29th Jul 2005 07:01
Lloyds TSB Group PLC29 July 2005 LLOYDS TSB GROUP PLC - RESULTS FOR HALF YEAR TO 30 JUNE 2005 PRESENTATION OF RESULTS Up to 31 December 2004 the Group prepared its financial statements in accordancewith UK Generally Accepted Accounting Principles (UK GAAP). On 1 January 2005the Group implemented International Financial Reporting Standards (IFRS). Inthis document the 2004 comparative financial information has been restated toreflect the adoption of those IFRS standards which are required to be appliedretrospectively, but has not been restated to include the additional impactsarising from first time application of IAS 32 'Financial Instruments: Disclosureand Presentation', IAS 39 'Financial Instruments: Recognition and Measurement'and IFRS 4 'Insurance Contracts' (including UK Financial Reporting Standard 27 'Life Assurance'), which have been implemented with effect from 1 January 2005,with the opening balance sheet at that date adjusted accordingly. Details ofthe impact of implementation of IFRS on comparative information were publishedin the Group's 'Transition to IFRS' announcement on 27 May 2005. The impact of IFRS, and in particular the increased use of fair values, islikely to lead to greater earnings volatility. In order to provide a morecomparable representation of business performance this volatility has beenseparately analysed for the Group's insurance and banking businesses (page 28,note 3). In addition, other IFRS related adjustments applied with effect from 1January 2005, for which comparatives are not required to be restated (page 26,note 2), and the impact on the Group's results of businesses sold in 2004, havebeen separately analysed in the Group's results. A reconciliation of this 'comparable' basis of presentation to the statutory profit before tax is shown onpage 1. For certain aspects of the Group's life assurance businesses additionalfinancial information has been provided on an 'embedded value' basis, as appliedunder UK GAAP in previous reporting periods. FORWARD LOOKING STATEMENTS This announcement contains forward looking statements with respect to thebusiness, strategy and plans of the Lloyds TSB Group, its current goals andexpectations relating to its future financial condition and performance. Bytheir nature, forward looking statements involve risk and uncertainty becausethey relate to events and depend on circumstances that will occur in the future.The Group's actual future results may differ materially from the resultsexpressed or implied in these forward looking statements as a result of avariety of factors, including UK domestic and global economic and businessconditions, risks concerning borrower credit quality, market related risks suchas interest rate risk and exchange rate risk in its banking business and equityrisk in its insurance businesses, changing demographic trends, unexpectedchanges to regulation or regulatory actions, changes in customer preferences,competition and other factors. Please refer to the latest Annual Report on Form20-F filed with the US Securities and Exchange Commission for a discussion ofsuch factors. CONTENTS PageProfit before tax by division 1Assets by division 1Performance highlights 2Summary of results 3Group Chief Executive's statement 4Group Finance Director's review of financial performance 7Segmental analysis 9Divisional performance - UK Retail Banking 11 - Insurance and Investments 14 - Wholesale and International Banking 18Consolidated income statement - statutory 20Consolidated balance sheet - statutory 21Condensed consolidated cash flow statement - statutory 22Consolidated statement of changes in equity - statutory 23Segmental analysis - statutory 24Notes 26Contacts for further information 43 LLOYDS TSB GROUP PROFIT BEFORE TAX BY DIVISION Half-year to Half-year to 30 June 31 December 2005 2004 2004 £m £m £m UK Retail Banking Before provisions for customer redress 830 800 939 Provisions for customer redress - - (100) 830 800 839Insurance and Investments Before provisions for customer redress 400 376 423 Provisions for customer redress - - (12) 400 376 411Wholesale and International Banking 662 582 671Central group items (page 32, note 6) (169) (153) (197)Profit before tax - comparable basis 1,723 1,605 1,724Volatility (page 28, note 3)- Banking (73) - -- Insurance 104 (65) 210- Policyholder tax 46 5 (3)Other IFRS adjustments applied from 1 January 2005 (page 26, note (124) - -2)Loss on sale of businesses (page 40, note 19) - (13) (8)Trading results of discontinued operations - 36 4Profit before tax 1,676 1,568 1,927 ASSETS BY DIVISION 30 June 1 January 2005 2005 £m £m UK Retail Banking 99,797 96,472 Insurance and Investments 77,071 69,864Wholesale and International Banking 126,568 123,826Central group items 1,776 1,835Total assets 305,212 291,997 Page 1 of 43 LLOYDS TSB GROUP PERFORMANCE HIGHLIGHTS Unless otherwise stated, throughout this document our analysis compares thehalf-year to 30 June 2005 to the corresponding period in 2004. Key achievements - comparable basis • The Group has continued to deliver earnings growth in all divisions. • Considerable progress in improving returns; increases in both economic profit and post-tax return on average shareholders' equity. • Good franchise growth with customer lending during the half up by 4 per cent to £167.6 billion and customer deposits up by 3 per cent to £130.6 billion. • Strong increase in retail banking quality customer recruitment. Good levels of customer balance growth in many product areas. • Substantial increase in life assurance new business weighted sales and market share. Increased new business contribution and margin, on an embedded value basis. • Good progress in delivering the strategy to build an integrated Wholesale bank. 25 per cent increase in Corporate Markets profit before tax, and 27 per cent increase in Business Banking profit before tax. • Costs remain firmly under control. Income growth exceeded cost growth in each division and at Group level. • Overall credit quality remains satisfactory. • Capital ratios remain robust. • Interim dividend maintained at 10.7p per share. Results - comparable basis • Profit before tax increased by £118 million, or 7 per cent, to £1,723 million. • Earnings per share increased by 10 per cent to 22.1p. • Economic profit increased by 11 per cent to £728 million. • Post-tax return on average shareholders' equity increased to 21.9 per cent, from 21.5 per cent. • Post-tax return on average risk-weighted assets decreased from 1.92 per cent to 1.88 per cent. Results - statutory • Profit before tax increased by £108 million, or 7 per cent, to £1,676 million. • Profit attributable to equity shareholders increased by 9 per cent to £1,192 million. • Earnings per share increased by 9 per cent to 21.3p. • Post-tax return on average shareholders' equity increased to 24.7 per cent. • Total capital ratio 9.6 per cent, tier 1 capital ratio 7.8 per cent. Page 2 of 43 LLOYDS TSB GROUP SUMMARY OF RESULTS Half-year to Half-year to 30 June Increase 31 December 2005 2004 (Decrease) 2004 £m £m % £mResults - comparable basis (page 26, note 2)Total income, net of insurance claims 4,831 4,610 5 4,888Operating expenses 2,597 2,529 3 2,737Trading surplus 2,234 2,081 7 2,151Impairment losses on loans and advances 511 476 7 427Profit before tax 1,723 1,605 7 1,724Economic profit (page 38, note 16) 728 655 11 694Earnings per share (pence) (page 39, note 17) 22.1 20.1 10 21.0Post-tax return on average shareholders' equity (%) 21.9 21.5 22.0Post-tax return on average risk-weighted assets (%) 1.88 1.92 1.91 Results - statutoryTotal income, net of insurance claims 4,925 4,572 8 5,107Operating expenses 2,579 2,549 1 2,748Trading surplus 2,346 2,023 16 2,359Impairment losses on loans and advances 670 442 52 424Profit before tax 1,676 1,568 7 1,927Profit attributable to equity shareholders 1,192 1,094 9 1,298Economic profit (page 38, note 16) 757 623 22 816Earnings per share (pence) (page 39, note 17) 21.3 19.6 9 23.2Post-tax return on average shareholders' equity (%) 24.7 20.9 24.2 Shareholder valueClosing market price per share (period-end) 473p 431.75p 473pTotal market value of shareholders' equity £26.5bn £24.2bn £26.5bnProposed dividend per share (page 42, note 21) 10.7p 10.7p 23.5p 30 June 1 January Increase 2005 2005 (Decrease) £m £m %Balance sheetShareholders' equity 9,475 9,572 (1)Net assets per share (pence) 167 169 (1)Total assets 305,212 291,997 5Loans and advances to customers 167,583 161,162 4Customer deposits 130,550 126,349 3 Risk asset ratios % %Total capital 9.6 10.1Tier 1 capital 7.8 8.2 Page 3 of 43 LLOYDS TSB GROUP GROUP CHIEF EXECUTIVE'S STATEMENT During the first half of 2005, the Group's profit before tax, on a comparablebasis, rose by 7 per cent to £1,723 million, despite entering a more challengingperiod in the economic cycle. The increase reflects the continued successfulunfolding of our organic growth strategy across each of our three operatingdivisions, as we build deep, long-lasting relationships within each of ourfranchises. In addition to continued earnings momentum, the Group also improvedits return on equity and economic profit. At the end of 2004, we set out three strategic priorities to guide our futuregrowth: • to materially deepen customer relationships • to improve our efficiency • to continue to enhance the Group's capabilities and processes to support faster growth. We have continued to make good progress on each of these management prioritiesand the key achievements over the last six months, which underpin our results,are summarised below. To materially deepen customer relationships In the Retail Bank, we saw a 4 per cent improvement in profit before tax, on acomparable basis, and we delivered positive jaws with 5 per cent income growthexceeding cost growth of 2 per cent. We have continued to build on our 'localmarkets' programme to bring us closer to the customer and we now have much ofthe necessary infrastructure in place. Our early results under this programmehave seen us progress against a number of the key drivers to building strongerrelationships such as enhancing the use of customer data. During the secondhalf of 2005, we will continue to develop the framework by increasing salescapacity and effectiveness. We continue to see improved results in terms of customer service, with ourcustomer satisfaction ratings reaching an all time high. Our quality managementprogramme, which is helping to continuously improve our processing efficiency,has played a key role in improving our cost position. Our improved customer satisfaction scores also helped to drive good levels ofnew quality customer recruitment. We have maintained strong flows of newbusiness and are continuing to meet our customers' broader range of needs in keyareas such as consumer lending, mortgages, savings and insurance where we haveseen good customer balance growth. Our market shares in these key product lineshave held steady, despite the highly competitive environment in which weoperate. Our asset quality remains satisfactory. In Wholesale and International Banking, our core businesses had another goodhalf-year and the division delivered a 14 per cent improvement in profit beforetax, on a comparable basis. We have successfully begun to implement our newstrategies in both Business Banking and the Corporate Markets franchise, whichwill play an important role in our future growth. Whilst the investment inthese strategies led to an increase in costs, we continued to deliver positivejaws with growth in income of 6 per cent and costs growth held to 5 per cent. Page 4 of 43 LLOYDS TSB GROUP In Business Banking, we have seen strong franchise growth and, in addition towinning a greater share of the 'switchers' market, we maintained our strongposition in business start-ups with a market share of 20 per cent. The growthin recruitment was accompanied by good growth in both customer lending anddeposits, as customers continued to place more of their business with us. Our Corporate Markets franchise enjoyed another strong half, with a 25 per centimprovement in profits underpinned by a 26 per cent improvement in thecross-sales of products as our relationship development programmes continue totake hold. Asset quality remains strong, with impairment losses falling year onyear. We have made continued investment in the Corporate Markets franchise, andthis has been rewarded both in terms of the stronger business levels as well asexternal recognition. In particular, we were delighted to receive the CBI BestCorporate Bank Award 2005. We will continue to develop the businesses, tostrengthen our capabilities and services that will allow us to provide a broaderrange of solutions for our customers and meet their needs. In Insurance and Investments our profit before tax, on a comparable basis,increased by 6 per cent, underpinned by an improvement in our market share inlife, pensions and investments which rose from 4.9 per cent to 6.2 per cent inthe first quarter of 2005. Our life and pensions new business margin alsoimproved. In our life, pensions and OEIC businesses, on an embedded valuebasis, we saw a 7 per cent profit improvement underpinned by a rise in newbusiness contribution of 32 per cent, as we continue to increase our focus onthe more profitable, more capital efficient business lines. We continue to make progress in our bancassurance programme, with a 4 per centincrease in sales, notwithstanding the slowdown in the growth of mortgagerelated protection business. Sales of OEICs rose by 29 per cent following thelaunch last year of our new simplified product range. Whilst we still have workto do to continue to improve our overall performance, we have a clear strategyto deliver profitable growth in this business. We have seen continued strong growth in our IFA business, with a 41 per centimprovement in weighted sales in the first half, underpinned by our product andservice developments in pensions and investments. This improved performance ledto an estimated market share of 7.1 per cent in the first quarter of this year,compared with 5.0 per cent in the first quarter of 2004, cementing ScottishWidows' success in this market. Scottish Widows remains strongly capitalised and in addition to the payment of a£200 million dividend to the Group in March 2005, we expect Scottish Widows tomake a further significant repatriation of capital to the Group in the secondhalf of the year as we improve our capital efficiency. Our General Insurance business delivered another robust half, with profits up 8per cent, despite a slowdown in the growth of our retail lending businesses.The results reflect successful investment in the direct channels, our claimsprocesses and the claims supply chain. Page 5 of 43 LLOYDS TSB GROUP To improve our efficiency The Group cost:income ratio, on a comparable basis, improved to 53.8 per centfrom 54.9 per cent in the first half of 2004, reflecting the fact that we haveonce again delivered positive jaws. The Group has maintained its firm costcontrol discipline and the growth in expenses was held to 3 per cent in thefirst half of the year. We believe there are good opportunities to drivefurther improvements in our cost position and we will be addressing this throughthe continued application of our quality programme as well as specificprogrammes in areas such as procurement and IT simplification. To continue to enhance the Group's capabilities and processes to support fastergrowth We believe it is necessary for us to enhance our framework of skills andcompetencies to allow us to drive higher rates of growth in a safe andsustainable manner. In Finance, we are, for example, further embedding the useof economic profit management disciplines to improve our pricing decisions andhence our returns. In terms of Risk, we continue to enhance the risk governanceframework throughout the organisation which is leading to a more detailedassessment of risk across the business portfolio and greater clarity around therisk/reward trade-offs. We are committed to building a high performance organisation. In addition tofurther strengthening our executive management team, we have put in placeintegrated programmes to further raise our performance and to enhance ourcapabilities to execute effectively. Summary We have a strong franchise and, looking forward, we remain committed to theexecution of our organic growth strategy, based on building ever deeperrelationships with our customers. We are investing in our business unitstrategies, which will provide the necessary platform to sustain our futuregrowth. Our staff are committed to the delivery of our plans and to serving theneeds of our customers. Our capital position remains robust and we continue toexpect to be beneficiaries of Basel II. Our asset quality is satisfactory andour broadly based franchise means that we are well positioned to deliver a goodtrading performance in the second half of 2005 and beyond. J Eric Daniels Group Chief Executive Page 6 of 43 LLOYDS TSB GROUP GROUP FINANCE DIRECTOR'S REVIEW OF FINANCIAL PERFORMANCE Since 1 January 2005, the Group has been using IFRS for financial reporting.Although IFRS significantly changes the timing of earnings recognition infinancial results, it is important to note that it has no impact on our businessfundamentals and cash flows, the development of our organic growth strategies,or our capital management policies. Full details of the retrospective impact of the Group's implementation of IFRSwere published in our 'Transition to IFRS' announcement on 27 May 2005. Theincreased use in IFRS of fair values has led to greater volatility in theearnings of the Group. In order to provide a more comparable representation ofour business performance this earnings volatility, together with other IFRSrelated adjustments applied with effect from 1 January 2005 and the impact onthe Group's results of businesses sold in 2004, have been separately analysed toprovide a comparable basis of presentation. In the first half of 2005 statutory profit before tax was £1,676 million, anincrease of £108 million, or 7 per cent, compared to £1,568 million in the firsthalf of 2004. Profit attributable to equity shareholders increased by £98million, or 9 per cent, to £1,192 million and earnings per share increased by 9per cent to 21.3p. On a comparable basis, as a result of earnings growth in all divisions, profitbefore tax increased by £118 million, or 7 per cent, to £1,723 million. Revenuegrowth of 5 per cent exceeded cost growth of 3 per cent. Earnings per shareincreased by 10 per cent to 22.1p and economic profit increased by 11 per centto £728 million. The post-tax return on average shareholders' equity was 21.9per cent. Our strategy to deepen customer relationships has led to an increase in retaillending, particularly in mortgages, credit cards and personal loans, and isreflected in a 4 per cent increase in loans and advances to customers to £168billion during the last six months. Total assets increased by 5 per cent to£305 billion. Over the same period, customer deposits increased by £4 billion,or 3 per cent, to £131 billion, largely as a result of strong growth in currentaccount credit balances. Group net interest income, on a comparable basis, increased by £151 million, or6 per cent, compared with the first half of last year. Good levels of consumerlending growth led to increases of £2.0 billion in average personal lending andcredit card balances and £7.7 billion in average mortgage balances, and customerlending growth in our Business Banking and Corporate Markets franchisesincreased average interest-earning assets by £4.8 billion. The net interest margin from our banking businesses (page 32, note 7) decreasedfrom 2.89 per cent in the first half of 2004 to 2.75 per cent in the first halfof 2005. However, much of this decline took place during the second half of2004. As anticipated, the rate of margin erosion has slowed significantly withonly a 5 basis point reduction during the first half of 2005. Much of thiserosion has been caused by the impact of lower earnings on the Group's capitaland other interest free liabilities and, excluding this funding impact, themargin was broadly stable during the first half of 2005. Page 7 of 43 LLOYDS TSB GROUP Other income, net of insurance claims, increased by £70 million to £2,174million (page 33, note 8). Fees and commissions receivable, on a comparablebasis, increased by 13 per cent to £1,623 million as a result of higher incomefrom the strong volume growth in credit and debit card services, higherinsurance broking commissions, and an increase in fees from large corporatebusiness and asset based lending, as a result of growing customer transactionvolumes. Operating expenses continued to be tightly controlled and on a comparable basisincreased by only 3 per cent to £2,597 million (page 34, note 10). Significantimprovements continue to be made in processing and operational efficiency and wehave continued to expand our programme of offshoring a number of our processingand back office operations to India. As a result of this constant focus onday-to-day operating cost control, the cost:income ratio improved to 53.8 percent, from 54.9 per cent in the first half of 2004. Overall asset quality remains satisfactory. On a comparable basis, impairmentlosses on loans and advances increased by 7 per cent to £511 million. Asubstantial reduction in impairment losses in the corporate franchise was offsetby a 21 per cent rise in the retail banking business, resulting from acombination of volume related asset growth in personal loan and credit cardlending, the absence of a provision release in the mortgage business whichtotalled £12 million in the first half of 2004, and an increase in the number ofpersonal customers experiencing repayment difficulties. Most of our new retaillending during the half has been to existing customers where we believe we havea better understanding of an individual customer's total financial position. Ona comparable basis, our impairment charge expressed as a percentage of averagelending improved to 0.63 per cent, compared to 0.68 per cent in the first halfof 2004 (page 35, note 12). On a statutory basis, impaired assets totalled£3,894 million, compared with £3,515 million at 1 January 2005, representing 2.3per cent of total lending, up from 2.1 per cent at 1 January 2005. Scottish Widows continues to be one of the most strongly capitalised lifeassurance companies in the UK. At the end of December 2004, the working capitalratio of the Scottish Widows Long-Term Fund was 19.0 per cent (page 41, note 20)and this improved to an estimated 19.5 per cent at the end of June 2005. Therequired risk capital margin was covered over 9 times. In March 2005, ScottishWidows paid a 2004 dividend of £200 million to Lloyds TSB reflecting the startof an expected regular dividend stream. We are continuing to examineopportunities to improve our capital efficiency and have work in progress thatwe believe will allow Scottish Widows, without compromising its strong capitalposition, to repatriate further capital to the Group, in excess of £500 millionin the second half of 2005, in addition to its annual dividend. Our capital position remains robust. At the end of June 2005, the total capitalratio was 9.6 per cent and the tier 1 capital ratio was 7.8 per cent. Duringthe half-year, risk-weighted assets increased by 6 per cent to £140 billion,reflecting good levels of growth in consumer lending and mortgages and stronggrowth in our Corporate Markets businesses. We continue to plan forrisk-weighted asset growth of mid-to-high single digits over the next few years,and expected profit retentions remain sufficient to support this level ofrisk-weighted asset growth within our current capital management policy. TheBoard has decided to maintain the interim dividend at 10.7p per share. Helen A Weir Group Finance Director Page 8 of 43 LLOYDS TSB GROUP SEGMENTAL ANALYSIS Half-year to Life,30 June 2005 pensions, OEICs and asset Wholesale UK manage Insurance and Central Retail General -ment and International group Banking insurance Investments Banking items TotalComparable basis £m £m £m £m £m £m £m Net interest income 1,612 19 186 205 1,035 (195) 2,657Other income (page 30, 908 261 6,796 7,057 774 4 8,743note 4)Total income (page 30, 2,520 280 6,982 7,262 1,809 (191) 11,400note 4)Insurance claims (page 30, - (108) (6,461) (6,569) - - (6,569)note 4)Total income, net ofinsurance claims 2,520 172 521 693 1,809 (191) 4,831Operating expenses (1,274) (78) (215) (293) (1,052) 22 (2,597)Trading surplus 1,246 94 306 400 757 (169) 2,234(deficit)Impairment losses onloans and advances (416) - - - (95) - (511)Profit (loss) before tax* 830 94 306 400 662 (169) 1,723Volatility- Banking - - - - - (73) (73)- Insurance - 7 97 104 - - 104- Policyholder tax - - 46 46 - - 46Other IFRS adjustments (134) - (2) (2) 33 (21) (124)applied from 1 January2005Profit (loss) before tax 696 101 447 548 695 (263) 1,676 Half-year to Life,30 June 2004 pensions, OEICs and asset Wholesale UK manage Insurance and Central Retail General -ment and International group Banking insurance Investments Banking items TotalComparable basis £m £m £m £m £m £m £m Net interest income 1,602 26 108 134 971 (201) 2,506Other income (page 30, 794 248 3,369 3,617 741 26 5,178note 4)Total income (page 30, 2,396 274 3,477 3,751 1,712 (175) 7,684note 4)Insurance claims (page 30, - (115) (2,959) (3,074) - - (3,074)note 4)Total income, net ofinsurance claims 2,396 159 518 677 1,712 (175) 4,610Operating expenses (1,252) (72) (229) (301) (998) 22 (2,529)Trading surplus 1,144 87 289 376 714 (153) 2,081(deficit)Impairment losses onloans and advances (344) - - - (132) - (476)Profit (loss) before tax* 800 87 289 376 582 (153) 1,605Volatility- Insurance - (5) (60) (65) - - (65)- Policyholder tax - - 5 5 - - 5Loss on sale of - - - - (13) - (13)businessesTrading results of - - - - 36 - 36discontinued operationsProfit (loss) before tax 800 82 234 316 605 (153) 1,568 *comparable basis Page 9 of 43 LLOYDS TSB GROUP SEGMENTAL ANALYSIS (continued) Half-year to Life,31 December 2004 pensions, OEICs and asset Wholesale UK manage- Insurance and Central Retail General ment and International group Banking insurance Investments Banking items TotalComparable basis £m £m £m £m £m £m £m Net interest income 1,626 18 131 149 1,015 (206) 2,584Other income (page 30, 902 248 6,880 7,128 803 19 8,852note 4)Total income (page 30, 2,528 266 7,011 7,277 1,818 (187) 11,436note 4)Insurance claims (page 30, - (99) (6,449) (6,548) - - (6,548)note 4)Total income, net of 2,528 167 562 729 1,818 (187) 4,888insurance claimsOperating expenses (1,357) (82) (239) (321) (1,049) (10) (2,737)Trading surplus 1,171 85 323 408 769 (197) 2,151(deficit)Impairment losses on (332) - 3 3 (98) - (427)loans and advancesProfit (loss) before tax* 839 85 326 411 671 (197) 1,724Volatility- Insurance - 13 197 210 - - 210- Policyholder tax - - (3) (3) - - (3)Loss on sale of - - - - (8) - (8)businessesTrading results of - - - - 4 - 4discontinued operationsProfit (loss) before tax 839 98 520 618 667 (197) 1,927 *comparable basis Page 10 of 43 LLOYDS TSB GROUP DIVISIONAL PERFORMANCE UK RETAIL BANKING Half-year to Half-year to 30 June 31 December 2005 2004 2004Comparable basis £m £m £m Net interest income 1,612 1,602 1,626Other income 908 794 902Total income 2,520 2,396 2,528Operating expenses: Before provisions for customer redress (1,274) (1,252) (1,257) Provisions for customer redress - - (100) (1,274) (1,252) (1,357)Trading surplus 1,246 1,144 1,171Impairment losses on loans and advances (416) (344) (332)Profit before tax* 830 800 839 Profit before tax, before provisions for customer redress* 830 800 939Cost:income ratio, before provisions for customer redress* 50.6% 52.3% 49.7%*comparable basis Key achievements • Continued earnings momentum. Profit before tax, on a comparable basis, increased by 4 per cent to £830 million. • Positive jaws continue to be delivered. Income growth of 5 per cent exceeded cost growth of 2 per cent. • Good customer balance growth in many product areas. Over the last six months: - Group mortgage balances increased by 4 per cent to £83.7 billion. - Credit card balances increased by 3 per cent to £7.7 billion. - Personal loan balances increased by 4 per cent to £11.2 billion. - Customer deposit balances increased by 3 per cent to £68.2 billion. • Good customer franchise growth. 22 per cent increase in quality customer current account recruitment. • Asset quality remains satisfactory. Page 11 of 43 LLOYDS TSB Group UK Retail Banking (continued) Profit before tax, on a comparable basis, from UK Retail Banking increased by£30 million, or 4 per cent, to £830 million, supported by continued growth inthe Group's consumer lending portfolios, higher than expected general insuranceprofit sharing commissions and improved fee income. Total income increased by 5per cent whilst cost growth was 2 per cent. Other income increased by 14 percent, and represents 36 per cent of total income, compared with 33 per cent inthe first half of 2004. In the first half of 2005, good levels of growth were achieved in all keyproduct areas. Personal loan balances outstanding at 30 June 2005 were £11.2billion, an increase of 11 per cent over the last twelve months and cardbalances totalled £7.7 billion, an increase of 8 per cent. In a slowingmortgage market, gross new mortgage lending for the Group totalled £11.8billion, compared with £13.6 billion in the first half of 2004. Net new lendingtotalled £3.6 billion resulting in a market share of net new lending of 8.9 percent, and mortgage balances outstanding increased by 10 per cent to £83.7billion. Credit balances on current accounts and savings and investmentaccounts increased by 7 per cent. Income and economic profit per customercontinued to improve during the half-year. Operating expenses remained well controlled throughout the business and, as aresult, increased by only £22 million, or 2 per cent, to £1,274 million comparedwith 5 per cent growth in income during the half-year. We have continued torationalise back office operations to improve efficiency. Levels of customerservice and satisfaction have also continued to improve. Overall asset quality remained satisfactory. Impairment losses on loans andadvances increased by £72 million, or 21 per cent, to £416 million, reflecting acombination of volume related asset growth in personal loan and credit cardlending, the absence of a mortgage provision release which in the first half of2004 totalled £12 million, and an increasing impact from customers experiencingrepayment difficulties. The impairment charge as a percentage of averagelending for personal loans and overdrafts increased to 4.45 per cent, from 4.34per cent in the first half of 2004, while the charge in the credit cardportfolio increased to 3.74 per cent, from 3.51 per cent in the first half of2004. In the mortgages business, the Group continued to experience a low levelof losses, however the absence of a provision release led to an increase in themortgage impairment charge to £6 million. Overall, the provisions charge as apercentage of average lending, on a comparable basis, was 0.87 per cent,compared to 0.79 per cent in the first half of 2004. Cheltenham & Gloucester (C&G) continues to focus on prime lending marketsegments. The average indexed loan-to-value ratio on the C&G mortgage portfoliowas 40 per cent (31 December 2004: 41 per cent), and the average loan-to-valueratio for C&G new mortgages and further advances written during the first halfof 2005 was 64 per cent (2004: 62 per cent). At 30 June 2005, 85 per cent ofC&G mortgage balances had an indexed loan-to-value ratio of less than 80per cent (31 December 2004: 88 per cent) and only 1 per cent of balances had anindexed loan-to-value ratio in excess of 95 per cent (31 December 2004: 0.3 percent). Page 12 of 43 LLOYDS TSB GROUP UK Retail Banking (continued) Within personal loans, key initiatives have been the increased use ofbehavioural and risk-based pricing, and leveraging our customer insightcapabilities to enable the Group to deliver more competitive pricing to betterquality customers within our existing customer base. 99 per cent of newpersonal loans and 76 per cent of new credit cards sold during the first half of2005 were to existing customers, where the Group has a better understanding ofan individual customer's total financial position. The retail bank has alsocontinued to avoid sub-prime lending. Dynamic delinquency measures, on arolling 12 month basis, remain in line with our expectations given the slowdownin consumer spending. Customers are increasingly choosing to buy through direct channels and continuedinvestment in our direct channel capabilities has supported good levels ofbusiness growth. Our internet bank now has 3.4 million registered users and, inthe first half of 2005, over 600,000 product sales were achieved through theinternet, an increase of 24 per cent compared to the first half of 2004. Over218 million transactions were processed through internet banking, an increase of36 per cent on the first half of 2004. Sales through direct channels nowrepresent almost half of total sales. Lloyds TSB remains a leader in the added value current account market, with over4 million customers. Quality customer current account recruitment increased by22 per cent, compared with the first half of 2004, whilst customer attritionlevels were flat. Page 13 of 43 LLOYDS TSB GROUP INSURANCE AND INVESTMENTS Half-year to Half-year to 30 June 31 December 2005 2004 2004Comparable basis £m £m £m Net interest income 205 134 149Other income (page 30, note 4) 7,057 3,617 7,128Total income (page 30, note 4) 7,262 3,751 7,277Insurance claims (page 30, note 4) (6,569) (3,074) (6,548)Total income, net of insurance claims 693 677 729Operating expenses (293) (301) (321)Trading surplus 400 376 408Impairment losses on loans and advances - - 3Profit before tax* 400 376 411 Profit before tax analysisLife, pensions and OEICs 298 287 320General insurance 94 87 85Scottish Widows Investment Partnership 8 2 6Profit before tax* 400 376 411 Embedded value basis+Life and pensionsNew business contribution 98 74 114Existing business 101 121 76Investment earnings - normalised 92 80 87Profit before tax 291 275 277OEICsProfit before tax 23 19 34Profit before tax (life, pensions and OEICs) 314 294 311New business margin (life and pensions) 25.8% 24.3% 32.4%*comparable basis + using the Group's 2004 UK GAAP reporting basis Key achievements • Improved profit performance. Profit before tax, on a comparable basis, increased by 6 per cent to £400 million. • On an embedded value basis, life, pensions and OEICs profit before tax increased by 7 per cent to £314 million. • Strong sales performance. 25 per cent increase in Scottish Widows' new business weighted sales, increasing the Group's overall market share from 4.9 per cent to 6.2 per cent. • Improved profitability. New business contribution in Scottish Widows', on an embedded value basis, increased by 32 per cent. Life and pensions new business margin increased to 25.8 per cent. • Good progress with Lloyds TSB Insurance's strategy to develop its manufacturing business and increase focus on direct channels. Direct sales increased by 19 per cent. • Strong capital position maintained. Page 14 of 43 LLOYDS TSB GROUP Insurance and Investments (continued) Profit before tax, on a comparable basis, increased by 6 per cent to £400million. Profit before tax from our life, pensions and OEIC businessesincreased by £11 million, or 4 per cent, to £298 million. The Group's strategyto improve its returns by focusing on more profitable, less capital intensive,business whilst constantly seeking to improve process and distributionefficiency has led to a 32 per cent increase in new business contribution, on anembedded value basis, to £98 million. As a result of this improved capitalefficiency, strong sales of pensions and single premium investments, andimproved returns from less capital efficient products such as stakeholderpensions, the life and pensions new business margin increased to 25.8 per cent,from 24.3 per cent in the first half of 2004. Overall, weighted sales in the first half of 2005 increased by 25 per cent to£443.1 million and as a result the Group's life, pensions and investments marketshare in the first quarter increased significantly to an estimated 6.2 per cent,compared with 4.9 per cent in the first quarter of 2004. IFA sales grew 41 percent to £280.0 million and our estimated market share of the IFA market improvedto 7.1 per cent, from 5.0 per cent in the first quarter of 2004. IFA salesbenefited particularly from improved product and service offerings for pensions,and savings and investments. Bancassurance sales were 4 per cent higher at£128.2 million, as a 29 per cent increase in weighted sales of OEICs through thebranch network and Lloyds TSB private banking clients was offset by lower salesof protection products, largely reflecting the slowdown in the rate of growth inmortgage lending. Our estimated market share through the bancassurance anddirect channels increased to 4.9 per cent, from 4.7 per cent in the firstquarter of 2004. Half-year to Half-year to 30 June 31 December 2005 2004 2004 £m £m £m Weighted sales (regular + 1/10 single)Life and pensions 379.3 305.0 351.7OEICs 63.8 49.6 36.8Life, pensions and OEICs 443.1 354.6 388.5 Bancassurance 128.2 123.3 118.3Independent financial advisers 280.0 198.3 233.3Direct 34.8 32.7 36.8Other 0.1 0.3 0.1Life, pensions and OEICs 443.1 354.6 388.5 Group funds under management £bn £bn £bnScottish Widows Investment Partnership 87 77 82UK Wealth Management 13 11 13International 14 14 13 114 102 108 Page 15 of 43 LLOYDS TSB GROUP Insurance and Investments (continued) Pre-tax profit, on a comparable basis, from Scottish Widows InvestmentPartnership (SWIP) increased to £8 million, compared with £2 million in thefirst half of 2004, reflecting improved market performance and increasedrevenues from new business. SWIP won £2.6 billion of gross new business in thefirst half of 2005, an increase of 73 per cent on the first half of 2004, andits assets under management increased by 13 per cent to £87 billion, comparedwith the first half of 2004. Overall investment performance in the first halfof 2005 has continued to improve. Page 16 of 43 LLOYDS TSB GROUP Insurance and Investments (continued) General insurance Half-year to Half-year to 30 June 31 December 2005 2004 2004 £m £m £m Premium income from underwritingCreditor 64 55 59Home 220 218 224Health 8 16 11Reinsurance premiums (15) (13) (16) 277 276 278Commissions from insurance brokingCreditor 229 203 239Home 22 21 24Health 8 10 10Other 105 57 108 364 291 381 Distribution commissions paid to banking businesses 370 339 403 Profit before tax, on a comparable basis, from our general insurance operationsincreased by £7 million, or 8 per cent, to £94 million. In an increasingly competitive home insurance market, continued progress inimproving levels of business retention and higher product margins led to anincrease of £2 million in premium income from underwriting home insurance.Insurance broking commission income increased by £73 million reflecting a £26million increase in income from creditor insurance, as improved sales throughdirect channels offset the impact of a slowdown in our mortgage and consumerlending growth, and a £48 million increase in other commissions, reflectinghigher than expected profit sharing income. Our strategy to increase investment in more cost efficient distribution throughdirect channels is starting to create a shift from face-to-face channels towardsdirect channels. As a result gross written premiums from new policies soldthrough direct channels increased by 19 per cent in the first half of 2005,reflecting strong growth in levels of new home and motor insurance business. Claims fell by £7 million to £108 million, compared to the first half of 2004,and the claims ratio improved to 37 per cent, compared with 40 per cent in thefirst half of 2004, reflecting good progress in re-engineering the claimsprocess and improvements in the cost effectiveness of the claims supply chain,as well as lower health claims as a result of the transfer of the Group'sprivate medical insurance business to BUPA during 2004. Page 17 of 43 LLOYDS TSB GROUP Wholesale and International Banking Half-year to Half-year to 30 June 31 December 2005 2004 2004Comparable basis £m £m £m Net interest income 1,035 971 1,015Other income 774 741 803Total income 1,809 1,712 1,818Operating expenses (1,052) (998) (1,049)Trading surplus 757 714 769Impairment losses on loans and advances (95) (132) (98)Profit before tax* 662 582 671 Cost:income ratio* 58.2% 58.3% 57.7%*comparable basis Key achievements • Strong profit growth. Profit before tax, on a comparable basis, increased by 14 per cent to £662 million. • Positive jaws. Income growth of 6 per cent exceeded cost growth of 5 per cent. • Good progress in delivering the strategy to build an integrated wholesale bank. • 25 per cent increase in Corporate Markets profit before tax. • Strong levels of franchise growth in Business Banking. 27 per cent growth in profit before tax. • Asset quality remains strong. Wholesale and International Banking profit before tax, on a comparable basis,increased by £80 million, or 14 per cent, to £662 million. Income growth of 6per cent exceeded cost growth of 5 per cent, leading to an improvement in thecost:income ratio to 58.2 per cent. In addition to a reduction in impairmentlosses, there was good income growth in Corporate Markets, Business Banking andAsset Finance. Net interest income increased by £64 million, or 7 per cent, reflecting higherincome from strong growth in customer lending in Corporate Markets, BusinessBanking and Asset Finance and improved margins in Business Banking. Otherincome increased by £33 million, or 4 per cent, as strong growth in fee incomein relationship businesses and higher levels of cross-selling activity withinCorporate Markets, and the beneficial impact of a number of motor dealershipacquisitions in Asset Finance, was partly offset by a reduction in the level ofventure capital investment realisations. Costs were 5 per cent higher at £1,052million, reflecting higher staff costs as a result of our increased investmentRelated Shares:
Lloyds