10th Dec 2007 07:01
Lloyds TSB Group PLC10 December 2007 141/07 10 December 2007 LLOYDS TSB - TRADING UPDATE Lloyds TSB Group plc will be holding discussions with analysts and investorsahead of its close period for the year ending 31 December 2007. This statementsets out the information that will be provided at those discussions. Eric Daniels, Group Chief Executive, commented: "The Group's relationship banking businesses have sustained their strongmomentum through one of the most challenging times in global financial marketsfor a generation. Our strong underlying performance demonstrates both theprudence of our business model and the high quality, sustainable nature of ourearnings. Whilst no bank has been immune from the recent turbulence, therelatively limited impact of the market dislocation on the Group has been morethan offset by the significant profit on the sales of non-core businesses. The Group remains firmly on track to deliver a good performance for the year,and good economic profit growth whilst maintaining a robust capital position.Underlying earnings for 2007 are in line with expectations and we remainconfident in the Group's earnings growth prospects over the next few years." Continuing to build our strong customer franchises and delivering on ourfinancial goals Lloyds TSB's strategy of building strong customer franchises and growing ourbusiness by realising the considerable potential within those franchisescontinues to deliver strong results. Within each of our divisions, we havecontinued to extend the reach and depth of our customer relationships, achievinggood sales growth, whilst also improving productivity and efficiency. Theunderlying performance of the business remains strong with revenue growthremaining well ahead of cost growth. Like many other financial institutions,the Group has been affected by the recent market dislocation. However, due toour lower risk strategy, the impact has been limited to approximately £200million at 31 October 2007. Excluding this impact, and the cost of thesettlement of overdraft claims, the Group expects to deliver underlying resultsbroadly in line with market expectations. In addition, the Group has achievedsubstantial gains on the disposal of non-core businesses. In UK Retail Banking and Insurance and Investments we have continued the strongperformance trends delivered in the first half of the year, with continued goodrevenue momentum. In Wholesale and International Banking we have made furtherprogress in building our corporate and commercial relationship bankingbusinesses. However, the division's overall performance has been affected bythe impact of the widespread turbulence in global financial markets. Over the last few months, despite the significant disruption in global financialmarkets, Lloyds TSB has maintained a strong liquidity and funding position,building on our 'triple A' long-term debt rating and strong balance sheet. Excellent progress in UK Retail Banking, with continued good revenue momentum The Retail Bank has continued to make excellent progress, with further stronggrowth in product sales and continued good revenue growth. We continue toincrease our market share of new current account customers and have alsodelivered a good performance in the growing savings and investment market,especially in bank savings where we have recently benefited from a significantlyimproved rate of deposit growth. As we indicated at the half-year, our market share of net new mortgage lendingin the four months to 31 October 2007 was below our outstanding stock position,reflecting our continued focus on writing value-creating business. Recentlevels of mortgage allocations have, however, been strong, and we expect this totranslate into good balance growth as we move into 2008. As a result of ourfocus on profitability and the recent marketwide increase in interest spreads,new business net interest margins have begun to improve. The Group hascontinued to maintain high levels of asset quality by focusing largely on theprime UK mortgage market. We have maintained our leadership position in personal loans, despite consumerdemand for unsecured lending remaining subdued, and have continued to build ourcredit card business with strong customer inflows into the Lloyds TSB AirMilesDuo account. The quality of our new unsecured personal lending has remainedstrong. Continued strong momentum in Insurance and Investments In Insurance and Investments, we have continued to achieve good levels of salesgrowth in life, pensions and long-term savings, particularly in thebancassurance channel, with trends remaining similar to those delivered in thefirst half of the year. Sales of protection products have been strong followingthe successful launch of the Group's new protection platform 'Protection forLife' in the second half of 2006 and a good performance from the new branchnetwork creditor insurance protection product. New business product marginshave remained robust. In General Insurance, we have delivered improved home insurance sales throughthe branch network and good cost control although, as we have previouslyannounced, unusually high weather related claims, in particular reflecting thesevere flooding in the UK in June and July 2007, have resulted in additionalclaims costs for the year of approximately £110 million (2007 first half: £57million). Scottish Widows has no exposure to US sub-prime Asset Backed Securities eitherdirectly or indirectly through Collateralised Debt Obligations. The Group holds£23 million of short-dated Structured Investment Vehicle (SIV) commercial paperthrough Scottish Widows. Wholesale and International Banking impacted by turbulence in global financialmarkets The division has continued to make substantial progress in its relationshipbanking businesses. In Commercial Banking, strong growth in business volumes,further customer franchise improvements and good progress in improvingoperational efficiency have resulted in continued strong profit growth. InCorporate Markets, further good progress has been made in developing ourrelationship banking franchise supported by a strong cross-selling performance.The division has limited exposure to assets affected by current capital marketuncertainties: US sub-prime Asset Backed Securities (ABS) and ABS Collateralised DebtObligations (CDOs) Lloyds TSB has no direct exposure to US sub-prime Asset Backed Securities andlimited indirect exposure through ABS CDOs. During the four month period to 31October 2007, the market value of our holdings in ABS CDOs reduced and, as aresult, the Group has written down their value by a total of £89 million,leaving a residual investment of £130 million net of hedges. The write-downlargely reflects junior tranches of CDOs which have been written down to theexpected interest payments to be received before the end of 2008. Structured Investment Vehicle (SIV) Capital Notes At 30 June 2007 the Group's exposure to SIV Capital Notes totalled £100 million.During the four month period to 31 October 2007 the Group wrote down the valueof these assets by £22 million, leaving a residual exposure at 31 October 2007totalling £78 million. Additionally, at 31 October 2007 the Group had undrawncommercial paper back up liquidity facilities totalling £377 million, of which£89 million has subsequently been drawn. All of these liquidity lines aresenior facilities. Cancara The Group's exposure to Cancara, our hybrid Asset Backed Commercial Paperconduit, through an undrawn liquidity backstop facility was £11.8 billion at 31October 2007. Cancara, which is fully consolidated in the Group's accounts,comprises £8.4 billion ABS and £3.4 billion client receivables transactions andis managed in a very conservative manner, which is demonstrated by the qualityand ratings stability of its underlying asset portfolio. The ABS bonds inCancara are 100 per cent Aaa/AAA rated by Moody's and Standard & Poor'srespectively, and there is no exposure either directly or indirectly tosub-prime US residential mortgages within the ABS portfolio. At 31 October 2007the client receivables portfolio included £116 million US sub-prime mortgageexposure. Since its inception in 2002, there has been no default on any assetwithin Cancara, and no bond in Cancara has ever suffered a rating downgrade. In the four months to 31 October 2007, Corporate Markets also saw a reduction inprofit before tax of approximately £90 million as a result of the impact ofmark-to-market adjustments in the Group's trading portfolio, to reflect themarketwide repricing of liquidity and, to a lesser extent, credit. At 31October 2007 the trading portfolio contained £181 million of indirect exposureto US sub-prime mortgages and ABS CDOs. This super senior exposure is protectedby note subordination. Strong Group cost performance The Group's strong cost performance has continued, resulting in a furtherimprovement in the Group's cost:income ratio. The Group's programme ofefficiency improvements is progressing well and we now expect to deliver netbenefits of circa £140 million, exceeding the previously indicated net benefitsof approximately £125 million per annum in 2007. Overall credit quality remains satisfactory Overall Group asset quality remains satisfactory. In the Retail Bank, ourarrears and delinquency trends have remained good, with further reductions inthe number of bankruptcies and Individual Voluntary Arrangements in the thirdquarter of the year. The asset quality in our mortgage portfolio has continuedto be excellent. As we have previously indicated, the retail impairment chargein 2007 is expected to be no higher than that in 2006. In Wholesale, corporate and small business asset quality has also remainedstrong. The underlying level of new corporate provisions is expected to remainat a relatively low level during 2007, albeit higher than last year. Theimpairment charge has been impacted by lower releases and recoveries, and the£28 million provision in the first half of 2007 reflecting the impact of the2007 Finance Act on the division's leasing business. Insurance volatility In the first 10 months of 2007, high levels of volatility in equity and fixedincome markets contributed to an adverse volatility relating to the insurancebusiness, excluding policyholder interests volatility, of £86 million. Capital ratios remain robust The Group's capital ratios remain robust and the rate of risk-weighted assetgrowth in 2007 is expected to be at the upper end of our previously indicatedmid-to-high single digit range. The capital position of Scottish Widows remainsstrong and we expect to repatriate more than £1.8 billion of surplus capital tothe Group during 2007 (2007 first half: £0.6 billion), bringing the totalcapital repatriation from Scottish Widows to the Group to in excess of £3.6billion over the last three years. On 5 December 2007 Standard & Poor'sannounced that it has placed its Scottish Widows debt rating on positiveoutlook. Maintaining a strong liquidity and funding position Throughout the recent liquidity crisis, Lloyds TSB has maintained a strongliquidity position for both the Group's funding requirements, which aresupported by the Group's strong and stable retail and corporate deposit base,and those of its sponsored conduit, Cancara. In addition, retail and corporatedeposit inflows have been strong and the Group continues to benefit from itsstrong credit ratings and diversity of funding sources. Settlement of claims relating to overdraft fees Along with many other UK banks, during the year the Group has experienced anumber of customer claims for the repayment of overdraft fees. On 27 July,several banks, together with the Office of Fair Trading (OFT), asked the HighCourt of England and Wales to clarify the legal position regarding personalcurrent account fees. It is unclear how long the case will last but, pendingresolution, the Financial Services Authority has agreed subject to certainconditions that the handling of customer complaints on this issue can besuspended. The first half results included a charge of £36 million relating tothe settlement of claims during the first half of the year, together withrelated costs. During the second half of the year the Group expects a similarcharge. Profit on sale of businesses In May 2007, Lloyds TSB Group agreed the sale of the business and assets ofLloyds TSB Registrars to Advent International for a total cash consideration of£550 million, subject to completion and other adjustments. The transactioncompleted on 30 September 2007 following regulatory approval and, subject tocompletion adjustments, the Group expects to report a profit before tax on thesale of this business of approximately £400 million (tax: nil) in the secondhalf of 2007. In July 2007, Lloyds TSB Group announced that it had reached an agreement tosell its subsidiary, Abbey Life Assurance Company Limited (Abbey Life) toDeutsche Bank AG. This transaction was also completed at the end of September2007 following receipt of regulatory approval, and the Group expects to report aprofit before tax on the sale of this business of approximately £275 million(tax: nil) in the second half of 2007. In addition, a pre-sale dividend of £175million was paid to the Group in June 2007. The effect of these sales will be modest earnings dilution in the fourth quarterof 2007 of approximately £20 million after tax. The substantial profitsachieved on the sales of these non-core businesses have further strengthened theGroup's capital ratios and improved capital flexibility. Trading update webcast details The Group Finance Director's briefing will be available as a live audio webcaston the Investor Relations website at www.investorrelations.lloydstsb.com and arecording will be posted on the website shortly after the briefing. Timetable 2007 results announcement 22 February 2008Ex dividend date 5 March 2008Dividend record date 7 March 2008Dividend payment date 7 May 2008 All dates are provisional and subject to change. For further information:- Investor RelationsMichael Oliver +44 (0) 20 7356 2167Director of Investor RelationsE-mail: [email protected] Douglas Radcliffe +44 (0) 20 7356 1571Senior Manager, Investor RelationsE-mail: [email protected] MediaMary Walsh +44 (0) 20 7356 2121Director of Corporate RelationsE-mail: [email protected] 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. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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