6th May 2008 07:02
Lloyds TSB Group PLC06 May 2008 42/08 6 May 2008 LLOYDS TSB RELATIONSHIP BUSINESSES CONTINUE TO DELIVER GOOD GROWTH Interim management statement - key highlights* • The Group continues to deliver good growth in its relationshipbanking businesses in a difficult period for financial services companies. • Excluding the impact of market dislocation and insurance relatedvolatility, each division and the Group achieved revenue growth in excess ofcost growth, and a double-digit percentage increase in profit before tax in thefirst quarter of 2008. • The Group has continued to capture market share in a number of keyareas, whilst improving product margins. • The impact of market dislocation on profit before tax in Wholesaleand International Banking was £387 million in the first quarter of 2008. • The Group has maintained its strong liquidity and funding position. • We remain firmly on track to deliver a good performance in the firsthalf of 2008. The Group's core banking businesses have continued their growth momentum duringthe first quarter of 2008, notwithstanding the continuing difficulties infinancial markets. This serves to demonstrate both the prudence of our businessmodel and the high quality, sustainable nature of our earnings. Whilst no bankhas been immune from the recent market turbulence, the impact on the Groupcontinues to be relatively limited. Continuing to build our strong customer franchises We have continued to extend our strong, relationship focused, customerfranchises by acquiring new customers, deepening relationships with existingcustomers, and achieving good sales growth, whilst also improving productivityand efficiency. The underlying performance of the business remains strong withrevenue growth remaining well ahead of cost growth. Like many other financialinstitutions, the Group has been affected by the recent market dislocation.However, due to our lower risk strategy, the impact on profit before tax in ourWholesale and International Banking division has been limited to £387 million inthe first quarter of 2008. In UK Retail Banking we have continued recent performance trends, with strongrevenue momentum and excellent cost management. Insurance and Investments hasdelivered a solid performance against the backdrop of a slowdown in the sale ofequity based savings and investment products. In Wholesale and InternationalBanking our strong liquidity position has led to further progress in buildingour corporate and commercial relationship banking businesses. However, thedivision's overall performance has been affected by the impact of the widespreadturbulence in global financial markets. *Unless otherwise stated, first quarter 2008 performance comparisons relate tothe equivalent period in 2007 for the Group's continuing businesses. Despite the significant disruption in financial markets, Lloyds TSB maintains astrong liquidity and funding position, building on our 'triple A' long-term debtrating and robust capital ratios. Continued strong revenue momentum in UK Retail Banking The Retail Bank has continued to make excellent progress, with further growth inproduct sales supporting strong revenue momentum. We continue to make progressin the acquisition of new current accounts and have also achieved good growth incustomer deposits, especially in bank savings and cash Individual SavingsAccounts. Our Wealth Management business delivered a particularly strong firstquarter with a significant increase in new business flows. In our mortgage business, we significantly improved our market share of net newmortgage lending in the first quarter of 2008, whilst maintaining prudent newbusiness loan-to-value ratios. Recent levels of mortgage allocations continueto be strong. New business net interest margins have improved considerably aswe benefit from both a market-wide increase in interest spreads and our relativefunding advantage. The Group has continued to maintain high levels of assetquality by focusing on the prime UK mortgage market. We have maintained our leadership position in personal loans and credit cardissuance, and have continued to build our transaction focused credit cardbusiness with strong growth in new customers choosing the Lloyds TSB AirMilesDuo account. The quality of our new unsecured personal lending has remainedstrong, reflecting lower levels of arrears and the Group's focus on lending toexisting current account customers where we better understand our customers'financial position. Continued progress in Insurance and Investments In Insurance and Investments, we have continued to achieve growth in thebancassurance channel, although the level of growth slowed during the firstquarter of 2008 as a result of a switch away from equity based products towardscash based products, and lower mortgage-related protection sales. Stand-alonesales of protection products have remained robust. In the IFA channel, sales ofpensions were good. However a significant reduction in the sale of savings andinvestment products, largely as a result of the uncertainty caused by proposedchanges to Capital Gains Tax, led to an overall reduction in new business sales. Scottish Widows continues to make improvements in service and operationalefficiencies and this has led to another excellent cost performance. Thecapital position of Scottish Widows remains strong. In General Insurance, we have delivered improved home insurance sales throughthe branch network and strong sales through our increasing corporate partneringarrangements. Cost control has been good and we expect to achieve notableprofit growth in the business in the first half of 2008, largely reflecting theexpected absence of last year's unusually high weather-related claims. Strong relationship banking growth in Wholesale and International Banking The division has continued to make substantial progress in its relationshipbanking businesses. Our Corporate and Commercial Banking businesses are in astrong competitive position and continue to expand their share of our customers'business. In Commercial Banking, strong growth in business volumes and goodprogress in improving operational efficiency have resulted in continued strongprofit growth. In Corporate Markets, further progress has been made indeveloping our relationship banking franchise supported by a significantincrease in the demand for corporate lending and a strong cross-sellingperformance. Reflecting this, in April 2008, our corporate relationship bankingbusinesses were awarded the CBI Corporate Bank of the Year Award for the fourthconsecutive year. The division has limited exposure to assets affected by current marketuncertainties. However, in Wholesale and International Banking profit beforetax was reduced by £387 million during the first quarter of 2008 as a result ofthe impact of market dislocation. This principally reflects mark-to-marketadjustments on assets in our trading portfolio. US sub-prime mortgage Asset Backed Securities (ABS) and ABS Collateralised DebtObligations (CDOs) Lloyds TSB continues to have no direct exposure to US sub-prime mortgage AssetBacked Securities and limited indirect exposure through ABS CDOs. During thefirst quarter of 2008, the market value of our holdings in ABS CDOs was writtendown by £5 million, leaving a residual investment of £125 million net of hedges. The Group's residual investment of £125 million is stated net of credit defaultswap (CDS) protection totalling £406 million purchased from a 'triple A' ratedmonoline financial guarantor. At 31 March 2008, the underlying assets supportedby this protection had fallen in value, leaving a reliance on the CDS protectiontotalling £187 million. During the quarter, the Group has written down thevalue of this protection by £58 million. In addition, at 31 March 2008, theGroup had £1,972 million of ABS CDOs which are fully cash collaterised by majorglobal financial institutions. During April 2008, this exposure reduced by £566 million, or 29 per cent, following the sale, at cost, of an ABS CDO. Structured Investment Vehicle (SIV) Capital Notes During the first quarter of 2008, the Group wrote down the value of its SIVassets by a total of £46 million, leaving a residual exposure to SIV CapitalNotes at 31 March 2008 totalling £35 million. Additionally, at 31 March 2008the Group had commercial paper back-up liquidity facilities totalling £182million, of which £115 million had been drawn. All of these liquidity lines aresenior facilities. Trading portfolio In the first quarter of 2008, Corporate Markets saw a reduction in profit beforetax of approximately £278 million as a result of the impact of mark-to-marketadjustments in the Group's trading portfolio, reflecting the market-widerepricing of liquidity and, to a lesser extent, credit. At 31 March 2008, thetrading portfolio contained £200 million of indirect exposure to US sub-primemortgages and ABS CDOs. Available-for-sale assets At 31 March 2008, the Group's portfolio of available-for-sale assets totalled£23.2 billion. A significant proportion of these assets (£7.9 billion) relatedto the ABS in Cancara, our hybrid Asset Backed Commercial Paper conduit. Over99 per cent of these ABS remain 'triple A' rated by both Moody's and Standard &Poor's. Cancara, which is fully consolidated in the Group's accounts, comprises£7.9 billion ABS and £3.9 billion client receivables transactions and is managedin a very conservative manner, which is demonstrated by the quality and ratingsstability of its underlying asset portfolio. Cancara has continued to funditself satisfactorily without having to utilise the Group's liquidity backstopfacility. The balance of the Group's available-for-sale assets includes £3.1 billionStudent Loan ABS, predominantly guaranteed by the US Government, £7.4 billionGovernment bond and short-dated bank commercial paper and certificates ofdeposit and £4.8 billion major bank senior paper and high quality ABS. Theseavailable-for-sale assets are intended to be held to maturity and as a result,under IFRS, they are marked-to-market through reserves. During the firstquarter of 2008, a net £740 million reserves adjustment has been made to reflectthe fact that, whilst not currently impaired, there has been a reduction in themarket value of these assets. This adjustment has no impact on the Group'scapital ratios. The attached appendix shows the credit market positions in Corporate Markets, at31 March 2008, on both a gross and net basis. Valuation of financial instruments Trading securities, other financial assets and liabilities at fair value throughprofit or loss, derivatives and available-for-sale financial assets are statedat fair value. The fair value of these financial instruments is the amount forwhich an asset could be exchanged or a liability settled between willing partiesin arm's length transactions. The fair values of financial instruments aredetermined by reference to observable market prices where these are availableand the market is active. Where market prices are not available or areunreliable because of poor liquidity, fair values are determined using valuationtechniques including cash flow models which, to the extent possible, useobservable market parameters. Within our Wholesale and International Bankingbusiness, exposure to assets held at fair value through profit or loss valuedusing unobservable market inputs totalled £1.3 billion, at 31 March 2008, ofwhich £0.7 billion related to the Lloyds TSB Development Capital portfolio ofinvestments. Strong Group cost performance The Group's strong cost performance has continued, resulting in a furtherimprovement in the Group's underlying cost:income ratio. The Group's programmeof efficiency improvements is progressing well and we remain on track to delivernet benefits of circa £250 million in 2008. Overall credit quality remains satisfactory Overall Group asset quality remains satisfactory. In the Retail Bank, arrearsand delinquency trends in both the secured and unsecured lending portfolios haveremained satisfactory. As we have previously indicated, the retail impairmentcharge in the first half of 2008 is not expected to be significantly differentfrom that in the first half of 2007. In Wholesale and International Banking, corporate and small business assetquality has also remained strong. The underlying level of new corporateprovisions, excluding the impact of market dislocation, is expected to remain ata relatively low level during the first half of 2008, albeit higher than in thefirst half of last year. Insurance volatility In the first quarter of 2008, high levels of volatility in fixed income marketsand lower equity markets contributed to adverse volatility of £474 millionrelating to the insurance business, excluding policyholder interests volatility. This reflects a reduction in the market consistent valuation of the annuityportfolio, driven by the continued widening of corporate bond spreads, and lowerexpected future shareholder income from contracts where the underlyingpolicyholder investments are in equities. Robust capital ratios and strong liquidity and funding position The Group's capital ratios remain robust and the rate of risk-weighted assetgrowth in 2008 is expected to be consistent with our previously indicated highsingle digit, low double-digit range. Throughout the ongoing market turbulence,Lloyds TSB has maintained a strong liquidity position for both the Group'sfunding requirements, which are supported by the Group's strong and stableretail and corporate deposit base, and those of its conduit, Cancara. Inaddition, retail and corporate deposit inflows remain strong and the Groupcontinues to benefit from its strong credit ratings and diversity of fundingsources. Eric Daniels, Group Chief Executive, commented: "Despite the more challenging market conditions, the Group remains firmly ontrack to deliver a good performance for the first half of 2008, excluding theimpact of market dislocation and insurance related volatility. Our strongliquidity and funding capability have ensured that the Group has continued toraise wholesale funding at market leading rates. This gives the Group acompetitive advantage and has enabled our corporate and retail relationshipbanking businesses to achieve strong levels of business growth in the firstquarter of the year, capturing market share in a number of key areas whilstimproving product margins. Our strategy and focus remains on continuing tobuild strong customer relationships, whilst improving the efficiency andeffectiveness of our operations. Excluding the impact of market dislocation and insurance related volatility,each division and the Group delivered double-digit profit before tax growth inthe first quarter of 2008. By focusing on our core strengths and continuing tocapture the growth opportunities within our relationship businesses, we expectto continue to deliver good levels of growth with high returns." Interim Management Statement webcast details The Acting Group Finance Director's briefing will be available as a live audiowebcast, at 9.30 a.m., on the Investor Relations website atwww.investorrelations.lloydstsb.com and a recording will be posted on thewebsite shortly after the briefing. Timetable 2008 interim results announcement 30 July 2008Ex dividend date 6 August 2008Interim dividend record date 8 August 2008Interim dividend payment date 1 October 2008 All dates are provisional and subject to change. For further information:- Investor RelationsMichael Oliver +44 (0) 20 7356 2167Director of Investor RelationsE-mail: michael.oliver@ltsb-finance.co.uk Douglas Radcliffe +44 (0) 20 7356 1571Senior Manager, Investor RelationsE-mail: douglas.radcliffe@ltsb-finance.co.uk Media RelationsKirsty Clay +44 (0) 20 7356 1517Head of Media RelationsE-mail: kirsty.clay@lloydstsb.co.uk 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. Appendix 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 financial market turbulence. Thefollowing table shows credit market positions in Corporate Markets, on both agross and net basis. Credit Market Positions 31 December 2007 31 March 2008 Write-down 2008Q1 Net Gross Net Gross Exposure Exposure Exposure Exposure £m £m £m £m £mUS sub-prime ABS-direct - - - - - ABS CDOs- unhedged 130 130 125 125 5- monoline hedged - 470 - 406 58- major global bank cash collateralised - 1,861 - 1,972 - Structured investment vehicles- capital notes 78 78 35 35 43- liquidity backup facilities 370 370 182 182 3 Trading portfolio- ABS trading book 474 474 399 399 75- secondary loan trading 665 863 594 933 47- other assets 3,895 3,895 3,715 3,715 156 387 Available-for-sale assets 31 December 2007 31 March 2008 Reserves adjustment 2008Q1 £bn £bn £m Cancara (Over 99% AAA/Aaa) 8.3 7.9 423- US sub-prime - nil- Alt-A - £456 million (100% AAA/Aaa)- CMBS - £1,256 million (100% AAA/Aaa) Student Loan ABS 3.2 3.1 214- US Government guaranteed Treasury assets 4.6 7.4 -- Government bond and short-dated bank commercial paper Other assets 4.1 4.8 103- Major bank senior paper and high quality ABSTotal - Group 20.2 23.2 740 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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