4th Mar 2005 07:01
Lloyds TSB Group PLC04 March 2005 LLOYDS TSB GROUP PLC - 2004 RESULTS PRESENTATION OF RESULTS In order to provide a clearer representation of the underlying performance ofthe Group, the results of the Group's life and pensions and general insurancebusinesses include investment earnings calculated using longer-term investmentrates of return (page 33, note 15). The difference between the normalisedinvestment earnings and the actual return ('the investment variance') togetherwith the impact of changes in the economic assumptions used in the embeddedvalue calculation (page 33, note 16), the profit/loss on the sale of a number ofoverseas businesses in 2003 and 2004 (page 34, note 17) and the trading resultsof businesses sold in 2003 have been separately analysed and a reconciliation tothe Group's profit before tax is shown on page 1. FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to thebusiness, strategy and plans of the Lloyds TSB Group, its current goals andexpectations relating to its future financial condition and performance. Bytheir nature, forward looking statements involve risk and uncertainty becausethey relate to events and depend on circumstances that will occur in the future.Lloyds TSB Group's actual future results may differ materially from theresults expressed or implied in these forward looking statements as a result ofa variety of factors, including UK domestic and global economic and businessconditions, risks concerning borrower credit quality, market related risks suchas interest rate risk and exchange rate risk in its banking business and equityrisk in its insurance businesses, changing demographic trends, unexpectedchanges to regulation or regulatory actions, changes in customer preferences,competition and other factors. Please refer to the latest Annual Report on Form20-F of Lloyds TSB Group filed with the US Securities and Exchange Commissionfor a discussion of such factors. CONTENTS PageProfit before tax by division 1Performance highlights 2Profit before tax by half-year 3Performance highlights - continuing operations 4Summary of results 5Group Chief Executive's statement 6Group Finance Director's review of financial performance 9Segmental analysis 12Divisional performance 13 - UK Retail Banking 13 - Insurance and Investments 16 - Wholesale and International Banking 19Consolidated profit and loss account 21Consolidated balance sheet 22Consolidated cash flow statement 23Notes 24Contacts for further information 37 LLOYDS TSB GROUP PROFIT BEFORE TAX BY DIVISION Increase 2004 2003 (Decrease) £m £m % UK Retail Banking Before provisions for customer redress 1,751 1,671 5 Provisions for customer redress (100) (200) 1,651 1,471 12Insurance and Investments Before provisions for customer redress 785 665 18 Provisions for customer redress (12) (100) 773 565 37Wholesale and International Banking (continuing operations) 1,272 1,038 23Central group items (page 26, note 4) (333) (12)Profit before tax from continuing operations* 3,363 3,062 10Changes in economic assumptions (page 33, note 16) (2) (22)Investment variance (page 33, note 15) 147 125Loss on sale of businesses in 2004 (15) -Discontinued operations in 2003 - 1,183Profit before tax 3,493 4,348 (20) *excluding changes in economic assumptions, investment variance and (loss) profit on sale of businesses 2003 figures have been restated to reflect changes in the Group's segmentalanalysis following the introduction, in 2004, of the management of the Group'sdistribution channels as profit centres and other changes in internal pricingarrangements. These changes have not resulted in any restatement to Groupprofit before tax. YEAR END ASSETS BY DIVISION 2004 2003 £m £m UK Retail Banking 101,615 90,541Insurance and Investments* 10,225 9,844Wholesale and International Banking 112,968 101,286Central group items 271 263Total assets* 225,079 201,934 *excluding long-term assurance assets attributable to policyholders Page 1 of 37 LLOYDS TSB GROUP PERFORMANCE HIGHLIGHTS Key achievements - continuing operations • The Group has improved its profits in each division. Strong earnings momentum continued into the second half of 2004. • Good franchise growth with customer lending up by 14 per cent to £154 billion and customer deposits up by 5 per cent to £122 billion. • Costs remain firmly under control. Income growth exceeded cost growth in each division and at Group level. • Strong credit quality, with improved trends in provisions for bad and doubtful debts. • Capital ratios remain satisfactory. Lloyds TSB Bank's 'triple A' credit rating from Moody's was reaffirmed in November 2004. Results - continuing operations excluding investment variance, changes ineconomic assumptions and profit/loss on sale of businesses • Profit before tax increased by £301 million, or 10 per cent, to £3,363 million. • Earnings per share increased by 12 per cent to 41.8p. • Economic profit increased by 9 per cent to £1,442 million. • Post-tax return on average shareholders' equity 23.5 per cent. • Post-tax return on average risk-weighted assets increased from 1.87 per cent to 1.95 per cent. Results - statutory • Profit before tax decreased by £855 million, or 20 per cent, to £3,493 million, reflecting the impact of businesses disposed in 2003 which contributed £1,183 million last year. • Profit attributable to shareholders decreased by £833 million, or 26 per cent, to £2,421 million. • Earnings per share decreased by 26 per cent to 43.3p. • Post-tax return on average shareholders' equity 24.3 per cent. • Total capital ratio 10.0 per cent, tier 1 capital ratio 8.9 per cent. • Dividend maintained. Final dividend of 23.5p per share, making a total of 34.2p for the year (2003: 34.2p) Page 2 of 37 LLOYDS TSB GROUP PROFIT BEFORE TAX BY HALF-YEAR 2004 2004 H1 H2 Increase £m £m % UK Retail Banking Before provisions for customer redress 818 933 14 Provisions for customer redress - (100) 818 833 2Insurance and Investments Before provisions for customer redress 378 407 8 Provisions for customer redress - (12) 378 395 4Wholesale and International Banking 616 656 6Central group items (167) (166)Profit before tax from continuing operations* 1,645 1,718 4Changes in economic assumptions 7 (9)Investment variance (72) 219(Loss) profit on sale of businesses (16) 1Profit before tax 1,564 1,929 23 *excluding changes in economic assumptions, investment variance and (loss) profit on sale of businesses Page 3 of 37 LLOYDS TSB GROUP PERFORMANCE HIGHLIGHTS - CONTINUING OPERATIONS Key achievements - UK Retail Banking • Profit before tax, excluding customer redress provisions, increased by 5 per cent to £1,751 million. On the same basis, income growth of 4 per cent exceeded cost growth of 1 per cent. • Strong balance growth in mortgages, credit cards and personal loans. - Mortgage balances increased by 13 per cent to £80.1 billion. - Credit card balances increased by 12 per cent to £7.5 billion. - Personal loan balances increased by 12 per cent to £10.7 billion. • 20 per cent increase in quality customer current account recruitment. • Good asset quality, with arrears position remaining satisfactory. Key achievements - Insurance and Investments • Profit before tax, excluding customer redress provisions, changes in economic assumptions and investment variance, increased by 18 per cent to £785 million. • Good progress in strategy to increase value of new business. - New business contribution in Scottish Widows increased by 21 per cent. - Life and pensions new business margin increased to 28.6 per cent, from 25.8 per cent in 2003. • 9 per cent increase in life and pensions sales, increasing the Group's market share to 7.5 per cent; 10 per cent growth in sales through the IFA distribution channel. • Good progress with Lloyds TSB Insurance's strategy to develop its manufacturing business and increase focus on direct channels, which generated 12 per cent growth in new business sales. • Strong capital position. Scottish Widows has paid a dividend of £200 million to Lloyds TSB. Key achievements - Wholesale and International Banking • Profit before tax, excluding impact of business disposals, increased by 23 per cent to £1,272 million. All major businesses performing well. • Good progress in delivering the strategy to build an integrated wholesale bank. • 11 per cent increase in Corporate Markets income. • Income growth of 5 per cent exceeded cost growth of 2 per cent. • Asset quality remains strong. Page 4 of 37 LLOYDS TSB GROUP SUMMARY OF RESULTS Increase 2004 2003 (Decrease) £m £m % Results - continuing operations*Total income 9,422 9,152 3Operating expenses 4,917 4,901 -Trading surplus 4,505 4,251 6Provisions for bad and doubtful debts 866 887 (2)Profit before tax 3,363 3,062 10Economic profit 1,442 1,329 9Earnings per share (pence) 41.8 37.4 12Post-tax return on average shareholders' equity (%) 23.5 n/a Results - statutoryTotal income 9,567 9,908 (3)Operating expenses 4,917 5,173 (5)Trading surplus 4,650 4,735 (2)Provisions for bad and doubtful debts 866 950 (9)Profit before tax 3,493 4,348 (20)Profit attributable to shareholders 2,421 3,254 (26)Economic profit (page 32, note 12) 1,525 2,493 (39)Earnings per share (pence) (page 32, note 13) 43.3 58.3 (26)Post-tax return on average shareholders' equity (%) 24.3 38.5 Balance sheetShareholders' equity 9,977 9,624 4Net assets per share (pence) 176 170 4Total assets 279,843 252,012 11Loans and advances to customers 154,240 135,251 14Customer deposits 122,062 116,496 5 Risk asset ratios % %Total capital 10.0 11.3Tier 1 capital 8.9 9.5 Shareholder valueClosing market price per share (year-end) 473p 448pTotal market value of shareholders' equity £26.5bn £25.1bnDividends per share 34.2p 34.2p *excluding investment variance, changes in economic assumptions and (loss) profit on sale of businesses Page 5 of 37 LLOYDS TSB GROUP GROUP CHIEF EXECUTIVE'S STATEMENT 2004 was a good year for Lloyds TSB and, in many respects, marks the closing ofone chapter and the opening of another. During the past two years, we worked on a three point plan: • to enhance the quality, and decrease the volatility, of our earnings • to maintain our good returns, and • to achieve growth. I am pleased to report that we have made good progress on each of thesepriorities and, in doing so, we have also addressed many of the concerns of ourshareholders, which centred on the adequacy of our capital, the sustainabilityof the dividend and the achievement of growth whilst continuing to deliverstrong returns. Our results in 2004 reflect a higher quality of earnings. The five LatinAmerican businesses that we sold had impacted adversely on our performance,incurring losses amounting to more than £200 million over the five years to2003, equivalent to a negative return on equity of some 28 per cent. Inaddition, the earnings lost from the strategic sale of our businesses in NewZealand and Brazil were replaced within a year, as the Group's organic growthstrategy continued to deliver. The work that we have done to allocate our capital more efficiently, as well asthe management of our quality and costs, has allowed us to maintain high returnswhilst we focused the organisation on delivering growth. Pleasingly, we arestarting to demonstrate better growth across all of our divisions and keybusinesses. In the Retail Bank, income growth exceeded cost growth, we maintained or grewmarket share in most of the major product categories and we improved the depthof customer relationships. We used the year to put in place a more competitiveproduct set and a new operating model, whereby we now manage the branch networkon what we term a 'local markets' basis. In essence, we have returned thebranch to being part of the local community and given branch managers greaterauthority to manage profitability and run their areas as businesses. Werecognise that the needs of customers vary by community and, by organising inthis way, we believe that we will be both more responsive and effective whichwill, in turn, result in faster growth. In our test markets, we achieved highergrowth in quality customer recruitment and a greater improvement in customersatisfaction than in the rest of the branch network, and this is now starting todeliver an improved sales performance. The new model was extended to the entirebranch network in the second half of 2004. In Wholesale Banking, each of the major businesses made good progress inacquiring and deepening customer relationships and all delivered year-on-yearprofit improvements in excess of 20 per cent. The new management teamstrengthened our competitive position with enhanced product offerings and moreproactive calling efforts. This renewed customer focus and better alignment ofrelationship and product managers resulted in a 25 per cent uplift in earningsin the Corporate Markets franchise. Business Banking and Asset Finance alsoperformed strongly, supported by good income growth and strong cost control. Page 6 of 37 LLOYDS TSB GROUP In Insurance and Investments, our new business contribution in Scottish Widowsincreased by 21 per cent as we successfully focused on more profitable, and morecapital efficient business lines. The sales of life and pensions products inthe branches were encouraging, although we lagged in unit trust sales. During2004, supported by the launch of a simplified suite of bancassurance products inthe second half of the year, we increased our market share of non-IFA life andpensions sales from 7.8 per cent to 8.9 per cent. Overall, life and pensionsproduct sales increased by 9 per cent. In Lloyds TSB Insurance, increasedinvestment resulted in strong growth in sales through direct channels and wemaintained our market leading position in home insurance distribution. In addition to the considerable progress in the divisions, we also used the yearto enhance the effectiveness of the Corporate Centre, with the appointment ofnew directors in the Risk, Audit, Human Resources and Finance functions. Thishas enabled us to strengthen the operating disciplines across the Group, whichprovide the framework for us to grow in a sustained fashion. We are only just beginning to unlock the growth potential of the Lloyds TSBfranchise. During 2004, customer satisfaction ratings reached record levels,employee engagement scores rose to their highest level ever, credit qualityremained strong and our financial disciplines guided the Group to exceedexpectations in terms of financial performance. This gives us a solidunderpinning for the future. We still have much to do in terms of improving ourexecution but I believe we can continue to deliver income growth in a controlledand sustainable way, due to the progress made by the divisions and improvementsin our operating processes achieved during 2004. As we look to the future, we are opening a new chapter focused primarily ongrowth. We will continue to focus our efforts on our core markets and build ourskills to sustain superior performance. Our new priorities are designed toleverage our strengths in those markets and they are: • to materially deepen customer relationships, meeting more of ourcustomers' needs and winning a greater share of their business. In the lastyear and a half, we have put in place many of the pieces to build strongerrelationships; across all of our divisions we have enhanced service performanceand we have introduced improved product ranges. We have also introduced localmarkets in the Retail Bank and built up strong regional centres in the WholesaleBank. Our task is now to integrate these pieces so that our customers enjoybetter value and view us as the place to bring more of their business. • to improve our efficiency, growing our top line whilst improving theproductivity of our cost base, using the discipline of 'positive jaws'. As ourincome grows, we will continue to increase our investment to improve ourcustomer satisfaction ratings and our efficiency, through further development ofour quality performance, automation, straight-through processing and the moreeffective leveraging of our Groupwide cost base. • to continue to enhance the Group's capabilities and processes tosupport faster growth. In Finance, we will further develop our capitalmanagement disciplines and our understanding of the key drivers of economicprofit growth at a more granular level. In Risk, we will continue to build ourskill base to enable us to grow with less volatility in our earnings and to takeadvantage of the strategic benefits of Basel II. In Human Resources, we aredeveloping our people to perform to their full potential and to create the highperformance organisation necessary to achieve our goals. Page 7 of 37 LLOYDS TSB GROUP Looking back on the year, we achieved our three point plan and are now makingmarked progress on the elements of the Group's balanced scorecard. Our capitalposition is in good shape, with the impact of recent accounting changesincorporated into our plans, and we achieved growth and higher quality earnings.Our staff are engaged and the achievement of these favourable results is dueto their commitment and dedication to serving our customers. I look forward to seeing continued growth and progress against our revised setof priorities in 2005 and beyond. J Eric Daniels Group Chief Executive Page 8 of 37 LLOYDS TSB GROUP GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE In 2004 the Group's statutory profit before tax was £3,493 million, a decreaseof £855 million compared to £4,348 million in 2003. This decrease wasattributable to the impact in 2003 of the profit on the sale and trading resultsof a number of overseas businesses, which contributed £1,183 million. For thesame reason, profit attributable to shareholders decreased by £833 million, or26 per cent, to £2,421 million and earnings per share decreased by 26 per centto 43.3p. To enable meaningful comparisons with 2003, it is appropriate to exclude theimpact of these 2003 disposals, together with the investment variance andchanges in economic assumptions in the Group's life assurance businesses. Onthis basis, as a result of earnings growth in each business unit, profit beforetax increased by £301 million, or 10 per cent, to £3,363 million. Earnings pershare increased by 12 per cent to 41.8p and economic profit increased by 9 percent to £1,442 million. The post-tax return on average shareholders' equity was23.5 per cent and the post-tax return on average risk-weighted assets increasedto 1.95 per cent, from 1.87 per cent in 2003. Group net interest income (page 26, note 5) from continuing operations increasedby £176 million, or 4 per cent, and average interest-earning assets increased by8 per cent to £170 billion. Strong consumer lending growth led to increases of£2.6 billion in average personal lending and credit card balances and £8.9billion in average mortgage balances. The Group net interest margin from continuing operations decreased by 11 basispoints to 2.89 per cent, after adjusting for the impact of a change in themiddle of 2004 in the Group's wholesale liquidity and funding strategy towardsthe use of more capital efficient reverse repurchase agreements, which have beenexcluded from the net interest margin calculation (page 26, note 5). Thismargin reduction reflected the impact of changes in business mix and lowermargins in the Group's credit card, personal lending and mortgages portfolios asa result of competitive pressures. During the second half of 2004, however, westarted to see a slowdown in the rate of margin erosion in a number of retailproduct areas. There has also been further substitution of net interest incomefor fee income in certain product lines. Strong growth in loans and advances to customers and banks, partly offset by areduction in debt securities, led to an 11 per cent increase in total assets to£280 billion. The Group's strategy to increase retail lending, particularly inmortgages, credit cards and personal loans, was reflected in a 14 per centincrease in loans and advances to customers to £154 billion. Customer depositsincreased by £6 billion, or 5 per cent, to £122 billion, largely as a result ofstrong growth in current account credit balances which was supported by furtherprogress in the take-up of added value current accounts. Page 9 of 37 LLOYDS TSB GROUP Other income from continuing operations, excluding investment variance andchanges in economic assumptions, increased by £89 million to £4,463 million(page 27, note 6). Prior year comparisons are, however, further distorted bythe impact of the sale, in 2003, of the Group's portfolio of emerging marketsdebt bonds and certain closed foreign exchange positions and customer redressprovisions. Excluding these items, other income increased by 7 per cent. Feesand commissions receivable increased by 5 per cent to £3,124 million as a resultof higher income from the strong volume growth in credit and debit cardservices, partly as a result of the acquisition of the Goldfish credit cardportfolio in September 2003, an increase in mortgage related fees, reflectingthe growth in new mortgage lending during the year, and an increase in fees fromlarge corporate business and asset based lending, as a result of growingcustomer transaction volumes. Income from long-term assurance business, excluding the impact of customerredress provisions, increased by 32 per cent to £590 million as a result ofsignificantly improved profitability in the Scottish Widows life and pensionsbusiness. There was also a £50 million increase in gains on the sales ofassets, largely the realisation of venture capital investments. Operating expenses on a continuing operations basis, excluding the impact ofcustomer redress provisions, continued to be tightly controlled and increased byonly 2 per cent to £4,817 million (page 35, note 20). Significant improvementshave been made in processing and operational efficiency and the Group hascontinued to expand its programme of offshoring a number of its processing andback office operations to India. As a result of this constant focus onday-to-day operating cost control, the Group's cost:income ratio improved to51.1 per cent, from 52.5 per cent in 2003 (page 28, note 7). Revenue growthexceeded cost growth in each division and at Group level. Much of the Group's new retail lending during 2004 has been to existingcustomers where the Group has a better understanding of each individualcustomer's total financial position and this, in conjunction with a relativelybenign economic environment and increased corporate liquidity, has led to creditquality remaining strong throughout the Group. Notwithstanding substantialgrowth in loans and advances to customers, the provisions charge for bad anddoubtful debts within the Group's continuing operations was 2 per cent lowerthan in 2003 and, as a result, the Group's provisions charge expressed as apercentage of average lending improved to 0.59 per cent, compared to 0.66 percent in 2003 (page 29, note 9). Non-performing lending was £1,240 millionrepresenting 0.8 per cent of total lending, down from 0.9 per cent at 31December 2003. During 2004 there has been an increase in the level of complaints relating topast sales and performance of certain endowment based and long-term savingsproducts. Whilst the Group maintains provisions for customer redress in respectof past product sales, the adequacy of these provisions has been reviewed in thelight of ongoing experience. As a result, an additional provision of £112million has been made. Page 10 of 37 LLOYDS TSB GROUP The Group's capital position remains satisfactory. At the end of 2004, thetotal capital ratio was 10.0 per cent and the tier 1 capital ratio was 8.9 percent. Risk-weighted assets increased by 12 per cent to £132.2 billion,reflecting strong growth in consumer lending and mortgages, higher lending inCorporate Markets and the acquisition of a UK corporate loan portfolio fromDanske Bank which added risk-weighted assets of some £2.0 billion. The Groupcontinues to plan for risk-weighted asset growth of mid-to-high single digitsover the next few years, and expected profit retentions are sufficient tosupport this level of risk-weighted asset growth within the Group's currentcapital management policy. Profit retentions for 2004 totalled £507 million. Scottish Widows continues to be one of the most strongly capitalised lifeassurance companies in the UK. We remain satisfied with the overall capitalposition of Scottish Widows when calculated using the Financial ServicesAuthority's (FSA) new 'realistic' basis of balance sheet reporting, and thefirst Individual Capital Assessment under the new FSA regime has been completedand shows that our capital requirements are well covered. At the end ofDecember 2004 the working capital ratio of the Scottish Widows Long-Term Fund,applying the FSA's new realistic basis, was an estimated 19.0 per cent (page 34,note 18). The required risk capital margin was covered over 9 times. ScottishWidows has also paid a 2004 dividend of £200 million to Lloyds TSB reflectingthe start of an expected regular dividend stream. Recognising the Group's high existing dividend payout ratio, and reflecting adesire to maintain capital flexibility to continue making value enhancingacquisitions, such as the acquisition of Danske Bank's UK corporate loanportfolio in December 2004, the Board has decided to maintain the final dividendat 23.5p per share to make a total for the year of 34.2p per share. Thisrepresents a dividend yield for shareholders of 7.2 per cent, calculated usingthe 31 December 2004 share price of 473p. Helen A Weir Group Finance Director Page 11 of 37 LLOYDS TSB GROUP SEGMENTAL ANALYSIS Year ended Wholesale31 December 2004 Insurance and Central UK Retail and International group Continuing Discontinued Banking Investments Banking items operations operations Total £m £m £m £m £m £m £m Net interest income 3,198 99 1,966 (343) 4,920 - 4,920Other finance income - - - 39 39 - 39Other income 1,639 1,170 1,641 13 4,463 - 4,463Total income 4,837 1,269 3,607 (291) 9,422 - 9,422Operating expenses 2,513 272 2,090 42 4,917 - 4,917Trading surplus (deficit) 2,324 997 1,517 (333) 4,505 - 4,505General insurance claims - 224 - - 224 - 224Bad debt provisions 673 - 193 - 866 - 866Amounts written off fixedasset investments - - 52 - 52 - 52Profit (loss) before tax* 1,651 773 1,272 (333) 3,363 - 3,363Changes in economicassumptions - (2) - - (2) - (2)Investment variance - 147 - - 147 - 147Profit (loss) on sale of - - (15) - (15) - (15)businessesProfit (loss) before tax 1,651 918 1,257 (333) 3,493 - 3,493 Year ended Wholesale31 December 2003+ Insurance and Central UK Retail and International group Continuing Discontinued Banking Investments Banking items operations operations Total £m £m £m £m £m £m £m Net interest income 3,137 81 1,875 (349) 4,744 511 5,255Other finance income - - - 34 34 - 34Other income 1,533 981 1,561 299 4,374 142 4,516Total income 4,670 1,062 3,436 (16) 9,152 653 9,805Operating expenses 2,583 261 2,048 9 4,901 272 5,173Trading surplus 2,087 801 1,388 (25) 4,251 381 4,632General insurance claims - 236 - - 236 - 236Bad debt provisions 594 - 306 (13) 887 63 950Amounts written off fixedasset investments - - 44 - 44 - 44Share of results of joint (22) - - - (22) - (22)venturesProfit (loss) before tax* 1,471 565 1,038 (12) 3,062 318 3,380Changes in economicassumptions - (22) - - (22) - (22)Investment variance - 125 - - 125 - 125Profit on sale of businesses - - - - - 865 865Profit (loss) before tax 1,471 668 1,038 (12) 3,165 1,183 4,348 *excluding profit/loss on sale of businesses, changes in economic assumptions and investment variance+restated (page 24, note 1) Page 12 of 37 LLOYDS TSB GROUP DIVISIONAL PERFORMANCE UK RETAIL BANKING 2004 2003+ £m £m Net interest income 3,198 3,137Other income 1,639 1,533Total income 4,837 4,670Operating expenses: Before provisions for customer redress 2,413 2,383 Provisions for customer redress 100 200 2,513 2,583Trading surplus 2,324 2,087Provisions for bad and doubtful debts 673 594Share of results of joint ventures - (22)Profit before tax 1,651 1,471 Profit before tax, before provisions for customer redress 1,751 1,671 Cost:income ratio, before provisions for customer redress 49.9% 51.0%Total assets (year-end) £101.6bn £90.5bnTotal risk-weighted assets (year-end) £60.5bn £54.1bn+restated (page 24, note 1) Profit before tax from UK Retail Banking increased by £180 million, or 12 percent, to £1,651 million, compared to £1,471 million in 2003, supported bycontinued strong growth in the Group's consumer lending portfolios, partlyoffset by lower product margins, higher current account credit balances,improved current account fee income, tight cost control and lower provisions forcustomer redress. Excluding the impact of provisions for customer redress,profit before tax in UK Retail Banking increased by 5 per cent, with incomegrowth of 4 per cent and cost growth of 1 per cent. During 2004, we completed the restructure of our retail branch network throughthe establishment of 165 profit centred local markets. Initially, weparticularly focused on developing our business in the London and South Eastmarkets where Lloyds TSB is currently under represented. Good progress has beenmade, and in our test markets, we achieved higher growth in quality customerrecruitment, and greater improvement in levels of customer satisfaction thanelsewhere in the branch network, and this is now starting to deliver an improvedsales performance. Page 13 of 37 LLOYDS TSB GROUP UK Retail Banking (continued) In 2004, market shares were increased or maintained in most key product areasincluding gross and net new mortgage lending, personal loans and credit cards.Income, profit and economic profit per customer all improved during 2004.Strong growth in volumes was achieved with personal loans outstanding at 31December 2004 of £10.7 billion, an increase of 12 per cent during the year, andcard balances of £7.5 billion, an increase of 12 per cent. Gross new mortgagelending increased by 9 per cent to a record £26.3 billion, compared with £24.2billion in 2003. Net new lending increased to £9.3 billion resulting in amarket share of net new lending of 9.2 per cent, and mortgage balancesoutstanding increased by 13 per cent to £80.1 billion. Credit balances oncurrent accounts and savings and investment accounts increased by 7 per cent. Within personal loans, key initiatives have been the increased use ofbehavioural and risk-based pricing, leveraging our customer relationshipmanagement capabilities to enable the Group to deliver more competitive pricingto better quality customers and to price by distribution channel within ourexisting customer base. 99 per cent of new personal loans, and 75 per cent ofnew credit cards, sold during 2004 were to existing customers, where the Grouphas a better understanding of an individual customer's total financial profile.The Group has also continued to avoid sub-prime lending. Dynamic delinquencymeasures, on a rolling 12 month basis, show an improving position for newbusiness written. We have also continued to rationalise back office operationsto improve efficiency and levels of customer service and satisfaction. Operating expenses were well controlled throughout the business and as a result,excluding provisions for customer redress, increased by only £30 million, or 1per cent, to £2,413 million compared with 4 per cent growth in income during theyear. The bad debt provisions charge increased by £79 million, or 13 per cent, to £673million. £37 million of this increase reflected the acquisition in September2003 of the Goldfish credit card and personal lending portfolios with theremainder reflecting volume related asset growth in personal loan and creditcard lending. The provisions charge as a percentage of average lending forpersonal loans and overdrafts fell to 4.20 per cent, from 4.25 per cent in 2003,while the charge in the credit card portfolio increased to 3.42 per cent, from3.19 per cent in 2003. In the mortgages business, there was a net provisionrelease of £42 million (2003: £18 million release), reflecting the continuinglow level of losses in a climate of rising house prices and historically lowinterest rates. Overall, the provisions charge as a percentage of averagelending was 0.71 per cent, compared to 0.72 per cent in 2003, and the arrearsposition remained satisfactory. C&G continues to focus on prime lending market segments, and has maintained itspolicy of not exceeding a 95 per cent loan-to-value ratio on new lending. Theaverage indexed loan-to-value ratio on the C&G mortgage portfolio was 41 percent (31 December 2003: 43 per cent), and the average loan-to-value ratio for C&G new mortgages and further advances written during 2004 was 62 per cent (2003:62 per cent). At 31 December 2004, 88 per cent of C&G mortgage balances had anindexed loan-to-value ratio of less than 80 per cent and only 0.3 per cent ofbalances had an indexed loan-to-value ratio in excess of 95 per cent. Page 14 of 37 LLOYDS TSB GROUP UK Retail Banking (continued) Customers are increasingly choosing to buy via direct channels and continuedinvestment in our direct channel capabilities has supported good levels ofbusiness growth. Our internet bank now has 3 million registered users and, in2004, 1.2 million product sales were achieved through the internet, an increaseof 39 per cent compared to 2003. Over 400 million transactions were processedthrough internet banking, an increase of 60 per cent on 2003. Sales throughdirect channels now represent 50 per cent of total sales. Lloyds TSB remains a leader in the added value current account market, with over4 million customers. Quality customer current account recruitment increased by20 per cent, compared with 2003, whilst quality current account attrition was 11 per cent lower, reflecting improvements made in levels of process quality,customer service and customer satisfaction. Page 15 of 37 LLOYDS TSB GROUP INSURANCE AND INVESTMENTS 2004 2003+ £m £m Life and pensions new business income 419 396Life and pensions distribution costs (231) (241)New business contribution 188 155Existing business- expected return 300 283- experience variances (41) (16)- assumption changes and other items (39) (75) 220 192Provisions for customer redress (12) (100)Development costs (11) (13)Investment earnings 167 153 Profit before tax (life and pensions)* 552 387Unit trusts 75 62Unit trust distribution costs (22) (38) Profit before tax (unit trusts) 53 24Profit before tax (life, pensions and unit trusts)* 605 411General insurance* 160 153Scottish Widows Investment Partnership 8 1Profit before tax* 773 565Profit before tax, excluding provisionsfor customer redress* 785 665 New business margin (life and pensions) 28.6% 25.8%*excluding changes in economic assumptions and investment variance+restated (page 24, note 1) Profit before tax from Insurance and Investments, excluding changes in economicassumptions, investment variance and customer redress provisions, increased by18 per cent to £785 million, from £665 million in 2003. On the same basis,profit before tax from our life, pensions and unit trust businesses increased by£106 million, or 21 per cent, to £617 million. The Group's strategy to improveits profit mix by focusing on more profitable, less capital intensive, businesswhilst constantly seeking to improve process and distribution efficiency has ledto a 21 per cent increase in new business contribution to £188 million. As aresult of this improved capital efficiency, strong sales of pensions and singlepremium investments, and a reduced emphasis on certain lower return productssuch as stakeholder pensions, the life and pensions new business marginincreased to 28.6 per cent, from 25.8 per cent in 2003. Profit before tax from existing business, excluding provisions for customerredress, increased by £28 million, or 15 per cent, to £220 million. Theexpected return from existing business, which largely reflects the unwinding ofthe long-term discount rate applied to the expected cash flows from the Group'sportfolio of in-force business, was £17 million, or 6 per cent, higher at £300million. Page 16 of 37 LLOYDS TSB GROUP Insurance and Investments (continued) During 2004, there was a net charge of £80 million from changes in actuarialassumptions and experience variances, compared to a net charge of £91 million in2003. Higher margins, lower distribution costs and an improved stock marketperformance led to a significant improvement in the profit before tax from unittrusts, despite a reduction in the level of unit trust sales. Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased to£8 million, compared with £1 million in 2003, reflecting improved marketperformance and increased revenues from new business. SWIP won a record £2.1billion of gross new business in 2004 and increased its assets under managementby 6 per cent to £82 billion. The investment performance of fixed income andproperty remained strong in 2004. Corporate composite bonds outperformed themarket in the three year period to 31 December 2004, and the principal propertyunit-linked funds have performed in the top quartile in each of the last threeyears. UK and European equity performance has shown steady improvement over2004 and UK equities within SWIP's largest institutional funds have beensignificantly ahead of the benchmark in the second half of 2004. SWIP hasintroduced a new simplified fund range to support Lloyds TSB's bancassuranceoffer. 2004 2003 £m £mWeighted sales (regular + 1/10 single)Life and pensions 656.7 601.7Unit trusts 86.4 131.7Life, pensions and unit trusts 743.1 733.4 Weighted sales by distribution channelBranch network 238.9 278.8Independent financial advisers 431.6 391.6Direct 72.2 61.6Other, including International 0.4 1.4Life, pensions and unit trusts 743.1 733.4 Group funds under management £bn £bnScottish Widows Investment Partnership 82 77UK Wealth Management 13 11International 13 15 108 103 Overall, weighted sales in 2004 increased to £743.1 million, compared to £733.4million in 2003 with 10 per cent growth in IFA sales to £431.6 million. Directsales grew by 17 per cent to £72.2 million, while branch network sales were 14per cent lower at £238.9 million largely reflecting the wider market trend oflower single premium unit trust sales. In life and pensions, supported bygrowth in all channels, weighted sales increased by 9 per cent to £656.7million, resulting in an increase in the Group's estimated market share to 7.5per cent, from 7.0 per cent in 2003. Through the branch network and directchannels, the Group's market share increased to 8.9 per cent, from 7.8 per centin 2003, whilst the Group's market share in the IFA market improved to 7.0 percent, from 6.7 per cent in 2003. Page 17 of 37 LLOYDS TSB GROUP Insurance and Investments (continued) General insurance 2004 2003+ £m £m Premium income from underwritingCreditor 114 104Home 442 410Health 27 43Reinsurance premiums (29) (22) 554 535Commissions from insurance brokingCreditor 377 351Home 30 30Health 19 16Other 160 207 586 604 Profit before tax* 160 153 *excluding investment variance+restated (page 24, note 1) Profit before tax, excluding investment variance, from our general insuranceoperations increased by £7 million, or 5 per cent, to £160 million. Continued progress in improving levels of business retention and higher productmargins led to premium income from underwriting increasing by £19 million, or 4per cent. Home insurance income increased by 8 per cent. Insurance brokingcommission income decreased by £18 million as a £26 million increase in incomefrom creditor insurance was offset by a £47 million reduction in othercommissions, reflecting lower profit sharing income. There was a significantimprovement in broking income from creditor insurance in the second half of theyear, partly reflecting improvements in personal loan and credit cardpenetration rates. The business strategy to increase investment in more cost efficient distributionthrough direct channels is starting to create a shift from face-to-face channelstowards direct channels. As a result gross written premiums from new policiessold through direct channels increased by 12 per cent in 2004. Gross writtenpremiums for new policies sold via the internet increased by 37 per cent. Claims fell by £12 million to £224 million, compared to 2003, and the claimsratio fell to 38 per cent compared with 42 per cent in 2003, reflecting benignweather conditions and improved leverage of the supply chain. The combinedratio relating to the underwriting business was 83.2 per cent in 2004. Page 18 of 37 LLOYDS TSB GROUP WHOLESALE AND INTERNATIONAL BANKING 2004 2003+ £m £m Net interest income 1,966 1,875Other income 1,641 1,561Total income 3,607 3,436Operating expenses 2,090 2,048Trading surplus 1,517 1,388Provisions for bad and doubtful debts 193 306Amounts written off fixed asset investments 52 44Profit before tax - continuing operations* 1,272 1,038(Loss) profit on sale of businesses (15) 865Trading results of businesses sold in 2003 - 318Profit before tax 1,257 2,221 Cost:income ratio* 57.9% 59.6%Total assets (year-end) £113.0bn £101.3bnTotal risk-weighted assets (year-end) £71.1bn £62.8bn *excluding (loss) profit on sale of businesses and trading results of discontinued operations+restated (page 24, note 1) Wholesale and International Banking profit before tax, excluding profit/loss onsale of businesses and trading results of discontinued operations, increased by£234 million, or 23 per cent, to £1,272 million, from £1,038 million in 2003.On the same basis income growth of 5 per cent exceeded cost growth of 2 percent, leading to an improvement in the cost:income ratio to 57.9 per cent. Ourfocus on cross-selling and capital efficiency has led to an increase in thepost-tax return on average risk-weighted assets to 1.42 per cent compared with1.23 per cent in 2003. In Wholesale, there was strong profit growth inCorporate Markets, Business Banking and Asset Finance, in addition to areduction in provisions for bad and doubtful debts. Excluding the trading results of businesses sold in 2003 net interest incomeincreased by £91 million, or 5 per cent, reflecting higher income from improvedmargins in Corporate Banking and the Asset Finance businesses, and strong growthin customer lending in Asset Finance. Other income increased by £80 million,partly as a result of a £50 million increase in gains on the sales of assets,largely the realisation of venture capital investments by Lloyds TSB DevelopmentCapital. Costs were tightly controlled, 2 per cent higher at £2,090 million,reflecting higher staff related costs and increased investment spend withinCorporate Markets, partially offset by lower operating lease depreciation withinAsset Finance. Page 19 of 37 LLOYDS TSB GROUP Wholesale and International Banking (continued) The charge for provisions for bad and doubtful debts decreased by £113 millionto £193 million. The charge in Wholesale fell by £68 million to £232 million,as a result of a decrease in provisions from the corporate lending portfolio,partially offset by higher charges in the Asset Finance business. InInternational Banking there was a credit of £39 million mainly reflecting a £30million release from the general provision against the Group's exposures inArgentina. We continue to deepen customer relationships, and the creation of an integratedregional sales structure, bringing together product specialists withRelated Shares:
Lloyds