension schemes related creditProfit attributable to equity shareholders £2,863m £2,634mWeighted average number of ordinary shares in issue 5,637m 5,616mEarnings per share 50.8p 46.9p Page 48 of 58 19. Scottish Widows - realistic balance sheet information Financial Services Authority (FSA) returns for large with-profits companiesinclude realistic balance sheet information. The information included in FSAreturns concentrates on the position of the With Profit Fund. However, underthe Scottish Widows demutualisation structure, which was court approved, thefund is underpinned by certain assets outside the With Profit Fund and it ismore appropriate to consider the long-term fund position as a whole to measurethe realistic capital position of Scottish Widows. The estimated position at 31December 2007, allowing for the proposed transfer of £300 million from the LongTerm Fund to the Shareholder Fund, is shown below, together with the actualposition at 31 December 2006. 31 December 2007 (estimated) With Profit Long Term Fund Fund £bn £bnAvailable assets, including support arrangement assets 17.8 20.9Realistic value of liabilities (16.8) (16.9)Working capital for fund 1.0 4.0 Working capital ratio 5.4% 19.2% 31 December 2006 With Profit Long Term Fund Fund £bn £bnAvailable assets, including support arrangement assets 19.4 22.3Realistic value of liabilities (18.3) (18.3)Working capital for fund 1.1 4.0 Working capital ratio 5.8% 17.9% The Risk Capital Margin (RCM) is the capital buffer that the FSA requires to beheld to cover prescribed adverse shocks. At 31 December 2007, the RCM wasestimated to be £62 million for the With Profit Fund and £96 million for theLong Term Fund (covered 15 times and 42 times respectively by the workingcapital for the fund). At 31 December 2006, the RCM was £57 million for theWith Profit Fund and £84 million for the Long Term Fund (covered 20 times and 47times respectively). Page 49 of 58 20. European Embedded Value reporting - results for year ended 31 December2007 This section provides further details of the Scottish Widows EEV financialinformation. Composition of EEV balance sheet 2007 2006 £m £m Value of in-force business (certainty 2,779 3,220equivalent)Value of financial options and guarantees (53) (56)Cost of capital (178) (248)Non-market risk (61) (75)Total value of in-force business 2,487 2,841Shareholders' net assets 2,878 3,572Total EEV of covered business 5,365 6,413 Reconciliation of opening EEV balance sheet to closing EEV balance sheet oncovered business Shareholders' Value of in-force net assets business Total £m £m £m As at 1 January 2006 3,445 2,941 6,386Total profit after tax 873 (100) 773Dividends (746) - (746)As at 31 December 2006 3,572 2,841 6,413Total profit after tax 661 107 768Profit on disposal of Abbey Life (EEV basis) Sale proceeds 985 - 985 Assets disposed (474) (461) (935) 511 (461) 50Dividends (1,866) - (1,866)As at 31 December 2007 2,878 2,487 5,365 Analysis of shareholders' net assets on an EEV basis on covered business Required Free Shareholders' capital surplus net assets £m £m £m As at 1 January 2006 2,393 1,052 3,445Total profit after tax (186) 1,059 873Dividends - (746) (746)As at 31 December 2006 2,207 1,365 3,572Total (loss) profit after tax (238) 899 661Disposal of Abbey Life (EEV basis) (232) 743 511Dividends - (1,866) (1,866)As at 31 December 2007 1,737 1,141 2,878 Page 50 of 58 20. European Embedded Value reporting - results for year ended 31 December2007 (continued) Summary income statement on an EEV basis 2007 2006 £m £mNew business profit 326 346Existing business profit- Expected return 337 403- Experience variances 78 69- Assumption changes (45) (133) 370 339Expected return on shareholders' net assets 207 167Profit before tax, excluding volatility and other items* 903 852Volatility (271) 176Other items* 58 76Total profit before tax 690 1,104Taxation (59) (331)Impact of Corporation tax rate change 137 -Total profit after tax, excluding profit on sale of Abbey Life 768 773Profit on sale of Abbey Life (EEV basis) 50 -Total profit after tax 818 773 *Other items represent amounts not considered attributable to the underlyingperformance of the business. Page 51 of 58 20. European Embedded Value reporting - results for year ended 31 December2007 (continued) Breakdown of income statement between life and pensions, and OEICs 2007 Life and pensions OEICS Total £m £m £mNew business profit 270 56 326Existing business- Expected return 286 51 337- Experience variances 35 43 78- Assumption changes (105) 60 (45) 216 154 370Expected return on shareholders' net assets 199 8 207Profit before tax* 685 218 903 New business margin (PVNBP) 3.5% 2.0% 3.1%Post-tax return on embedded value* 9.9% 2006 Life and pensions OEICS Total £m £m £mNew business profit 287 59 346Existing business- Expected return 361 42 403- Experience variances 35 34 69- Assumption changes (129) (4) (133) 267 72 339Expected return on shareholders' net assets 160 7 167Profit before tax* 714 138 852 New business margin (PVNBP) 4.1% 2.2% 3.6%Post-tax return on embedded value* 9.3% *Excluding volatility and other items. Page 52 of 58 20. European Embedded Value reporting - results for year ended 31 December2007 (continued) Economic assumptions A bottom up approach is used to determine the economic assumptions for valuingthe business in order to determine a market consistent valuation. The risk-free rate assumed in valuing in-force business is 10 basis points overthe 15 year gilt yield. In valuing financial options and guarantees therisk-free rate is derived from gilt yields plus 10 basis points, in line withScottish Widows' FSA realistic balance sheet assumptions. The table below showsthe range of resulting yields and other key assumptions. 31 December 31 December 2007 2006 % % Risk-free rate (value of in-force) 4.65 4.72Risk-free rate (financial options and guarantees) 4.28 to 4.81 3.91 to 5.41Retail price inflation 3.28 3.23Expense inflation 4.18 4.13 Non-market risk An allowance for non-market risk is made through the choice of best estimateassumptions based upon experience, which generally will give the mean expectedfinancial outcome for shareholders and hence no further allowance for non-marketrisk is required. However, in the case of operational risk and the With ProfitFund these are asymmetric in the range of potential outcomes for which anexplicit allowance is made. Non-economic assumptions Future mortality, morbidity, lapse and paid-up rate assumptions are reviewedeach year and are based on an analysis of past experience and on management'sview of future experience. These assumptions are intended to represent a bestestimate of future experience. For OEIC business, the lapse assumption is based on recent experience which hasbeen collected over a period that has coincided with favourable investmentconditions. Management have used a best estimate of the long-term lapseassumption which is higher than indicated by this experience. In management'sview, the approach and lapse assumption are both reasonable. Page 53 of 58 20. European Embedded Value reporting - results for year ended 31 December2007 (continued) Sensitivity analysis The table below shows the sensitivity of the EEV and the new business profitbefore tax to movements in some of the key assumptions. The impact of a changein the assumption has only been shown in one direction other than for risk freerate. Where the impact has been shown only in one direction it can be assumedto be reasonably symmetrical. Impact on new Impact business profit on EEV before tax £m £m2007 EEV/new business profit before tax 5,365 326 (1a) 100 basis points reduction in risk-free rate 161 7(1b) 100 basis points increase in risk-free rate (115) (7)(2) 10 per cent reduction in market values of equity assets (178) n/a(3) 10 per cent reduction in market values of property assets (32) n/a(4) 10 per cent reduction in expenses 96 31(5) 10 per cent reduction in lapses 88 19(6) 5 per cent reduction in annuitant mortality (64) (5)(7) 5 per cent reduction in mortality and morbidity (excluding annuitants) 22 3(8) 100 basis points increase in equity and property returns nil nil(9) 10 basis points increase in credit spreads (46) (6) (1) In this sensitivity the impact takes into account the change in the valueof in-force business, financial options and guarantee costs, statutory reservesand asset values. (2) The reduction in market values is assumed to have no corresponding impacton dividend yields. (3) The reduction in market values is assumed to have no corresponding impacton rental yields. (4) This sensitivity shows the impact of reducing new business maintenanceexpenses and investment expenses to 90 per cent of the expected rate. (5) This sensitivity shows the impact of reducing lapse and surrender rates to90 per cent of the expected rate. (6) This sensitivity shows the impact on our annuity and deferred annuitybusiness of reducing mortality rates to 95 per cent of the expected rate. (7) This sensitivity shows the impact of reducing mortality rates onnon-annuity business to 95 per cent of the expected rate. (8) Under a market consistent valuation, changes in assumed equity andproperty returns have no impact on the EEV. (9) This sensitivity shows the impact of a 10 basis point increase incorporate bond yields and the corresponding reduction in market values.Government bond yields and the risk-free rate are assumed to be unchanged. In sensitivities (4) to (7) assumptions have been flexed on the basis used tocalculate the value of in-force business and the realistic and the statutoryreserving bases. A change in risk discount rates is not relevant as the riskdiscount rate is not an input to a market consistent valuation. Page 54 of 58 21. Scottish Widows - weighted sales (Annual Premium Equivalent) 2007 2006 £m £mWeighted sales (regular + 1/10 single)Life and pensions:Savings and investments 89 128Protection 117 49Individual pensions 273 270Corporate and other pensions 352 322Retirement income 101 98Managed fund business 47 35 Life and pensions 979 902 OEICs 297 290Life, pensions and OEICs 1,276 1,192 Bancassurance 458 403Independent financial advisers 733 714Direct 85 75Life, pensions and OEICs 1,276 1,192 22. Legal and regulatory matters During the ordinary course of business the Group is subject to threatened oractual legal proceedings. All such material cases are periodically reassessed,with the assistance of external professional advisers where appropriate, todetermine the likelihood of the Group incurring a liability. In those instanceswhere it is concluded that it is more likely than not that a payment will bemade, a provision is established to management's best estimate of the amountrequired to settle the obligation at the relevant balance sheet date. In somecases it will not be possible to form a view, either because the facts areunclear or because further time is needed properly to assess the merits of thecase. No provisions are held against such cases; however the Group does notcurrently expect the final outcome of these cases to have a material adverseeffect on its financial position. In the UK and elsewhere, there is continuing political and regulatory scrutinyof financial services. On 6 November 2007 the Competition Commission publishedits emerging thinking into the Payments Protection Inquiry and is expected toreport by December 2008. The OFT is also carrying out a market study intopersonal current account pricing alongside its investigation into certaincurrent account charges which are also subject to a legal test case (see below).The OFT is also investigating interchange fees charged by some card networks inparallel with the European Commission's own investigation into cross-borderinterchange fees. At the same time regulators are considering the review ofretail distribution and UK financial stability and depositor protectionproposals. It is not presently possible to assess the cost or income impact ofthese inquiries or any connected matters on the Group until the outcome isknown. In addition, a number of EU directives, including the Unfair CommercialPractices Directive and Payment Services Directive are currently beingimplemented in the UK. The EU is also considering regulatory proposals for,inter alia, a Consumer Credit, Mortgage Credit, Single European Payments Area,Retail Financial Services Review and capital adequacy requirements for insurancecompanies (Solvency II). Page 55 of 58 22. Legal and regulatory matters (continued) On 27 July 2007, following agreement between the UK Office of Fair Trading (OFT)and a number of UK financial institutions, the OFT issued High Court legalproceedings against those institutions, including Lloyds TSB Bank plc, todetermine the legal status and enforceability of certain of the charges appliedto their personal customers in relation to requests for unplanned overdrafts. Apreliminary issues hearing has now taken place and judgment is currentlyawaited. It is likely that further hearings will be required and, if appealsare pursued, the proceedings may take a number of years to conclude. Pendingresolution, the Financial Services Authority has agreed, subject to certainconditions, that the handling of customer complaints on this issue can besuspended until the proceedings are concluded unless in the light of prevailingcircumstances this would be inappropriate. The Group intends strongly to defendits position. Accordingly, no provision in relation to the outcome of thislitigation has been made. Depending on the Court's determinations, a range ofoutcomes is possible, some of which could have a significant financial impact onthe Group. The ultimate impact of the litigation on the Group can only be knownat its conclusion. There has been increased scrutiny of the financial institutions sector,especially in the US, with respect to combating money laundering and terroristfinancing and enforcing compliance with economic sanctions. The Office ofForeign Assets Control (OFAC) administers US laws and regulations in relation toUS economic sanctions against designated foreign countries, nationals and othersand the Group has been conducting a review of its conduct with respect tohistoric US dollar payments involving countries, persons or entities subject tothose sanctions. The Group has provided information relating to its review ofsuch historic payments to a number of authorities including OFAC, the USDepartment of Justice and the New York County District Attorney's office which,along with other authorities, have been reported to be conducting a broaderreview of sanctions compliance by non-US financial institutions. The Group isinvolved in ongoing discussions with these authorities with respect to agreeinga resolution of their investigations. No provision has been made in respect ofthis matter. The Group does not expect the final outcome to have a materialadverse effect on its financial position. 23. Taxation The statutory effective tax rate in 2007 was 17.0 per cent, compared to 31.6 percent in 2006. Under IFRS the Group is required to include in income taxexpense the tax attributable to UK life insurance policyholder earnings and itsinterests in Open-ended Investment Companies (OEICs). The effective rate of theGroup, excluding the gross policyholder and OEIC interests from profit beforetax and the tax charge and, in 2007, the profit on disposal of businesses fromprofit before tax and the impact on the year end deferred tax position of the UKcorporation tax rate change (£110 million credit), was 28.3 per cent (2006: 28.0per cent). The 2007 Finance Act reduction in the corporation tax rate from 30 per cent to28 per cent has resulted in a one-off impairment charge relating to a reductionin future rental income within the Group's leasing business of £28 million, as aresult of the triggering of relevant tax variation clauses. In addition, theGroup's deferred tax liabilities have been remeasured resulting in a credit tothe Group's tax charge of £110 million. The net impact of these items has beento increase shareholders' equity by £90 million. The future impact of thereduction in capital allowances from 25 per cent to 20 per cent will not bematerial for the Group. Page 56 of 58 23. Taxation (continued) A reconciliation of the charge that would result from applying the standard UKcorporation tax rate to profit before tax to the tax charge is given below: 2007 2006 £m £m Profit before tax 4,000 4,248Tax charge thereon at UK corporation tax rate of 30% 1,200 1,274Factors affecting charge:Disallowed and non-taxable items 2 (8)Overseas tax rate differences (4) (2)Gains exempted or covered by capital losses (274) (78)Policyholder interests (173) 123Corporation tax rate change (110) -Other items 38 32Tax charge 679 1,341 24. Dividend A final dividend for 2007 of 24.7p (2006: 23.5p), representing an increase of 5per cent, will be paid on 7 May 2008. The total amount of this dividend is£1,394 million. 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 5 March 2008Record date 7 March 2008Final date for joining or leaving the dividend reinvestment plan 9 April 2008Final dividend paid 7 May 2008Annual general meeting 8 May 2008 25. 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 2007 were approved bydirectors on 21 February 2008 and will be delivered to the Registrar ofCompanies following publication on 29 March 2008. The auditors' report on theseaccounts was unqualified and did not include a statement under sections 237(2)(accounting records or returns inadequate or accounts not agreeing with recordsand returns) or 237(3) (failure to obtain necessary information andexplanations) of the Companies Act 1985. Page 57 of 58 CONTACTS For further information please contact:- Michael Oliver Director of Investor Relations Lloyds TSB Group plc 020 7356 2167 Email: michael.oliver@ltsb-finance.co.uk Mary Walsh Director of Corporate Relations Lloyds TSB Group plc 020 7356 2121 Email: mary.walsh@lloydstsb.co.uk Kirsty Clay Senior Manager, Media Relations Lloyds TSB Group plc 020 7356 1517 Email: kirsty.clay@lloydstsb.co.uk Copies of this news release may be obtained from Investor Relations, Lloyds TSBGroup plc, 25 Gresham Street, London EC2V 7HN. The full news release can alsobe found on the Group's website - www.lloydstsb.com. A copy of the Group's corporate responsibility report may be obtained by writingto Corporate Responsibility, Lloyds TSB Group plc, 25 Gresham Street, LondonEC2V 7HN. This information together with the Group's code of business conductis also available on the Group's website. Registered office: Lloyds TSB Group plc, Henry Duncan House, 120 George Street,Edinburgh, EH2 4LH. Registered in Scotland no. 95000. Page 58 of 58 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Lloyds