Interim Results

31st Jul 2007 07:02

Lloyds TSB Group PLC31 July 2007 Lloyds TSB Group plc Results for half-year to 30 June 2007 CONTENTS PageKey operating highlights 1Summary of results 2Profit analysis by division 3Group Chief Executive's statement 4Group Finance Director's review of financial performance 7Summarised segmental analysis 11Divisional performance: 13 - UK Retail Banking 13 - Insurance and Investments 16 - Wholesale and International Banking 22Consolidated interim income statement - statutory 26Consolidated interim balance sheet - statutory 27Consolidated interim statement of changes in equity - statutory 28Condensed consolidated interim cash flow statement - statutory 29Condensed segmental analysis - statutory 30Notes 32Contacts for further information 50 FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to thebusiness, strategy and plans of the Lloyds TSB Group, its current goals andexpectations relating to its future financial condition and performance. Bytheir nature, forward looking statements involve risk and uncertainty becausethey relate to events and depend on circumstances that will occur in the future.The Group's actual future results may differ materially from the resultsexpressed or implied in these forward looking statements as a result of avariety of factors, including UK domestic and global economic and businessconditions, risks concerning borrower credit quality, market related risks suchas interest rate risk and exchange rate risk in its banking business and equityrisk in its insurance businesses, changing demographic trends, unexpectedchanges to regulation, the policies and actions of governmental and regulatoryauthorities in the UK or jurisdictions outside the UK, including other Europeancountries and the US, changes in customer preferences, competition and otherfactors. Please refer to the latest Annual Report on Form 20-F filed with theUS Securities and Exchange Commission for a discussion of such factors. Theforward looking statements contained in this announcement are made as at thedate of this announcement, and the Group undertakes no obligation to update anyof its forward looking statements. KEY OPERATING HIGHLIGHTS Unless otherwise stated the analysis throughout this document compares thehalf-year to 30 June 2007 with the half-year to 30 June 2006 and excludes theimpact of volatility (page 34, note 2). "I am delighted to report that the Group has again delivered an excellenttrading performance, with broad based revenue and earnings growth. Eachdivision has delivered a strong increase in profit before tax, building on thedemonstrable progress made in recent years. The Board is increasingly confident in the Group's earnings prospects for 2007and beyond and, as a result, has decided to increase the interim dividend by 5per cent to 11.2p per share." Sir Victor Blank Chairman • Accelerating profit momentum with improved returns: profit beforetax up 15 per cent to £2,010 million, whilst post-tax return on equity increasedto 27.0 per cent. All divisions showing strong profit growth. Statutory profitbefore tax increased by 12 per cent to £1,993 million. • Improved income growth. Income growth of 9 per cent reflectedstrong performances from all divisions. • Excellent cost management. Cost growth of 6 per cent, deliveringwide positive jaws. Significant cost:income ratio improvement. Groupwideproductivity improvement programme remains on track to deliver substantialfurther benefits. • Satisfactory credit quality. Strong corporate asset qualitycontinues; retail impairment charge broadly flat. Group impairment charge as apercentage of average lending down. • Strong capital management. Robust capital ratios maintained. • Interim dividend increased by 5 per cent. First increase for fiveyears. • Excellent income momentum in UK Retail Banking. Overall productsales up 16 per cent, with 23 per cent growth in the branch network. Income up6 per cent with profit before tax increasing by 13 per cent. • Continued strong performance in Scottish Widows with an 8 per centincrease in new business sales. Insurance and Investments profit before tax,adjusting for the impact of surplus capital repatriation and insurance grossing,increased by 11 per cent. • Continued strong trading momentum in Wholesale and InternationalBanking driven by a 26 per cent increase in Corporate Markets income. Incomegrowth of 10 per cent exceeded cost growth of 5 per cent; profit before taxincreased by 12 per cent. Page 1 of 50 SUMMARY OF RESULTS Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mResults - statutoryTotal income, net of insurance claims 5,590 5,189 8 5,915Operating expenses 2,760 2,610 (6) 2,691Trading surplus 2,830 2,579 10 3,224Impairment losses on loans and advances 837 800 (5) 755Profit before tax 1,993 1,779 12 2,469Economic profit (page 42, note 14) 1,027 749 37 1,106Profit attributable to equity shareholders 1,540 1,214 27 1,589Earnings per share (page 43, note 15) 27.3p 21.7p 26 28.2pPost-tax return on average shareholders' 27.0% 23.5% 29.6%equity Results - excluding volatility* Total income, net of insurance claims 5,607 5,160 9 5,534Operating expenses 2,760 2,610 (6) 2,819Trading surplus 2,847 2,550 12 2,715Impairment losses on loans and advances 837 800 (5) 755Profit before tax 2,010 1,750 15 1,960Economic profit 1,008 772 31 918Earnings per share 26.9p 22.1p 22 24.8pPost-tax return on average shareholders' 27.0% 24.0% 26.2%equityPost-tax return on average risk-weighted 1.93% 1.66% 1.78%assets Shareholder valueClosing market price per share (period end) 556p 531.5p 5 571.5pTotal market value of shareholders' equity £31.4bn £29.9bn 5 £32.2bnProposed dividend per share (page 49, note 11.2p 10.7p 5 23.5p20) 30 June 30 June Change 31 December 2007 2006 2006 £m £m £mBalance sheet %Shareholders' equity 11,373 10,157 12 11,155Net assets per share (pence) 199 178 12 195Total assets 353,095 325,767 8 343,598Loans and advances to customers 200,181 182,157 10 188,285Customer deposits 144,654 136,465 6 139,342 Risk asset ratiosTotal capital 10.4% 10.3% 10.7%Tier 1 capital 8.1% 7.4% 8.2% *results for the half-year to 31 December 2006 also exclude the £128 million pension schemes related credit. Page 2 of 50 PROFIT ANALYSIS BY DIVISION Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £m UK Retail Banking (page 13) - Before settlement of overdraft claims 839 713 18 836- Settlement of overdraft claims (36) - - 803 713 13 836 Insurance and Investments (page 16) 499 466 7 507 Wholesale and International Banking (page 22) 863 768 12 872 Central group items - Before pension schemes related credit (155) (197) (255)- Pension schemes related credit - - 128 (155) (197) (127)Profit before tax - excluding volatility 2,010 1,750 15 2,088Volatility (page 34, note 2)- Insurance 41 (61) 145- Policyholder interests (58) 90 236Profit before tax 1,993 1,779 12 2,469Taxation (433) (543) (798)Profit for the period 1,560 1,236 26 1,671 Profit attributable to minority interests 20 22 82Profit attributable to equity shareholders 1,540 1,214 27 1,589Profit for the period 1,560 1,236 26 1,671 Page 3 of 50 GROUP CHIEF EXECUTIVE'S STATEMENT During the first half of 2007, the Group has continued to make strong progressand we have again delivered good growth and high returns. We are reporting agrowth in profits of 15 per cent, excluding volatility, and have achieved a 27per cent return on equity, as we continue the successful realisation of ourgrowth strategy. Over the last few years, the Group has established good earnings momentum, andthis has been clearly evident in our recent results. We have delivered improvedlevels of revenue growth, whilst continuing to enhance our productivity and thisis creating increased capacity for investment in building the business. Ourcapital management is strong and the Group's capital ratios remain robust. As a result of its increasing confidence in the Group's future earningsperformance, the Board has decided to increase the 2007 interim dividend by 5per cent to 11.2p per share. Going forward, the Board expects to grow thedividend, whilst continuing to build dividend cover. As I have stated previously, when developing our strategy, we identified thatour best opportunity was to grow our business by realising the considerablepotential within our existing franchises. We also believed there weresignificant opportunities to improve our productivity, and we could bettermanage our capital to fund our growth. By making progress against theseopportunities, we could accelerate the levels of earnings growth from our corebusinesses and maintain our high returns. Our results over the past severalperiods, and especially during the first half of the year, validate that we areworking on the right strategy, confirm that the core processes are in place andgive us greater confidence for the future. Our business model is based on developing deep, long-lasting relationships withour customers that allow us to generate a sustainable flow of high qualityearnings. Our commitment to customers is reflected not only in our improvedlevels of customer satisfaction over the past several years and the developmentof a range of new customer offers, but also in the way we seek to make a realdifference to customers. For instance, during the recent severe flooding in theUK, our staff have worked proactively with customers to help and reassure themduring what has been a particularly challenging period. In the past few years, the Group has delivered a consistently improvingperformance, whilst maintaining our strong returns. In the first half of 2007,we have made further progress against our objectives and, excluding volatility,profit before tax rose by 15 per cent, whilst economic profit rose by 31 percent. The performance was underpinned by an improved rate of income growth,which rose to 9 per cent. Costs were again well controlled, up 6 per cent,supporting good levels of business investment, and this led to an increase inthe trading surplus of 12 per cent. Asset quality remains in very good shape. We have a long standing track record of improving the Group's efficiency and Iam pleased that we have again made further progress as the cost:income ratio,excluding volatility and the settlement of overdraft claims, improved to 48.6per cent, from 50.6 per cent in the first half of 2006. We are achieving thisthrough the delivery of Groupwide initiatives such as centralising operations inGroup Manufacturing, applying Lean and Sigma techniques to all our processes,and we are getting much smarter at leveraging our scale to reduce ourprocurement costs. The efficiency benefits are creating greater capacity forinvestment to underpin our future success. Page 4 of 50 We have further enhanced our capital management programmes in support of ourbusiness objectives. Our redirection of capital towards more profitablebusiness and asset distribution initiatives are successfully supporting ourWholesale growth strategy, and we have continued our mortgage securitisationprogramme. We are managing our capital within Scottish Widows more effectivelyand, in addition to the £0.6 billion repatriated in the first half of 2007, weexpect to identify further opportunities to repatriate additional capital. The level of income and profit growth across each of the three operatingdivisions indicates that we have made good progress in building strongerrelationships with our customers. This is also reflected in the improvedcustomer satisfaction scores, the stronger level of new customer recruitment tothe Group, and the good sales growth as we are able to satisfy more of ourcustomers' financial services needs. In the Retail Bank, profit before tax grew by 13 per cent, underpinned by 6 percent growth in income. Costs continue to be well managed, rising just 2 percent before the impact of the settlement of overdraft claims, and this allowedus to deliver good positive jaws. Our focus on improving the quality of our newlending, enhancements to our collections processes and better than assumedrecoveries, has resulted in the charge for impairments falling by 1 per cent. The Retail Bank has made substantial progress against its objectives this year.We continue to focus on improving the quality of service received by ourcustomers, across all our distribution channels, and we are further extendingthe range of products and services we offer. During 2007, we introduced anumber of innovative offerings, including the extension of our Added ValueAccount range and the more recent launch of our Duo credit cards. We have had considerable success in our efforts to build the retail franchise,and saw good growth in both assets, up 7 per cent, and liabilities, up 8 percent. This was underpinned by excellent results in our leading indicators, suchas the increase in current account openings, up 25 per cent, and the growth insales volumes of 16 per cent, as we seek to win a greater share of ourcustomers' financial services spend. In Insurance and Investments, profit before tax, adjusted for the impact ofsurplus capital repatriation and excluding volatility and insurance grossing,rose by 11 per cent and this was driven by income growth of 8 per cent. We havecontinued to invest in sales and service platforms and, thanks to continuedproductivity improvements, the cost increase was maintained at 4 per cent, whichagain allowed us to deliver wide positive jaws. One of the major successes of this business has been its relationship with thedistribution arms of the Retail Bank and Commercial Banking. In recent years,we have delivered strong growth in Scottish Widows sales to our franchisecustomers and this year I am again pleased that we are reporting a furtherincrease of 16 per cent in our sales of bancassurance products. In the IFAchannel, sales increased by 1 per cent, following record sales levels in thefirst half of last year. As a result of our continued focus on managing the efficient use of capital inthe business, we saw a further improvement in the new business margin as wecontinued to develop more capital efficient products to meet the needs of ourcustomers. Scottish Widows remains well capitalised, notwithstanding thepayment of more than £2.3 billion of dividends to Group over the past threeyears. Page 5 of 50 Wholesale and International Banking delivered another strong performance, withincome up 10 per cent and profit before tax up 12 per cent, as we continue tobuild our key businesses: Corporate Markets and Commercial Banking. We continueto invest for future growth in both these areas and notwithstanding the 5 percent increase in costs, we again delivered positive jaws. We maintain robustmanagement controls over our asset portfolio, and wholesale asset qualityremains strong. Our Corporate Markets business continues to perform very strongly and delivereda 23 per cent improvement in profit before tax. We have continued to invest inthis business in recent years, to allow us to develop the services and productrange for our Corporate Banking clients, and this was rewarded with a 26 percent increase in income, a significant (32 per cent) increase in cross-salesincome and strong growth from Lloyds TSB Development Capital. We will besustaining this investment programme to ensure we can meet more of ourcustomers' needs and to build on the broader revenue streams that have beenestablished. We were once again delighted to be named the CBI Corporate Bank ofthe Year, for the third year in succession, and we were recently named best UKBank in the Euromoney Awards. The Commercial Banking performance was also strong, with profit before taxincreasing by 11 per cent, reflecting increased business volumes. We continueto attract new customers, cementing our market-leading position in the start-upmarket and, in addition, we continue to attract higher numbers of the valuableswitcher accounts from competitors. The recent restructuring brought CommercialFinance, our factoring and invoice discounting unit, into the business and thisis now providing a co-ordinated market-leading approach for our customers. Whilst we have made considerable progress in building the business in recentyears, we also recognise that part of our success depends on the strength of thecommunities in which we operate. The Group has a long-established corporateresponsibility programme, which incorporates the Lloyds TSB Foundations. TheFoundations make a substantial difference to the many thousands of people theysupport through their donations, and in 2007 they received some £37 million fromthe Group to continue their work. In March of this year, the Group was also delighted to announce it was to be theofficial banking and insurance partner to the London 2012 Olympic Games. Thismarks a major sponsorship programme for the Group and will provide substantialbusiness opportunities for us, working with communities throughout the country,in the lead up to the Games. Summary Lloyds TSB has a clear objective of developing strong customer franchises whichwe will successfully grow in the coming years by providing great value for ourcustomers, and that in turn will allow us to deliver strong returns to ourshareholders. By putting the processes that support the business model in place, we aredelivering improved results in the face of a more difficult operatingenvironment. When taken together with our advances in areas such as riskmanagement, our customer data analysis and the development of our people, we arebuilding a framework to allow us to deliver higher performance both now and overthe longer term. Finally, let me again take this opportunity to express my sincere thanks to allour staff throughout the Group, who continue to deliver for our customers.Their commitment to our success is key to the Group, and our growing reputationreflects very strongly their wonderful contribution. J Eric Daniels Group Chief Executive Page 6 of 50 GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE In the first half of 2007 the Group delivered a strong performance. Statutoryprofit before tax was £1,993 million, an increase of £214 million, or 12 percent. Profit attributable to equity shareholders increased by £326 million, or27 per cent, to £1,540 million and earnings per share increased by 26 per centto 27.3p. Economic profit increased by 37 per cent to £1,027 million, and thepost-tax return on equity improved from 23.5 per cent to 27.0 per cent. Accelerating earnings momentum Profit before tax, excluding volatility, increased by £260 million, or 15 percent, to £2,010 million, underpinned by strong profit momentum in all divisions,and notwithstanding the impact of a £28 million impairment charge relating to achange in the rate of corporation tax and a £36 million cost relating to thesettlement of overdraft claims. An improved rate of revenue growth of 9 percent exceeded cost growth of 6 per cent, with each division delivering strongerhalf-on-half revenue growth than cost growth. Earnings per share, excludingvolatility, increased by 22 per cent to 26.9p and economic profit increased by31 per cent to £1,008 million. Capital efficiency continued to improvethroughout the Group, resulting in the post-tax return on average shareholders'equity increasing to 27.0 per cent, and the post-tax return on averagerisk-weighted assets increasing to 1.93 per cent, from 1.66 per cent. In ourInsurance business, the post-tax return on embedded value, on an EEV basis,increased to 10.7 per cent, from 9.5 per cent. Improved rate of income growth Overall income growth of 9 per cent, excluding volatility, reflects asignificant improvement on recent reporting periods and good progress indelivering our divisional strategies of increasing income from both new andexisting customers, with good growth in both assets and liabilities, as well assignificant increases in other income. Excluding the impact of insurancegrossing adjustments, income increased by 8 per cent to £5,585 million. Group net interest income, excluding volatility and insurance grossing,increased by £53 million. Strong levels of customer lending growth inCommercial Banking and Corporate Markets, and good growth in mortgages andretail deposits, more than offset lower unsecured personal lending balances.Total assets increased by 8 per cent to £353 billion, with a 10 per centincrease in loans and advances to customers. Customer deposits increased by 6per cent to £145 billion, supported in particular by good growth in savingsbalances in the retail bank. The net interest margin from our banking businesses (page 36, note 4) decreasedby 16 basis points, to 2.87 per cent. Stronger growth in finer margin mortgagesand a reduction in wider margin unsecured consumer lending contributed to anegative mix effect which accounted for 7 basis points of the margin decline,and funding costs accounted for 2 basis points. Overall product margins were 7basis points lower, largely reflecting competitive pressures in the mortgage andasset finance businesses and a move to finer margin secured lending inCommercial Banking, which were partly offset by an increase in retail savingsmargins. Other income, net of insurance claims and excluding volatility and insurancegrossing, increased significantly, by £380 million, or 16 per cent, to £2,773million. This reflected an improvement in fees and commissions receivable as aresult of strong growth in added value current accounts, and higher insurancecommissions in the retail bank. In addition, particularly strong growth wasachieved in cross-selling income from sales and structuring, and debt capitalmarkets activities within Corporate Markets, which supported a 33 per centincrease in Corporate Markets other income. Page 7 of 50 General insurance weather related claims increased by £57 million, of which £45million related to severe flooding in the UK in June 2007. Further severeflooding in the UK during July 2007 is likely to result in additionalexceptional claims in the second half of 2007 (page 21). In addition to reporting under IFRS, the Group provides supplemental financialinformation relating to Scottish Widows on a European Embedded Value (EEV)basis. We believe that EEV represents the most appropriate measure of long-termvalue creation in life assurance and investment businesses. On an IFRS basis,Scottish Widows' 2007 first half profit before tax, excluding volatility,totalled £419 million, whilst on an EEV basis profit before tax, excludingvolatility, was £482 million. Similarly, the embedded value on an IFRS basis at30 June 2007 was £5,165 million, compared to embedded value on an EEV basis of£6,362 million. Excellent cost management The Group continues to make significant investment in improving processingefficiency, the benefits of which are seen in a strong cost performance. Duringthe first half of 2007, operating expenses increased by 6 per cent to £2,760million. However, excluding the settlement of overdraft claims, costs rose by 4per cent. Over the last 12 months, staff numbers have fallen by 2,251 (3 percent) to 66,012, largely as a result of greater efficiency in back officeprocessing centres. These improvements in operational effectiveness haveresulted in a Group cost:income ratio, excluding volatility and the impact ofthe settlement of overdraft claims, which is 2.0 percentage points lower at 48.6per cent. The Group's programme of productivity initiatives has continued to deliversignificant benefits. In the first half of the year the programme delivered netbenefits of £72 million, with gross benefits of £114 million and reinvestment infurther programme initiatives of £42 million. The Group remains on track todeliver net annual benefits of approximately £125 million in 2007, and £250million in 2008. Along with a number of other UK banks, during the first half of 2007 the Grouphas experienced a number of customer claims for the repayment of overdraft fees.On 27 July, a number of banks, together with the Office of Fair Trading (OFT),asked the UK High Court to clarify the legal position regarding these fees. Itis unclear how long the case will last but, in the meanwhile, the handling ofcustomer complaints on this issue has been suspended pending a decision by thecourt. The first half results include a charge of £36 million relating to thesettlement of claims during the first half of the year, together with relatedcosts. Satisfactory asset quality Impairment losses on loans and advances increased by 5 per cent to £837 million.Our impairment charge expressed as a percentage of average lending was 0.84per cent, compared to 0.88 per cent in the first half of last year (page 39,note 9). Impaired assets were broadly unchanged at £4,049 million, and nowrepresent 2.0 per cent of total lending, down from 2.1 per cent at 30 June 2006. In UK Retail Banking, impairment losses on loans and advances decreased by £5million, or 1 per cent, to £627 million. During the first half of 2007, wehave seen a reduction in the level of customer insolvencies, improvements in theGroup's collections procedures and better than assumed recoveries. The qualityof new unsecured lending has continued to be strong and our arrears anddelinquency trends have remained satisfactory. In addition, the asset qualityin our mortgage portfolio has remained excellent. The retail impairment chargefor 2007 is currently expected to be no higher than that in 2006. Page 8 of 50 The Wholesale and International Banking charge for impairment losses on loansand advances increased by £51 million to £210 million, including a one-offcharge of £28 million relating to the impact of the 2007 Finance Act on theGroup's leasing business and, as expected, lower levels of releases andrecoveries in Corporate Markets and Commercial Banking. Overall asset qualityremains strong and the level of new corporate provisions remains at a low level. Strong capital management disciplines At the end of June 2007, the total capital ratio was 10.4 per cent and the tier1 ratio was 8.1 per cent. During the half-year, risk-weighted assets increasedby 3 per cent to £161 billion, as strong growth in our mortgage and CorporateMarkets businesses was partly offset by the impact of the Group's securitisationprogramme, which reduced risk-weighted assets by £1.9 billion. Scottish Widows remains strongly capitalised and, at the end of June 2007, theworking capital ratio of the Scottish Widows Long Term Fund was an estimated19.1 per cent (page 43, note 16). In the first half of 2007, further capitalrepatriation totalling £0.6 billion was made to the Group, bringing the totalcapital repatriation since the beginning of 2005 to £2.3 billion. We continueto examine opportunities to improve our capital efficiency and have work underway that we believe will allow Scottish Widows to further repatriate in excessof £1 billion capital to the Group, whilst maintaining a strong capitalposition. The Group has continued to make good progress in its preparations for theintroduction of Basel II and we plan to move to the Internal Ratings Basedapproach from January 2008. Our final regulatory capital assessment is notexpected until the fourth quarter of 2007, however we expect to maintainsatisfactory capital ratios throughout the transition. No deduction ofinvestments in insurance subsidiaries is expected to be made from tier 1 capitaluntil at least 2012. During the first half of the year, the Group's pension schemes accountingdeficit reduced by £130 million, to £2,332 million, as cash contributions to theGroup's defined benefit schemes exceeded the regular cost. A review of theposition at 30 June 2007 in the Group's two principal pension schemes, whichwill be formally updated at the year-end, has indicated that the deficit hadreduced by approximately £1.6 billion since 31 December 2006 before taking intoaccount the effect of the IAS19 corridor approach, largely reflecting the impactof rising corporate bond yields. This is not reflected in the Group's half-yearresults. Impact of 2007 Finance Act The effective tax rate of the Group, excluding policyholder and OEIC interestsand the impact of a tax credit arising from the UK corporation tax rate change,was 28.3 per cent (page 48, note 19). The 2007 Finance Act reduction incorporation tax rate from 30 per cent to 28 per cent resulted in a one-offimpairment charge of £28 million before tax, relating to a reduction in futurerental income within the Group's leasing business. In addition, the Group'sdeferred tax liabilities have reduced, resulting in a credit to the Group's taxcharge of £89 million. The net impact of these items has been to increaseearnings attributable to shareholders by £70 million during the first half ofthe year. Sale of Lloyds TSB Registrars In May 2007, Lloyds TSB agreed the sale of the business and assets of Lloyds TSBRegistrars to Advent International for a total cash consideration of £550million, subject to completion and other adjustments. The transaction isexpected to be completed in the second half of 2007 and remains subject toregulatory approval. Subject to completion and other adjustments, it isexpected that a profit before tax of circa £440 million (tax: nil) will berecognised in the income statement of Lloyds TSB Group for the year ending 31December 2007. Page 9 of 50 Delivering accelerated earnings momentum, whilst improving profitability andreturns For the first time in recent years, the Group has delivered double-digit growthin profit before tax, earnings per share and economic profit. This is a verystrong performance, in what has been a competitive environment, and is driven byan improved rate of revenue growth, excellent cost management and satisfactoryasset quality. Encouragingly, this growth has not come at the expense ofreturns as the Group has substantially improved both its return on equity andreturn on risk-weighted assets. As a result, we expect 2007 to be another goodyear for the Group. Helen A Weir Group Finance Director Page 10 of 50 SUMMARISED SEGMENTAL ANALYSIS Half-year to Wholesale Group30 June 2007 UK Insurance and Central excluding Retail and International group insurance Insurance Banking Investments** Banking items gross up gross up** Group £m £m £m £m £m £m £m Net interest income 1,844 27 1,275 (334) 2,812 126 2,938Other income 883 937 923 182 2,925 3,865 6,790Total income 2,727 964 2,198 (152) 5,737 3,991 9,728Insurance claims - (152) - - (152) (3,969) (4,121)Total income, net of 2,727 812 2,198 (152) 5,585 22 5,607insurance claimsOperating expenses (1,297) (325) (1,125) (3) (2,750) (10) (2,760)Trading surplus (deficit) 1,430 487 1,073 (155) 2,835 12 2,847Impairment losses on loans (627) - (210) - (837) - (837)and advances Profit (loss) before tax* 803 487 863 (155) 1,998 12 2,010Volatility- Insurance - 41 - - 41 - 41- Policyholder interests - - - - - (58) (58)Profit (loss) before tax 803 528 863 (155) 2,039 (46) 1,993 Half-year to30 June 2006 Net interest income 1,794 28 1,194 (257) 2,759 35 2,794Other income 783 832 805 68 2,488 2,517 5,005Total income 2,577 860 1,999 (189) 5,247 2,552 7,799Insurance claims - (95) - - (95) (2,544) (2,639)Total income, net of 2,577 765 1,999 (189) 5,152 8 5,160insurance claimsOperating expenses (1,232) (312) (1,072) 1 (2,615) 5 (2,610)Trading surplus (deficit) 1,345 453 927 (188) 2,537 13 2,550Impairment losses on loans (632) - (159) (9) (800) - (800)and advances Profit (loss) before tax* 713 453 768 (197) 1,737 13 1,750Volatility- Insurance - (61) - - (61) - (61)- Policyholder interests - - - - - 90 90Profit (loss) before tax 713 392 768 (197) 1,676 103 1,779 * excluding volatility. **the Group's income statement includes income and expenditure which areattributable to the policyholders of the Group's long-term assurance funds.These items have no impact upon the profit attributable to equity shareholders.In order to provide a clearer representation of the underlying trends within theInsurance and Investments segment, these items are shown within a separatecolumn in the segmental analysis above. Page 11 of 50 SUMMARISED SEGMENTAL ANALYSIS (continued) Half-year to Wholesale Group31 December 2006 UK Insurance and Central excluding Retail and International group insurance Insurance Banking Investments** Banking items gross up gross up** Group £m £m £m £m £m £m £m Net interest income 1,848 28 1,191 (336) 2,731 43 2,774Other income 838 908 1,022 133 2,901 5,789 8,690Total income 2,686 936 2,213 (203) 5,632 5,832 11,464Insurance claims - (105) - - (105) (5,825) (5,930)Total income, net of 2,686 831 2,213 (203) 5,527 7 5,534insurance claimsOperating expenses (1,244) (334) (1,192) (52) (2,822) 3 (2,819)Trading surplus (deficit) 1,442 497 1,021 (255) 2,705 10 2,715Impairment losses on loans (606) - (149) - (755) - (755)and advancesProfit (loss) before tax+ 836 497 872 (255) 1,950 10 1,960Pension schemes related - - - 128 128 - 128creditProfit (loss) before tax* 836 497 872 (127) 2,078 10 2,088 Volatility- Insurance - 145 - - 145 - 145- Policyholder interests - - - - - 236 236Profit (loss) before tax 836 642 872 (127) 2,223 246 2,469 * excluding volatility. +also excludes pension schemes related credit. **the Group's income statement includes income and expenditure which areattributable to the policyholders of the Group's long-term assurance funds.These items have no impact upon the profit attributable to equity shareholders.In order to provide a clearer representation of the underlying trends within theInsurance and Investments segment, these items are shown within a separatecolumn in the segmental analysis above. Page 12 of 50 DIVISIONAL PERFORMANCE UK RETAIL BANKING Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mNet interest income 1,844 1,794 3 1,848Other income 883 783 13 838Total income 2,727 2,577 6 2,686Operating expenses- Before settlement of overdraft claims (1,261) (1,232) (2) (1,244)- Settlement of overdraft claims (36) - - (1,297) (1,232) (5) (1,244)Trading surplus 1,430 1,345 6 1,442Impairment losses on loans and advances (627) (632) 1 (606)Profit before tax 803 713 13 836 Cost:income ratio, excluding settlement of overdraft 46.2% 47.8% 46.3%claimsPost-tax return on average risk-weighted assets 1.89% 1.65% 1.87% Total assets £112.7bn £105.7bn 7 £108.4bnRisk-weighted assets £59.6bn £61.6bn (3) £59.1bnCustomer deposits £78.0bn £72.5bn 8 £75.7bn Key highlights • Strong income momentum, up 6 per cent, supporting 13 per cent growthin profit before tax. Excluding the settlement of overdraft claims, profitbefore tax increased by 18 per cent to £839 million. • Strong sales growth with overall sales up 16 per cent, with 23 percent growth in the branch network. • Further good progress in growing the current account customerfranchise, with a 25 per cent increase in current account recruitment, includinga 73 per cent increase in new added value current accounts. • Excellent cost management, with a clear focus on improvingprocessing efficiency and service quality. Excluding the impact of thesettlement of overdraft claims, operating expenses increased by 2 per cent andthere was a substantial improvement in the cost:income ratio. • The quality of new lending continues to be strong. Impairmentcharge broadly flat. The retail impairment charge for 2007 is currentlyexpected to be no higher than that in 2006. • Improved return on risk-weighted assets, reflecting the impact ofdouble-digit profit growth and a reduction in risk-weighted assets followingmortgage securitisations. Page 13 of 50 UK RETAIL BANKING (continued) Profit before tax from UK Retail Banking increased by £90 million, or 13 percent, to £803 million, reflecting strong levels of franchise growth, excellentcost management and a broadly flat impairment charge. Total income increased by£150 million, or 6 per cent, supported by higher income from current accounts,savings and personal lending, whilst costs remain well controlled. Excludingthe settlement of overdraft claims, profit before tax increased by 18 per centto £839 million. The adverse mix effect of stronger growth in finer margin mortgages and areduction in wider margin unsecured personal lending led to an overall reductionin the division's net interest margin. Product margins also fell slightlyreflecting competitive pressures in the mortgage business which more than offsetan increase in retail savings margins. Operating expenses remained well controlled, increasing by 2 per cent, excludingthe settlement of overdraft claims. Significant improvements have been made inthe rationalisation of back office operations to improve efficiency and wecontinue to increase the proportion of front office to back office staff in thebranch network. During the first half of 2007, UK Retail Banking has made substantial progressin each of its key strategic priorities: growing income from its existingcustomer base; expanding its customer franchise; and improving productivity andefficiency. In each of these areas, a key focus has been on improving sales ofrecurring income products, such as savings and bancassurance products which,combined with higher lending related income, has supported the accelerating rateof revenue growth. Growing income from the customer base Overall sales increased by 16 per cent, with improvements over a broad range ofproducts, particularly current accounts, bank savings and bancassuranceproducts. This improved sales growth has benefited from higher levels of newproduct innovation over the last twelve months with the successful launch, forexample, of a number of enhanced savings products, an improved range of addedvalue current accounts and the introduction of the innovative Lloyds TSB Duocredit card offer. Customer deposits have increased by 8 per cent over the last12 months, with strong progress in growing our bank savings and wealthmanagement deposit balances. 30 June 30 June 31 December 2007 2006 Change 2006Current account and savings balances £m £m % £m Bank savings 38,062 34,181 11 36,417C&G deposits 14,502 14,151 2 14,621Wealth management 4,737 4,014 18 4,402UKRB savings 57,301 52,346 9 55,440Current accounts 20,684 20,115 3 20,221Total customer deposits 77,985 72,461 8 75,661 The Group has delivered good levels of growth in the mortgage business, focusingon prime mortgage business and seeking to maintain economic returns in whatcontinues to be a fiercely competitive market. Gross new mortgage lending forthe Group totalled £16.0 billion (2006 first half: £13.0 billion). Mortgagebalances outstanding increased by 9 per cent to £100.1 billion and net newlending totalled £4.8 billion, resulting in a market share of net new lending ofapproximately 8.9 per cent, broadly in line with our stock position. Page 14 of 50 UK RETAIL BANKING (continued) In unsecured consumer lending, tightened credit criteria over the last twoyears, together with the slowdown in consumer demand, has led to unsecuredconsumer credit balances falling slightly during the half-year. Personal loanbalances outstanding at 30 June 2007 were flat at £11.1 billion, and credit cardbalances totalled £6.6 billion, a decrease of 7 per cent, although thesebalances showed signs of stabilisation during the second quarter of 2007. Expanding the customer franchise In addition to the strong growth in product sales from existing customers, theGroup has continued to make progress in expanding its customer franchise.Current account recruitment increased by 25 per cent, compared with the firsthalf of last year, supported by the new range of added value current accounts,in particular the Silver Account focusing on foreign nationals. Wealth Management continues to make good progress with its expansion plans, andover 240 advisers have now been trained on an improved wealth management offercomprising private banking, open architecture portfolio management, retirementplanning, insurance and estate planning services. In the first half of 2007,total new assets under management increased by 15 per cent and wealth managementbanking deposits grew by 18 per cent. In June 2007, the Group launched the Lloyds TSB AirMiles Duo account - a new,innovative and exclusive credit card that offers a 'two in one' easy to manageaccount, with one PIN, one statement and two cards - an American Express and aMasterCard on which customers can earn AirMiles. The initial demand for thisnew product has been extremely strong. By the middle of July, approximately140,000 applications had been received from a generally more transactional, highquality, customer segment. Improving productivity and efficiency We have continued to make significant progress in reducing levels ofadministration and processing work carried out in branches and, as a result, wehave increased the number of dedicated customer facing branch network staff bysome 4,000 over the last twelve months. Over the last 2 years, branch networkstaff time spent on back office administration work has reduced fromapproximately 35 per cent to around 5 per cent. This has enabled us to increaseour focus on meeting our customers' needs and has supported the substantiallyimproved branch network sales productivity and service efforts. Theseimprovements have led to the retail banking cost:income ratio, excluding theimpact of the settlement of overdraft claims, improving to 46.2 per cent, from47.8 per cent last year. Impairment levels slightly decreased Impairment losses on loans and advances decreased by £5 million, or 1 per cent,to £627 million, largely reflecting a reduction in the level of customerinsolvencies and the strong quality of new lending. In addition, collectionsprocedures continue to improve and we achieved better than assumed recoveries.The impairment charge as a percentage of average lending improved to 1.15 percent, compared to 1.23 per cent in the first half of last year. Over 99 percent of new personal loans and over 80 per cent of new credit cards sold duringthe first half of 2007 were to existing customers, where the Group has a betterunderstanding of an individual customer's total financial position. Mortgagecredit quality remains good and, as a result, the impairment charge fell by £1million to £5 million. Arrears in the mortgage business have also fallen duringthe first half of the year. In Cheltenham & Gloucester, the average indexedloan-to-value ratio on the mortgage portfolio was 44 per cent, and the averageloan-to-value ratio for new mortgages and further advances written during thefirst half of 2007 was 63 per cent. Whilst customer insolvency and interestrate trends remain key factors in the outlook for retail impairment, the retailimpairment charge for 2007 is currently expected to be no higher than that in2006. Page 15 of 50 INSURANCE AND INVESTMENTS Half-year to Half-year to Half-year to 30 June 30 June 31 DecemberExcluding volatility 2007 2006 Change 2006 £m £m % £mNet interest income 27 28 (4) 28Other income 937 832 13 908Total income 964 860 12 936Insurance claims (152) (95) (60) (105)Total income, net of insurance claims 812 765 6 831Operating expenses (325) (312) (4) (334)Insurance grossing adjustment (page 11) 12 13 10Profit before tax 499 466 7 507 Profit before tax analysisLife, pensions and OEICsNew business profit - life and pensions 80 71 13 100New business profit - OEICs (12) (12) - (12)Existing business 248 188 32 196Expected return on shareholders' net assets 103 73 41 67Impact of surplus capital repatriation - 15 15 419 335 25 366General insurance 59 114 (48) 129Scottish Widows Investment Partnership 21 17 24 12Profit before tax 499 466 7 507 Present value of new business premiums (PVNBP) 5,372 4,969 8 4,771PVNBP new business margin (EEV basis) 3.4% 3.3% 3.8%Post-tax return on embedded value 10.7% 9.5% 9.1% (EEV basis, page 46, note 17) Key highlights • Strong profit performance. Profit before tax increased by 7 percent to £499 million. Adjusting for the impact of surplus capital repatriation,profit before tax increased by 11 per cent. • Good income growth. Income, net of insurance claims and adjustingfor the impact of surplus capital repatriation, increased by 8 per cent,exceeding cost growth of 4 per cent. • Good sales performance. 8 per cent increase in Scottish Widows'present value of new business premiums. Strong progress in increasingbancassurance sales, up 16 per cent, with a good performance in the sale ofprotection products. • Strong new business profitability. On an EEV basis, life, pensionsand OEICs new business profit in Scottish Widows increased by 9 per cent and thepost-tax return on embedded value increased to 10.7 per cent. New businessmargin remained robust at 3.4 per cent. • Strong capital position of Scottish Widows maintained. ScottishWidows continues to deliver improving capital efficiency and self-financinggrowth, and a further £0.6 billion of capital was repatriated to the Group inthe first half of 2007. • Increased weather related claims of £57 million, £45 millionrelating to the severe flooding in the UK in June, contributed to a 48 per centreduction in profit before tax in General insurance. Page 16 of 50 INSURANCE AND INVESTMENTS (continued) Scottish Widows Life, pensions and OEICs Profit before tax increased by £84 million, or 25 per cent, to £419 million.The effect of surplus capital repatriation to the Group has been to reduceinvestment earnings by a total of £15 million in the first half of 2007.Adjusting for this impact, profit before tax increased by 31 per cent. Life and pensions new business profit grew by 13 per cent to £80 millionreflecting higher sales volumes and an improved business mix. Total existingbusiness profit grew by 32 per cent to £248 million, partly reflecting higherannuity profits from the closed Abbey Life business, and the absence of adverseassumption changes. The expected return on shareholders' net assets increasedby 41 per cent to £103 million as a result of a higher volume of free assets,driven by strong equity markets and the impact of regulatory changes in 2006,and a higher expected rate of return. During the first half of 2007, Scottish Widows has continued to make strongprogress in each of its key business priorities: to maximise bancassurancesuccess; to profitably grow IFA sales; to improve service and operationalefficiency; and to optimise capital management. Maximising bancassurance success In the first half of 2007, the value of Scottish Widows' bancassurance newbusiness premiums increased by 16 per cent, building on the success of thesimplified product range for distribution through the Lloyds TSB branch network,Commercial Banking and Wealth Management channels. Sales of protection productswere particularly strong. Towards the end of 2006, Scottish Widows launched anew protection product, 'Protection for Life', and this, together with a newbranch network creditor insurance and protection product which replaced anexternally provided creditor product, has led to the significant increase inprotection sales during the first half of 2007. OEICs sales were 11 per centlower in the first half of 2007, but this was a good performance following themore than doubling of sales in 2006. Profitably growing IFA sales Sales through the IFA distribution channel increased by 1 per cent, followingrecord sales levels in the first half of 2006. Our strategy remains to writeprofitable business, as Scottish Widows has continued to increase its focus onthe more profitable business areas within the IFA market. Sales of savings andinvestment products were lower as a result of the partial closure to newbusiness last year of the Property Fund. This has now been re-opened for newbusiness. Sales of corporate pensions products remained strong followingexcellent growth last year. A new pensions proposition was launched in thefirst quarter of 2007 to support pre-retirement sales. Improving service and operational efficiency Operational efficiencies have continued to improve during the first half of2007, and expense growth has been restricted to 4 per cent, despite significantinvestment in new products and platforms and increased sales volumes throughoutthe division. External operational cost benchmarking indicates that ScottishWidows is in the top quartile for servicing costs per policy. Customersatisfaction levels continued to improve and Scottish Widows has again won asignificant number of awards for service quality. Page 17 of 50 INSURANCE AND INVESTMENTS (continued) Optimising capital management Scottish Widows has maintained its strong focus on improving capital management.During the first half of 2007 Scottish Widows continued to deliver a morecapital efficient product profile, improved internal rates of return and anincreased new business margin. The post-tax return on embedded value, on an EEVbasis, increased to 10.7 per cent, from 9.5 per cent in the first half of lastyear. In the first half of 2007, £0.6 billion of capital was repatriated to theGroup, giving a total capital repatriation of over £2.3 billion since thebeginning of 2005. We continue to explore a number of opportunities torepatriate in excess of £1 billion of further capital from Scottish Widows inorder to further improve capital efficiency. Present value of new business premiums (PVNBP) Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mLife and pensions:Savings and investments 499 728 (31) 572Protection 488 111 340 121Individual pensions 1,092 1,152 (5) 1,067Corporate and other pensions 928 894 4 1,067Retirement income 516 397 30 563Managed fund business 344 184 87 164Life and pensions 3,867 3,466 12 3,554OEICs 1,505 1,503 1,217Life, pensions and OEICs 5,372 4,969 8 4,771 Single premium business 4,378 3,779 16 3,542Regular premium business 994 1,190 (16) 1,229Life, pensions and OEICs 5,372 4,969 8 4,771 Bancassurance 2,138 1,841 16 1,580Independent financial advisers 2,950 2,929 1 2,777Direct 284 199 43 414Life, pensions and OEICs 5,372 4,969 8 4,771 New business margin (PVNBP) 3.4% 3.3% 3.8% Overall, sales in the first half of 2007 increased by 8 per cent reflecting, inparticular, strong growth in the sale of protection and retirement incomeproducts. Bancassurance sales improved significantly and were 16 per centhigher at £2,138 million, including good growth in the sale of protectionproducts through both the branch network and our general insurance business.IFA sales were 1 per cent higher at £2,950 million, following record sales inthe first half of last year. OEIC sales through the IFA channel were 75 percent higher whilst sales of savings and investment products were lower as aresult of the partial closure to new business last year of the Property Fund.Managed fund business benefited from higher levels of external client business.Good growth in retirement income products led to a 43 per cent increase in salesthrough the direct channels. Page 18 of 50 INSURANCE AND INVESTMENTS (continued) Results on a European Embedded Value (EEV) basis Lloyds TSB continues to report under IFRS, however, in line with industry bestpractice, the Group provides supplementary financial reporting for ScottishWidows on an EEV basis. The Group believes that EEV represents the mostappropriate measure of long-term value creation in life assurance and investmentbusinesses. Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 Life, Life, Change Life, pensions pensions pensions and OEICs and OEICs and OEICs £m £m % £mNew business profit 180 165 9 181Existing business- Expected return 174 206 (16) 197- Experience variances 23 (5) 74- Assumption changes (3) (20) (113) 194 181 7 158Expected return on shareholders' net assets 108 69 57 68Profit before tax, adjusted 482 415 16 407for capital repatriation*Impact of surplus capital repatriation to Group - 15 15Profit before tax* 482 430 12 422New business margin (PVNBP) 3.4% 3.3% 3.8%Embedded value (period-end) £6,362m £6,436m £6,413mPost-tax return on embedded value* 10.7% 9.5% 9.1% *excluding volatility and other items (page 46, note 17) Adjusting for the impact of capital repatriation, EEV profit before tax from theGroup's life, pensions and OEICs business increased by 16 per cent to £482million, reflecting the Group's continuing focus on the more profitable businessareas and distribution channels. The Group's strategy to improve its returns by focusing on more profitable, lesscapital intensive, business whilst constantly seeking to improve process anddistribution efficiency has led to a 9 per cent increase in new business profitto £180 million. As a result of growth in higher margin products in thebancassurance distribution channel, the new business margin remained robust at3.4 per cent. Existing business profit increased by 7 per cent. Expected return decreased by16 per cent to £174 million, primarily reflecting a lower shareholder benefitthis half-year from the reduction in the value of realistic balance sheetliabilities. Positive experience variances were driven by lower than expectedtake-up rates on guaranteed annuity options in Life and pensions. In the firsthalf of 2007, overall lapse experience was broadly in line with the Group'sexpectations. Lapse rates in life and pensions business were slightly higherthan expected whilst there was a favourable lapse experience in OEICs. Theexpected return on shareholders' net assets increased by £39 million, as aresult of a higher volume of free assets, driven by strong equity markets andthe impact of regulatory changes in 2006, and a higher expected rate of return. Overall the post-tax return on embedded value increased to 10.7 per cent from9.5 per cent. Page 19 of 50 INSURANCE AND INVESTMENTS (continued) Scottish Widows Investment Partnership Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased by24 per cent to £21 million, reflecting increased profitability resulting from animproved mix in external business, a key strategic priority for SWIP. Over thelast 12 months, SWIP's assets under management increased by £0.5 billion to£97.8 billion. Movements in funds under management The following table highlights the movement in retail and institutional fundsunder management. Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £bn £bn £bnOpening funds under management 105.7 97.5 100.4 Movement in Retail FundsPremiums 6.2 5.9 5.8Claims (2.1) (1.8) (1.8)Surrenders (2.8) (2.5) (2.9)Net inflow of business 1.3 1.6 1.1 Investment return, expenses and commission 1.7 0.8 5.2Net movement 3.0 2.4 6.3 Movement in Institutional FundsLloyds TSB Pension Scheme (5.7) - -Other institutional funds (0.3) 0.4 (1.7)Investment return, expenses and commission 0.5 0.3 1.2Net movement (5.5) 0.7 (0.5) Dividends and surplus capital repatriation (0.6) (0.2) (0.5)Closing funds under management 102.6 100.4 105.7 Managed by SWIP 97.8 97.3 101.7Managed by third parties 4.8 3.1 4.0Closing funds under management 102.6 100.4 105.7 During the first half of 2007, the net movement in retail funds, net of expensesand commissions, remained strong at £3.0 billion as a result of strong premiumgrowth and higher investment returns. Institutional funds under managementreduced as a result of the decision by the Trustees of the Lloyds TSB pensionschemes to move £5.7 billion into external passive management. Including assets under management within our UK Wealth Management andInternational Private Banking businesses, Groupwide funds under managementincreased by 1 per cent to £122 billion. Page 20 of 50 INSURANCE AND INVESTMENTS (continued) General insurance Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mCommission receivable 335 293 14 336Commission payable (353) (328) (8) (336)Underwriting income (net of reinsurance) 294 302 (3) 298Other income 14 20 (30) 15Net operating income 290 287 1 313Claims paid on insurance contracts (net of reinsurance) (152) (95) (60) (105)Operating income, net of claims 138 192 (28) 208 Operating expenses (79) (78) (1) (79)Profit before tax 59 114 (48) 129 Claims ratio 50% 30% 34%Combined ratio 96% 78% 82% Profit before tax from our general insurance operations decreased by £55million, to £59 million, as a result of a £57 million increase in weatherrelated claims, of which £45 million related to severe flooding in the UK inJune. Net operating income increased by 1 per cent whilst costs also increasedby 1 per cent. Sales performance has been robust with 10 per cent growth in new business grosswritten premiums (GWP). Home insurance sales through the UK Retail Bankcontinue to perform well with 10 per cent growth in new business GWP. Ourpresence in the small business insurance market continues to improve with anincrease of 12 per cent in new business GWP from our general liability product. Net operating income improved by £3 million, or 1 per cent, as growth in loanprotection income was largely offset by lower motor insurance income and therun-off from the legacy health portfolio. Good income growth from our main homeinsurance product and the migration of the Pearl home insurance portfolio waspartly offset by lower renewal income within our existing home insuranceportfolio. Income, net of claims, was £54 million lower, largely as a result of theincreased extreme weather related claims in the first half of 2007, following abenign period in the first half of last year. As a result, overall claimsincreased by £57 million, and key underwriting ratios were significantlyaffected with an increase in the claims ratio to 50 per cent, and an increase inthe combined ratio to 96 per cent. Further severe flooding in the UK duringJuly is likely to result in additional exceptional claims in the second half of2007. Although it is early in terms of our assessment of the eventual cost ofthese additional claims, it is likely that the level of claims will be similarto that experienced as a result of the June floods. The business continues to invest in the development of its Corporate Partneringcapability. Integration of the Pearl general insurance business acquired inJuly 2006 has progressed well. Notwithstanding the impact of recent weatherrelated claims, performance of the Pearl business is in line with initialexpectations. Page 21 of 50 WHOLESALE AND INTERNATIONAL BANKING Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mNet interest income 1,275 1,194 7 1,191Other income 923 805 15 1,022Total income 2,198 1,999 10 2,213Operating expenses (1,125) (1,072) (5) (1,192)Trading surplus 1,073 927 16 1,021Impairment losses on loans and advances (210) (159) (32) (149)Profit before tax 863 768 12 872 Cost:income ratio 51.2% 53.6% 53.9%Post-tax return on average risk-weighted assets 1.60% 1.31% 1.45% Total assets £151.4bn £136.2bn 11 £147.8bnRisk-weighted assets £96.1bn £86.5bn 11 £91.8bnCustomer deposits £64.4bn £61.6bn 5 £61.2bn Profit before tax by business unitCorporate Markets 565 461 23 569Commercial Banking 216 195 11 203Asset Finance 33 63 (48) 50International Banking and other businesses 49 49 - 50 863 768 12 872 Key highlights • Continued strong trading momentum. Substantial increase in tradingsurplus, up 16 per cent to £1,073 million, and a 12 per cent increase in profitbefore tax. • Strong income growth, up 10 per cent, supported by broader revenuestreams in Corporate Markets and higher volumes in Commercial Banking. • Strong risk management and asset quality, despite a rise of £51million in impairment losses as a result of a lower level of corporate releasesand recoveries in the first half of the year and a £28 million provisionreflecting the impact of the 2007 Finance Act on the division's leasingbusiness. Gross provisions remained at a low level, reflecting the high overallquality of our lending. • Improving capital efficiency. Post-tax return on averagerisk-weighted assets increased to 1.60 per cent, from 1.31 per cent. • Wide positive jaws. Income growth exceeded cost growth of 5 percent, and led to a substantial improvement in the cost:income ratio,notwithstanding continued investment in our front-line capabilities andinfrastructure. • Further good progress in expanding our Corporate Markets business,with a 26 per cent increase in Corporate Markets income supporting a 23 per centgrowth in profit before tax. Cross selling income in Corporate Marketsincreased by 32 per cent. • Continued strong franchise growth in Commercial Banking, with an 8per cent growth in income and 11 per cent growth in profit before tax. LloydsTSB has retained its leading position as the bank of choice for start-upbusinesses. • Tightened credit criteria in Asset Finance, and a slowdown in demandin the consumer lending portfolio, led to a 48 per cent reduction in profitbefore tax. Page 22 of 50 WHOLESALE AND INTERNATIONAL BANKING (continued) In Wholesale and International Banking, the Group has continued to makesignificant progress in its strategy to leverage the Group's strong corporateand small to medium business customer franchises and, in doing so, become thebest UK mid-market focused wholesale bank. We have continued to develop newproduct revenue streams, particularly in areas such as securitisation,structured credit and credit loan trading which, coupled with a strong focus ontargeted corporate customer segments and Corporate Markets' cross-selling incomegrowth remaining strong, has supported good levels of overall income growth.Revenue growth has continued to exceed cost growth notwithstanding significantinvestment being made in the enhancement of our product and distributioncapabilities and operating platforms, particularly in the Corporate Markets andCommercial Banking businesses. We have recently re-aligned the Wholesale and International Bankingorganisational structure to better meet customer needs and improve efficiency.Customers with turnover between £2 million and £15 million per annum have movedfrom Corporate Markets to Business Banking, which has been renamed CommercialBanking. Lloyds TSB Commercial Finance, our asset-backed lending business whichserves customers from start-ups to major international corporates, is now alsopart of Commercial Banking. Profit before tax increased by £95 million, or 12 per cent, to £863 million.Good trading momentum has continued and has generated strong income growth of 10per cent, driven by Corporate Markets income growth of 26 per cent. Thisexceeded cost growth of 5 per cent, leading to a reduction in the cost:incomeratio to 51.2 per cent, from 53.6 per cent last year. Trading surplus increasedby £146 million, or 16 per cent, to £1,073 million. Net interest income increased by £81 million, or 7 per cent, reflecting higherincome from strong growth in customer lending and customer deposits. Thebanking net interest margin reduced, largely reflecting the mix effect of areduction in the wider margin Asset Finance business and lower CommercialBanking margins reflecting a higher proportion of finer margin secured lendingbeing written. Other income increased by £118 million, or 15 per cent, as aresult of good levels of growth in financial markets product sales, structuredfinance and income from venture capital investments. In addition, othertransactional income throughout the division benefited from volume growth acrossa broad range of customer activity. Costs were 5 per cent higher at £1,125million, reflecting higher costs resulting from the continuing investment inpeople, processes and systems, as the Group builds up its Corporate Marketsproduct capability and Commercial Banking business. As expected, the charge for impairment losses on loans and advances increased by£51 million to £210 million, as a result of the lower level of releases andrecoveries in the first half of 2007, and the impact of a one-off £28 millionimpairment charge reflecting a reduction in rental income from operating leaseactivities following the corporation tax rate change included in the 2007Finance Act. Overall corporate and SME asset quality remains strong and thelevel of new corporate provisions remains at a low level. We continue to expectsome normalisation in the impairment charge over the next few years, but believewe remain relatively well positioned as a result of our prudent creditmanagement policy. Page 23 of 50 WHOLESALE AND INTERNATIONAL BANKING (continued) Corporate Markets Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mNet interest income 500 413 21 393Other income 419 314 33 507Total income 919 727 26 900Operating expenses (303) (271) (12) (344)Trading surplus 616 456 35 556Impairment (losses)/credit on loans and advances- Before 2007 Finance Act impact (23) 5 13- 2007 Finance Act impact (28) - - (51) 5 13Profit before tax 565 461 23 569 In Corporate Markets, profit before tax grew by 23 per cent, driven by excellentlevels of income growth. Income increased by 26 per cent, supported bycontinued high levels of cross-selling income and a higher level of income fromventure capital investments. By building new product revenue streams in areassuch as structured products and debt capital markets, and targeting anddeveloping relationships in selected corporate customer segments, CorporateMarkets has created a broader, more diversified stream of revenues to underpinfuture revenue growth. There has also been significant progress in the deliveryof our strategy focused on improved origination and distribution capabilities inthe mid-sized corporate business. Operating expenses increased by 12 per centto £303 million, reflecting further investment in people, premises and systemsto support ongoing business growth. The trading surplus increased by 35 percent. The impairment charge of £51 million reflects the lower level of releasesand recoveries and the £28 million one-off charge relating to the impact of the2007 Finance Act on the division's leasing business. Page 24 of 50 WHOLESALE AND INTERNATIONAL BANKING (continued) Commercial Banking Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mNet interest income 430 398 8 423Other income 208 193 8 204Total income 638 591 8 627Operating expenses (375) (349) (7) (378)Trading surplus 263 242 9 249Impairment losses on loans and advances (47) (47) (46)Profit before tax 216 195 11 203 Profit before tax in Commercial Banking grew by £21 million, or 11 per cent,reflecting strong growth in business volumes, further improvements in growingthe Commercial Banking customer franchise and progress in improving operationalefficiency. Income increased by 8 per cent to £638 million, reflecting stronggrowth in lending and deposit balances, whilst costs were 7 per cent higher, asa result of increased investment to improve the operating platform. CommercialBanking continued to develop and grow its customer franchise strongly, withcustomer recruitment of more than 60,000 during the first half of 2007,reflecting its market-leading position in the start-up market. Lloyds TSBCommercial Finance has continued to improve its strong market position, with amarket share of approximately 20 per cent, measured by client numbers. Assetquality in the Commercial Banking portfolios remains strong, and the impairmentcharge was unchanged at £47 million. Asset Finance Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 Change 2006 £m £m % £mNet interest income 234 275 (15) 264Other income 158 153 3 168Total income 392 428 (8) 432Operating expenses (248) (250) 1 (258)Trading surplus 144 178 (19) 174Impairment losses on loans and advances (111) (115) 3 (124)Profit before tax 33 63 (48) 50 Profit before tax in Asset Finance decreased by 48 per cent to £33 million,reflecting tightened credit criteria and a slowdown in demand in the consumerlending portfolio which has led to a reduction in the level of new businessunderwritten. As a result, income decreased by £36 million, or 8 per cent.Costs were slightly lower and the impairment charge decreased by £4 million to£111 million, reflecting the recent tightening of credit criteria, improvedcollections procedures and lower balances outstanding, which offset an increasein arrears. Conditions in the Motor Finance business remain challenging. Newbusiness volumes have reduced, reflecting the market-wide slowdown in consumerdemand, and we have sought to avoid the structural contraction in interestmargins. In Personal Finance, new business volumes have risen modestly in afiercely competitive market. Our Contract Hire business, Autolease, hasperformed well by continuing to leverage its strong market position andefficient operation. Page 25 of 50 CONSOLIDATED INTERIM INCOME STATEMENT - STATUTORY (unaudited) Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £mInterest and similar income 8,076 6,756 7,560Interest and similar expense (5,136) (3,962) (4,817)Net interest income 2,940 2,794 2,743Fee and commission income 1,597 1,518 1,598Fee and commission expense (395) (430) (416)Net fee and commission income 1,202 1,088 1,182Net trading income 2,366 1,194 5,147Insurance premium income 2,535 2,329 2,390Other operating income 668 423 383Other income 6,771 5,034 9,102Total income 9,711 7,828 11,845Insurance claims (4,121) (2,639) (5,930)Total income, net of insurance claims 5,590 5,189 5,915Operating expenses (2,760) (2,610) (2,691)Trading surplus 2,830 2,579 3,224Impairment losses on loans and advances (837) (800) (755)Profit before tax 1,993 1,779 2,469Taxation (433) (543) (798)Profit for the period 1,560 1,236 1,671 Profit attributable to minority interests 20 22 82Profit attributable to equity shareholders 1,540 1,214 1,589Profit for the period 1,560 1,236 1,671 Basic earnings per share 27.3p 21.7p 28.2pDiluted earnings per share 27.1p 21.5p 28.0p Dividend per share for the period* 11.2p 10.7p 23.5pDividend for the period* £632m £603m £1,325m *the dividend for the half-year to 30 June 2007 represents the interim dividendfor 2007 which will be paid and accounted for on 3 October 2007 (the dividendsshown for the half-year to 30 June 2006 and the half-year to 31 December 2006represent the interim and final dividends for 2006 which were paid and accountedfor on 4 October 2006 and 2 May 2007 respectively). Page 26 of 50 CONSOLIDATED INTERIM BALANCE SHEET - STATUTORY (unaudited) 30 June 30 June 31 December 2007 2006 2006Assets £m £m £mCash and balances at central banks 1,255 1,294 1,898Items in course of collection from banks 1,727 1,814 1,431Trading and other financialassets at fair value through profit or loss 68,424 60,803 67,695Derivative financial instruments 6,640 5,032 5,565Loans and advances to banks 33,599 34,927 40,638Loans and advances to customers 200,181 182,157 188,285Available-for-sale financial assets 21,994 20,221 19,178Investment property 5,177 4,856 4,739Goodwill 2,377 2,377 2,377Value of in-force business 2,890 2,929 2,723Other intangible assets 141 50 138Tangible fixed assets 3,220 4,281 4,252Other assets 5,470 5,026 4,679Total assets 353,095 325,767 343,598 Equity and liabilitiesDeposits from banks 40,017 39,466 36,394Customer accounts 144,654 136,465 139,342Items in course of transmission to banks 727 707 781Trading and other liabilities at fair value through 2,866 1,543 1,184profit or lossDerivative financial instruments 6,890 6,068 5,763Debt securities in issue 49,812 39,703 54,118Liabilities arising from insurance contracts andparticipating investment contracts 41,985 40,215 41,445Liabilities arising from non-participatinginvestment contracts 25,609 22,489 24,370Unallocated surplus within insurance businesses 628 573 683Other liabilities 12,072 11,360 10,985Retirement benefit obligations 2,332 2,799 2,462Current tax liabilities 946 449 817Deferred tax liabilities 1,236 1,337 1,416Other provisions 233 307 259Subordinated liabilities 11,378 11,693 12,072Total liabilities 341,385 315,174 332,091 EquityShare capital 1,430 1,427 1,429Share premium account 1,284 1,243 1,266Other reserves 371 397 355Retained profits 8,288 7,090 8,105Shareholders' equity 11,373 10,157 11,155Minority interests 337 436 352Total equity 11,710 10,593 11,507 Total equity and liabilities 353,095 325,767 343,598 Page 27 of 50 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 2006 2,590 383 7,222 435 10,630 Movement in available-for-sale - 2 - - 2financial assets, net of taxMovement in cash flow hedges, net of tax - 11 - - 11Currency 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 - - - 80Repayment of capital to minority - - - (4) (4)shareholdersBalance at 30 June 2006 2,670 397 7,090 436 10,593 Movement in available-for-sale - (33) - - (33)financial assets, net of taxMovement in cash flow hedges, net of tax - (10) - - (10)Currency translation differences - 1 (20) (4) (23)Net income recognised directly in equity - (42) (20) (4) (66)Profit for the period - - 1,589 82 1,671Total recognised income for the period - (42) 1,569 78 1,605Dividends - - (603) (15) (618)Purchase/sale of treasury shares - - 6 - 6Employee share option schemes:- value of employee services - - 43 - 43- proceeds from shares issued 25 - - - 25Repayment of capital to minority - - - (147) (147)shareholdersBalance at 31 December 2006 2,695 355 8,105 352 11,507 Movement in available-for-sale - 13 - - 13financial assets, net of taxMovement in cash flow hedges, net of tax - (2) - - (2)Currency translation differences - 5 (1) (1) 3Net income recognised directly in equity - 16 (1) (1) 14Profit for the period - - 1,540 20 1,560Total recognised income for the period - 16 1,539 19 1,574Dividends - - (1,325) (4) (1,329)Purchase/sale of treasury shares - - (36) - (36)Employee share option schemes:- value of employee services - - 5 - 5- proceeds from shares issued 19 - - - 19Repayment of capital to minority - - - (30) (30)shareholdersBalance at 30 June 2007 2,714 371 8,288 337 11,710 Page 28 of 50 CONDENSED CONSOLIDATED INTERIM CASH FLOW STATEMENT - STATUTORY (unaudited) Half-year to Half-year to Half-year to 31 30 June 2007 30 June 2006 December 2006 £m £m £m Profit before tax 1,993 1,779 2,469 Adjustments for: Change in operating assets (4,602) (10,873) (21,122) Change in operating liabilities 9,888 17,458 15,611 Non-cash and other items 1,081 (233) 1,788 Tax paid (394) (426) (372) Net cash from (used in) operating activities 7,966 7,705 (1,626) Cash flows from investing activitiesPurchase of available-for-sale financial assets (12,133) (12,306) (11,142)Proceeds from sale and maturity of available-for-sale financial 8,946 6,661 11,445assetsPurchase of fixed assets (874) (723) (1,001)Proceeds from sale of fixed assets 388 170 1,087Acquisition of businesses, net of cash acquired (5) (20) -Disposal of businesses, net of cash disposed (26) 936 -Net cash (used in) from investing activities (3,704) (5,282) 389 Cash flows from financing activitiesDividends paid to equity shareholders (1,325) (1,316) (603)Dividends paid to minority interests (4) (17) (15)Interest paid on subordinated liabilities (342) (341) (372)Proceeds from issue of subordinated liabilities - - 1,116Proceeds from issue of ordinary shares 19 80 25Repayment of subordinated liabilities (300) (250) (509)Repayment of capital to minority shareholders (30) - (151)Net cash used in financing activities (1,982) (1,844) (509)Effects of exchange rate changes on cash and cash equivalents (9) (39) (109)Change in cash and cash equivalents 2,271 540 (1,855)Cash and cash equivalents at beginning of period 25,438 26,753 27,293Cash and cash equivalents at end of period 27,709 27,293 25,438 Cash and cash equivalents comprise cash and balances at central banks (excludingmandatory deposits) and amounts due from banks with a maturity of less thanthree months. Page 29 of 50 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) Lloyds TSB Group is a leading UK-based financial services group, providing awide range of banking and financial services in the UK and in certain locationsoverseas. The Group's activities are organised into three segments: UK RetailBanking, Insurance and Investments and Wholesale and International Banking.Central group items includes the funding cost of certain acquisitions lessearnings on capital, central costs and accruals for payment to the Lloyds TSBFoundations. Services provided by UK Retail Banking encompass the provision of banking andother financial services to personal customers, private banking and mortgages.Insurance and Investments offers life assurance, pensions and savings products,general insurance and asset management services. Wholesale and InternationalBanking provides banking and related services for major UK and multinationalcompanies, banks and financial institutions, and small and medium-sized UKbusinesses. It also provides asset finance to personal and corporate customers,manages the Group's activities in financial markets and provides banking andfinancial services overseas. Half-year to UK General Life, Insurance Wholesale Central30 June 2007 Retail insurance pensions and and group Banking and asset Investments International items* management Banking Total £m £m £m £m £m £m £mInterest and similar 3,755 10 459 469 4,744 (892) 8,076income*Interest and similar (1,911) - (314) (314) (3,469) 558 (5,136)expense*Net interest income 1,844 10 145 155 1,275 (334) 2,940Other income (net of fee 883 286 4,497 4,783 923 182 6,771and commission expense)Total income 2,727 296 4,642 4,938 2,198 (152) 9,711Insurance claims - (152) (3,969) (4,121) - - (4,121)Total income, net of 2,727 144 673 817 2,198 (152) 5,590insurance claimsOperating expenses (1,297) (79) (256) (335) (1,125) (3) (2,760)Trading surplus (deficit) 1,430 65 417 482 1,073 (155) 2,830Impairment losses on loans (627) - - - (210) - (837)and advancesProfit (loss) before tax 803 65 417 482 863 (155) 1,993 External revenue 4,361 639 5,037 5,676 5,089 116 15,242Inter-segment revenue* 441 22 97 119 915 (1,475) -Segment revenue 4,802 661 5,134 5,795 6,004 (1,359) 15,242 *Central group items on this and the following page includes inter-segment consolidation adjustments withininterest and similar income and within interest and similar expense as follows: interest and similar income £(1,397) million (2006H1: £(1,542) million; 2006H2: £(1,699) million); interest and similar expense £1,397 million(2006H1: £1,542 million: 2006 H2: £1,699 million). There is no impact on net interest income. Similarly,Central group items includes inter-segment revenue adjustments of £(1,913) million (2006 H1: £(1,665) million:2006 H2: £(2,437) million). Page 30 of 50 CONDENSED SEGMENTAL ANALYSIS - STATUTORY (unaudited) Half-year to UK General Life, Insurance Wholesale Central30 June 2006 Retail insurance pensions and and group Banking and asset Investments International items* management Banking Total £m £m £m £m £m £m £mInterest and similar income* 3,365 12 386 398 3,895 (902) 6,756Interest 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 Half-year to UK General Life, Insurance Wholesale Central31 December 2006 Retail insurance pensions and and group Banking and asset Investments International Items* management Banking Total £m £m £m £m £m £m £mInterest and similar income* 3,548 12 434 446 4,911 (1,345) 7,560Interest and similar (1,700) - (406) (406) (3,720) 1,009 (4,817)expense*Net interest income 1,848 12 28 40 1,191 (336) 2,743Other income (net of fee 838 314 6,795 7,109 1,022 133 9,102and commission expense)Total income 2,686 326 6,823 7,149 2,213 (203) 11,845Insurance claims - (105) (5,825) (5,930) - - (5,930)Total income, net of 2,686 221 998 1,219 2,213 (203) 5,915insurance claimsOperating expenses (1,244) (79) (252) (331) (1,192) 76 (2,691)Trading surplus (deficit) 1,442 142 746 888 1,021 (127) 3,224Impairment losses on loans (606) - - - (149) - (755)and advancesProfit (loss) before tax 836 142 746 888 872 (127) 2,469External revenue 4,158 648 7,268 7,916 5,015 (11) 17,078Inter-segment revenue* 379 9 155 164 1,450 (1,993) -Segment revenue 4,537 657 7,423 8,080 6,465 (2,004) 17,078 Page 31 of 50 NOTES Page1 Accounting policies, presentation and estimates 332 Volatility 343 Mortgage lending 354 Group net interest income 365 Other income 376 General insurance income 377 Operating expenses 388 Number of employees (full-time equivalent) 389 Impairment losses on loans and advances 3910 Retirement benefit obligations 3911 Capital ratios 4012 Balance sheet information 4113 Total assets by division 4214 Economic profit 4215 Earnings per share 4316 Scottish Widows - realistic balance sheet information 4317 European Embedded Value reporting - results for half-year to 30 June 2007 4418 Scottish Widows - weighted sales (Annual Premium Equivalent) 4819 Taxation 4820 Dividend 4921 Other information 49 Page 32 of 50 1. Accounting policies, presentation and estimates These condensed consolidated interim financial statements as at and for thehalf-year to 30 June 2007 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 2006 ('2006 Annual Reportand Accounts') copies of which can be found on the Group's website atwww.investorrelations.lloydstsb.com/ir/company_report_and_accounts.asp or areavailable upon request from the Company Secretary's Department, Lloyds TSB Groupplc, 25 Gresham Street, London EC2V 7HN. The accounting policies, significant judgements made by management in applyingthem, and key sources of estimation uncertainty applied by the Group in thesecondensed consolidated interim financial statements are the same as thoseapplied by the Group in its 2006 Annual Report and Accounts. The preparation ofinterim financial statements requires management to make judgements, estimatesand assumptions that impact the application of accounting policies and thereported amounts of assets, liabilities, income and expense. Actual results maydiffer from these estimates. There have been no significant changes in thebases upon which estimates have been determined, compared to those applied at 31December 2006. The Group has reviewed the valuation of its pension schemes andhas concluded that no adjustment is required at 30 June 2007. In accordancewith IAS 19, the valuations will be formally updated at the year-end. Goodwillheld in the Group's balance sheet is tested (at least) annually for impairmentin the second half of the year. No circumstances have arisen during thehalf-year to 30 June 2007 to require additional impairment testing. The Group has had no material or unusual related party or share-based paymenttransactions during the half-year to 30 June 2007. Related party andshare-based transactions for the half-year to 30 June 2007 are similar in natureto those for the year ended 31 December 2006. No significant events, other thanthose disclosed within this document, have occurred between 30 June 2007 and thedate of approval of these interim results. A variety of contingent liabilitiesand commitments arise in the ordinary course of the Group's banking business;there has been no significant change in the volume or nature of suchtransactions during the half-year to 30 June 2007. Full details of the Group'srelated party transactions for the year to 31 December 2006, share-based paymentschemes and contingent liabilities and commitments can be found in the Group's2006 Annual Report and Accounts. The following pronouncements relevant to the Group are applicable for the yearending 31 December 2007; these pronouncements do not apply to interim financialstatements and have not been applied in preparing these financial statements butwill be applied in the financial statements for the year ending 31 December2007. Pronouncement Nature of change Effective date IFRS 7 Financial Instruments: Consolidates the current financial Annual periods beginning on or after instruments disclosures into a single 1 January 2007Disclosures standard and requires more detailed qualitative and quantitative disclosures about exposure to risks arising from financial instruments. Amendment to IAS 1 Presentation Introduces additional disclosures of Annual periods beginning on or afterof Financial Statements - Capital the objectives, policies and processes 1 January 2007Disclosures for managing capital, quantitative data about what the entity regards as capital, and compliance with capital requirements. Page 33 of 50 2. Volatility Banking volatility Since the introduction of IFRS in 2005, in order to provide a clearer view ofthe underlying performance of the business, the Group has separately disclosedwithin Central group items the effects of marking-to-market derivatives held forrisk management purposes. This amount, net of the effect of the Group's IAS 39compliant hedge accounting relationships, was previously disclosed as bankingvolatility. The use of fair values in financial reporting is now more widespread and thereis a better understanding of their effects; consequently, in line with evolvingbest practice, the Group no longer considers it appropriate to disclose bankingvolatility separately. Divisions will continue to transfer to Group CorporateTreasury (included in Central group items) the movements in the market value ofhedging derivatives where the impact is not locally managed. Insurance volatility The Group's insurance businesses have liability products that are supported bysubstantial holdings of investments, including equities, property and fixedinterest investments, all of which have a volatile fair value. The value of theliabilities does not move exactly in line with changes in the fair value of theinvestments, yet IFRS requires that the changes in both the value of theliabilities and investments be reflected within the income statement. As theseinvestments are substantial and movements in their fair value can have asignificant impact on the profitability of the Insurance and Investmentsdivision, management believes that it is appropriate to disclose the division'sresults on the basis of an expected return in addition to the actual return.The difference between the actual return on these investments and the expectedreturn based upon economic assumptions made at the beginning of the period isincluded within insurance volatility. Changes in market variables also affect the realistic valuation of theguarantees and options embedded within products written in the Scottish WidowsWith Profit Fund, the value of the in-force business and the value ofshareholders' funds. Fluctuations in these values caused by changes in marketvariables are also included within insurance volatility. The expected investment returns used to determine the normalised profit of thebusiness, which are based on prevailing market rates and published research intohistoric investment return differentials, are set out below: 2007 2006 % %Gilt yields (gross) 4.62 4.12Equity returns (gross) 7.62 6.72Dividend yield 3.00 3.00Property return (gross) 7.62 6.72Corporate bonds (gross) 5.22 4.72 During the six months to 30 June 2007, profit before tax included positiveinsurance volatility of £41 million, being a credit of £2 million to netinterest income and a credit of £39 million to other income (2006H1: negativevolatility of £61 million, being a charge to other income; 2006H2: positivevolatility of £145 million, being a credit of £2 million to net interest incomeand a credit of £143 million to other income). Although equity values continuedto rise in the first half of 2007, this was less marked than in the second halfof last year. Page 34 of 50 2. Volatility (continued) Policyholder interests volatility As a result of the requirement under IFRS to consolidate the Group's life andpensions businesses on a line-by-line basis, the Group's income statementincludes amounts attributable to policyholders which affect profit before tax;the most significant of these items is policyholder tax. Under IFRS, tax on policyholder investment returns is required to be included inthe Group's tax charge rather than being offset against the related income, asit is in actual distributions made to policyholders. The impact is, therefore,to either increase or decrease profit before tax with a corresponding change inthe tax charge. Other items classified within policyholder interests volatilityinclude the effects of investment vehicles which are only majority owned by thelong-term assurance funds. In the case of these vehicles, the Group's profitfor the period includes the minorities' share of the profits earned. As theseamounts do not accrue to the equity holders, management believes a clearerrepresentation of the underlying performance of the Group's life and pensionsbusinesses is presented by excluding policyholder interests volatility. During the six months to 30 June 2007, profit before tax included negativepolicyholder interests volatility of £58 million, being a charge to other income(2006H1: positive volatility of £90 million, being a credit to other income;2006H2: positive volatility of £236 million, being a charge of £33 million tonet interest income and a credit of £269 million to other income). In the firsthalf of 2007, substantial policyholder tax losses have been generated as aresult of a fall in gilt and bond values. These losses reduce futurepolicyholder tax liabilities and have led to a policyholder tax credit duringthe period. 3. Mortgage lending Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006Gross new mortgage lending £16.0bn £13.0bn £14.6bnMarket share of gross new mortgage lending 9.0% 8.1% 7.9%Redemptions £11.2bn £9.6bn £11.1bnMarket share of redemptions 9.1% 8.8% 8.8%Net new mortgage lending £4.8bn £3.4bn £3.5bnMarket share of net new mortgage lending 8.9% 6.7% 5.9%Mortgages outstanding (period-end)* £100.1bn £91.8bn £95.3bnMarket share of mortgages outstanding 8.8% 9.0% 8.8% *excluding the effect of IFRS related adjustments in order to conform with industry statistics. In Cheltenham & Gloucester, the average indexed loan-to-value ratio on themortgage portfolio was 44 per cent (31 December 2006: 44 per cent), and theaverage loan-to-value ratio for new mortgages and further advances writtenduring the first half of 2007 was 63 per cent (2006 first half: 64 per cent).At 30 June 2007, only 0.6 per cent of balances had an indexed loan-to-valueratio in excess of 95 per cent (31 December 2006: 0.6 per cent). Page 35 of 50 4. Group net interest income Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £mBanking marginNet interest income 2,572 2,519 2,603Average interest-earning assets, excluding reverse 180,891 167,610 173,825reposNet interest margin 2.87% 3.03% 2.97% Statutory basisNet interest income 2,940 2,794 2,743Average interest-earning assets, excluding reverse 244,463 220,710 233,168reposNet interest margin 2.43% 2.55% 2.33% The Group's net interest income includes certain amounts attributable topolicyholders, in addition to the interest earnings on shareholders' funds heldin the Group's insurance businesses. In addition, the Group's net interestmargin is significantly affected by the accounting treatment of a number ofProducts and Markets and other products, principally those where funding costsare treated as an interest expense and related revenues are recognised withinother income. In order to enhance comparability in the Group's banking netinterest margin these items have been excluded in determining both net interestincome and average interest-earning assets. A reconciliation of banking net interest income to Group net interest incomefollows: Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £mBanking net interest income 2,572 2,519 2,603Products and Markets, and other products 240 240 128Volatility 2 - (31)Insurance grossing adjustment 126 35 43Group net interest income 2,940 2,794 2,743 Page 36 of 50 5. Other income Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £mFee and commission income: UK current account fees 345 320 332 Other UK fees and commissions 602 590 620 Insurance broking 335 293 336 Card services 250 247 246 International fees and commissions 65 68 64 1,597 1,518 1,598Fee and commission expense (395) (430) (416)Net fee and commission income 1,202 1,088 1,182Net trading income 2,408 1,187 4,794Insurance premium income 2,535 2,329 2,390Other operating income 645 401 324Total other income* 6,790 5,005 8,690Insurance claims (4,121) (2,639) (5,930)Total other income, net of insurance claims* 2,669 2,366 2,760Volatility- Insurance 39 (61) 143- Policyholder interests (58) 90 269Total other income, net of insurance claims 2,650 2,395 3,172 *excluding volatility. For statutory reporting purposes, volatility totalling £(19) million in the first halfof 2007 (2006H1: £29 million; 2006H2: £412 million) is included in total other income; comprising net tradingincome of £(42) million (2006H1: £7 million; 2006H2: £353 million) and other operating income of £23 million(2006H1: £22 million; 2006H2: £59 million). 6. General insurance income Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £mPremium income from underwritingCreditor 84 92 88Home 216 213 211Health 5 7 6Reinsurance premiums (11) (10) (7) 294 302 298Commissions from insurance brokingCreditor 219 163 214Home 22 21 26Health 7 6 7Other 87 103 89 335 293 336 Page 37 of 50 7. Operating expenses Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006Administrative expenses: £m £m £mStaff: Salaries 1,049 1,030 1,087 National insurance 84 80 81 Pensions - Before pension schemes related credit 125 140 153 - Pension schemes related credit - - (128) 125 140 25 Other staff costs 160 156 142 1,418 1,406 1,335Premises and equipment: Rent and rates 154 154 156 Hire of equipment 7 7 8 Repairs and maintenance 79 78 87 Other 74 70 79 314 309 330Other expenses: Communications and external data processing 247 232 267 Advertising and promotion 104 89 95 Professional fees 122 100 131 Settlement of overdraft claims 36 - - Other 207 171 217 716 592 710Administrative expenses 2,448 2,307 2,375Depreciation and amortisation 312 303 316Total operating expenses 2,760 2,610 2,691Cost:income ratio - statutory basis* 49.4% 50.3% 45.5%Cost:income ratio - excluding volatility and the 48.6% 50.6% 50.9%settlement of overdraft claims* *total operating expenses divided by total income, net of insurance claims. The ratio excluding volatility forthe half-year to 31 December 2006 also excludes the £128 million pension schemes related credit. 8. Number of employees (full-time equivalent) 30 June 30 June 31 December 2007 2006 2006UK Retail Banking 30,528 31,609 30,204Insurance and Investments 5,879 6,009 5,714Wholesale and International Banking 19,145 19,356 19,210Other, largely IT and Operations 10,460 11,289 10,371 66,012 68,263 65,499Agency staff (full time equivalent)) (3,681) (3,096) (2,869)Total number of employees (full time equivalent) 62,331 65,167 62,630 Page 38 of 50 9. Impairment losses on loans and advances Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £mImpairment losses on loans and advances (see below) 839 801 759Other credit risk provisions (2) (1) (4) 837 800 755 Impairment losses on loans and advancesUK Retail Banking Personal loans/overdrafts 352 387 353 Credit cards 270 239 251 Mortgages 5 6 2 627 632 606 Wholesale and International Banking 212 160 153 Central group items - 9 - Total charge 839 801 759 Charge as % of average lending (annualised): Personal loans/overdrafts 5.60 6.18 5.52 Credit cards 8.14 6.78 7.20 Mortgages 0.01 0.01 -UK Retail Banking 1.15 1.23 1.13Wholesale and International Banking 0.50 0.43 0.36Total charge 0.84 0.88 0.77 10. Retirement benefit obligations The recognised liability has reduced by £130 million, from £2,462 million at 31December 2006 to £2,332 million at 30 June 2007, as contributions to the Group'sdefined benefit schemes exceeded the regular cost. Page 39 of 50 11. Capital ratios 30 June 30 June 31 December 2007 2006 2006Capital £m £m £m Core tier 1Share capital and reserves 11,373 10,157 11,155 Regulatory post-retirement benefit adjustments 977 1,294 1,041 Other items 64 66 39 Perpetual non-cumulative preference shares Preference share capital 1,588 538 1,610 Innovative tier 1 Innovative tier 1 capital instruments+ 1,374 1,921 1,372 Less: restriction in amount eligible - (223) - Deductions from tier 1 Available-for-sale revaluation reserve and cash flow hedging (28) (54) (12)reserveGoodwill (2,377) (2,377) (2,377) Total tier 1 capital 12,971 11,322 12,828 Tier 2 Undated loan capital 4,364 4,480 4,390 Dated loan capital 3,453 3,787 3,624 Innovative capital restricted from tier 1 - 223 - Collectively assessed provisions 2,009 1,911 1,951 Available-for-sale revaluation reserve in respect of equities 11 29 -Total tier 2 capital 9,837 10,430 9,965 22,808 21,752 22,793 Supervisory deductions Life and pensions businesses (5,165) (5,441) (5,368) Other deductions (922) (633) (790) Total supervisory deductions (6,087) (6,074) (6,158) Total capital 16,721 15,678 16,635 Risk-weighted assets £bn £bn £bnUK Retail Banking 59.6 61.6 59.1Insurance and Investments 3.1 3.2 3.1Wholesale and International Banking 96.1 86.5 91.8Central group items 1.9 1.6 2.0Total risk-weighted assets 160.7 152.9 156.0 Risk asset ratios Total tier 1 8.1% 7.4% 8.2%Total tier 1, excluding innovative capital instruments+ 7.2% 6.3% 7.3%Total capital 10.4% 10.3% 10.7% Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006Post-tax return on average risk-weighted assets 1.98% 1.65% 2.11%Post-tax return on average risk-weighted assets* 1.93% 1.66% 1.78% *excluding volatility and, in the second half of 2006, pension schemes related credit. +a firm is permitted to include innovative tier 1 capital in its tier 1 capital resources for thepurposes of GENPRU1.2 (adequacy of financial resources) but is required to exclude these amounts fromtier 1 for the purposes of meeting the main BIPRU firm Pillar 1 rules. Accordingly, the Group hasprovided its tier 1 capital ratio both including and excluding these amounts. Page 40 of 50 12. Balance sheet information 30 June 30 June 31 December 2007 2006 2006 £m £m £mDeposits - customer accountsSterling:Non-interest bearing current accounts 3,610 3,651 3,739Interest bearing current accounts 42,426 40,687 40,906Savings and investment accounts 66,436 62,322 64,380Other customer deposits 19,059 16,808 19,134Total sterling 131,531 123,468 128,159Currency 13,123 12,997 11,183Total deposits - customer accounts 144,654 136,465 139,342 Loans and advances to customers Agriculture, forestry and fishing 2,928 2,297 2,905Energy and water supply 2,258 1,905 2,024Manufacturing 8,023 7,421 7,513Construction 2,548 2,407 2,332Transport, distribution and hotels 10,970 10,706 10,490Postal and communications 924 753 831Property companies 16,062 11,043 12,896Financial, business and other services 26,082 21,741 22,999Personal : mortgages 100,140 92,029 95,601 : other 22,473 22,980 23,025Lease financing 4,948 5,879 4,802Hire purchase 5,063 5,160 5,060 202,419 184,321 190,478Allowance for impairment losses on loans and (2,238) (2,164) (2,193)advancesTotal loans and advances to customers 200,181 182,157 188,285 Total loans and advances to customers in our international businesses totalled£5,635 million (30 June 2006: £5,494 million; 31 December 2006: £5,589 million). Page 41 of 50 13. Total assets by division 30 June 30 June 31 December 2007 2006 2006 £m £m £m UK Retail Banking 112,705 105,726 108,381 Insurance and Investments 88,183 82,636 86,074Wholesale and International Banking 151,371 136,157 147,836Central group items 836 1,248 1,307Total assets 353,095 325,767 343,598 14. Economic profit Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £m Statutory basis Average shareholders' equity 11,504 10,417 10,643 Profit attributable to equity shareholders 1,540 1,214 1,589 Less: notional charge (513) (465) (483) Economic profit 1,027 749 1,106 Excluding volatility and, in the second half of 2006, pensionschemes related creditAverage shareholders' equity 11,305 10,390 10,578 Profit attributable to equity shareholders 1,513 1,236 1,398 Less: notional charge (505) (464) (480) Economic profit 1,008 772 918 Economic profit represents the difference between the earnings on the equityinvested in a business and the cost of the equity. The notional charge has beencalculated by multiplying average shareholders' equity by the cost of equityused by the Group of 9 per cent (2006: 9 per cent). Page 42 of 50 15. Earnings per share Half-year to Half-year to Half-year to 30 June 30 June 31 DecemberStatutory basis 2007 2006 2006 BasicProfit attributable to equity shareholders £1,540m £1,214m £1,589mWeighted average number of ordinary shares in issue 5,634m 5,602m 5,630mEarnings per share 27.3p 21.7p 28.2p Fully diluted Profit attributable to equity shareholders £1,540m £1,214m £1,589mWeighted average number of ordinary shares in issue 5,685m 5,655m 5,679mEarnings per share 27.1p 21.5p 28.0p Excluding volatility and, in the second half of 2006, pensionschemes related creditProfit attributable to equity shareholders £1,513m £1,236m £1,398mWeighted average number of ordinary shares in issue 5,634m 5,602m 5,630mEarnings per share 26.9p 22.1p 24.8p 16. Scottish Widows - realistic balance sheet information Financial Services Authority (FSA) returns for large with-profits companiesinclude realistic balance sheet information. The information included in FSAreturns concentrates on the position of the With Profit Fund. However, underthe Scottish Widows demutualisation structure, which was court approved, thefund is underpinned by certain assets outside the With Profit Fund and it ismore appropriate to consider the long-term fund position as a whole to measurethe realistic capital position of Scottish Widows. The estimated position at 30June 2007 is shown below, together with the actual position at 31 December 2006. 30 June 2007 (estimated) With Profit Long Term Fund Fund £bn £bnAvailable assets, including support arrangement assets 18.8 21.9Realistic value of liabilities (17.6) (17.7)Working capital for fund 1.2 4.2 Working capital ratio 6.2% 19.1% 31 December 2006 With Profit Long Term Fund Fund £bn £bnAvailable assets, including support arrangement assets 19.4 22.3Realistic value of liabilities (18.3) (18.3)Working capital for fund 1.1 4.0 Working capital ratio 5.8% 17.9% The Risk Capital Margin (RCM) is the capital buffer that the FSA requires to beheld to cover prescribed adverse shocks. At 30 June 2007, the RCM was estimatedto be £53 million for the With Profit Fund and £79 million for the Long TermFund (covered 22 times and 53 times respectively by the working capital for thefund). At 31 December 2006, the RCM was £57 million for the With Profit Fund and£84 million for the Long Term Fund (covered 20 times and 47 times respectively). Page 43 of 50 17. European Embedded Value reporting - results for half-year to 30 June2007 This section provides further details of the Scottish Widows EEV financialinformation. Composition of EEV balance sheet 30 June 30 June 31 December 2007 2006 2006 £m £m £m Value of in-force business (certainty equivalent) 3,512 3,489 3,220Value of financial options and guarantees (57) (149) (56)Cost of capital (244) (293) (248)Non-market risk (80) (72) (75)Total value of in-force business 3,131 2,975 2,841Shareholders' net assets 3,231 3,461 3,572Total EEV of covered business 6,362 6,436 6,413 Reconciliation of opening EEV balance sheet to closing EEV balance sheet oncovered business Shareholders' Value of in-force net assets business Total £m £m £m As at 1 January 2006 3,445 2,941 6,386Total profit after tax 222 34 256Dividends (206) - (206)As at 30 June 2006 3,461 2,975 6,436Total profit (loss) after tax 651 (134) 517Dividends (540) - (540)As at 31 December 2006 3,572 2,841 6,413Total profit after tax 247 290 537Dividends (588) - (588)As at 30 June 2007 3,231 3,131 6,362 Analysis of shareholders' net assets on an EEV basis on covered business Required Free Shareholders' capital surplus net assets £m £m £m As at 1 January 2006 2,393 1,052 3,445Total profit after tax 56 166 222Dividends - (206) (206)As at 30 June 2006 2,449 1,012 3,461Total profit (loss) after tax (242) 893 651Dividends - (540) (540)As at 31 December 2006 2,207 1,365 3,572Total profit (loss) after tax (12) 259 247Dividends - (588) (588)As at 30 June 2007 2,195 1,036 3,231 Page 44 of 50 17. European Embedded Value reporting - results for half-year to 30 June2007 (continued) Summary income statement on an EEV basis Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £m New business profit 180 165 181Existing business profit- Expected return 174 206 197- Experience variances 23 (5) 74- Assumption changes (3) (20) (113) 194 181 158Expected return on shareholders' net assets 108 84 83Profit before tax, excluding volatility and other items* 482 430 422Volatility 44 (78) 254Other items* 38 14 62Total profit before tax 564 366 738Attributed shareholder tax (169) (110) (221)Impact of Corporation tax rate change 142 - -Total profit after tax 537 256 517 *other items represent amounts not considered attributable to the underlyingperformance of the business; primarily intra-Group transfers of OEICs togetherwith, in the second half of 2006, the benefits of the FSA's Policy Statement 06/14. Page 45 of 50 17. European Embedded Value reporting - results for half-year to 30 June2007 (continued) Breakdown of income statement between life and pensions, and OEICs Half-year to 30 June 2007 Life and pensions OEICS Total £m £m £mNew business profit 141 39 180Existing business- Expected return 150 24 174- Experience variances 11 12 23- Assumption changes (40) 37 (3) 121 73 194Expected return on shareholders' net assets 104 4 108Profit before tax* 366 116 482 New business margin (PVNBP) 3.6% 2.6% 3.4%Post-tax return on embedded value* 10.7% Half-year to 30 June 2006 Life and pensions OEICS Total £m £m £mNew business profit 130 35 165Existing business- Expected return 181 25 206- Experience variances (22) 17 (5)- Assumption changes (28) 8 (20) 131 50 181Expected return on shareholders' net assets 80 4 84Profit before tax* 341 89 430 New business margin (PVNBP) 3.8% 2.3% 3.3%Post-tax return on embedded value* 9.5% Half-year to 31 December 2006 Life and pensions OEICS Total £m £m £mNew business profit 157 24 181Existing business- Expected return 180 17 197- Experience variances 57 17 74- Assumption changes (101) (12) (113) 136 22 158Expected return on shareholders' net assets 80 3 83Profit before tax* 373 49 422 New business margin (PVNBP) 4.4% 2.0% 3.8%Post-tax return on embedded value* 9.1% *excluding volatility and other items. Page 46 of 50 17. European Embedded Value reporting - results for half-year to 30 June2007 (continued) Economic assumptions A bottom up approach is used to determine the economic assumptions for valuingthe business in order to determine a market consistent valuation. The risk-free rate assumed in valuing in-force business is 10 basis points overthe 15 year gilt yield. In valuing financial options and guarantees therisk-free rate is derived from gilt yields plus 10 basis points, in line withScottish Widows' FSA realistic balance sheet assumptions. The table below showsthe range of resulting yields and other key assumptions. 30 June 30 June 31 December 2007 2006 2006 % % % Risk-free rate (value of in-force) 5.44 4.77 4.72Risk-free rate (financial options and guarantees) 4.39 to 6.29 4.11 to 4.94 3.91 to 5.41Retail price inflation 3.44 3.08 3.23Expense inflation 4.34 3.98 4.13 Non-market risk An allowance for non-market risk is made through the choice of best estimateassumptions based upon experience, which generally will give the mean expectedfinancial outcome for shareholders and hence no further allowance for non-marketrisk is required. However, in the case of operational risk and the With ProfitFund these are asymmetric in the range of potential outcomes for which anexplicit allowance is made. Non-economic assumptions Future mortality, morbidity, lapse and paid-up rate assumptions are reviewedeach year and are based on an analysis of past experience and on management'sview of future experience. These assumptions are intended to represent a bestestimate of future experience. For OEIC business, the lapse assumption is based on experience which has beencollected over a 20 month period. To recognise that this is a shorter periodthan that normally available for life and pensions business, and that thisperiod has coincided with favourable investment conditions, management have useda best estimate of the long-term lapse assumption which is higher than indicatedby this 20 month experience. In management's view, the approach and lapseassumption are both reasonable. Page 47 of 50 18. Scottish Widows - weighted sales (Annual Premium Equivalent) Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006Weighted sales (regular + 1/10 single) £m £m £mLife and pensions:Savings and investments 50 73 55Protection 60 24 25Individual pensions 143 139 131Corporate and other pensions 167 157 165Retirement income 51 41 57Managed fund business 34 18 17Life and pensions 505 452 450 OEICs 160 162 128Life, pensions and OEICs 665 614 578 Bancassurance 239 210 193Independent financial advisers 370 369 345Direct 56 35 40Life, pensions and OEICs 665 614 578 19. Taxation 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 and OEICinterests from profit before tax and the tax charge and, in 2007, excluding the£89 million credit arising from the UK corporation tax rate change from the taxcharge, was 28.3 per cent (2006 first half: 27.7 per cent) compared to thestandard UK corporation tax rate of 30 per cent. The effective tax rateincluding policyholder and OEIC interests and, in 2007, the £89 million creditarising from the UK corporation tax rate change was 21.7 per cent, compared to30.5 per cent in the first half of 2006. The 2007 Finance Act reduction in the corporation tax rate from 30 per cent to28 per cent has resulted in a one-off impairment charge relating to a reductionin future rental income within the Group's leasing business of £28 million, as aresult of the triggering of relevant tax variation clauses. In addition, theGroup's deferred tax liabilities have been remeasured resulting in a credit tothe Group's tax charge of £89 million. Both of these are one-off adjustments inthe income statement in 2007 and give rise to a net increase in shareholders'equity of £70 million. The future impact of the reduction in capital allowancesfrom 25 per cent to 20 per cent will not be material for the Group. Page 48 of 50 19. Taxation (continued) A reconciliation of the charge that would result from applying the standard UKcorporation tax rate to profit before tax to the tax charge, includingpolicyholder and OEIC interests and, in 2007, the £89 million credit arisingfrom the UK corporation tax rate change, is given below: Half-year to Half-year to Half-year to 30 June 30 June 31 December 2007 2006 2006 £m £m £m Profit before tax 1,993 1,779 2,469Tax charge thereon at UK corporation tax rate of 30% 598 534 740Factors affecting charge:Disallowed and non-taxable items (3) (30) 22Overseas tax rate differences (5) (8) 6Net tax effect of disposals and unrealised gains (36) (11) (67)Policyholder and OEIC interests (42) 49 90Corporation tax rate change (89) - -Other items 10 9 7Tax charge 433 543 798 20. Dividend An interim dividend for 2007 of 11.2p (2006: 10.7p), representing an increase of5 per cent, will be paid on 3 October 2007. The total amount of this dividendis £632 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 8 August 2007Record date 10 August 2007Final date for joining or leaving the dividend reinvestment plan 5 September 2007Interim dividend paid 3 October 2007 On 2 May 2007, a final dividend for 2006 of 23.5p per share was paid toshareholders. This dividend totalled £1,325 million. 21. Other information The financial information included in this news release does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.Statutory accounts for the year ended 31 December 2006 were delivered to theRegistrar of Companies following publication on 31 March 2007. The auditors'report on these accounts was unqualified and did not include a statement undersections 237(2) (accounting records or returns inadequate or accounts notagreeing with records and returns) or 237(3) (failure to obtain necessaryinformation and explanations) of the Companies Act 1985. Page 49 of 50 CONTACTS For further information please contact:- Michael Oliver Director of Investor Relations Lloyds TSB Group plc 020 7356 2167 Email: [email protected] Mary Walsh Director of Corporate Relations Lloyds TSB Group plc 020 7356 2121 Email: [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. Registered office: Lloyds TSB Group plc, Henry Duncan House, 120 George Street,Edinburgh, EH2 4LH. Registered in Scotland no. 95000. Page 50 of 50 This information is provided by RNS The company news service from the London Stock Exchange

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