Interim Results

2nd Aug 2006 07:02

Lloyds TSB Group PLC02 August 2006 Lloyds TSB Group plc Results for half-year to 30 June 2006 PRESENTATION OF RESULTS The impact of International Financial Reporting Standards, and in particular theincreased use of fair values, has led to greater earnings volatility and, inorder to provide a more comparable representation of business performance, thisvolatility has been separately analysed for the Group's insurance and bankingbusinesses (page 30, note 2). In addition, profits and losses on sale andclosure of businesses have been separately analysed in the Group's results. Areconciliation of this basis of presentation to the statutory profit before taxis shown on page 1. Certain commentaries separately analyse the impact, in thesecond half of 2005, of customer redress provisions and the strengthening ofreserves for annuitant mortality. For certain aspects of the Group's life assurance businesses, additionalfinancial information has been provided on an 'embedded value' basis. FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to thebusiness, strategy and plans of the Lloyds TSB Group, its current goals andexpectations relating to its future financial condition and performance. Bytheir nature, forward looking statements involve risk and uncertainty becausethey relate to events and depend on circumstances that will occur in the future.The Group's actual future results may differ materially from the resultsexpressed or implied in these forward looking statements as a result of avariety of factors, including UK domestic and global economic and businessconditions, risks concerning borrower credit quality, market related risks suchas interest rate risk and exchange rate risk in its banking business and equityrisk in its insurance businesses, changing demographic trends, unexpectedchanges to regulation or regulatory actions, changes in customer preferences,competition and other factors. Please refer to the latest Annual Report on Form20-F filed with the US Securities and Exchange Commission for a discussion ofsuch factors. CONTENTS PageProfit analysis by division 1Assets by division 1Performance highlights 2Summary of results 3Group Chief Executive's statement 4Group Finance Director's review of financial performance 7Summarised segmental analysis 10Divisional performance 12 - UK Retail Banking 12 - Insurance and Investments 15 - Wholesale and International Banking 19Consolidated interim income statement - statutory 22Consolidated interim balance sheet - statutory 23Consolidated interim statement of changes in equity - statutory 24Condensed consolidated interim cash flow statement - statutory 25Condensed segmental analysis - statutory 26Notes 28Contacts for further information 41 PROFIT ANALYSIS BY DIVISION Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mUK Retail Banking Before provisions for customer redress 713 699 2 771 Provisions for customer redress - - (150) 713 699 2 621Insurance and Investments Before strengthening of reserves for mortality 466 425 10 455 Strengthening of reserves for mortality - - (155) 466 425 10 300Wholesale and International Banking 768 695 11 829Central group items (195) (193) (231)Profit before tax - excluding volatility and 1,752 1,626 8 1,519 profit on sale and closure of businessesVolatility (page 30, note 2)- Banking (2) (73) (51)- Insurance (61) 131 307- Policyholder interests 90 29 282Profit on sale and closure of businesses (page - - 5037, note 13)Profit before tax 1,779 1,713 4 2,107Taxation (543) (509) (756)Profit for the period 1,236 1,204 1,351 Profit attributable to minority interests 22 12 50Profit attributable to equity shareholders 1,214 1,192 1,301Profit for the period 1,236 1,204 1,351 Earnings per share 21.7p 21.3p 23.3p ASSETS BY DIVISION 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mUK Retail Banking 105,726 98,911 7 102,945 Insurance and Investments 82,636 77,978 6 80,148Wholesale and International Banking 136,157 126,568 8 124,044Central group items 1,248 2,649 (53) 2,617Total assets 325,767 306,106 6 309,754 Page 1 of 41 PERFORMANCE HIGHLIGHTS Unless otherwise stated, the analysis throughout this document compares thehalf-year to 30 June 2006 with the half-year to 30 June 2005. Results - statutory • Profit before tax increased by £66 million, or 4 per cent, to £1,779 million.• Profit attributable to equity shareholders increased by 2 per cent to £1,214 million.• Earnings per share increased by 2 per cent to 21.7p.• Post-tax return on average shareholders' equity decreased to 23.5 per cent, from 24.9 per cent.• Total capital ratio 10.3 per cent, tier 1 capital ratio 7.4 per cent.• Interim dividend maintained at 10.7p. Results - excluding volatility • Profit before tax increased by £126 million, or 8 per cent, to £1,752 million.• Income growth of 6 per cent exceeded cost growth of 1 per cent. Cost:income ratio improved to 50.6 per cent, from 53.0 per cent.• Trading surplus increased by £260 million, or 11 per cent, to £2,552 million.• Earnings per share increased by 7 per cent to 22.1p.• Economic profit increased by 7 per cent to £773 million.• Post-tax return on average shareholders' equity was broadly stable at 24 per cent. Key highlights • Balanced and continuing trading momentum with income up 6 per cent and trading surplus up 11 per cent, excluding volatility.• Excellent cost control. Income growth, excluding volatility, of 6 per cent exceeded cost growth of 1 per cent delivering widened positive jaws of 5 percentage points. Productivity improvement programme on track.• Good trading performance in UK Retail Banking, with a more balanced sales mix. Overall product sales volumes up 17 per cent. Income up 3 per cent, costs reduced by 3 per cent resulting in trading surplus increasing by 8 per cent.• Excellent growth in Scottish Widows with a 35 per cent increase in new business weighted sales (bancassurance up 64 per cent; IFA sales up 25 per cent). Improved new business margin. Profit before tax, adjusting for the impact of capital repatriation in 2005 and insurance grossing, increased by 15 per cent.• Continued strong trading momentum in Wholesale and International Banking supported by a 22 per cent increase in cross-selling income. Income growth of 8 per cent exceeded cost growth of 2 per cent; trading surplus increased by 17 per cent.• Impairment up 20 per cent; overall credit quality remains satisfactory.• Capital ratios remain robust. Page 2 of 41 SUMMARY OF RESULTS Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £m Results - statutoryTotal income, net of insurance claims 5,189 4,962 5 5,578Operating expenses 2,610 2,583 (1) 2,888Trading surplus 2,579 2,379 8 2,690Impairment losses on loans and advances 800 666 (20) 633Profit before tax 1,779 1,713 4 2,107Profit attributable to equity shareholders 1,214 1,192 2 1,301Earnings per share (page 38, note 15) 21.7p 21.3p 2 23.3pPost-tax return on average shareholders' equity 23.5% 24.9% 26.3% Results - excluding volatility*Total income, net of insurance claims 5,162 4,875 6 5,195Operating expenses 2,610 2,583 (1) 2,738Trading surplus 2,552 2,292 11 2,457Impairment losses on loans and advances 800 666 (20) 633Profit before tax 1,752 1,626 8 1,824Economic profit (page 38, note 14) 773 725 7 876Earnings per share 22.1p 20.7p 7 23.5pPost-tax return on average shareholders' equity 24.0% 24.1% 26.8%Post-tax return on average risk-weighted assets 1.66% 1.73% 1.81% Shareholder valueClosing market price per share (period end) 531.5p 473p 12 488.5pTotal market value of shareholders' equity £29.9bn £26.5bn 13 £27.4bnProposed dividend per share (page 40, note 18) 10.7p 10.7p 23.5p 30 June 30 June 31 December 2006 2005 Change 2005Balance sheet - statutory £m £m % £mShareholders' equity 10,157 9,392 8 10,195Net assets per share (pence) 178 165 8 180Total assets 325,767 306,106 6 309,754Loans and advances to customers 182,157 167,583 9 174,944Customer deposits 136,465 130,550 5 131,070 Risk asset ratiosTotal capital 10.3% 9.6% 10.9%Tier 1 capital 7.4% 7.7% 7.9% *results for the half-year to 31 December 2005 also exclude profit on sale and closure of businesses,customer redress provisions and strengthening of reserves for mortality. Page 3 of 41 GROUP CHIEF EXECUTIVE'S STATEMENT Lloyds TSB had a pleasing first half of the year, as we delivered a good levelof earnings growth despite the anticipated higher impairment losses in ourunsecured consumer portfolios. We have continued to show tangible progressagainst the second phase of our strategy, which focuses on building customerfranchises for sustained growth. We have seen strong growth in sales, improvedlevels of customer acquisition and success in deepening relationships. Allthree divisions delivered strong trading surplus growth. As importantly, theleading indicators for income and costs, as well as the record scores inemployee engagement and customer satisfaction, show that we are executing welland point to continued growth in the future. During the first half of 2006, we made good progress on the Groupwideinitiatives of improving productivity and better capital management. Ourproductivity programme is on track to deliver significant benefits and ourquality programmes are enhancing our service to customers as well as deliveringefficiency gains. We have seen an improvement in our cost:income ratio from53.0 per cent in the first half of 2005 to 50.6 per cent in 2006, excludingvolatility. This has been achieved at a time when we are continuing to investin our key growth franchises. We are managing our capital more efficiently, andremain on track with plans we set out earlier this year in the areas ofsecuritisation, origination and distribution, and the additional repatriation ofcapital from Scottish Widows. Our capital ratios remain robust. We have continued to develop our risk framework, which is important as it allowsus to manage the risks as we grow the business. The deterioration in theunsecured consumer lending environment, particularly reflecting the changes topersonal bankruptcy laws, that we highlighted earlier in the year, has led to anincrease in our impairment charge. We are, however, expecting greater stabilityin the charge for retail impairments in the second half as the benefits of ourtightened credit criteria show through. Unsecured consumer lending represents12 per cent of our customer lending and, given the corporate lending andmortgage portfolios remain of high quality, our overall credit quality remainssatisfactory. We have made a good start to 2006. We have delivered another half-year of goodgrowth and have continued with the successful implementation of our Group anddivisional strategies. We have three well balanced divisions and this allowsthe Group to manage successfully through the differing parts of the economiccycle and credit environment. We have achieved growth whilst maintaining a highreturn on equity at 24.0 per cent. The highlights of each division's performance, excluding volatility, aresummarised below: The Retail Bank reported strong trading surplus growth, up 8 per cent,underpinned by positive jaws of 6 per cent. Income increased 3 per cent whilstcosts were reduced by 3 per cent. Profit before tax grew by 2 per cent as theincreased charge for impairments impacted the results. During the first half of 2006, there has also been substantial progress againstthe priorities we have established for the Retail Bank. Sales volumes increasedby 17 per cent, and we have seen better growth in the higher value distributionchannels with sales in the branch channel up 31 per cent, and the telephony andinternet channels up 38 per cent. We are shifting our sales focus to theproduct areas where we expect greatest future growth and are seeing good resultsin bancassurance sales (up 64 per cent) and bank savings (up 10 per cent). Page 4 of 41 Our efficiency improvements have been achieved at the same time as we haveinvested further in the franchise, which is enabling us to develop new customeroffers and improve our processes. Both of these are supporting the improvementsin our customer satisfaction scores which are now at record high levels. The Retail Bank has grown its customer franchise, with the recruitment of newtarget current account customers up 65 per cent. The continued focus onimproving the levels of service quality and customer satisfaction is helping tomaintain our current low levels of customer attrition. Our productivityprogramme is supporting the quality improvements and is enabling us to free upmore time to spend with our customers. So far it has generated the equivalentof an additional 660 staff to serve customers. In Insurance and Investments our underlying profit before tax increased by 15per cent, underpinned by strong profitable growth across our bancassurance andIFA distribution channels and we remain very well placed to benefit from theanticipated growth in savings and investment business over the coming years.The focus on profitable growth resulted in an improvement in the new businesscontribution, on an embedded value basis, of 28 per cent, and the life andpensions new business margin increased to 28.8 per cent, from 25.8 per cent.Good improvements were also achieved in key individual product margins. Scottish Widows remains strongly capitalised and, in addition to the payment ofthe second annual dividend to the Group in March 2006, we again expect it tomake a further distribution to the Group later this year as we continue toimprove the capital efficiency of the business. Total Scottish Widows sales increased by 35 per cent, and we made particularlystrong progress in our more profitable bancassurance channel, with a 64 per centincrease in weighted sales reflecting the ongoing development of our productoffers and salesforce. We delivered very strong growth in investment sales,with the sales of OEICs up 153 per cent, underpinned by the improvements we havemade in the OEIC product portfolio and higher levels of customer confidence inthe stock market. In addition to writing substantially higher levels ofbusiness through the branch network, it is pleasing that we are also achievinghigher levels of sales from the Private Bank and to business customers. We haveseen continued strong growth in our IFA business, with a 25 per cent improvementin weighted sales in the first half, due to our continued product and servicedevelopments, as Scottish Widows maintained its position as a key distributor inthis market. Our General Insurance business delivered another strong half, with profits up 21per cent. The performance reflects the results of our investment in thebusiness, which is leading to improved customer service, reduced claims costsand enhanced sales volumes to franchise customers. In Wholesale and International Banking, we are continuing to see the benefits ofour investment for growth strategy, with a trading surplus increase of 17 percent. Our results show excellent progress in our core businesses and thedivision delivered an 11 per cent improvement in profit before tax. The chargefor impairment losses on loans increased given, as expected, the lower level ofreleases and recoveries in Corporate Markets, and a higher level of consumerfinance losses in the Asset Finance businesses. The divisional results demonstrate the success of the new strategies in ourBusiness Banking and Corporate Markets businesses, which are providing theengine for sustained growth. Despite the ongoing investments in staff, newproducts and premises, we have again maintained our discipline of positive jaws,with the rate of growth in income 6 per cent ahead of the growth in costs, as weensure we realise the benefits of recent higher levels of investment. Page 5 of 41 The Corporate Markets businesses delivered another strong performance with a 20per cent improvement in profits. The results demonstrate our successes indeepening our relationships with customers, as we meet more of their needsthrough a greater understanding of their businesses, and continuing to improveour products and services. We were also delighted to be awarded the CBICorporate Bank of the Year Award, for the second year running, a tribute to thehard work of our staff in this area. We continue to manage our lendingportfolios very closely, and asset quality remains strong. In Business Banking, we have delivered strong profit growth of 25 per cent,whilst also attracting new customers in both the start-up and switcher markets.We have also been successful in winning a greater share of our customers'business, which is reflected in good customer lending and deposit growth. Summary Turning to the second half of 2006, we expect to make further progress in eachof our strategic objectives, building stronger business franchises, improvingour efficiency and developing those defining skills and competencies that willsupport our future growth plans. I firmly believe that great businesses arebased on strong customer franchises and we will continue to put the needs of thecustomer at the heart of our business strategies, which will allow us tocontinue to grow in the coming years. Integral to our objectives is the development of a management team that iscommitted to delivering success. We have continued to develop our leadershipteam and now have an experienced senior management group. I am pleased that wehave again, in the last six months, attracted some very high calibre recruits,who are committed to helping us grow the business and develop a high performanceculture across the organisation. We take our commitment to the broader community very seriously and Lloyds TSBstaff have supported a wide range of community programmes throughout thisperiod, both in terms of financial support and through the giving of their timeand energy. We are also very proud of the work of the Lloyds TSB Foundations,which make a major difference to the lives of many thousands of people eachyear, and in February we gave a further £34 million in support of theircontinued work. Overall, we have made a good start to 2006, delivering good results whilstcontinuing the successful implementation of our growth strategies across theGroup, and I look forward to reporting our further progress at the end of thisyear. Finally, let me again take this opportunity to express my thanks to allour staff across the Group. Their determination to serve our customers andtheir support for the implementation of our growth strategy, are major factorsbehind our progress and underpin our future success. J Eric DanielsGroup Chief Executive Page 6 of 41 GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE In the first half of 2006, statutory profit before tax was £1,779 million, anincrease of £66 million (4 per cent) compared to £1,713 million in the firsthalf of 2005. Profit attributable to equity shareholders increased by £22million, or 2 per cent, to £1,214 million and earnings per share increased by 2per cent to 21.7p. To enable meaningful comparisons to be made with the first half of 2005, theremaining income statement commentaries exclude the impact of volatility. Continued earnings momentum Profit before tax increased by £126 million, or 8 per cent, to £1,752 million,demonstrating continued momentum in all divisions. Revenue growth of 6 per centexceeded cost growth of 1 per cent, with each division delivering a widened gapbetween revenue growth and cost growth, on a like-for-like basis. Our strategyto deepen customer relationships at the same time as improving productivity hasled to strong and increased levels of trading surplus growth in each division.Earnings per share increased by 7 per cent to 22.1p and economic profit alsoincreased by 7 per cent to £773 million. The post-tax return on averageshareholders' equity remains strong and was broadly stable at 24.0 per cent. Balanced income growth Overall income growth of 6 per cent reflects good progress in balance sheetgrowth in both customer assets and liabilities, as well as increased fee income. Group net interest income, excluding insurance grossing adjustments, increasedby £177 million, or 7 per cent, compared with the first half of last year.Strong levels of customer lending growth in Business Banking and CorporateMarkets, and good growth in mortgages, increased banking averageinterest-earning assets by £21 billion, or 11 per cent, to £211 billion. Overthe last 12 months, total assets increased by 6 per cent to £326 billion, with a9 per cent increase in loans and advances to customers. Strong growth incorporate and small business lending, and good levels of growth in mortgages,offset the expected slowdown in the rate of growth in unsecured personallending. Over the same period, customer deposits increased by 5 per cent to£136 billion, largely as a result of good growth in current account creditbalances and saving balances in the retail bank. The net interest margin from our banking businesses (page 32, note 4) decreasedslightly from 2.79 per cent in the first half of 2005 to 2.69 per cent in thefirst half of 2006. Whilst individual product margins were broadly stable,stronger growth in finer margin mortgage and corporate lending led to a negativemix effect which accounted for 9 basis points of the fall in margin. Other income, net of insurance claims and excluding insurance grossingadjustments, increased by £93 million (4 per cent) to £2,347 million. Fees andcommissions receivable increased by 3 per cent to £1,518 million as a result ofhigher income from strong growth in added value current account and privatebanking fees, and an increase in Open-Ended Investment Company fees. Page 7 of 41 Excellent cost control The Group continues to invest significantly in improving levels of servicequality and processing efficiency, the benefits of which are seen in anexcellent cost performance. During the first half of 2006, operating expensesincreased by only 1 per cent to £2,610 million. Over the last 12 months, staffnumbers have fallen by 4,438 (6 per cent) to 65,167, largely as a result ofimproved efficiency in back office processing centres and the reduction ofadministration carried out in the branch network. These improvements inoperational efficiency have resulted in an improved cost:income ratio, 2.4percentage points lower at 50.6 per cent. The Group's programme of productivity improvement initiatives remains on trackto deliver net benefits of approximately £30 million in 2006 and approximately£100-£150 million in 2007. During the first half of 2006 we invested just over£60 million in a number of initiatives, funded by benefits of £50 million frominitiatives launched in the last year. Overall asset quality remains satisfactory Impairment losses on loans and advances increased by 20 per cent to £800million. In UK Retail Banking, impairment losses on loans and advancesincreased by £86 million, or 16 per cent, to £632 million, reflecting morecustomers, with higher levels of indebtedness, experiencing repaymentdifficulties as well as higher levels of customer bankruptcies. As a result ofthe improved quality of new business written during 2005, following the recenttightening of credit criteria, and improvements in the Group's collectionprocedures, we continue to expect greater stability in the level of retailimpairment in the second half of 2006. The rate of growth in the number ofcustomers filing for bankruptcy and IVAs does, however, remain a key factor inthe outlook for retail impairment. In Wholesale and International Banking, thecharge for impairment losses on loans and advances increased by £61 million to£159 million, as a result of the high level of releases and recoveries inCorporate Markets in the first half of 2005 which, as expected, were notrepeated in the first half of 2006, and a higher level of consumer financelending impairment in the Asset Finance business. Our impairment charge expressed as a percentage of average lending was 0.88 percent, compared to 0.80 per cent in the first half of 2005 (page 35, note 9).Impaired assets totalled £4,029 million, compared with £4,122 million at 31December 2005, representing 2.1 per cent of total lending, down from 2.3 percent at 31 December 2005. Capital position remains robust At the end of June 2006, the total capital ratio was 10.3 per cent and the tier1 ratio was 7.4 per cent. During the half-year, risk-weighted assets increasedby 5.5 per cent to £152.9 billion, reflecting strong growth in our mortgage andCorporate Markets businesses. The Board has decided to maintain the interimdividend at 10.7p per share. We have also made good progress in our plans to improve the way in which thebalance sheet is managed, moving from a 'buy and hold' approach towards an 'origination and distribution' framework. Our preparations for thesecuritisation of mortgage assets are well advanced and we anticipate thecompletion of an initial securitisation tranche of approximately £5 billion inthe second half of 2006. This programme will be expanded in 2007 with theplanned securitisation programme totalling at least £10 billion. Page 8 of 41 Scottish Widows continues to be one of the most strongly capitalised lifeassurance companies in the UK. At the end of June 2006, the working capitalratio of the Scottish Widows Long-Term Fund was an estimated 19.6 per cent (page 39, note 16) and the required risk capital margin was covered over 16 times.We continue to examine opportunities to improve our capital efficiency and havework in progress that we believe will allow Scottish Widows to repatriatefurther capital to the Group, whilst maintaining a strong capital position. Inthe second half of 2006 we expect additional capital repatriation ofapproximately £400 million. The Group's pension schemes accounting deficit totalled £2,799 million at theend of June 2006 (£1,959 million net of deferred tax) as cash contributions tothe Group's defined benefit schemes exceeded the regular cost. The Group hasrecently reached agreement with the Lloyds TSB Group pension schemes' trusteesto fund the schemes' actuarial funding deficit of £1.5 billion over a period of10 years. We also expect to continue to make additional voluntary contributionsand, if the Group's total deficit contributions remain at broadly the samelevels as in recent years, we would expect to see the accounting deficiteliminated over a period of approximately 10 years, and the actuarial fundingdeficit eliminated over approximately 6 years. Delivering strong and balanced trading momentum During the first half of 2006, the Group has delivered strong and balancedtrading momentum, with good sales growth, across all of the divisions.Substantial improvements in productivity and operational efficiency haveresulted in excellent cost control and widened positive jaws. Asset qualityremains satisfactory, our post-tax return on equity remains high and we have arobust capital position. As a result, we expect 2006 to be another good yearfor the Group, with good levels of revenue growth, excellent cost control andcontinued earnings momentum. Helen A WeirGroup Finance Director Page 9 of 41 SUMMARISED SEGMENTAL ANALYSIS Insurance and Investments Half-year to 30 June 2006 Excluding Wholesale UK insurance Insurance and Central Retail grossing Insurance and International group Banking adjustment gross up+ Investments Banking items Total £m £m £m £m £m £m £m Net interest income 1,794 28 35 63 1,194 (209) 2,842Other income 783 832 2,517 3,349 805 22 4,959Total income 2,577 860 2,552 3,412 1,999 (187) 7,801Insurance claims - (95) (2,544) (2,639) - - (2,639)Total income, net of 2,577 765 8 773 1,999 (187) 5,162 insurance claimsOperating expenses (1,232) (312) 5 (307) (1,072) 1 (2,610)Trading surplus (deficit) 1,345 453 13 466 927 (186) 2,552Impairment losses on loans (632) - - - (159) (9) (800)and advancesProfit (loss) before tax* 713 453 13 466 768 (195) 1,752Volatility- Banking - - - - - (2) (2)- Insurance - (61) - (61) - - (61)- Policyholder interests - - 90 90 - - 90Profit (loss) before tax 713 392 103 495 768 (197) 1,779 Insurance and InvestmentsHalf-year to 30 June 2005 Excluding Wholesale UK insurance Insurance and Central Retail grossing Insurance and International group Banking adjustment gross up+ Investments Banking items Total £m £m £m £m £m £m £m Net interest income 1,711 35 159 194 1,084 (200) 2,789Other income 801 781 4,892 5,673 759 21 7,254Total income 2,512 816 5,051 5,867 1,843 (179) 10,043Insurance claims - (108) (5,060) (5,168) - - (5,168)Total income, net of 2,512 708 (9) 699 1,843 (179) 4,875 insurance claimsOperating expenses (1,267) (293) 19 (274) (1,050) 8 (2,583)Trading surplus (deficit) 1,245 415 10 425 793 (171) 2,292Impairment losses on loans (546) - - - (98) (22) (666)and advancesProfit (loss) before tax* 699 415 10 425 695 (193) 1,626Volatility- Banking - - - - - (73) (73)- Insurance - 131 - 131 - - 131- Policyholder interests - - 29 29 - - 29Profit (loss) before tax 699 546 39 585 695 (266) 1,713 *excluding volatility. +the Group's income statement includes premiums receivable from policyholdersand the returns on investments held within the life funds and OEICs which areshown within total income, and related deductions within interest expense andinsurance claims. There is no material impact upon the Group's profitability.This segmental analysis separately identifies the impact of the insurancegrossing adjustment. In the summarised segmental analysis above, the results of the Goldfishbusiness, which was sold in December 2005, have been transferred into Centralgroup items in order to allow a meaningful comparison of the results of UKRetail Banking. Page 10 of 41 SUMMARISED SEGMENTAL ANALYSIS (continued) Insurance and Investments Half-year to 31 December 2005 Excluding Wholesale UK insurance Insurance and Central Retail grossing Insurance and International group Banking adjustment gross up+ Investments Banking items Total £m £m £m £m £m £m £m Net interest income 1,772 44 151 195 1,181 (193) 2,955Other income 773 651 6,792 7,443 869 18 9,103Total income 2,545 695 6,943 7,638 2,050 (175) 12,058Insurance claims - (89) (6,929) (7,018) - - (7,018)Total income, net 2,545 606 14 620 2,050 (175) 5,040 of insurance claimsOperating expenses (1,405) (314) (6) (320) (1,131) (32) (2,888)Trading surplus (deficit) 1,140 292 8 300 919 (207) 2,152Impairment losses on loans (519) - - - (90) (24) (633)and advancesProfit (loss) before tax* 621 292 8 300 829 (231) 1,519Volatility- Banking - - - - - (51) (51)- Insurance - 307 - 307 - - 307- Policyholder interests - - 282 282 - - 282Profit (loss) on sale and - - - - (6) 56 50closure of businessesProfit (loss) before tax 621 599 290 889 823 (226) 2,107 *excluding volatility and profit (loss) on sale and closure of businesses. +the Group's income statement includes premiums receivable from policyholdersand the returns on investments held within the life funds and OEICs which areshown within total income, and related deductions within interest expense andinsurance claims. There is no material impact upon the Group's profitability.This segmental analysis separately identifies the impact of the insurancegrossing adjustment. In the summarised segmental analysis above, the results of the Goldfishbusiness, which was sold in December 2005, have been transferred into Centralgroup items in order to allow a meaningful comparison of the results of UKRetail Banking. Page 11 of 41 DIVISIONAL PERFORMANCE UK RETAIL BANKING Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mNet interest income 1,794 1,711 5 1,772Other income 783 801 (2) 773Total income 2,577 2,512 3 2,545Operating expenses (1,232) (1,267) 3 (1,255)Trading surplus 1,345 1,245 8 1,290Impairment losses on loans and advances (632) (546) (16) (519)Profit before tax, before provisions for customer 713 699 2 771redressProvisions for customer redress - - (150) Profit before tax 713 699 2 621 Cost:income ratio, before provisions for customer 47.8% 50.4% 49.3%redress 30 June 30 June 31 December 2006 2005 2005Total assets £105.7bn £98.9bn 7 £102.9bnTotal risk-weighted assets £61.6bn £58.4bn 5 £60.4bn Key highlights • Income growth of 3 per cent and a reduction in costs of 3 per cent resulted in an 8 per cent increase in trading surplus.• Strong sales performance in each key distribution channel; overall product sales up 17 per cent. Significant progress in the rebalancing of sales mix towards a broader set of products, with an increased focus on non-lending related revenue streams.• Excellent progress in growing the current account customer franchise, with a 65 per cent increase in target customer current account recruitment.• Good income growth, against the background of a significant decrease in income from creditor insurance.• Excellent cost control, with a clear focus on improving processing efficiency and service quality. Positive jaws widened.• Impairment charge up 16 per cent, reflecting market wide deterioration in retail credit quality. Greater stability expected in the second half of 2006.• Substantial improvements in levels of customer satisfaction and employee engagement. Page 12 of 41 UK RETAIL BANKING (continued) During the first half of 2006 UK Retail Banking has made substantial progress inincreasing sales, and improving its sales effectiveness and operationalefficiency. Product sales increased by 17 per cent, with performanceimprovement over a broad range of products, particularly in current accounts,bank savings and OEICs. The retail bank has also continued to grow its customerfranchise, particularly in the recruitment of new target current accountcustomers, and has substantially improved levels of service quality, customersatisfaction and cost efficiency. Profit before tax from UK Retail Banking increased by £14 million, or 2 percent, to £713 million, as good levels of business growth were partly offset bythe impact of higher impairment losses. Increased income from the Group'smortgage lending and customer deposit portfolios more than offset the impact oflower levels of unsecured consumer lending and related insurance products.Total income increased by £65 million, or 3 per cent, notwithstanding asignificant decrease in income from unsecured creditor insurance, whilst costsfell by 3 per cent. The trading surplus increased by 8 per cent. During the first half of 2006 significant progress has been made in re-balancingthe sales mix in the retail bank towards a broader set of products, with anincreasing focus on non-lending related income streams. Target customer currentaccount recruitment increased by 65 per cent, compared with the first half oflast year, and significant improvements have been made in the sale of addedvalue current accounts, bank savings products, bancassurance products and in thelevel of retail bank customer introductions to our wealth management business.Lloyds TSB remains a leader in the added value current account market, with over4 million customers. During the first half of the year, we have continued to deliver improved levelsof growth in branch based sales, particularly current accounts and savings andinvestment products, whilst continued investment in our direct channelcapabilities has supported good levels of business growth. Branch network salesrose by 31 per cent and product sales via the internet and telephone increasedby 38 per cent as customers are increasingly choosing to buy through directchannels as well as through our branches. Our internet bank has 4 millionregistered users and nearly 300 million transactions were processed throughinternet banking in the first half of 2006, an increase of 37 per cent. Gross new mortgage lending for the Group totalled £13.0 billion (2005H1: £11.8billion). Mortgage balances outstanding increased by 10 per cent to £91.8billion and net new lending totalled £3.4 billion, resulting in a market shareof net new lending of 6.7 per cent, as the Group focused on maintaining returnsin a competitive market. Personal loan balances outstanding at the period endwere £11 billion, a decrease of 1 per cent and credit card balances totalled £7billion, an increase of 3 per cent. The reduction in new unsecured consumerlending reflects a slowdown in customer demand and the recent tightening ofcredit criteria. Credit balances on current accounts and savings and investmentaccounts increased by 6 per cent. UK Wealth Management continues to make good progress. The Investment PortfolioService (IPS), launched in 2005, is attracting both existing and new clients.Over half of our existing clients have moved across to IPS whilst new clientrecruitment is up 143 per cent and new Funds Under Management have grown by 128per cent compared to the first half of 2005. Wealth Protection sales have alsoseen good growth and banking deposits are up over 20 per cent. This trend isexpected to continue as we roll out expansion plans which include making morePrivate Bankers accessible to customers in key branch locations. Page 13 of 41 UK RETAIL BANKING (continued) Operating expenses remained very well controlled, decreasing by 3 per cent.Significant improvements have been made in the rationalisation of back officeoperations to improve efficiency, and this has led to a substantial improvementin the levels of customer service and satisfaction. We continue to increase theproportion of front office to back office staff and have substantially improvedour sales productivity. Impairment losses on loans and advances increased by £86 million, or 16 percent, to £632 million, reflecting the impact of more customers, with higherlevels of indebtedness, experiencing repayment difficulties and higher levels ofcustomer bankruptcies. The impairment charge as a percentage of average lendingfor personal loans and overdrafts increased to 6.18 per cent, from 5.82 per centin the first half of 2005, while the charge in the credit card portfolioincreased to 6.78 per cent, from 5.66 per cent. Overall, the impairment chargeas a percentage of average lending was 1.23 per cent, compared to 1.16 per centin the first half of last year. Over 99 per cent of new personal loans and 80per cent of new credit cards sold during the first half of 2006 were to existingcustomers, where the Group has a better understanding of an individualcustomer's total financial position. The probability of default on new personalloan and credit card business written has continued to reduce over the last sixmonths and dynamic delinquency measures remain in line with our expectations. In Cheltenham & Gloucester (C&G), mortgage credit quality remains good and, as aresult, the impairment charge was unchanged at £6 million for the half-year.The average indexed loan-to-value ratio on the mortgage portfolio was 44 percent (31 December 2005: 43 per cent), and the average loan-to-value ratio fornew mortgages and further advances written during the first half of 2006 was 64per cent (2005: 64 per cent). At 30 June 2006, only 0.7 per cent of balanceshad an indexed loan-to-value ratio in excess of 95 per cent (31 December 2005:0.6 per cent). Page 14 of 41 INSURANCE AND INVESTMENTS Excluding volatility Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mNet interest income 28 35 (20) 44Other income 832 781 7 806Total income 860 816 5 850Insurance claims (95) (108) 12 (89)Total income, net of insurance claims 765 708 8 761Operating expenses (312) (293) (6) (314)Profit before tax, excluding strengthening of 453 415 9 447reserves for mortalityStrengthening of reserves for mortality - - (155)Insurance grossing adjustment 13 10 8Profit before tax 466 425 10 300 Profit before tax analysisLife, pensions and OEICs* 335 323 4 332General insurance 114 94 21 115Scottish Widows Investment Partnership 17 8 113 8Profit before tax* 466 425 10 455 *excluding strengthening of reserves for mortality. Key highlights • Significantly improved profit performance. Profit before tax increased by 10 per cent to £466 million.• Strong income growth. On a like-for-like basis, adjusting for the impact of the £800 million capital repatriation in December 2005, income, net of insurance claims, increased by 11 per cent, exceeding cost growth of 6 per cent. On the same basis, profit before tax increased by 15 per cent.• Strong sales performance. 35 per cent increase in Scottish Widows' new business weighted sales. - Excellent progress in increasing bancassurance sales, up 64 per cent, with a very strong increase in the sale of OEICs. - Good momentum maintained in sales through Independent Financial Advisers. Sales increased by 25 per cent, reflecting excellent growth in the sales of corporate pension products.• Improved profitability. On an embedded value basis, life and pensions new business contribution in Scottish Widows increased by 28 per cent and life and pensions new business margin increased by 3 percentage points to 28.8 per cent. Good improvement in key individual product margins.• Strong capital position of Scottish Widows maintained. Scottish Widows continues to deliver improving capital efficiency and self-financing growth, in addition to its regular dividend payment to the Group.• Good progress with General Insurance's strategy to develop its manufacturing business and build distribution capability. Clear focus on improving underwriting, supply chain efficiency and claims management led to profit before tax increasing by 21 per cent. Combined ratio improved 7 percentage points to 78 per cent. Page 15 of 41 INSURANCE AND INVESTMENTS (continued) Profit before tax increased by £41 million, or 10 per cent, to £466 million. InDecember 2005, Scottish Widows repatriated £800 million surplus capital to theGroup as part of a capital restructuring programme. This capital repatriationhas the effect of reducing investment earnings and increasing funding charges bya total of £20 million in the first half of 2006. Adjusting the first half of2005 for this impact and excluding insurance grossing adjustments, profit beforetax increased by 15 per cent, income increased by 11 per cent and costsincreased by 6 per cent. Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005Weighted sales (regular + 1/10 single) £m £m % £mLife and pensions:Savings and investment 73 72 1 72Protection 24 30 (20) 27Individual pensions 139 141 (1) 130Corporate and other pensions 157 102 54 112Retirement income 41 34 21 34Life and pensions 434 379 15 375OEICs 162 64 153 84Life, pensions and OEICs 596 443 35 459 Bancassurance 210 128 64 146Independent financial advisers 351 280 25 282Direct 35 35 - 31Life, pensions and OEICs 596 443 35 459 Overall, weighted sales in 2006 increased by 35 per cent reflecting, inparticular, strong growth in the sales of OEICs and corporate pension products.Bancassurance sales improved significantly and were 64 per cent higher at £210million, including excellent growth in the weighted sales of OEICs through thebranch network and to Lloyds TSB private banking clients. IFA sales grew 25 per cent to £351 million, supported by significant product and service enhancementsin pensions and investments. Scottish Widows' overall market share increased toan estimated 6.3 per cent, from 6.1 per cent in the first half of 2005. Page 16 of 41 INSURANCE AND INVESTMENTS (continued) Scottish Widows - profit before tax analysis* Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005Life and pensions (embedded value basis)+ £m £m % £m New business contribution 125 98 28 126Existing business 111 104 7 96Investment earnings - normalised 76 87 (13) 99Profit before tax, adjusted for capital 312 289 8 321repatriationOEICs 44 23 91 41 Profit before tax, adjusted for capital 356 312 14 362repatriationImpact of £800 million capital repatriation to - 20 18GroupProfit before tax (life, pensions and OEICs) 356 332 7 380 New business margin (life and pensions) 28.8% 25.8% 33.6% *excluding volatility and strengthening of reserves for mortality. +includes the impact of the realistic valuation of liabilities within the with-profits fund. Adjusting for the impact of last year's capital repatriation, profit before taxfrom the Group's life, pensions and OEICs business, on an embedded value basis,increased by 14 per cent to £356 million. The Group's strategy to improve itsreturns by focusing on more profitable, less capital intensive, business whilstconstantly seeking to improve process and distribution efficiency has led to a28 per cent increase in new business contribution. As a result of improvementsin key individual product margins and strong sales of pensions and profitablesingle premium investments, the life and pensions new business margin increasedto 28.8 per cent, compared with 25.8 per cent for the first half of 2005. Scottish Widows Investment Partnership Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased to£17 million, compared with £8 million in 2005, reflecting increased revenuesfrom new business and improved market performance. SWIP won £3.8 billion ofgross new business in the first half of 2006, an increase of 51 per cent on2005, and its assets under management increased by 11 per cent to £97 billion.Groupwide funds under management increased by 7 per cent to £122 billion. Page 17 of 41 Insurance and Investments (continued) General insurance Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mCommission receivable 293 364 (20) 317Commission payable (328) (374) 12 (321)Underwriting income (net of reinsurance) 302 277 9 285Other income 20 13 54 5Net operating income 287 280 3 286Claims paid on insurance contracts (net of (95) (108) 12 (89)reinsurance)Operating income, net of claims 192 172 12 197 Operating expenses (78) (78) - (82)Profit before tax 114 94 21 115 Claims ratio 30% 37% 30%Combined ratio 78% 85% 76% Profit before tax from our general insurance operations increased by £20million, or 21 per cent, to £114 million. Operating income, net of claims,increased by 12 per cent whilst costs were flat. Good progress continues to bemade in implementing new platforms for underwriting and claims processes. Net operating income improved by £7 million, or 3 per cent, as 9 per cent growthin underwriting income was offset by a reduction in broking commissions,particularly relating to creditor insurance, which were 20 per cent lower thanthe first half of 2005 largely as a result of the slowdown in unsecured consumerlending (page 33, note 6). In addition to the distribution agreement securedwith MORE TH>N in 2005, good progress continues to be made in building theGroup's corporate partnering capability with a new distribution agreementsecured with Argos during the first half of 2006, and the recently announcedarrangement with Pearl Group. Excluding the impact of lower creditor insurance business, new sales through theUK Retail Bank have been robust, with a 39 per cent increase in home insurancenew gross written premiums. Our presence in the small business insurance marketcontinues to improve with an increase of 12 per cent in new business grosswritten premiums. Internet sales are becoming increasingly important and nowrepresent 34 per cent of direct sales volumes. Claims fell by £13 million to £95 million, and the claims ratio improved to 30per cent (2005H1: 37 per cent), reflecting further progress in re-engineeringthe claims process, improvements in the cost effectiveness of the claims supplychain and lower weather related claims. As a result, the combined ratiorelating to the underwriting business improved to 78 per cent (2005H1: 85 percent). Page 18 of 41 WHOLESALE AND INTERNATIONAL BANKING Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mNet interest income 1,194 1,084 10 1,181Other income 805 759 6 869Total income 1,999 1,843 8 2,050Operating expenses (1,072) (1,050) (2) (1,131)Trading surplus 927 793 17 919Impairment losses on loans and advances (159) (98) (62) (90)Profit before tax 768 695 11 829 Cost:income ratio 53.6% 57.0% 55.2% Total assets £136.2bn £126.6bn 8 £124.0bnTotal risk-weighted assets £86.5bn £76.7bn 13 £80.1bn Profit before tax by business unitCorporate Markets 512 428 20 548Business Banking 116 93 25 103Asset Finance 100 107 (7) 112International Banking and other businesses 40 67 (40) 66 768 695 11 829 Key highlights • Profit before tax increased by 11 per cent, or £73 million, to £768 million, despite a rise of £61 million in impairment losses largely as a result of the level of releases and recoveries in the first half of 2005 not being repeated.• Strong income growth, up 8 per cent, supported by a 22 per cent increase in cross-selling income and higher business volumes throughout the division.• Widening of positive jaws. Income growth of 8 per cent exceeded cost growth of 2 per cent. Continued investment in people and systems to support new product capabilities.• Continued strong trading momentum. Substantial increase in trading surplus, up 17 per cent, to £927 million.• Corporate asset quality remains strong.• Further good progress in delivering the strategy to build an integrated wholesale bank for corporate markets, with a 30 per cent increase in Corporate Markets trading surplus.• Continued strong franchise growth in Business Banking. 18 per cent growth in trading surplus, and 25 per cent growth in profit before tax. Lloyds TSB has retained its leading position as the bank of choice for start-up businesses.• Increased fee income and good cost control in Asset Finance, with trading surplus up 7 per cent. However, higher levels of consumer finance impairment resulted in a 7 per cent fall in profit before tax. Page 19 of 41 WHOLESALE AND INTERNATIONAL BANKING(continued) Wholesale and International Banking profit before tax increased by £73 million,or 11 per cent, to £768 million. Good trading momentum has continued andsignificant progress in our strategy to leverage the Group's excellent corporateand small business customer relationships continues to generate strong incomegrowth of 8 per cent. This exceeded cost growth of 2 per cent, leading to areduction in the cost:income ratio to 53.6 per cent, from 57.0 per cent lastyear. Trading surplus increased by £134 million, or 17 per cent, to £927million. There was strong profit growth in Corporate Markets and BusinessBanking while Asset Finance saw good trading surplus growth, in a slowerconsumer lending market, before higher impairment losses. Net interest income increased by £110 million, or 10 per cent, reflecting higherincome from strong growth in customer lending and customer deposits in CorporateMarkets and Business Banking, and increased income from financial marketsinterest rate products. Other income increased by £46 million, or 6 per cent,as a result of good levels of growth in financial markets product sales andcredit structuring. In addition, fee income throughout the division benefitedfrom volume growth across a broad range of customer activity. Costs were 2 percent higher at £1,072 million, as higher staff costs resulting from ourcontinuing investment in people, as we build up our Corporate Markets productcapability and expertise, were offset by further day-to-day operational costsavings. As expected, the charge for impairment losses on loans and advances increased by£61 million to £159 million, as a result of the high level of releases andrecoveries in Corporate Markets in the first half of 2005 which were notrepeated in the first half of 2006, and a higher level of consumer financelending impairment in the Asset Finance business in the first half of 2006. Corporate Markets Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mNet interest income 436 368 18 409Other income 391 339 15 468Total income 827 707 17 877Operating expenses (320) (317) (1) (348)Trading surplus 507 390 30 529Impairment losses on loans and advances 5 38 (87) 19Profit before tax 512 428 20 548 In Corporate Markets, profit before tax grew by 20 per cent, driven by stronglevels of income growth and good cost control. Income increased by 17 per cent,supported by higher levels of cross-selling income. There has been significantprogress in the delivery of our strategy focused on improved origination anddistribution capabilities, balance sheet efficiency and value creation in themid-sized corporate business. Operating expenses increased by 1 per cent to£320 million, as further investment in people, premises and systems was partlyoffset by good progress in improving efficiency. The trading surplus increasedby 30 per cent. The net impairment credit reduced to £5 million, reflecting thelower level of releases and recoveries, and profit before tax increased by 20per cent. Page 20 of 41 WHOLESALE AND INTERNATIONAL BANKING(continued) Business Banking Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mNet interest income 289 269 7 282Other income 124 121 2 127Total income 413 390 6 409Operating expenses (252) (254) 1 (273)Trading surplus 161 136 18 136Impairment losses on loans and advances (45) (43) (5) (33)Profit before tax 116 93 25 103 Profit before tax in Business Banking grew by £23 million, or 25 per cent,reflecting strong growth in business volumes and further improvements in growingthe Business Banking customer franchise. Strong income growth combined withtight cost control led to an improvement of over 4 percentage points in thecost:income ratio to 61.0 per cent. Costs remain well controlled and were 1 per cent lower. Customer deposits rose by 7 per cent to £11.7 billion and customerlending increased by 12 per cent to £8.6 billion. Business Banking continued todevelop and grow its customer franchise strongly, with customer recruitment ofover 62,000 during the first half of 2006, reflecting a market leading positionin the start-up market. We continue to be a strong performer in attractingswitchers to the Group with over 9,000 customers transferring their bankingarrangements to the Group from other banking providers during the first half ofthe year. Asset Finance Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 Change 2005 £m £m % £mNet interest income 304 318 (4) 322Other income 199 173 15 193Total income 503 491 2 515Operating expenses (285) (288) 1 (294)Trading surplus 218 203 7 221Impairment losses on loans and advances (118) (96) (23) (109)Profit before tax 100 107 (7) 112 Profit before tax in Asset Finance decreased by 7 per cent to £100 million,reflecting higher levels of consumer finance impairment losses, which offset thecontinued development of the personal finance, asset-backed lending and contracthire businesses. Income increased by £12 million, or 2 per cent, as good feeincome growth was partly offset by the impact of the tightening of lendingcredit criteria. Costs were reduced by 1 per cent, leading to a 7 per centgrowth in the trading surplus. Lloyds TSB Commercial Finance has continued tobe a major presence in its market, with a 19 per cent market share measured byclient numbers, and the motor and leisure business continues to be the largestindependent lender in the UK motor and leisure point-of-sale market with a shareof 17 per cent. Page 21 of 41 CONSOLIDATED INTERIM INCOME STATEMENT - STATUTORY (unaudited) Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005+ 2005 £m £m £mInterest and similar income 6,756 6,040 6,549Interest and similar expense (3,962) (3,289) (3,629)Net interest income 2,794 2,751 2,920Fees and commission income 1,518 1,474 1,516Fees and commission expense (430) (397) (445)Net fees and commission income 1,088 1,077 1,071Net trading income 1,194 3,536 5,762Insurance premium income 2,329 2,210 2,259Other operating income 423 556 584Other income 5,034 7,379 9,676Total income 7,828 10,130 12,596Insurance claims (2,639) (5,168) (7,018)Total income, net of insurance claims 5,189 4,962 5,578Operating expenses (2,610) (2,583) (2,888)Trading surplus 2,579 2,379 2,690Impairment losses on loans and advances (800) (666) (633)Profit on sale and closure of businesses - - 50Profit before tax 1,779 1,713 2,107Taxation (543) (509) (756)Profit for the period 1,236 1,204 1,351 Profit attributable to minority interests 22 12 50Profit attributable to equity shareholders 1,214 1,192 1,301Profit for the period 1,236 1,204 1,351 Basic earnings per share 21.7p 21.3p 23.3pDiluted earnings per share 21.5p 21.1p 23.1p Dividend per share for the period* 10.7p 10.7p 23.5pDividend for the period* £602m £599m £1,316m +restated. \* The dividend for the half-year to 30 June 2006 represents the interim dividend for 2006 which will be paidand accounted for on 4 October 2006 (the dividends shown for the half-year to 30 June 2005 and the half-yearto 31 December 2005 represent the interim and final dividends for 2005 which were paid and accounted for on 5October 2005 and 3 May 2006 respectively). Page 22 of 41 CONSOLIDATED INTERIM BALANCE SHEET - STATUTORY (unaudited) 30 June 30 June 31 December 2006 2005* 2005Assets £m £m £m Cash and balances at central banks 1,294 943 1,156Items in course of collection from banks 1,814 1,716 1,310Trading securities and other financialassets at fair value through profit or loss 60,803 57,350 60,374Derivative financial instruments 5,032 10,438 5,878Loans and advances to banks 34,927 36,090 31,655Loans and advances to customers 182,157 167,583 174,944Available-for-sale financial assets 20,221 13,693 14,940Investment property 4,856 3,906 4,260Goodwill 2,377 2,472 2,373Value of in-force business 2,929 2,923 2,922Other intangible assets 50 25 50Tangible fixed assets 4,281 4,185 4,291Other assets 5,026 4,782 5,601Total assets 325,767 306,106 309,754 Equity and liabilitiesDeposits from banks 39,466 33,946 31,527Customer accounts 136,465 130,550 131,070Items in course of transmission to banks 707 725 658Derivative financial instruments, trading and otherliabilities at fair value through profit or loss 7,611 10,467 6,396Debt securities in issue 39,703 35,810 39,346Liabilities arising from insurance contracts and 40,215 37,594 40,550participating investment contractsLiabilities arising from non-participatinginvestment contracts 22,489 19,049 21,839Unallocated surplus within insurance businesses 573 524 518Other liabilities 11,360 10,741 9,843Retirement benefit obligations 2,799 3,010 2,910Current tax liabilities 449 396 552Deferred tax liabilities 1,337 1,169 1,145Other provisions 307 315 368Subordinated liabilities 11,693 12,067 12,402Total liabilities 315,174 296,363 299,124 EquityShare capital 1,427 1,420 1,420Share premium account 1,243 1,162 1,170Other reserves 397 372 383Retained profits 7,090 6,438 7,222Shareholders' equity 10,157 9,392 10,195Minority interests 436 351 435Total equity 10,593 9,743 10,630 Total equity and liabilities 325,767 306,106 309,754 *restated. Page 23 of 41 CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY - STATUTORY (unaudited) Attributable to equity shareholders Share capital Other Retained Minority and premium reserves profits interests Total £m £m £m £m £mBalance at 1 January 2005 2,564 371 6,554 81 9,570Movement in available-for-sale - 1 - - 1financial assets, net of taxCurrency translation differences - - 14 - 14Net income recognised directly in - 1 14 - 15equityProfit for the period - - 1,192 12 1,204Total recognised income for the period - 1 1,206 12 1,219Dividends - - (1,315) (16) (1,331)Purchase/sale of treasury shares - - (19) - (19)Employee share option schemes:- value of employee services - - 12 - 12- proceeds from shares issued 18 - - - 18Changes in minority interests - - - 274 274Balance at 30 June 2005 2,582 372 6,438 351 9,743Movement in available-for-sale - 7 - - 7financial assets, net of taxMovement in cash flow hedges, net of - 11 - - 11taxCurrency translation differences - (7) 10 - 3Net income recognised directly in - 11 10 - 21equityProfit for the period - - 1,301 50 1,351Total recognised income for the period - 11 1,311 50 1,372Dividends - - (599) (21) (620)Purchase/sale of treasury shares - - 37 - 37Employee share option schemes:- value of employee services - - 35 - 35- proceeds from shares issued 8 - - - 8Changes in minority interests - - - 55 55Balance at 31 December 2005 2,590 383 7,222 435 10,630Movement in available-for-sale - 2 - - 2financial assets, net of taxMovement in cash flow hedges, net of - 11 - - 11taxCurrency translation differences - 1 (11) - (10)Net income recognised directly in equity - 14 (11) - 3Profit for the period - - 1,214 22 1,236Total recognised income for the period - 14 1,203 22 1,239Dividends - - (1,316) (17) (1,333)Purchase/sale of treasury shares - - (41) - (41)Employee share option schemes:- value of employee services - - 22 - 22- proceeds from shares issued 80 - - - 80Changes in minority interests - - - (4) (4)Balance at 30 June 2006 2,670 397 7,090 436 10,593 Page 24 of 41 CONDENSED CONSOLIDATED INTERIM CASH FLOW STATEMENT - STATUTORY (unaudited) Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £m Net cash provided by (used in) operating 7,364 6,428 (6,739)activities Cash flows from investing activitiesPurchase of available-for-sale financial assets (12,306) (4,528) (5,580)Proceeds from sale and maturity of 6,661 5,859 4,407available-for-sale financial assetsPurchase of fixed assets (723) (645) (1,198)Proceeds from sale of fixed assets 170 360 713Acquisition of businesses, net of cash acquired (20) (23) (4)Disposal of businesses, net of cash disposed 936 - (4)Net cash (used in) generated by investing (5,282) 1,023 (1,666)activities Cash flows from financing activitiesDividends paid to equity shareholders (1,316) (1,315) (599)Dividends paid to minority interests (17) (16) (21)Proceeds from issue of subordinated liabilities - 802 559Proceeds from issue of ordinary shares and 80 18 8transactions in own shares held in respect ofemployee share schemesRepayment of subordinated liabilities (loan (250) - (232)capital)Capital element of finance lease rental payments - - (2)Change in minority investment in subsidiaries - 274 55Net cash used in financing activities (1,503) (237) (232)Effects of exchange rate changes on cash and cash (39) (56) 36equivalentsChange in cash and cash equivalents 540 7,158 (8,601)Cash and cash equivalents at beginning of period 26,753 28,196 35,354Cash and cash equivalents at end of period 27,293 35,354 26,753 Cash and cash equivalents comprise cash and balances at central banks (excludingmandatory deposits) and amounts due from banks with a maturity of less thanthree months. Page 25 of 41 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) Lloyds TSB Group is a leading UK-based financial services group, whosebusinesses provide a wide range of banking and financial services in the UK andin certain locations overseas. The Group's activities are organised into threesegments: UK Retail Banking, Insurance and Investments and Wholesale andInternational Banking. Central group items includes the funding cost of certainacquisitions less earnings on capital, central costs and accruals for payment tothe Lloyds TSB Foundations. Services provided by UK Retail Banking encompass the provision of banking andother financial services to personal customers, private banking, stockbrokingand mortgages. Insurance and Investments offers life assurance, pensions andsavings products, general insurance and asset management services. Wholesaleand International Banking provides banking and related services for major UK andmultinational companies, banks and financial institutions, and small andmedium-sized UK businesses. It also provides asset finance to personal andcorporate customers, manages the Group's activities in financial markets andprovides banking and financial services overseas. During the first half of 2006, the bases adopted for allocating income and costsbetween the different segments were consistent with those used in 2005 and setout in the 2005 Annual Report and Accounts. Half-year to Life, 30 June 2006 pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items* Total £m £m £m £m £m £m £mInterest and similar 3,365 12 386 398 3,895 (902) 6,756income*Interest and similar (1,571) - (335) (335) (2,701) 645 (3,962)expense*Net interest income 1,794 12 51 63 1,194 (257) 2,794Other income (net of fee 783 280 3,098 3,378 805 68 5,034and commission expense)Total income 2,577 292 3,149 3,441 1,999 (189) 7,828Insurance claims - (95) (2,544) (2,639) - - (2,639)Total income, net of 2,577 197 605 802 1,999 (189) 5,189insurance claimsOperating expenses (1,232) (78) (229) (307) (1,072) 1 (2,610)Trading surplus (deficit) 1,345 119 376 495 927 (188) 2,579Impairment losses on loans (632) - - - (159) (9) (800)and advancesProfit (loss) before tax 713 119 376 495 768 (197) 1,779External revenue 3,978 601 3,620 4,221 3,852 169 12,220Inter-segment revenue* 319 10 44 54 826 (1,199) -Segment revenue 4,297 611 3,664 4,275 4,678 (1,030) 12,220 *Central group items on this and the following page includes inter-segment consolidation adjustments withininterest and similar income, and interest and similar expense as follows: interest and similar income £(1,542)million (2005H1: £(1,476) million; 2005H2: £(1,499) million) and interest and similar expense £1,542 million(2005H1: £1,476 million; 2005H2: £1,499 million), there is no impact on net interest income. Similarly, Centralgroup items includes inter-segment revenue adjustments of £1,665 million (2005H1: £2,031 million; 2005H2: £1,920million). Page 26 of 41 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) (continued) Half-year to Life, 30 June 2005 pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total £m £m £m £m £m £m £mInterest and similar income 3,267 13 396 409 3,303 (939) 6,040Interest and similar (1,537) (3) (212) (215) (2,219) 682 (3,289)expenseNet interest income 1,730 10 184 194 1,084 (257) 2,751Other income (net of fee 815 277 5,556 5,833 759 (28) 7,379and commission expense)Total income 2,545 287 5,740 6,027 1,843 (285) 10,130Insurance claims - (108) (5,060) (5,168) - - (5,168)Total income, net of 2,545 179 680 859 1,843 (285) 4,962insurance claimsOperating expenses (1,281) (78) (196) (274) (1,050) 22 (2,583)Trading surplus (deficit) 1,264 101 484 585 793 (263) 2,379Impairment losses on loans (568) - - - (98) - (666)and advancesProfit (loss) before tax 696 101 484 585 695 (263) 1,713External revenue 3,856 656 5,928 6,584 3,433 (57) 13,816Inter-segment revenue 405 13 160 173 861 (1,439) -Segment revenue 4,261 669 6,088 6,757 4,294 (1,496) 13,816 Half-year to Life, 31 December 2005 pensions, Wholesale UK OEICs Insurance and Central Retail General and asset and International group Banking Insurance management Investments Banking items Total £m £m £m £m £m £m £mInterest and similar income 3,385 14 454 468 3,641 (945) 6,549Interest and similar (1,594) (1) (266) (267) (2,460) 692 (3,629)expenseNet interest income 1,791 13 188 201 1,181 (253) 2,920Other income (net of fee 790 294 7,732 8,026 869 (9) 9,676and commission expense)Total income 2,581 307 7,920 8,227 2,050 (262) 12,596Insurance claims - (89) (6,929) (7,018) - - (7,018)Total income, net of 2,581 218 991 1,209 2,050 (262) 5,578insurance claimsOperating expenses (1,416) (82) (238) (320) (1,131) (21) (2,888)Trading surplus (deficit) 1,165 136 753 889 919 (283) 2,690Impairment losses on loans (543) - - - (90) - (633)and advancesProfit (loss) on sale and 76 - - - (6) (20) 50closure of businessesProfit (loss) before tax 698 136 753 889 823 (303) 2,107External revenue 3,977 616 8,199 8,815 3,850 28 16,670Inter-segment revenue 339 3 170 173 825 (1,337) -Segment revenue 4,316 619 8,369 8,988 4,675 (1,309) 16,670 Page 27 of 41 NOTES 1. Accounting policies, presentation and estimates These condensed consolidated interim financial statements as at and for thehalf-year to 30 June 2006 have been prepared in accordance with InternationalFinancial Reporting Standard IAS 34 Interim Financial Reporting. They do notinclude all of the information required for full annual financial statements,and should be read in conjunction with the Group's consolidated financialstatements as at and for the year ended 31 December 2005 ('2005 Annual Reportand Accounts') copies of which can be found on the Group's website atwww.investorrelations.lloydstsb.com/report_and_accounts.asp or are availableupon request from the Company Secretary's Department, Lloyds TSB Group plc, 25Gresham Street, London EC2V 7HN. Except as described below, the accounting policies, the significant judgementsmade by management in applying them, and the key sources of estimationuncertainty applied by the Group in these condensed consolidated interimfinancial statements were the same as those applied by the Group in its 2005Annual Report and Accounts. The preparation of interim financial statementsrequires management to make judgements, estimates and assumptions that impactthe application of accounting policies and the reported amounts of assets,liabilities, income and expense. Actual results may differ from theseestimates. There have been no significant changes in the bases upon whichestimates at 31 December 2005 have been determined. The Group has reviewed thevaluation of its pension schemes and has concluded that no adjustment isrequired at 30 June 2006. In accordance with IAS 19 the valuations will beformally updated at the year-end. Goodwill held in the Group's balance sheet istested (at least) annually for impairment in the second-half of the year. Nocircumstances have arisen during the half-year to 30 June 2006 to requireadditional impairment testing. The Group has had no material or unusual related party or share-based paymenttransactions during the half-year to 30 June 2006. Related party andshare-based transactions for the half-year to 30 June 2006 are similar in natureto those for the year ended 31 December 2005. No significant events haveoccurred between 30 June 2006 and the date of approval of these interim results.A variety of contingent liabilities and commitments arise in the ordinarycourse of the Group's banking business; there has been no significant change inthe volume or nature of such transactions during the half-year to 30 June 2006.Full details of the Group's related party transactions for the year to 31December 2005, share-based payment schemes and contingent liabilities andcommitments can be found in the Group's 2005 Annual Report and Accounts. Page 28 of 41 1. Accounting policies, presentation and estimates (continued) The following IFRS pronouncements relevant to the Group are applicable for theyear ending 31 December 2006: Pronouncement ImpactAmendment to IAS 19 Actuarial Gains and Losses, The Group retains its existing accounting policy regardingGroup Plans and Disclosures the recognition of actuarial gains and losses.Amendment to IAS 39 Financial Instruments: This amendment has not impacted the classification andRecognition and Measurement - The Fair Value valuation of those financial assets that were designated intoOption the fair value through profit or loss category prior to 1 January 2006 as the Group is able to comply with the amended criteria for those assets. Since 1 January 2006, the Group is permitted to designate financial liabilities meeting the criteria into the fair value through profit or loss category. During the half-year to 30 June 2006, the Group designated £1.5 billion of financial liabilities into this category. This change has had no material impact on the Group's profit for the half-year to 30 June 2006.Amendment to IAS 39 Financial Instruments: Since 1 January 2006, all of the Group's financial guaranteeRecognition and Measurement and IFRS 4 Insurance contracts are accounted for as financial instruments. ThisContracts - Financial Guarantee Contracts change has had no material impact on the Group's financial statements.IFRIC Interpretation 4 Determining Whether an The Group has reviewed affected contracts at 1 January 2006Arrangement Contains a Lease and the interpretation has had no material impact for the Group. To ensure consistency with the Group's accounting policies reported in the 2005Annual Report and Accounts, the Group has restated the 30 June 2005 figurespreviously reported in its 'Results for half-year to 30 June 2005' to: • present the value of in-force life assurance business gross of attributable tax (with a consequential adjustment to the tax charge) in line with industry practice; this has had no net effect on the Group's income statement or shareholders' equity, and • allow for deferred tax on properties acquired as part of a business combination and reclassify certain balance sheet items following revised interpretations of the requirements of IFRS; this has resulted in a reduction in shareholders' equity although there is no effect upon the Group's income statement. Page 29 of 41 1. Accounting policies, presentation and estimates (continued) The effect of these changes is set out below: Value of As previously in-force Other reported business adjustments Restated £m £m £m £mFor the half-year to 30 June 2005Profit before tax 1,676 37 - 1,713Taxation (472) (37) - (509)Profit for the year 1,204 - - 1,204 At 30 June 2005Total assets 305,212 907 (13) 306,106Shareholders' equity 9,475 - (83) 9,392 2. Volatility Banking volatility In accordance with IFRS, it is the Group's policy to recognise all derivativesat fair value. The banking businesses manage their interest rate and othermarket risks primarily through the use of intra-Group derivatives, with theresulting net positions managed centrally using external derivatives. IFRS doesnot, however, permit the intra-Group derivatives to be used in a hedgerelationship for reporting purposes. Although fair value accounting can have asignificant impact on reported earnings, it does not impact on the businessfundamentals or cash flows of the businesses. The Group has, therefore,implemented an internal pricing structure that allows divisions to transfer toCentral group items the volatility associated with marking to market derivativesheld for risk management purposes. 'Banking volatility' is principallycomprised of the difference between the result that would be recognised on anaccrual accounting basis for derivatives held for risk management purposes andtheir mark to market value. The Group has set up a central hedging function toreduce the impact of this volatility by establishing, where possible, accountinghedge relationships for the external derivatives. During the first half of 2006, profit before tax included negative bankingvolatility of £2 million (2005H1: negative £73 million). The significantreduction in this source of volatility reflects the beneficial effect of risinginterest rates on the fair value of those derivatives for which hedge accountingrelationships have not been established. Insurance volatility Changes in market variables such as the performance and volatility of equitymarkets and the level of interest rates, which are beyond the control ofmanagement, can result in significant volatility in the profitability of theGroup's insurance businesses. As in previous years, in order to provide aclearer representation of the underlying performance of the life and pensionsand general insurance businesses, the effect of these changes is separatelyanalysed within insurance volatility. Page 30 of 41 2. Volatility (continued) The Group's insurance businesses have substantial holdings of investments whichare accounted for at fair value with changes being reflected within the incomestatement. The difference between the actual return on these investmentsattributable to shareholders and the expected return based upon economicassumptions made at the beginning of the period is included within insurancevolatility. In addition, the calculation of the value of in-force businessmakes assumptions about future investment returns; to the extent that actualexperience is different the effect is also included within insurance volatility. The main assumptions used in the calculation of the value of in-force businessat 30 June 2006 were as follows: 30 June 30 June 31 December 2006 2005 2005 % % %Risk-adjusted discount rate (net of tax) 7.63 7.08 7.02Return on equities (gross of tax) 7.27 6.83 6.72Return on fixed interest securities (gross of tax) 4.77 4.23 4.12Expenses inflation 3.98 3.59 3.79 Changes in stock market performance also affect the realistic valuation of theguarantees and options embedded within products written in the Scottish WidowsWith-Profits Fund, which is reflected in the Group's balance sheet.Fluctuations in this valuation caused by market-related movements are alsoincluded within insurance volatility. During the first half of 2006, profit before tax included negative insurancevolatility of £61 million (2005H1: positive £131 million after restatement forthe effect of presenting the movements in the value of in-force business grossof tax). Returns in the first half of 2005 benefited from rising stock marketsand falling gilt yields. Although equity values continued to rise in the firsthalf of 2006, this was less marked than in 2005 and the effect was more thanoffset by rising gilt yields and a charge following the change in the economicassumptions used to calculate the value of in-force business at 30 June 2006. Policyholder interests volatility As a result of the requirement contained in IFRS to consolidate the Group's lifeand pensions businesses on a line by line basis, the Group's income statementincludes amounts attributable to policyholders which affect profit before tax;the most significant of these items is policyholder tax. Under IFRS, tax onpolicyholder investment returns is included in the Group's tax charge ratherthan being offset against the related income, either increasing or decreasingprofit before tax with a corresponding change in the tax charge. In order toprovide a clearer representation of the underlying performance of the Group'slife and pensions businesses the impact of these items upon pre-tax profit hasbeen separately identified within volatility. During the first half of 2006, profit before tax included positive policyholderinterests volatility of £90 million (2005H1: £29 million after restatement forthe effect of presenting the movements in the value of in-force business grossof tax). The increase in policyholder interests volatility reflects the factthat during the first half of 2005, the policyholder tax charge was reducedthrough the use of substantial tax losses brought forward. In addition, duringthe first half of 2006 there was an improved return from other policyholderinterests. Page 31 of 41 3. Mortgage lending Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005Gross new mortgage lending £13.0bn £11.8bn £14.2bnMarket share of gross new mortgage lending 8.1% 9.4% 8.8%Net new mortgage lending £3.4bn £3.6bn £4.7bnMarket share of net new mortgage lending 6.7% 8.8% 9.3%Mortgages outstanding (period-end)* £91.8bn £83.7bn £88.4bnMarket share of mortgages outstanding 9.0% 9.1% 9.1% *excluding the effect of IFRS related adjustments in order to conform with industry statistics. 4. Group net interest income Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £mStatutory basisNet interest income 2,794 2,751 2,920Average interest-earning assets, excluding reverse repos 220,710 195,975 207,556Net interest margin 2.55% 2.83% 2.79% Banking margin*Net interest income 2,811 2,615 2,783Average interest-earning assets, excluding reverse repos 210,639 189,205 199,240Net interest margin 2.69% 2.79% 2.77% *the Group's net interest income includes certain amounts attributable to policyholders, in addition to the interestearnings on shareholders' funds held in the Group's insurance businesses. To present the Group's banking net interestmargin these amounts, together with the related average interest-earning assets, have been excluded. Page 32 of 41 5. Other income Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £mExcluding volatilityFees and commissions receivable: UK current account fees 320 285 308 Other UK fees and commissions 590 497 544 Insurance broking 293 364 317 Card services 247 267 278 International fees and commissions 68 61 69 1,518 1,474 1,516Fees and commissions payable (430) (397) (445)Net fees and commissions income 1,088 1,077 1,071Net trading income 1,141 3,525 5,334Insurance premium income 2,329 2,210 2,259Other operating income 401 442 439Total other income* 4,959 7,254 9,103Insurance claims (2,639) (5,168) (7,018)Total other income, net of insurance claims* 2,320 2,086 2,085Volatility- Banking 46 (35) (10)- Insurance (61) 131 301- Policyholder interests 90 29 282Total other income, net of insurance claims 2,395 2,211 2,658 *excluding volatility. For statutory reporting purposes, volatility totalling £75 million in the first half of 2006(2005H1: £125 million; 2005H2: £573 million) is included in total other income; comprising net trading income of £53million (2005H1: £11 million; 2005H2: £428 million) and other operating income of £22 million (2005H1: £114 million;2005H2: £145 million). 6. General insurance income Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £mPremium income from underwritingCreditor 92 64 63Home 213 220 221Health 7 8 8Reinsurance premiums (10) (15) (7) 302 277 285Commissions from insurance brokingCreditor 163 229 167Home 21 22 27Health 6 8 7Other 103 105 116 293 364 317 Page 33 of 41 7. Operating expenses Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £mAdministrative expenses: Staff: Salaries 1,030 1,014 1,054 National insurance 80 78 76 Pensions 140 144 164 Other staff costs 156 134 191 1,406 1,370 1,485Premises and equipment: Rent and rates 154 145 160 Hire of equipment 7 6 7 Repairs and maintenance 78 70 66 Other 70 62 90 309 283 323Other expenses: Communications and external data processing 232 227 240 Advertising and promotion 89 112 95 Professional fees 100 97 119 Provisions for customer redress - - 150 Other 171 170 155 592 606 759Administrative expenses 2,307 2,259 2,567Depreciation 303 324 315Impairment of goodwill - - 6Total operating expenses 2,610 2,583 2,888Cost:income ratio - excluding volatility, provisions for 50.6% 53.0% 52.7%customer redress and the strengthening of reserves formortality*Cost:income ratio - statutory basis* 50.3% 52.1% 51.8% *total operating expenses divided by total income, net of insurance claims. Page 34 of 41 8. Number of employees (full-time equivalent) 30 June 30 June 31 December 2006 2005 2005 UK Retail Banking 32,339 35,014 33,247Insurance and Investments 6,133 6,027 6,128Wholesale and International Banking 19,415 19,899 19,708Other, largely IT and Operations 10,376 11,761 10,695 68,263 72,701 69,778Agency staff (FTE) (3,096) (3,096) (2,981)Total number of employees (full-time equivalent) 65,167 69,605 66,797 9. Impairment losses on loans and advances Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £mImpairment losses on loans and advances (see below) 801 670 632Other credit risk provisions (1) (4) 1 800 666 633Impairment losses on loans and advancesUK Retail Banking Personal loans/overdrafts 387 352 304 Credit cards 239 188 208 Mortgages 6 6 7 632 546 519 Wholesale and International Banking 160 102 89 Central group items 9 22 24 Total charge 801 670 632 Charge as % of average lending: % % % Personal loans/overdrafts 6.18 5.82 4.86 Credit cards 6.78 5.66 5.93 Mortgages 0.01 0.02 0.02UK Retail Banking 1.23 1.16 1.03Wholesale and International Banking 0.43 0.31 0.25Total charge 0.88 0.80 0.71 In the analysis of impairment losses set out above, the losses attributable tothe Goldfish business, which was sold in December 2005, have been transferredinto Central group items in order to allow a meaningful comparison of theresults of UK Retail Banking. Page 35 of 41 10. Capital ratios 30 June 31 December 2006 2005Capital £m £m Tier 1 11,322 11,478Tier 2 10,430 10,447 21,752 21,925 Supervisory deductions (6,074) (6,160) Total capital 15,678 15,765 Risk-weighted assets £bn £bn UK Retail Banking 61.6 60.4Insurance and Investments 3.2 2.6Wholesale and International Banking 86.5 80.1Central group items 1.6 1.8Total risk-weighted assets 152.9 144.9 Risk asset ratios Total capital 10.3% 10.9%Tier 1 7.4% 7.9% Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005Post-tax return on average risk-weighted assets 1.65% 1.79% 1.84%Post-tax return on average risk-weighted assets* 1.66% 1.73% 1.81% *excluding volatility, profit (loss) on sale and closure of businesses, customer redress provisions and strengtheningof reserves for mortality. 11. Retirement benefit obligations The recognised liability has reduced by £111 million from £2,910 million at 31December 2005 to £2,799 million at 30 June 2006, as cash contributions to theGroup's defined benefit schemes exceeded the regular cost. The Group has recently reached agreement with the Lloyds TSB Group pensionschemes' trustees to fund the schemes' actuarial funding deficit of £1.5 billionover a period of 10 years. We also expect to continue to make additionalvoluntary contributions and, if the Group's total deficit contributions remainat broadly the same levels as in recent years, we would expect to see theaccounting deficit eliminated over a period of approximately 10 years, and theactuarial deficit eliminated over approximately 6 years. Page 36 of 41 12. Balance sheet information 30 June 30 June 31 December 2006 2005 2005Deposits - customer accounts £m £m £m Sterling:Non-interest bearing current accounts 3,651 3,547 3,604Interest bearing current accounts 40,687 37,100 37,976Savings and investment accounts 62,322 59,315 60,522Other customer deposits 16,808 18,455 16,809Total sterling 123,468 118,417 118,911Currency 12,997 12,133 12,159Total deposits - customer accounts 136,465 130,550 131,070 Loans and advances to customers Domestic:Agriculture, forestry and fishing 2,253 2,191 2,299Manufacturing 5,527 5,001 5,983Construction 2,168 2,463 2,059Transport, distribution and hotels 7,959 7,358 7,649Property companies 10,292 7,095 8,267Financial, business and other services 16,361 16,937 16,272Personal : mortgages 91,703 83,950 88,528 : other 22,595 23,390 22,776Lease financing 5,637 6,266 5,815Hire purchase 5,154 4,980 4,853Other 9,178 5,597 7,696Total domestic 178,827 165,228 172,197 International:Latin America 167 153 173United States of America 1,909 1,989 1,984Europe 2,665 1,704 1,927Rest of the world 753 624 735Total international 5,494 4,470 4,819 184,321 169,698 177,016Allowance for impairment losses on loans and advances (2,164) (2,115) (2,072)Total loans and advances to customers 182,157 167,583 174,944 13. Profit on sale of businesses In December 2005, the Group announced the disposal of its Goldfish credit cardbusiness and this, together with additional costs incurred in relation tobusiness closures or previous disposals, led to a net profit of £50 millionbeing recognised in the income statement for the half-year to 31 December 2005. Page 37 of 41 14. Economic profit Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £m Statutory basis Average shareholders' equity 10,417 9,662 9,831Profit attributable to equity shareholders 1,214 1,192 1,301Less: notional charge (465) (431) (446) Economic profit 749 761 855 Excluding volatility, profit on sale and closureof businesses, customer redress provisions and strengthening ofreserves for mortalityAverage shareholders' equity 10,392 9,686 9,746 Profit attributable to equity shareholders 1,237 1,157 1,318Less: notional charge (464) (432) (442) Economic profit 773 725 876 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 (2005: 9 per cent). 15. Earnings per share Statutory basis Half-year to Half-year to Half-year to 30 June 30 June 31 DecemberBasic 2006 2005 2005Profit attributable to equity shareholders £1,214m £1,192m £1,301mWeighted average number of ordinary shares in issue 5,602m 5,592m 5,598mEarnings per share 21.7p 21.3p 23.3p Fully diluted Profit attributable to equity shareholders £1,214m £1,192m £1,301mWeighted average number of ordinary shares in issue 5,655m 5,637m 5,641mEarnings per share 21.5p 21.1p 23.1p Excluding volatility, profit on sale and closureof businesses, customer redress provisions andstrengthening of reserves for mortalityProfit attributable to equity shareholders £1,237m £1,157m £1,318mWeighted average number of ordinary shares in issue 5,602m 5,592m 5,598mEarnings per share 22.1p 20.7p 23.5p Page 38 of 41 16. Scottish Widows - realistic balance sheet information Financial Services Authority (FSA) returns for large with-profits companies nowinclude realistic balance sheet information. The information included in FSAreturns concentrates on the position of the with-profits fund. However, underthe Scottish Widows demutualisation structure, which was court approved, thefund is underpinned by certain assets outside the with-profits fund and it ismore appropriate to consider the long-term fund position as a whole to measurethe realistic capital position of Scottish Widows. The estimated position at 30June 2006 is shown below, together with the actual position at 31 December 2005. 30 June 2006 (estimated) With-profits Long-term fund fund £bn £bnAvailable assets, including support account 19.4 22.5Realistic value of liabilities (18.2) (18.1)Working capital for fund 1.2 4.4 Working capital ratio 6.2% 19.6% Risk capital margin cover 5.1 times 16.2 times 31 December 2005 With-profits Long-term fund fund £bn £bnAvailable assets, including support account 20.4 23.2Realistic value of liabilities (19.3) (19.1)Working capital for fund 1.1 4.1 Working capital ratio 5.5% 17.7% Risk capital margin cover 3.6 times 11.9 times Page 39 of 41 17. Tax Under IFRS the Group is required to include in income tax expense the taxattributable to UK life insurance policyholder earnings and its interests inOpen Ended Investment Companies (OEICs). The effective tax rate of the Group, excluding the gross policyholder tax chargeand OEIC interests from profit before tax and the tax charge, was 27.7 per cent(2005H1: 28.1 per cent) compared to the standard UK corporation tax rate of 30per cent. The effective tax rate including policyholder tax and OEIC interests was 30.5per cent, compared to 29.7 per cent in the half-year to 30 June 2005. A reconciliation of the charge that would result from applying the standard UKcorporation tax rate to profit before tax to the tax charge, includingpolicyholder tax and OEIC interests, is given below: Half-year to Half-year to Half-year to 30 June 30 June 31 December 2006 2005 2005 £m £m £mProfit before tax 1,779 1,713 2,107Tax charge thereon at UK corporation tax rate of 30% 534 514 632Factors affecting charge:Disallowed and non-taxable items (30) (8) (39)Overseas tax rate differences (8) (4) 3Net tax effect of disposals and unrealised gains (11) (18) (41)Policyholder tax and OEIC interests 49 27 196Other items 9 (2) 5Tax charge 543 509 756 18. Dividend An interim dividend for 2006 of 10.7p per share (2005: 10.7p) will be paid on 4October 2006. The total amount of this dividend is £602 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 9 AugustRecord date 11 AugustFinal date for joining or leaving the dividend reinvestment plan 6 SeptemberInterim dividend paid 4 October On 3 May 2006, a final dividend for 2005 of 23.5p per share was paid toshareholders. This dividend totalled £1,316 million. Page 40 of 41 19. Other information Results for the half-year ended 30 June 2006 were approved by the directors on 1August 2006. The financial information included in this news release does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.Statutory accounts for the year ended 31 December 2005 were delivered to theregistrar of companies. The auditors' report on these accounts was unqualifiedand did not include a statement under sections 237(2) (accounting records orreturns inadequate or accounts not agreeing with records and returns) or 237(3)(failure to obtain necessary information and explanations) of the Companies Act1985. CONTACTS For further information please contact:- Michael Oliver Director of Investor Relations Lloyds TSB Group plc 020 7356 2167 E-mail: [email protected] Sarah Pollard Senior Manager, Investor Relations Lloyds TSB Group plc 020 7356 1571 E-mail: [email protected] Mary Walsh Director of Corporate Relations Lloyds TSB Group plc 020 7356 2121 E-mail: [email protected] Copies of this news release may be obtained from Investor Relations, Lloyds TSBGroup plc, 25 Gresham Street, London EC2V 7HN. The full news release can alsobe found on the Group's website - www.lloydstsb.com. A copy of the Group's corporate responsibility report may be obtained by writingto Corporate Responsibility, Lloyds TSB Group plc, 25 Gresham Street, LondonEC2V 7HN. This information together with the Group's code of business conductis also available on the Group's website. Page 41 of 41 This information is provided by RNS The company news service from the London Stock Exchange

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