Lloyds Banking Group PLC Annual Report 2000

Plain-text annual report

new products and services building customer relationships e-mpowering customers easier access to ﬁnancial services real time banking banking by telephone and internet annual report & accounts 2000 CONTENTS 1 2000 highlights 2 Chairman’s statement 4 Group Chief Executive’s review 8 Our role in the community 9 The businesses of Lloyds TSB 11 Financial review 34 Five year financial summary 37 The board 38 Directors’ report 40 Directors’ remuneration 46 Corporate governance 48 Auditors’ report 49 Consolidated profit and loss account 50 Consolidated balance sheet 52 Company balance sheet 53 Other statements 54 Consolidated cash flow statement 55 Notes to the accounts 77 Information for shareholders OUR GOVERNING OBJECTIVE IS TO MAXIMISE SHAREHOLDER VALUE OVER TIME TO MEET OUR GOVERNING OBJECTIVE WE AIM: • TO BE A LEADER IN OUR CHOSEN MARKETS • TO BE THE FIRST CHOICE FOR OUR 16 MILLION CUSTOMERS • TO REDUCE DAY-TO-DAY OPERATING COSTS THROUGH INCREASED EFFECTIVENESS PRESENTATION OF RESULTS PROFIT BEFORE TAX BY MAIN BUSINESSES On 3 March 2000 the Group completed the acquisition of Scottish Widows and, as a result, the investments now held to support the with- proﬁts business of the Group’s life companies are much more signiﬁcant than in previous years. In accordance with generally accepted UK Retail Banking Mortgages accounting practice amongst listed insurance companies in the UK, the Insurance and Investments* results of the Group’s insurance businesses have been separately UK Retail Financial Services analysed between an operating proﬁt, which includes investment earnings calculated using longer-term rates of investment return, and a proﬁt before tax, separately identifying the short-term ﬂuctuations in Wholesale Markets International Banking Central group items 2000 £ million daaaaaasfff 1999 £ million daaaaaasfff 817 865 789 868 1,447 daaaaaasfff 873 daaaaaasfff 3,129 2,530 749 501 728 444 (133) daaaaaasfff 119 daaaaaasfff investment returns (page 28). Business as usual operating profit 4,246 3,821 Other items also had a signiﬁcant impact on the Group’s 2000 results: Short-term ﬂuctuations in investment returns changes in the economic assumptions applied to our long-term assurance business (page 29), exceptional restructuring costs Changes in economic assumptions Exceptional restructuring costs (page 27), the impact of provisions for redress to past purchasers of Pension provisions pension policies (page 17) and a one-off charge relating to stakeholder Stakeholder pension related charge pensions (page 17). In 1999 the sale and closure of businesses was Loss on sale and closure of businesses also signiﬁcant (page 58). To facilitate comparisons of the results, Statutory proﬁt before tax (119) 127 (188) (100) (80) 28 – – (102) – – (126) daaaaaasfff daaaaaasfff asfffffffs asfffffffs 3,621 3,886 certain ﬁnancial information and commentaries have been presented on * Insurance and Investments includes ‘normalised’ investment returns based on long-term a ‘business as usual operating proﬁt’ basis, which excludes the effect of rates of investment return (page 28). these items. 2000 highlights RESULTS Business as usual basis Total income increased by 8 per cent to £8,641 million. Operating proﬁt up 11 per cent to £4,246 million from £3,821 million. Efﬁciency ratio 43.6 per cent compared with 42.7 per cent. Earnings per share increased by 10 per cent to 54.5p. Post-tax return on average shareholders’ equity 31.8 per cent. RESULTS Statutory basis UK Retail Financial Services proﬁt up £599 million, or Proﬁt before tax up 7 per cent to £3,886 million from 24 per cent, to £3,129 million. £3,621 million. Other signiﬁcant achievements during 2000 include: Total income increased by 7 per cent to £8,469 million. Economic proﬁt increased by 6 per cent to £1,882 million. The Group completed the acquisitions of Scottish Widows and Chartered Trust. Customer lending grew by 12 per cent to £114 billion and customer deposits increased by 8 per cent to £101 billion. Earnings per share increased by 7 per cent to 49.6p. Shareholders’ funds up by 13 per cent to £9,737 million. Post-tax return on average shareholders’ equity 29.1 per cent. The Group has over 1.2 million online customers of Total capital ratio 9.0 per cent; tier 1 capital ratio LloydsTSB.com. LloydsTSB.com is now consistently one of the 8.2 per cent. most visited ﬁnancial websites in Europe. A ﬁnal dividend of 21.3p per share will be paid on 2 May 2001. This makes a total of 30.6p for the year, an increase of 15 per cent. 11.4 per cent estimated market share of net new mortgage lending. Funds under management throughout the Group increased to £122 billion. 30.6 26.6 22.2 17.2 13.2 96 DIVIDENDS PER SHARE (PENCE) 99 98 97 00 LLOYDS TSB GROUP 1 chairman’s statement OUR GOVERNING OBJECTIVE IS TO MAXIMISE SHAREHOLDER VALUE OVER TIME 2000 was another successful year for the Lloyds TSB Group. We continued to grow our business organically and we made two important acquisitions, Scottish Widows and Chartered Trust. We earned record proﬁts and earnings per share; and the dividend was increased by 15 per cent. At the same time, we are investing heavily in e-commerce and restructuring to enhance future earnings. Over the ﬁve years since the merger between Lloyds Bank and TSB at the end of 1995 our share price rose by 114 per cent Sir Brian Pitman and gross dividends increased by 140 per cent. An investment of £1,000 in Lloyds TSB shares on 1 January 1996, with dividends reinvested, was worth £2,500 at the end of 2000, a compound growth rate of over 20 per cent per annum and more than 30 per cent better than an investment in the FTSE All Share index over the same period. We have no illusions. We have to continue to produce favourable results. If we can do that, our share price should follow. A CHANGING ENVIRONMENT Few would deny that ﬁnancial services is an industry in ferment. It is being transformed by increased competition, technology and consumer demand. The scale of competition has changed dramatically in recent years. Consumers have more ﬁnancial choices than ever. 2 LLOYDS TSB GROUP Everybody seems to want to be in the money business. New competitors are popping up all over the place. Yet, the basic ﬁnancial needs of our customers do not change that much. They want to save, borrow, invest, transact and be insured. They want value, convenience, security and trust. They want sound ﬁnancial advice. They want access to ﬁnancial services when, where and how it is most convenient for them. If the value they are offered is clear and compelling, if the service and advice they receive is good, they will give us more of their business. We have risen to the challenges which the increasingly competitive environment presents by widening our product range, greatly expanding our distribution capabilities and by offering our customers more value. Although some new entrants in retail ﬁnancial services have particularly low cost structures, we have the advantage of multi-channel distribution, which is what most people want. We can now offer more choice and greater accessibility and few can match the personal service many of our customers prefer. In little more than a year, we have become one of the UK’s leading e-commerce providers of ﬁnancial services, which is a considerable achievement. The arrival of stakeholder pensions in the UK in 2001 is a further change that will beneﬁt people who traditionally have had difﬁculty accessing a suitable pension. The internet will also grow in its reach and effect. It is already bringing transparency to all markets. Our task is to respond to customer needs more readily than ever. OUR STRATEGY For years, we have been working to be more than just a bank and, in doing so, we have built one of the UK’s most diversiﬁed ﬁnancial services companies. Not only is the market for ﬁnancial services much bigger than the banking market, it is also growing much faster. We want to continue to grow our share of banking business in the UK, but our biggest opportunity for growth lies in increasing our share of total ﬁnancial assets. So, there is plenty of room for growth. Our aim is to attract more of the business that our 16 million customers have with other ﬁnancial companies. In pursuit of this strategy, in the year 2000, we sold more products to more people than ever before. believe that over time competition on price alone is a losing strategy. The key to success is to ﬁnd new, different and, of course, better ways of serving each customer group – services that our customers value highly and that command a price reﬂecting that value. Ultimately, enhancing customer value for target customers is the primary means of delivering superior shareholder returns. Because it remains highly fragmented, the ﬁnancial services industry is ripe for further consolidation. It is not a question of whether restructuring is necessary, but how it will be achieved. The acquisition of Scottish Widows and Chartered Trust are further examples of our participation in the continuing industry consolidation. Today, market segmentation has assumed even greater importance. We Scottish Widows – one of the most highly regarded names in life and pensions – will greatly strengthen our hand in the rapidly growing long-term savings market. It will enhance not only the quantity but also the quality of our earnings by reducing our dependence on net interest income, where pressure on margins is growing. Chartered Trust will reinforce our leadership in motor vehicle ﬁnance. Both of these acquisitions have been successfully integrated with our existing business and we will realise substantial synergies over the next few years. So, our basic strategy remains unchanged. We want to be the best and most successful company in the ﬁnancial services industry. There is plenty of scope for organic growth in our chosen markets, but we shall also continue to seek growth by acquisition. OUR PEOPLE We are at heart a service company. More sales do not always lead to better service, but better service almost always leads to better sales. Even in the age of the internet, the most critical constituency in our success is our people. The scale and pace of change and the success of the company would not have been possible without the professionalism, dedication and sheer energy of our staff at home and overseas. OUR FUTURE We have a strong balance sheet, with a Triple A rating, and we are one of the most proﬁtable banks in the world. Strategically, we are well placed in all key areas of UK retail ﬁnancial services. We aim to continue to be a leader in creating value for shareholders by offering superior customer value, both in products and service, whether in the branch, on the telephone or via the web. Our current heavy investment in e-commerce and restructuring is planned to produce substantial productivity gains, which will enable us further to enhance customer value and hence shareholder value. Price competition is increasing, but we expect margin erosion to be offset by volume growth. BOARD CHANGES This year we shall bid farewell to Paddy Linaker, a director since 1994. He leaves with our thanks and best wishes. I will retire at this year’s annual general meeting in April and I am delighted that Maarten van den Bergh, formerly President of Royal Dutch Petroleum Company, has agreed to succeed me as Chairman. I have every conﬁdence that the company is in safe hands and that it is well equipped to meet the challenges of the future. I thank you, our owners, for your support over many years and I especially thank our great team of talented people for being the best at what they do. Sir Brian Pitman Chairman 15 February 2001 LLOYDS TSB GROUP 3 group chief executive’s review WE AIM TO LOOK AFTER OUR CUSTOMERS SO WELL THAT THEY WILL WANT US TO HANDLE MORE OF THEIR FINANCIAL AFFAIRS Peter Ellwood 2000 was a watershed year for the ﬁnancial services sector. time is underpinned by our three strategic aims of being a It heralded dramatic change in the use of technology, driven leader in our chosen markets, being ﬁrst choice for our by the internet. It saw a signiﬁcant increase in competition from customers by better understanding and meeting their needs, both traditional players and new entrants, and it was marked by and by driving down our day-to-day operating costs so that we the increasing requirements of consumers who are rightly have greater scope for investment in better products, superior becoming more aware and more demanding. 2000 also saw service and multi-channel distribution. We have made good strong Government interest in the industry with the Cruickshank progress on a number of fronts. report and the subsequent review by the Competition Commission into the provision of banking services to small and medium-sized businesses. We were pleased to commit, with the other major banks, to partial funding of the Universal Bank, which we believe will be a useful contribution to providing banking facilities to all those who require them. During the year we made further progress on our ﬁrst strategic aim to be a leader in our chosen markets with the acquisition of Scottish Widows, concluded in March, which made us one of the top three suppliers of long-term savings and protection products in the UK. Scottish Widows also brought a leading and powerful brand to the Group. In September we also concluded Against that background, we believe that the organisations which the purchase of Chartered Trust which gave us market will survive and prosper in this changing environment will be leadership in the independent provision of motor ﬁnance. those which maximise shareholder value by creating real value for their customers. Our vision is to create an organisation that understands and looks after our customers so well that they give us the privilege of looking after more of their ﬁnancial affairs. So, we have made signiﬁcant progress towards meeting this important strategic aim, but the most exciting developments and progress have been made in the critically important strategic aim of being ﬁrst choice for our customers by better Our governing objective to maximise shareholder value over understanding and meeting their needs. CUSTOMER RELATIONSHIP MANAGEMENT During 2000 we introduced a greatly manage customer relationships in a enhanced model of customer relationship manner that is consistent with an individual management (CRM) which is already customer’s needs. The new system takes improving customer loyalty, and a segmented approach to our customer increasing revenue growth in our retail base and draws extensively on best CRM business. This involves the real time practice throughout the world. Full roll out delivery of detailed information to our throughout our UK branch network is to be customer facing staff and allows us to completed during the ﬁrst quarter of 2001. 4 LLOYDS TSB GROUP REVENUE GROWTH Revenue growth will be a key component of sustainable proﬁts over the next few years and we will therefore be investing heavily in core markets such as wealth management, long-term savings and investments, business banking, our core retail franchise and in new technology. Our added value current account product range continues to be in strong demand and over 2 million of our customers now have either a Gold or Select current account, making us a market leader in WEALTH MANAGEMENT this ﬁeld. In addition, we increased the At its heart, CRM is about retaining and The Create offer will be underpinned by number of our higher value personal deepening our relationships with our access to the comprehensive broking choice customers to over 850,000 customers through a policy of services of Goldman Sachs PrimeAccess™. during 2000, and increased our segmentation and this forms a key part This service will provide clients with customers’ total product holdings by a net 700,000. We are targeting to increase our product sales substantially during 2001 and we remain conﬁdent of achieving a net 3 million increase in total product holdings by the end of 2002. of our new strategies in the wealth customised proprietary research from management and small business sectors. Goldman Sachs, international equity The ﬁrst stage of our new approach in dealing and market making, custody and the wealth management segment has settlement, and access to selected equity been the development of our plans to capital market offerings managed by provide a new set of products and Goldman Sachs. Create forms a key part services for more afﬂuent customers, of Lloyds TSB’s revenue growth strategy which are now being implemented under and expects to have around 250,000 a new brand ‘Create’. For these clients by the end of 2002. Lloyds TSB customers we will provide tailored currently makes pre-tax proﬁts of some independent advice, superior service and £300 million annually from wealth a choice of investment options from management in the UK and overseas, quality providers. Key elements will be and believes that this can be doubled our online share dealing and funds within four years of Create’s full market hypermarket, and a new Wealth launch this summer. Management Account that will allow consolidation of all ﬁnancial products into a single account. E-COMMERCE Lloyds TSB is one of the most powerful ﬁnancial services brands in the UK. We have a very comprehensive network of branches together with one of the largest telephone banking businesses in the UK with over 2.0 million customers and, with over 1.2 million registered online customers, LloydsTSB.com is now consistently one of the most visited ﬁnancial websites in Europe. Our overall distribution capability will be further improved in the second half of the year as we complete our IT integration as planned, providing online real time technology for all our retail banking customers, a facility which will become increasingly important in the internet world. In December 2000 the Group announced that it had agreed to form a joint venture between Goldﬁsh, Centrica’s ﬁnancial services brand, and evolvebank.com, Lloyds TSB’s standalone internet banking operation. The joint venture intends to offer a broad range of integrated ﬁnancial services products from which customers can select to meet their individual needs. evolvebank.com will provide technology and banking expertise, together with Lloyds TSB’s track record in bancassurance and regulatory experience. Centrica will bring the Goldﬁsh brand, together with immediate access to 9 million Centrica customers. LLOYDS TSB GROUP 5 notes to the accounts group chief executive’s review BUSINESS BANKING In the small business market, we have been greatly encouraged by the success of a recent pilot of a set of new segmented offers, which we have developed in response to our business customers’ differing needs. The roll out of these new offers during 2001, coupled with further enhancement of our innovative small business portal – success4business.com – which within 6 months of launch already has over 20,000 registered customers, will cement our position as the UK’s leading bank for small business start ups. We have also launched LloydsTSBMarketplace, a trade facilitation web service, that allows suppliers and buyers access to a secure e-enabled environment to conduct business with a wide variety of companies within their speciﬁc marketplace. COST MANAGEMENT Turning from income generation to cost management, the management of our day-to-day costs continues to have a strong emphasis in the Group, whilst at the same time we are continuing to invest heavily in e-commerce, in restructuring to improve our efﬁciency and productivity, and in improving the quality of our sales and service in order to enhance future earnings. Our restructuring programme is making strong progress, with further centralisation of processing achieved and consolidation of IT centres underway. We are also accelerating the expansion of lower cost delivery channels which will involve greater use of telephony, with more telephone calls taken out of our branches into dedicated call centres, allowing the branches to concentrate on face-to-face contact with our customers. In August 2000 the Group announced the creation of a new payments processing company – Intelligent Processing Solutions Limited (iPSL) – in conjunction with Unisys and Barclays. iPSL will handle all the Group’s cheque processing activities. With increased levels of electronic banking leading to a decline in the volume of cheques being processed, iPSL provides the economies of scale needed to offset the increasing unit cost of processing cheques. RESULTS So, how did these strategies translate into growth and proﬁts? Our business as usual results for 2000 were good, with an 8 per cent growth in income, proﬁt before tax up 11 per cent, customer lending up 12 per cent, and customer deposits up by 8 per cent. Our efﬁciency ratio remained good at 43.6 per cent, one of the best efﬁciency ratios in the world for a ﬁnancial services group of our size, business mix and complexity. Asset quality improved and we maintained our strong position in all our core markets. Proﬁt before tax on a statutory basis rose by £265 million, or 7 per cent, to £3,886 million. Retained proﬁt for the year was £1,041 million, reﬂecting the signiﬁcant capital generation within the Group. Income again grew satisfactorily with continuing margin pressure in retail markets more than offset by good volume growth in a number of areas. We achieved a record level of product sales, and market share gains in many of our core markets. We are now selling more retail products and servicing more personal customers than we have ever done. The quality of the Group’s earnings remained high and proﬁt before tax from UK Retail Financial Services, encompassing UK Retail Banking, Mortgages, and Insurance and Investments, increased by £599 million, or 24 per cent, to £3,129 million. This represents 74 per cent of total group proﬁt. Our Wholesale Markets and International Banking divisions also continued to make solid progress. 6 LLOYDS TSB GROUP GROWTH Going forward, the thrust of our strategy is about the continuing investment in our growth businesses to deliver organic revenue growth through customer relationship management, leveraging the strength of our brands and our multi- channel distribution capability, reducing our day-to-day unit costs and driving forward our e-commerce strategy. We also intend to participate in the further consolidation of ﬁnancial services, both in the UK and overseas. The implementation of our strategies will ensure that, through proﬁtable top line revenue growth and a strong grip on our day-to-day operating costs, the Group can continue to deliver a strong and sustainable return on equity, together with robust growth in equity and economic proﬁt. The future for the ﬁnancial services sector will undoubtedly be more challenging than it has been in the past, but we believe we are equipped with the strategy, the staff, the management and the determination to continue to succeed. A TAILOR-MADE SERVICE GIVING VALUE TO CUSTOMERS SCOTTISH WIDOWS IS THE GROUP’S PROVIDER OF LONG-TERM SAVINGS AND INVESTMENT PRODUCTS. IN THE SECOND HALF OF 2000, SALES FROM THE COMBINED LLOYDS TSB AND SCOTTISH WIDOWS LIFE, PENSIONS AND UNIT TRUST BUSINESSES INCREASED BY 19 PER CENT, COMPARED TO THE SECOND HALF OF 1999. LOOKING AHEAD Given the increasing competition and unprecedented level of change within our industry, the quality of our staff will be absolutely crucial to the success of our organisation. During 2000, Lloyds TSB staff at every level have responded with vigour and commitment to the challenges we face and they can be justly proud of their achievements. Our staff are our greatest asset, and I am conﬁdent that they have the talent to ensure our continued success. I am most grateful for their tremendous contribution. he has given to me during my four years as Group Chief Executive, but also for his unique contribution to the Lloyds TSB Group and to British banking over the past forty years. His retirement will indeed mark the end of an era and we wish him every happiness and success in the next stage of his life. Maarten van den Bergh succeeds Sir Brian in April and I look forward to working equally closely with him, over the next few years. It gives me great pleasure to close by paying tribute to Sir Brian Pitman, our Chairman, who will retire in April, not only for the signiﬁcant help and guidance Peter Ellwood Group Chief Executive 15 February 2001 LLOYDS TSB GROUP 7 our role in the community Education’ we are working with 2,750 Strong communities form the building blocks of business success and, with the schools and 50 local education largest community programme in the UK, authorities to promote quality in school Lloyds TSB has taken a leading role in management and more than 600 making a positive difference to local members of staff receive training and communities. support for their school governor To help tackle ﬁnancial exclusion and responsibilities. promote regeneration, we have launched We continue to support those charitable a new Bank Account for low-income organisations that are the lifeblood of local customers, developed a package of communities through the Lloyds TSB support for community credit unions and Foundations. The four independent extended our support for money advice Foundations receive one per cent of services. Working in partnership with Lloyds TSB Group’s pre-tax proﬁts, voluntary and public organisations, we averaged over three years, in lieu of their have also helped to create a blueprint for shareholder dividend. In 2001, they will a new community-based ﬁnancial service receive more than £34 million to support to bring mainstream ﬁnancial services to registered charities and make £1.2 million deprived communities. And to ensure available to match funds raised, and time that no community where we are currently given, by staff to charities through the represented is left without access to a Matched Giving Scheme. bank, we will no longer close any Lloyds TSB branch where, as of 1 May 2000, we are the last bank in town. Since the merger of Lloyds Bank and TSB in 1995, including the £34 million to be paid in respect of 2000, the four We play an active role in education too. Foundations will have received more than Lloyds TSB Live! has provided more than £120 million to distribute to charities, 900,000 secondary school children with placing the Lloyds TSB Foundations opportunities to take part in drama, amongst the largest independent grant- music and sport. Through ‘Quality in giving trusts in the UK. 8 LLOYDS TSB GROUP WE AIM TO SUPPORT THOSE COMMUNITIES THAT WE ALSO SERVE AS A BUSINESS 34 31 27 21 13 96 97 98 99 00 DISTRIBUTION TO THE LLOYDS TSB FOUNDATIONS (£M) the businesses of Lloyds TSB Lloyds TSB is one of the leading UK-based ﬁnancial services • Internet Banking. Internet Banking provides online banking groups, whose businesses provide a comprehensive range of facilities for personal and business customers and enables them banking and ﬁnancial services in the UK and overseas. At the to conduct their ﬁnancial affairs without using the branch end of 2000 total group assets were £218 billion and there network. Over 1.2 million customers have registered to use the were over 77,000 employees. Market capitalisation was Group’s internet banking services. £39 billion. • Business Banking. Small businesses are served by dedicated The main businesses and activities of the Group during 2000 business managers based in over 450 locations throughout the are described below: UK Retail Financial Services encompasses three of the main businesses – UK Retail Banking, Mortgages, and Insurance and Investments – and provides a full range of banking and ﬁnancial services to 16 million customers. With more than 2,400 branches of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester (C&G), the Group provides UK. Customers have access to a full range of tailored business services including money transmission, lending and deposits, asset ﬁnance, factoring, mortgages, insurance and investments, as well as success4business, an internet portal for business customers. Lloyds TSB is the leading bank for new business start-ups with around one in four opening accounts with the Group. comprehensive geographic coverage in England, Scotland and • Private Banking and Stockbroking. Private Banking provides Wales. UK Retail Banking • Current accounts, savings and investment accounts, and consumer lending. The retail branches of Lloyds TSB Bank offer a broad range of branded products and C&G provides retail a range of tailor-made wealth management services and products to individuals from 40 ofﬁces throughout the UK. In addition to asset management, these include tax and estate planning, executor and trustee services, deposit taking and lending, insurance, and personal equity plan and ISA products. At the end of 2000, funds managed and administered totalled investments through its branch network and a postal investment some £12 billion. centre. • Card Services provides a range of card-based products and services, including credit and debit cards and card processing services for retailers. The Group is a member of both the VISA Lloyds TSB Stockbrokers undertakes retail stockbroking through its Sharedeal Direct telephone service. Mortgages and MasterCard payment systems and is the third largest credit Cheltenham & Gloucester is the Group’s specialist residential card issuer in the UK. • Cash machines. The Group has one of the largest cash machine networks of any leading banking group in the UK and personal customers of Lloyds TSB Bank are able to withdraw cash, check balances and obtain mini statements through 4,400 cashpoints at branches and external locations around the country. In addition, they have access to a further 27,000 cash machines mortgage provider, selling its mortgages through branches of C&G and Lloyds TSB Bank in England and Wales, as well as through the telephone, internet and postal service, C&G TeleDirect. The Group is the third largest residential mortgage lender in the UK, with a market share of 9.8 per cent, loans outstanding at the end of 2000 of £52.7 billion and over 980,000 borrowers. via LINK in the UK and to cash machines worldwide through the Insurance and Investments VISA and MasterCard networks. • Scottish Widows is the Group’s specialist provider of life • Telephone Banking. Telephone Banking continues to grow and assurance, pensions and investment products, which are the Group provides one of the largest telephony services in Europe. distributed through the Lloyds TSB branch network, through At the end of 2000 over 2.0 million customers had registered to independent ﬁnancial advisers and directly via the telephone use the services of PhoneBank and the automated voice response and the internet. service PhoneBank Express. LLOYDS TSB GROUP 9 the businesses of Lloyds TSB • General insurance. Lloyds TSB General Insurance provides International Banking general insurance and broking services through the retail branches of Lloyds TSB Bank and C&G, and through a direct telephone operation and the internet. The business is the market leader in the distribution of household insurance in the UK. • Scottish Widows Investment Partnership manages funds for the Group’s retail life, pensions and investment products. Clients also include corporate pension schemes, local • The Americas. The Group has operated in The Americas for over 130 years and has ofﬁces in Argentina, Brazil, Colombia and 6 other countries. In addition there are private banking and investment operations in the United States and the Bahamas. • New Zealand. The National Bank of New Zealand is the country’s second largest bank and provides a full range of banking services through some 160 outlets. authorities and other institutions in the UK and overseas. At the end of 2000 funds under management totalled some • Europe. International Private Banking covers services to wealthy individuals outside their country of residence. The £87 billion. Wholesale Markets The Group’s relationships with major UK and multinational companies, banks and institutions, and medium-sized UK businesses, together with its activities in ﬁnancial markets, are managed through dedicated ofﬁces in the UK and a number of locations overseas, including New York and Tokyo. business is conducted through Switzerland and through 4 other countries overseas. There are additional private and corporate banking operations in Spain and France. • Offshore Banking comprises all the Group’s ofﬁces in the Channel Islands and Isle of Man, as well as its operations in Hong Kong, Singapore and Malaysia and representation in Belgium, Dubai and in the USA. It provides a full range of retail banking, private banking and ﬁnancial services to overseas • Treasury is a leading participant in foreign exchange, money residents and islanders, together with deposit services offshore and certain derivatives markets to meet the needs of customers, for UK residents. and as part of the Group’s trading activities, including liquidity management. • Corporate and Commercial provides a full range of banking and related services, including electronic banking, large value lease ﬁnance, share registration, venture capital, correspondent banking and capital markets services to major UK and multinational companies, ﬁnancial institutions and, through a network of dedicated ofﬁces, to medium-sized businesses in the UK. The Agricultural Mortgage Corporation provides long-term ﬁnance for the agricultural sector. • Asset ﬁnance provides leasing, hire purchase and loan products to the corporate and personal sectors through the Lloyds UDT, Chartered Trust and Lloyds TSB Autolease brands. Lloyds TSB Commercial Finance and Alex Lawrie Factors are leading invoice discounting and factoring companies, providing ﬁnance to developing companies. 10 LLOYDS TSB GROUP ﬁnancial review ACCOUNTING POLICIES AND PRESENTATION Accounting policies are set out on pages 55 to 57. During the year, the Group implemented the requirements of Financial Reporting Standard 15, ‘Tangible Fixed Assets’; this has resulted in two changes. The Group’s freehold and long leasehold premises were previously included in the balance sheet at the last valuation on the basis of existing use value. Following the implementation of the new standard the Group’s premises will no longer be revalued, and a prior year adjustment has been made to restate the carrying value to historical cost. This has resulted in the carrying value of tangible ﬁxed assets as at 1 January 1999 being reduced by £112 million and an equivalent adjustment being made against reserves. The effect of this change upon the Group’s proﬁt and loss account is not signiﬁcant. In addition, the Group has reassessed the useful economic lives and residual values of its freehold and long leasehold premises and with effect from 1 January 2000, the cost of these properties, after deducting the value of land, is being depreciated over 50 years. Previously it was considered that the residual values were such that depreciation was not signiﬁcant. The effect of this change has been to increase the depreciation charge in 2000 by £8 million. The Group has also changed its presentation of assets held for leasing to customers under operating lease agreements. These assets are now included within tangible ﬁxed assets and depreciation charged over their estimated useful economic lives. Rental income received from customers is included within other operating income. Operating lease assets were previously included within loans and advances and the related income within net interest income. This change has no effect on proﬁt before tax. The effect of this change on the balance sheet has been to increase tangible ﬁxed assets by £1,280 million and reduce loans and advances to customers by an equivalent amount (31 December 1999: £479 million). Comparative ﬁgures have been restated. On 3 March 2000 the Group completed the acquisition of Scottish Widows and, as a result, the investments now held to support the with-proﬁts business of the Group’s life companies are much more signiﬁcant than in previous years. In accordance with generally accepted accounting practice amongst listed insurance companies in the UK, the results of the Group’s insurance businesses have been separately analysed between an operating proﬁt, which includes investment earnings calculated using longer-term rates of investment return, and a proﬁt before tax, separately identifying the short-term ﬂuctuations in investment returns (page 28). Other items also had a signiﬁcant impact on the Group’s 2000 results: changes in the economic assumptions applied to our long-term assurance business (page 29), exceptional restructuring costs (page 27), the impact of provisions for redress to past purchasers of pension policies (page 17) and a one-off charge relating to stakeholder pensions (page 17). In 1999, the sale and closure of businesses was also signiﬁcant (page 58). To facilitate comparisons of the results, certain ﬁnancial information and commentaries have been presented on a ‘business as usual operating proﬁt’ basis, which excludes the effect of these items. SUMMARY OF GROUP RESULTS As mentioned above, 2000 ﬁgures contain a number of items which had a signiﬁcant impact on the Group’s results. Excluding the impact of these items, proﬁt before tax on a business as usual basis rose by £425 million, or 11 per cent, to £4,246 million from £3,821 million in 1999. Total income increased by 8 per cent, operating expenses increased by 10 per cent and there was a 6 per cent increase in the trading surplus. Customer lending and deposits continued to grow, however the net interest margin decreased by 37 basis points to 3.49 per cent, partly as a result of the impact of the funding cost of the purchase of Scottish Widows which, as expected, reduced the margin by 20 basis points. Excluding the funding cost of Scottish Widows, the group net interest margin in the second half of 2000 was 3.67 per cent, compared with 3.70 per cent in the ﬁrst half of the year. Good volume growth in customer lending and deposits more than compensated for the decrease in the margin. The efﬁciency ratio was 43.6 per cent compared with 42.7 per cent in 1999. Proﬁt attributable to shareholders increased by 11 per cent, earnings per share increased by 10 per cent to 54.5p and economic proﬁt increased by 10 per cent to £2,142 million. The post-tax return on average shareholders’ equity was 31.8 per cent, compared with 32.7 per cent in 1999. The post-tax return on average assets increased to 1.92 per cent from 1.82 per cent in 1999, and the post-tax return on average risk-weighted assets increased to 3.44 per cent from 3.24 per cent. LLOYDS TSB GROUP 11 ﬁnancial review SUMMARY OF GROUP RESULTS (CONTINUED) Proﬁt before tax on a statutory basis rose by £265 million, or 7 per cent, to £3,886 million from £3,621 million in 1999. Economic proﬁt increased by 6 per cent to £1,882 million, earnings per share increased by 7 per cent to 49.6p, shareholders’ equity increased by 13 per cent and the post-tax return on average shareholders’ equity was 29.1 per cent. The transfer of Scottish Widows’ business to the Lloyds TSB Group was completed on 3 March 2000 and the results of the Scottish Widows’ business have been consolidated in full with effect from that date. On a business as usual basis, Scottish Widows contributed £403 million since 3 March 2000, before taking into account funding costs of £258 million. This compares with normalised pre-tax proﬁts of £349 million in 1999. As a result of the Scottish Widows acquisition, group fee income increased to 46 per cent of total income in 2000, compared with 40 per cent in 1999. In 2000 the contribution from Insurance and Investments rose to 34 per cent of group proﬁt, with more than half of this from life, pensions and unit trusts. The acquisition of Chartered Trust was completed on 1 September 2000. Its results have been consolidated in full with effect from that date and a restructuring provision of £21 million has been made to cover the costs of integrating Chartered Trust and Lloyds UDT. Excluding this restructuring provision and £9 million goodwill amortisation, the impact on group ﬁgures has been to increase net interest income by £31 million after funding costs of £12 million, increase other income by £53 million, increase operating expenses by £62 million, increase the provisions charge by £12 million and increase proﬁt before tax by £10 million. As previously anticipated, we incurred £188 million exceptional restructuring costs in 2000. E-commerce investment costs totalled approximately £150 million. Cost control will remain very important but a core element of our strategies is to continue to increase investment to underpin further our competitiveness and revenue growth opportunities. These strategies are aimed at increasing economic proﬁt from many of the Group’s higher growth markets, particularly wealth management, long-term savings and investments, business banking and the further segmentation of our core retail franchise. Accordingly, the Group’s efﬁciency ratio is expected to improve further over time but we no longer believe that it is appropriate to be constrained by a separate efﬁciency ratio target. The total group charge for bad and doubtful debts was 19 per cent lower at £475 million, compared with £588 million in 1999. The domestic charge decreased to £426 million from £500 million, lower provisions in retail banking and mortgages were partially offset by a higher charge in the motor ﬁnance businesses. Provisions overseas decreased to £49 million from £88 million mainly as a result of higher Emerging Market Debt provision releases, following debt repayments and some asset sales, which offset higher provisions in Argentina. The Group’s charge for bad and doubtful debts, expressed as a percentage of average lending, was 0.43 per cent compared to 0.57 per cent in 1999. At the end of the year speciﬁc provisions for bad and doubtful debts for the Group totalled £1,816 million, representing over 140 per cent of non-performing loans. The total capital ratio was 9.0 per cent and the tier 1 capital ratio was 8.2 per cent. Balance sheet assets increased by £42 billion, or 24 per cent, to £218 billion from £176 billion at the end of 1999. £25 billion of this growth was represented by an increase in long-term assurance liabilities to policyholders following the acquisition of Scottish Widows. Loans and advances to customers increased by £12 billion, or 12 per cent. Risk-weighted assets increased by 11 per cent to £93.5 billion from £84.1 billion at the end of 1999. Staff eligible to participate in the staff proﬁt sharing scheme will receive 10 per cent of basic salary (1999: 10.5 per cent). The total payment will be £108 million (1999: £104 million). 12 LLOYDS TSB GROUP ﬁnancial review QUALITY OF EARNINGS Insurance and Investments 33% (1999: 24%) UK Retail Banking 19% (1999: 21%) Wholesale Markets 17% (1999: 20%) Mortgages 20% (1999: 23%) International Banking 11% (1999: 12%) excluding central group items for the year ended 31 December 2000 PROFIT BEFORE TAX BY MAIN BUSINESSES UK Retail Financial Services Total proﬁt before tax on a business as usual basis from UK Retail Financial Services, which encompasses UK Retail Banking, Mortgages, and Insurance and Investments, increased by £599 million, or 24 per cent, to £3,129 million from £2,530 million in 1999. UK Retail Banking and Mortgages Total proﬁt before tax from UK Retail Banking and Mortgages rose by £25 million, or 2 per cent, to £1,682 million. Total income increased by 2 per cent and costs increased by 7 per cent, largely as a result of e-commerce investment costs and higher marketing costs. Bad debt provisions decreased by £93 million, or 22 per cent, to £332 million largely due to the good economic conditions during 2000, and a one-off beneﬁt of £42 million arising from a change in methodology for retail provisioning to recognise more accurately the amount that the Group expects to recover. Net interest income Other income Total income Operating expenses Trading surplus Provisions for bad and doubtful debts Proﬁt before tax Proﬁt before tax: UK Retail Banking Mortgages Efﬁciency ratio Total assets (year-end) Total risk-weighted assets (year-end) UK Retail Banking 2000 £m aaaaaffffffffffffffffffffffffff 2,962 1,143 aaaaaffffffffffffffffffffffffff 4,105 2,091 aaaaaffffffffffffffffffffffffff 2,014 332 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,682 817 865 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,682 50.9% £71.3bn £44.0bn 1999 £m aaaaaffffffffffffffffffffffffff 2,943 1,090 aaaaaffffffffffffffffffffffffff 4,033 1,951 aaaaaffffffffffffffffffffffffff 2,082 425 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,657 789 868 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,657 48.4% £64.3bn £39.7bn (the UK retail businesses of Lloyds TSB, providing banking and ﬁnancial services to personal and small business customers; private banking; and stockbroking) Pre-tax proﬁt from UK Retail Banking rose by £28 million, or 4 per cent, to £817 million. Total income increased by 2 per cent, costs increased by 7 per cent largely as a result of e-commerce investment costs, and there was a reduction of 19 per cent in bad debt provisions. A signiﬁcant element of the proﬁtability of the Group’s insurance operations is also driven through the relationship we have with our substantial retail customer base. LLOYDS TSB GROUP 13 ﬁnancial review UK Retail Banking (continued) Personal loans and credit card lending increased by 9 per cent since the end of 1999 and balances on current accounts and savings and investment accounts grew by 10 per cent over the same period, supported by the launch of a number of new products. The popularity of the Group’s Added Value current accounts continued with Lloyds TSB maintaining its position as a market leader in this area with over 2 million accounts in operation. The Group also continues to maintain market-leading positions in many of its core markets, including personal current accounts, savings and business banking. We have continued to develop a number of alternative distribution channels in order to offer a broad range of access points for our customers thereby improving service and enhancing revenue growth. PhoneBank, our telephone banking operation, is one of the largest in Europe with 1.3 million customers. In addition, PhoneBank Express, our leading edge interactive voice recognition system, now has over 700,000 registered users. PhoneBank and PhoneBank Express handled 23.5 million calls during the year. Our supermarket banking operation, branded ‘easibank’, continues to expand and we now have 22 branches in ASDA stores or large shopping centres. We have extended our relationship with the Post Ofﬁce to allow our personal customers to undertake banking transactions in post ofﬁces in Scotland, in addition to our existing arrangements in England and Wales. We continue to make substantial progress with our e-commerce strategy. We exceeded our target of 1 million online customers of LloydsTSB.com by the end of 2000 and we now have over 1.2 million customers registered to use our online banking service. LloydsTSB.com is now consistently one of the most visited ﬁnancial websites in Europe. We successfully launched our standalone internet bank, evolvebank.com, in Spain during November 2000. We have also made substantial progress on a number of initiatives for business customers. The Group has launched success4business.com, an internet portal designed to help small business customers maximise opportunities in e-commerce, and LloydsTSBMarketplace, a trade facilitation web service, that allows suppliers and buyers access to a secure e-enabled environment to conduct business with a wide variety of companies within their speciﬁc marketplace. Our new e-procurement system has recently been launched throughout the Group and over 8,000 staff can now make purchases from their desktop PCs, saving substantial time and money as all purchases are made using the Group’s preferred suppliers with whom discounts have been negotiated. On 20 July 2000 the Group announced a mobile banking offer, in association with BT Cellnet, that will provide Lloyds TSB customers with access to the Bank’s internet banking service, as well as a range of other online services. We have also started to provide, in association with Telewest, a product information service on digital interactive television, and will launch a banking service in Spring 2001. On 24 July 2000 the Group announced the launch of a £20 million joint venture with antfactory, a leading European e-commerce investment company. The new joint venture, called Valuefactory Ventures, aims to identify, invest in and develop global new economy businesses as standalone, value-creating companies. The focus will be on investment opportunities which can beneﬁt from the resources and capabilities of Lloyds TSB and antfactory. On 15 August 2000 the Group announced the creation of a new payments processing company – Intelligent Processing Solutions Limited (iPSL) – in conjunction with Unisys and Barclays. iPSL, which is 24.5 per cent owned by Lloyds TSB, will handle all the Group’s cheque processing activities. With increased levels of electronic banking leading to a decline in the volume of cheques being processed, iPSL provides the economies of scale needed to offset the increasing unit cost of processing cheques. On 13 December 2000 the Group announced that it had agreed to form a joint venture between Goldﬁsh, Centrica’s ﬁnancial services brand, and evolvebank.com, Lloyds TSB’s standalone internet banking operation. The joint venture will be known as Goldﬁsh Holdings Ltd. Centrica will have a 70 per cent share of the joint venture and Lloyds TSB will have a 30 per cent share. The joint venture intends to offer a broad range of integrated ﬁnancial services products from which customers can select to meet their individual needs. evolvebank.com will provide technology and banking expertise, together with Lloyds TSB’s track record in bancassurance and regulatory experience. Centrica will bring the Goldﬁsh brand, together with immediate access to 9 million Centrica customers. 14 LLOYDS TSB GROUP ﬁnancial review UK Retail Banking (continued) Business Banking continues to attract a substantial number of new customers and has further consolidated the Group’s position as a market leader in the recruitment of start-up businesses. Some 116,000 new business customers chose Lloyds TSB during the year. Revenue growth and proﬁtability has again improved based on a 14 per cent increase in lodgements, a 13 per cent increase in lending and increased sales of insurance, mortgages and investment products. Business Banking has, during 2000, successfully launched four new relationship offers which provide our small business customers with a choice of options regarding the level of business and banking support they require from Lloyds TSB. Following a pilot study in May 2000, full national roll out has commenced and supports our strategy of increasing market share from 19 per cent in 1999 to 23 per cent in 2003. In our UK wealth management businesses, UK Private Banking had another successful year. Proﬁt before tax increased by 11 per cent to £110 million, from £99 million in 1999. £1.5 billion of new funds were gained during the year and total funds managed and administered now stand at some £12.2 billion. Lloyds TSB Stockbrokers, one of the largest retail stockbrokers in the UK, continued to perform well as high transaction levels were combined with efﬁciency gains. Pre-tax proﬁt increased to £23 million compared with £21 million last year. A new wealth management strategy, based on providing a new set of products and services for more afﬂuent customers, is now being implemented under a new brand ‘Create’. For these customers we will provide tailored independent advice, superior service and a choice of investment options from quality providers. Key elements will be our online share dealing and funds hypermarket, and a new Wealth Management Account that will allow consolidation of all ﬁnancial products into a single account. The Create offer will be underpinned by access to the comprehensive broking services of Goldman Sachs PrimeAccess™. This service will provide clients with customised proprietary research from Goldman Sachs, international equity dealing and market making, custody and settlement, and access to selected equity capital market offerings managed by Goldman Sachs. Create forms a key part of Lloyds TSB’s revenue growth strategy and expects to have around 250,000 clients by the end of 2002. Lloyds TSB currently makes pre-tax proﬁts of some £300 million annually from wealth management in the UK and overseas, and believes that this can be doubled within four years of Create’s full market launch this summer. Mortgages (covering the Group’s total UK mortgage business through Cheltenham & Gloucester, Lloyds TSB, Lloyds TSB Scotland, Scottish Widows Bank and C&G TeleDirect) Proﬁt before tax Efﬁciency ratio Gross new mortgage lending Market share of gross new mortgage lending Net new mortgage lending Market share of net new mortgage lending Mortgages outstanding (year-end) Market share of mortgages outstanding 2000 aaaaaffffffffffffffffffffffffff £865m 23.9% £11.5bn 9.6% £4.6bn 11.4% £52.7bn 9.8% 1999 aaaaaffffffffffffffffffffffffff £868m 22.6% £10.7bn 9.4% £2.8bn 7.4% £47.5bn 9.5% Intense competition in the mortgage market was evident throughout the year leading, as anticipated, to a lower net interest margin which resulted in pre-tax proﬁt from Mortgages decreasing by £3 million to £865 million, from £868 million in 1999. Proﬁt before tax in the second half of 2000 was £436 million, £7 million, or 2 per cent, higher than in the ﬁrst half of the year. The efﬁciency ratio of the Group’s total mortgage business was 23.9 per cent compared with 22.6 per cent in 1999. The Group continues to be one of the most efﬁcient mortgage providers in the UK. Against this competitive background, the Group achieved in excess of its natural market share of net new lending. Gross new lending increased by 7 per cent to £11.5 billion, compared with £10.7 billion a year ago, and net new lending was £4.6 billion, signiﬁcantly higher than £2.8 billion last year. This represented an estimated market share of net new lending of 11.4 per cent, higher than our 9.8 per cent share of mortgages outstanding, and is particularly encouraging given that mortgages are key recruitment products for other retail products and services. LLOYDS TSB GROUP 15 ﬁnancial review Mortgages (continued) C&G continues to beneﬁt from mortgage sales distribution through the Lloyds TSB branch network, the IFA market and from the strength of the C&G brand. Once again the provision of a ﬁrst class service has been a signiﬁcant factor with independent ﬁnancial advisers awarding C&G its sixth consecutive 5-star rating in the 2000 Financial Adviser service awards. Business levels sourced from intermediaries remain strong. A relatively low arrears position and the beneﬁcial effect of house price increases have meant that bad debt provisions remained at a low level. New provisions were offset by releases and recoveries resulting in a net credit of £13 million for the year, compared with a credit of £3 million in 1999. The quality of our mortgage lending remains very satisfactory. Insurance and Investments (the life, pensions and unit trust businesses of Scottish Widows and Abbey Life; general insurance underwriting and broking; and Scottish Widows Investment Partnership) Life and pensions: Scottish Widows Lloyds TSB bancassurance Abbey Life General insurance Operating proﬁt from Insurance* Scottish Widows Investment Partnership: Scottish Widows Hill Samuel Asset Management Total operating proﬁt* Short-term ﬂuctuations in investment returns Changes in economic assumptions Pension provisions Stakeholder pension related charge 2000 £m aaaaaffffffffffffffffffffffffff 393 259 164 aaaaaffffffffffffffffffffffffff 816 591 aaaaaffffffffffffffffffffffffff 1,407 10 30 40 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,447 (119) 127 (100) (80) 1999 £m aaaaaffffffffffffffffffffffffff – 234 156 aaaaaffffffffffffffffffffffffff 390 461 aaaaaffffffffffffffffffffffffff 851 – 22 22 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 873 28 – (102) – * including ‘normalised’ investment returns based on long-term rates of investment return and excluding changes in the economic assumptions applied to our long-term assurance business, pension provisions and stakeholder pension related charge Operating proﬁt, including investment returns based on long-term rates of investment return, from Insurance and Investments increased by 66 per cent to £1,447 million from £873 million, largely as a result of the inclusion, since 3 March 2000, of Scottish Widows within our life and pensions business. Since that date Scottish Widows contributed pre-tax proﬁts of £403 million, before funding costs of £258 million. This compares with normalised pre-tax proﬁts of £349 million in 1999. Proﬁt before tax from our life and pensions business increased by £426 million, or 109 per cent, to £816 million. Weighted sales of life, pensions and unit trusts increased by 40 per cent as the sale, on 1 February 2000, of the new business capability of Abbey Life was offset by the inclusion, from 3 March 2000, of Scottish Widows. Pre-tax proﬁt from general insurance operations, comprising underwriting and broking, rose by £130 million, or 28 per cent, to £591 million, mainly as a result of continued strong revenue growth and an improvement in our claims experience. The Group has maintained its position as a leading distributor of personal lines insurance in the UK. The merger of Scottish Widows Investment Management and Hill Samuel Asset Management was completed on 30 June 2000, and the enlarged asset management operation was launched under a new brand, Scottish Widows Investment Partnership. The creation of Scottish Widows Investment Partnership, with some £87 billion of funds under management, has enabled the Group to become a leading player in the asset management business. Pre-tax proﬁt from investment management for the year was £40 million, up 82 per cent from £22 million in 1999, largely as a result of the inclusion, since 3 March 2000, of the Scottish Widows investment management business. 16 LLOYDS TSB GROUP Life and pensions (including unit trusts) New business Existing business Investment earnings Life and pensions distribution costs Unit trusts Unit trust distribution costs Operating proﬁt* ﬁnancial review 2000 £m aaaaaffffffffffffffffffffffffff 1999 £m aaaaaffffffffffffffffffffffffff 281 500 212 (225) 768 157 (109) 48 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 816 134 260 38 (99) 333 138 (81) 57 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 390 * * including ‘normalised’ investment returns based on long-term rates of investment return Weighted sales of life, pensions and unit trusts increased by 40 per cent to £789.5 million from £565.2 million in 1999 as a result of the inclusion, from 3 March 2000, of Scottish Widows. The withdrawal from sale of mortgage-related endowment policies slowed the sales of regular premium life policies. On a pro forma basis, weighted sales for the combined Lloyds TSB bancassurance and Scottish Widows life, pensions and unit trust businesses were £711.0 million, compared to £713.1 million in 1999. By distribution channel pro forma weighted sales in 2000 were £353.3 million from the branch network, £280.8 million from independent ﬁnancial advisers and £76.9 million from direct channels, compared with £355.2 million, £296.5 million and £61.4 million respectively in 1999. In the second half of 2000, weighted sales increased by 19 per cent from £318.4 million in the second half of 1999 to £379.8 million. In 2001, we anticipate that our sales growth will exceed overall market growth. From the date of acquisition, Scottish Widows products have been available throughout the Lloyds TSB branch network, as well as via independent ﬁnancial advisers and directly from Scottish Widows itself. From August 2000, Scottish Widows has successfully been selling term assurance to Cheltenham & Gloucester customers. Scottish Widows maintained its 5-star awards from independent ﬁnancial advisers in both the Life and Pensions and Investment Provider ratings. This is the ﬁfth consecutive Life and Pensions Provider 5-star award and the fourth consecutive Investment Provider 5-star award. The adequacy of the provision for redress to past purchasers of pension policies has been reviewed in the light of the changes arising from SERPS adjustments, further experience and improved knowledge as to the number and size of compensation claims likely to be paid. The cost of redress is forecast to increase by £100 million and a provision of this amount has been made, bringing the total provision charged for this purpose to £902 million, of which £654 million had been used at 31 December 2000. Stakeholder pensions will be introduced from 6 April 2001, with charges on these new products being limited by Government to a maximum of 1 per cent per annum. In order not to disadvantage existing pensions customers, charges will be reduced on our existing book. This will have the effect of reducing future cash ﬂows in the Group’s embedded value calculation and a one-off charge of £80 million has therefore been made to the 2000 proﬁt and loss account. In 1998, a provision was made within Abbey Life for liabilities under certain unit-linked products with guaranteed annuity options written in the mid-1960s to the mid-1980s and at 31 December 2000 this provision was £152 million. We continually review the adequacy of the provision and remain satisﬁed that no further provision is necessary at this stage. As part of the acquisition of Scottish Widows by the Group, certain measures were taken to protect shareholders from any likely potential exposure to this issue. Scottish Widows has assets to match its liabilities in respect of guaranteed annuity options. The assets are held in such a way that should a change in interest rates cause the liabilities to increase then the assets will also increase to reﬂect this. LLOYDS TSB GROUP 17 ﬁnancial review Life and pensions (including unit trusts) (continued) Total new business premium income and unit trust sales: Regular premiums Single premiums Unit trusts Weighted sales (regular + 1⁄10 single) Weighted sales by distribution channel: Branch network Independent ﬁnancial advisers Direct Fund management Scottish Widows (including bancassurance): Regular premiums: Life – mortgage related – non-mortgage related Pensions Fund management Health Total regular premiums Single premiums: Life Annuities Pensions Fund management Total single premiums External unit trust sales: Regular payments Single amounts Total external unit trust sales Abbey Life:* Single premiums Regular premiums External unit trust sales: Regular payments Single amounts 2000 £m aaaaaffffffffffffffffffffffffff 158.1 3,501.4 1,993.3 789.5 353.3 253.0 69.5 113.7 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 789.5 23.6 19.2 105.2 1.2 5.6 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 154.8 1,196.5 327.1 830.8 1,125.3 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,479.7 90.9 1,899.1 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,990.0 21.7 3.3 0.1 3.2 1999 £m aaaaaffffffffffffffffffffffffff 129.4 1,875.7 1,770.2 565.2 355.2 92.8 9.3 107.9 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 565.2 31.4 9.8 28.2 – 4.9 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 74.3 329.6 101.7 79.3 1,079.0 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,589.6 76.7 1,624.5 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,701.2 286.1 55.1 2.4 66.6 Total life funds under management 51,085 26,542 * The Group disposed of the new business capability of Abbey Life on 1 February 2000 18 LLOYDS TSB GROUP General Insurance Premium income from underwriting: Creditor Home Health Other Re-insurance premiums Commissions from insurance broking: Creditor Home Health Other Operating proﬁt* * including ‘normalised’ investment returns based on long-term rates of investment return ﬁnancial review 2000 £m aaaaaffffffffffffffffffffffffff 126 228 50 – (5) aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 399 225 34 19 120 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 398 591 1999 £m aaaaaffffffffffffffffffffffffff 136 203 55 1 (5) aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 390 175 35 21 96 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 327 461 Operating proﬁt, excluding short-term ﬂuctuations in investment returns, from general insurance operations, comprising underwriting and broking, rose by £130 million, or 28 per cent, to £591 million. Income from creditor insurance increased by 13 per cent, reﬂecting higher personal and business sector lending. Sales of home insurance policies increased by 10 per cent, with strong growth in both branch network and direct sales. Lloyds TSB is now the leading distributor of household insurance in the UK. Overall new business sales in 2000 were over 2.4 million, 14 per cent higher than in 1999, of which over 900,000 were home insurance policies. The overall increase in sales, together with renewal business, produced a 22 per cent increase in commission income from broking and a 2 per cent increase in earned premium income from underwriting. Investment income, on a normalised basis, increased by 37 per cent to £67 million. The overall claims ratio of 35.1 per cent was lower than in 1999 (42.8 per cent). Claims were £27 million, or 16 per cent, lower at £142 million than in last year. This reﬂected the favourable impact on our creditor products of good economic conditions throughout the year, partly offset by the adverse weather conditions in the autumn. The Group now has six general insurance products live on interactive television and has full quote and buy functionality on the internet for home, motor and travel insurance. Wholesale Markets (banking, treasury, large value lease ﬁnance, long-term agricultural ﬁnance, share registration, venture capital, factoring and invoice discounting, and other related services for major UK and multinational companies, banks and ﬁnancial institutions, and medium-sized UK businesses; and Lloyds UDT) Net interest income Other income Total income Operating expenses Trading surplus Provisions for bad and doubtful debts Amounts written off ﬁxed asset investments Proﬁt before tax Efﬁciency ratio Total assets (year-end) Total risk-weighted assets (year-end) 2000 £m aaaaaffffffffffffffffffffffffff 900 622 aaaaaffffffffffffffffffffffffff 1,522 665 aaaaaffffffffffffffffffffffffff 857 94 14 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 749 43.7% £65.7bn £36.5bn 1999 £m aaaaaffffffffffffffffffffffffff 930 444 aaaaaffffffffffffffffffffffffff 1,374 564 aaaaaffffffffffffffffffffffffff 810 75 7 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 728 41.0% £61.5bn £31.6bn LLOYDS TSB GROUP 19 ﬁnancial review Wholesale Markets (continued) Wholesale Markets pre-tax proﬁt increased by £21 million, or 3 per cent, to £749 million. Provisions for bad and doubtful debts increased by £19 million to £94 million largely as a result of a higher level of provisions in the motor ﬁnance businesses and the acquisition of Chartered Trust. Total assets increased by 7 per cent and risk-weighted assets grew by 16 per cent reﬂecting the acquisition of Chartered Trust. The efﬁciency ratio increased to 43.7 per cent, from 41.0 per cent in 1999, again reﬂecting the acquisition of Chartered Trust. Our Corporate and Financial Institutions businesses, serving the larger corporate market and ﬁnancial institutions, achieved record results. Corporate Banking’s continuing focus on quality income growth ensured another strong performance. Bad debt provisions remain at a relatively low level. Lloyds TSB Leasing maintained its position as the largest ‘big ticket’ leasing company in the UK and Lloyds TSB Commercial Banking, serving the commercial middle market, continued to perform well, with revenue increases, tight cost control and lower provisions all contributing to the achievement of record proﬁts for the year. Lloyds TSB Commercial Finance and Alex Lawrie Factors, two of the leading invoice discounting and factoring companies in the UK, expanded their range of specialist products and services and continued to grow their market share. Lloyds TSB Development Capital continued to expand its presence in the venture capital market and achieved record proﬁts in 2000. The Agricultural Mortgage Corporation maintained its position as a market leader in the provision of long-term ﬁnance to farmers. Lloyds TSB Registrars had another very successful year with income growing by 9 per cent and proﬁt by 41 per cent to a record £45 million. During the year shareview.co.uk, our unique internet information service for shareholders, was successfully launched. In Treasury Division the more stable interest rate environment, compared with 1999, resulted in lower income from our interest rate management businesses. The Group’s activity in the derivatives markets continues to remain focused on straight cash based products. On 1 September 2000, the Group announced that its subsidiary, Lloyds UDT, had acquired Chartered Trust Group Plc and ACL Autolease Holdings Limited (‘Chartered Trust’), the UK consumer ﬁnance and contract hire subsidiaries of Standard Chartered Bank, for a cash consideration of £614 million. The acquisition allowed the Group to consolidate its position as market leader in the independent provision of motor ﬁnance and become one of the leading contract hire providers in the UK. A restructuring provision of £21 million has been made to cover the costs of integrating Chartered Trust and Lloyds UDT. International Banking (banking and ﬁnancial services overseas in four main areas: The Americas, New Zealand, Europe and Offshore Banking; and Emerging Markets Debt) Net interest income Other income Total income Operating expenses Trading surplus Provisions for bad and doubtful debts Proﬁt before tax Efﬁciency ratio Total assets (year-end) Total risk-weighted assets (year-end) 2000 £m aaaaaffffffffffffffffffffffffff 753 386 aaaaaffffffffffffffffffffffffff 1,139 589 aaaaaffffffffffffffffffffffffff 550 49 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 501 51.7% £19.2bn £11.9bn 1999 £m aaaaaffffffffffffffffffffffffff 734 378 aaaaaffffffffffffffffffffffffff 1,112 580 aaaaaffffffffffffffffffffffffff 532 88 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 444 52.2% £19.4bn £11.6bn International Banking pre-tax proﬁt was £57 million, or 13 per cent, higher at £501 million compared with 1999 and represented 12 per cent of group pre-tax proﬁt. 4 per cent related to our New Zealand business, 5 per cent to our Europe and offshore banking operations, and 3 per cent to Latin America. 20 LLOYDS TSB GROUP ﬁnancial review International Banking (continued) Proﬁts from New Zealand in local currency terms increased by 21 per cent. International private banking and the Group’s offshore banking operations both showed strong improvements over 1999 with an 18 per cent increase in pre-tax proﬁt to £194 million, from £165 million in 1999. Our consumer ﬁnance business in Brazil, Losango Consumer Finance, made a pre-tax proﬁt of £41 million, compared with a proﬁt of £31 million in 1999. The Emerging Markets Debt portfolio contributed £104 million, which included a release of provisions of £85 million following the repayment of debt by certain borrowers and some asset sales. This compared with a contribution of £48 million in 1999, which included a release of provisions of £32 million. At the end of December 2000 the Group’s provisionable exposure to Emerging Market economies which is included in loans and advances was £1,352 million (December 1999: £1,328 million) against which provisions of £803 million (December 1999: £799 million) were held, giving cover of 59 per cent (December 1999: 60 per cent). Based on secondary market prices, the surplus of market value over net book value of the total Emerging Markets Debt portfolio (including advances, unapplied interest and collateralised bonds held as investments) was more than £800 million (December 1999: £700 million). Central group items (earnings on surplus capital, central costs and other unallocated items) Accrual for payment to Lloyds TSB Foundations Earnings on surplus capital, central costs and other unallocated items 2000 £m aaaaaffffffffffffffffffffffffff (34) (99) aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff (133) 1999 £m aaaaaffffffffffffffffffffffffff (31) 150 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 119 The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly disabled and disadvantaged people, to play a fuller role in society. The Foundations receive 1 per cent of the Group’s pre-tax proﬁt, averaged over 3 years, instead of the dividend on their shareholdings. In 2001 they will receive £34 million (2000: £31 million) to distribute to charities, making them in aggregate one of the largest general grant-giving organisations in the UK. The reduction in earnings on surplus capital, central costs and other unallocated items in 2000 reﬂects the incorporation, for the ﬁrst time, of the funding cost of the purchase of Scottish Widows. Historically it has been the Group’s practice for central income items such as the earnings on surplus group capital and the proﬁt on the sale of investments to be allocated to business units for statutory reporting purposes. To avoid unnecessary volatility in business unit earnings, as a result of decisions at the Group Centre on the build up and use of surplus capital, these central income items will in the future be reported within central group items. The effect on 1999 ﬁgures, which have been restated, is an increase in central group items of £168 million offset by a commensurate reduction in business unit earnings. LLOYDS TSB GROUP 21 ﬁnancial review NET INTEREST INCOME Group: Net interest income £m Average interest-earning assets £m Gross yield on interest-earning assets % Interest spread % Net interest margin % Domestic: Net interest income £m Average interest-earning assets £m Gross yield on interest-earning assets % Interest spread % Net interest margin % International: Net interest income £m Average interest-earning assets £m Gross yield on interest-earning assets % Interest spread % Net interest margin % 2000 aaaaaffffffffffffffffffffffffff 4,587 131,369 8.41 2.95 3.49 3,956 110,574 8.07 3.06 3.58 631 20,795 10.23 2.41 3.03 1999 aaaaaffffffffffffffffffffffffff 4,783 123,988 8.43 3.16 3.86 4,154 104,242 7.69 3.38 3.98 629 19,746 12.34 2.36 3.19 Notes: a) Gross yield is the rate of interest earned on average interest-earning assets. b) Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest- bearing liabilities. c) Net interest margin is net interest income as a percentage of average interest-earning assets. d) The analysis of net interest income by domestic and international operations shown above is based on the location of the ofﬁce recording the transaction, except for lending by the international business booked in London. For details of payments made under cash gift and discount mortgage schemes, see page 65, note 31. Excluding the £258 million funding cost of Scottish Widows, group net interest income increased by £62 million, or 1 per cent, to £4,845 million, notwithstanding a reduction of £200 million caused by a 17 basis point reduction in the underlying net interest margin. This £200 million reduction in net interest income was more than offset by higher volumes of both customer lending and deposits. Average interest-earning assets increased by 6 per cent to £131 billion. There was further growth in mortgages and other customer lending in the UK. The net interest margin decreased to 3.49 per cent, a reduction of 37 basis points. The impact of the funding cost of Scottish Widows represented 20 basis points of this 37 basis point reduction, with the residual 17 basis point decrease in the margin reﬂecting the increasingly competitive operating environment and a lower international net interest margin. Excluding the funding cost of Scottish Widows, the group net interest margin in the second half of 2000 was 3.67 per cent, compared with 3.70 per cent in the ﬁrst half of the year. Domestic net interest income decreased by £198 million, or 5 per cent, to £3,956 million, reﬂecting the £258 million funding cost of Scottish Widows, and this represents 86 per cent of total group net interest income. Average interest-earning assets increased by 6 per cent to £111 billion. There was further growth in mortgages and other customer lending. The net interest margin decreased by 40 basis points to 3.58 per cent, again partly reﬂecting the funding cost of Scottish Widows, which caused a reduction of 23 basis points. In addition, the increasingly competitive operating environment, particularly for retail lending, and the higher cost of deposit products in a higher average interest rate environment caused an underlying reduction of 17 basis points in the net interest margin. During the year the Group had strong growth in a number of ﬁner margin products, particularly mortgages and preferentially priced savings accounts. Excluding the funding cost of Scottish Widows, the domestic net interest margin in the second half of 2000 was 3.80 per cent, compared with 3.83 per cent in the ﬁrst half of the year. Net interest income from international operations increased by £2 million to £631 million, representing 14 per cent of total group net interest income. Underlying growth on a local currency basis was largely offset by a £14 million reduction caused by exchange rate movements. Average interest-earning assets on a local currency basis increased by 7 per cent, helped by growth in our New Zealand mortgage portfolio, but this increase was partly offset by the effect of exchange rate movements. The international net interest margin decreased by 16 basis points to 3.03 per cent. Whilst the interest spread held up well, the gross yield on interest-earning assets fell signiﬁcantly as a result of lower interest rates in Latin America. 22 LLOYDS TSB GROUP ﬁnancial review OTHER INCOME Other income increased by £737 million, or 23 per cent, to £3,882 million. This represented 46 per cent of total income. Scottish Widows contributed £317 million of this increase. Excluding short-term ﬂuctuations in investment returns in our insurance businesses, changes in the economic assumptions applied to our long-term assurance business, pension provisions and the stakeholder pension related charge in 2000, other income increased by £837 million, or 26 per cent, to £4,054 million. Fees and commissions receivable increased by 11 per cent reﬂecting increased business volumes and strong growth in income from insurance broking. Other UK fees and commissions increased by 20 per cent, as a result of growth in all core UK businesses and the impact of the acquisition of Scottish Widows. International fees and commissions increased by 6 per cent. Fees and commissions payable increased by £53 million against 1999, largely as a result of higher interchange fees for card services and increased costs associated with a number of new products. Income from long-term assurance business increased by £388 million, largely as a result of the impact of the acquisition of Scottish Widows. General insurance premium income on underwritten business increased by £9 million, or 2 per cent, against 1999. Other operating income increased by £139 million, largely reﬂecting the acquisition of Chartered Trust and increased operating lease rental income within Lloyds TSB Leasing. There were also higher gains on the realisation of venture capital investments. Fees and commissions receivable: UK current account fees Other UK fees and commissions Insurance broking Card services International fees and commissions Fees and commissions payable Dealing proﬁts (before expenses): Foreign exchange trading income Securities and other gains Income from long-term assurance business: Income before pension provisions Pension provisions General insurance premium income Other operating income Total other income 2000 £m aaaaaffffffffffffffffffffffffff 1999 £m aaaaaffffffffffffffffffffffffff 629 1,171 398 304 266 2,768 (479) 141 57 198 715 (100) 615 399 381 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,882 663 978 327 279 250 2,497 (426) 133 82 215 329 (102) 227 390 242 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,145 LLOYDS TSB GROUP 23 ﬁnancial review OPERATING EXPENSES Administrative expenses Staff: Salaries and proﬁt sharing National insurance Pensions Restructuring Other staff costs Premises and equipment: Rent and rates Hire of equipment Repairs and maintenance Other Other expenses: Communications and external data processing Advertising and promotion Professional fees Other Administrative expenses Exceptional restructuring costs Total administrative expenses Depreciation Amortisation of goodwill Total operating expenses Efﬁciency ratio Efﬁciency ratio* 2000 £m aaaaaffffffffffffffffffffffffff 1999 £m aaaaaffffffffffffffffffffffffff 1,626 131 (105) 47 189 1,888 247 26 115 109 497 394 167 126 306 993 aaaaaffffffffffffffffffffffffff 3,378 188 aaaaaffffffffffffffffffffffffff 3,566 364 22 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,952 46.7% 43.6% 1,500 125 (108) 20 180 1,717 250 33 107 100 490 406 113 90 324 933 aaaaaffffffffffffffffffffffffff 3,140 – aaaaaffffffffffffffffffffffffff 3,140 265 12 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,417 43.1% 42.7% * excluding short-term ﬂuctuations in investment returns, changes in economic assumptions, exceptional restructuring costs, pension provisions and stakeholder pension related charge Total operating expenses increased by £535 million, or 16 per cent, compared with 1999. On a like-for-like basis, excluding exceptional restructuring costs of £188 million, increased costs following the acquisitions of Scottish Widows and Chartered Trust of £117 million, and additional investments in revenue growth businesses and e-commerce of £224 million (1999: £44 million), costs increased by 1 per cent to £3,423 million, from £3,373 million in 1999, less than the underlying rate of inﬂation. Reduced costs in many areas were offset by higher staff costs, partly reﬂecting an increased accrual for proﬁt sharing and millennium weekend overtime costs, increased advertising costs and a higher depreciation charge. The exceptional restructuring costs of £188 million comprise mainly severance, consultancy costs, the write-down of equipment and the £21 million Chartered Trust restructuring provision. During 2001 we expect restructuring costs relating to the efﬁciency programme to be approximately £200 million, reducing to approximately £130 million in 2002 and £60 million in 2003. Annualised cost beneﬁts resulting from these investments are expected to total approximately £75 million in 2001 rising to £410 million in 2004. Expenditure on e-commerce in 2001 is expected to be similar to 2000 at approximately £150 million, and we will also spend £100 million in 2001 to deliver our new wealth management strategies. Overall, the individual programmes associated with these costs are expected to achieve average payback within three years. The efﬁciency ratio was 46.7 per cent compared to 43.1 per cent a year ago. Excluding short-term ﬂuctuations in investment returns, changes in the economic assumptions applied to our long-term assurance business, exceptional restructuring costs, pension provisions and the stakeholder pension related charge in 2000, the efﬁciency ratio deteriorated slightly to 43.6 per cent, from 42.7 per cent in 1999. 24 LLOYDS TSB GROUP ﬁnancial review NUMBER OF EMPLOYEES (FULL-TIME EQUIVALENT) Staff numbers increased by 1,484 to 77,540 during 2000. Excluding an increase of 3,061 staff following the acquisition of Scottish Widows, an increase of 1,775 staff following the acquisition of Chartered Trust and a reduction of 584 on the disposal of the new business capability of Abbey Life, staff numbers decreased by 2,768. Within UK Retail Banking staff numbers decreased by 287 despite improvements to customer service and a substantial increase in our call centre capacity. In Insurance and Investments numbers of staff increased to reﬂect the acquisition of Scottish Widows, in Wholesale Markets staff numbers increased by 1,245, reﬂecting the acquisition of Chartered Trust, and in International Banking there were lower staff numbers in Brazil and New Zealand. Since the merger of Lloyds Bank and TSB Group at the end of 1995, there has been an underlying reduction of 20,076 staff of which 5,407 relate to staff employed in businesses sold and 14,669 to reductions in our ongoing businesses. UK Retail Banking* Mortgages Insurance and Investments Wholesale Markets International Banking Other Total number of employees (full-time equivalent) 31 December 2000 aaaaaffffffffffffffffffffffffff 31 December 1999 aaaaaffffffffffffffffffffffffff 45,371 3,657 6,420 8,339 12,563 1,190 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 77,540 45,658 3,669 5,187 7,094 13,223 1,225 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 76,056 * Although the costs of distributing mortgages and insurance through the Lloyds TSB network are allocated to the mortgage and insurance businesses, the number of employees involved in these activities in the network is included under UK Retail Banking. CHARGE FOR BAD AND DOUBTFUL DEBTS The total charge for bad and doubtful debts decreased to £475 million from £588 million. The domestic charge decreased to £426 million from £500 million largely due to the good economic conditions during 2000, and a one-off beneﬁt of £42 million arising from a change in methodology for retail provisioning to recognise more accurately the amount that the Group expects to recover. Provisions overseas decreased to £49 million from £88 million, mainly as a result of higher Emerging Market Debt provision releases, which offset higher provisions in Argentina. Domestic: UK Retail Banking Mortgages Wholesale Markets Total domestic International Banking Total charge Speciﬁc provisions General provisions Total charge Charge as % of average lending: Domestic International Total charge 2000 £m aaaaaffffffffffffffffffffffffff 345 (13) 94 aaaaaffffffffffffffffffffffffff 426 49 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 475 481 (6) aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 475 % 0.45 0.32 0.43 1999 £m aaaaaffffffffffffffffffffffffff 428 (3) 75 aaaaaffffffffffffffffffffffffff 500 88 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 588 588 – aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 588 % 0.57 0.60 0.57 LLOYDS TSB GROUP 25 ﬁnancial review TOTAL PROVISIONS FOR BAD AND DOUBTFUL DEBTS At the end of 2000 provisions for bad and doubtful debts totalled £2,173 million. This represented 1.9 per cent of total lending. The level of speciﬁc provisions increased to £1,816 million. Non-performing lending increased to £1,283 million from £1,088 million in December 1999, largely reﬂecting the acquisition of Chartered Trust, and represented 1.1 per cent of total lending, compared with 1.0 per cent in December 1999. At the end of the year, speciﬁc provisions represented over 140 per cent of non-performing loans. (Movements in provisions during the year are shown on page 61 in note 16.) Total provisions for bad and doubtful debts as % of lending (excluding unapplied interest) Speciﬁc: Domestic International General Total TAX 31 December 2000 £m aaaaaffffffffffffffffffffffffff 774 1,042 aaaaaffffffffffffffffffffffffff 1,816 357 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,173 31 December 1999 £m aaaaaffffffffffffffffffffffffff 773 989 aaaaaffffffffffffffffffffffffff 1,762 361 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,123 (0.8%) (6.5%) (1.6%) (0.3%) (1.9%) (0.9%) (6.6%) (1.7%) (0.3%) (2.0%) The effective rate of tax was 28.6 per cent (1999: 30.4 per cent), compared with an average UK corporation tax rate for 2000 of 30 per cent (1999: 30.25 per cent). The lower effective rate of tax, compared with the standard tax rate of 30 per cent, is largely due to tax relief on payments to the QUEST to satisfy Save As You Earn options, and gains on disposals of investments and properties sheltered by capital losses. CAPITAL RATIOS The international standard for measuring capital adequacy is the risk asset ratio, which relates capital to balance sheet assets and off-balance sheet exposures weighted according to broad categories of risk. At the end of December 2000 the risk asset ratios were 9.0 per cent for total capital and 8.2 per cent for tier 1 capital. The 8.2 per cent tier 1 capital ratio appears higher than would perhaps be expected for the Group. This reﬂects the higher level of supervisory deductions resulting from Lloyds TSB’s signiﬁcantly increased investment in life assurance following the acquisition of Scottish Widows. In 2000, following the acquisitions of Scottish Widows and Chartered Trust, total capital for regulatory purposes fell by £4,219 million to £8,379 million. Tier 1 capital was reduced by £686 million, as retained proﬁts and the raising of the necessary capital required to complete the purchases of Scottish Widows and Chartered Trust was offset by the £2.4 billion goodwill arising on the acquisitions. Tier 2 capital increased by £741 million and supervisory deductions increased by £4,274 million, largely resulting from the acquisition of the Scottish Widows insurance business. Risk-weighted assets increased to £93.5 billion and the post-tax return on average risk-weighted assets, a key measure of efﬁcient use of capital, improved to 3.14 per cent from 3.02 per cent in 1999. 26 LLOYDS TSB GROUP ﬁnancial review 31 December 2000 £m aaaaaffffffffffffffffffffffffff 7,662 7,579 aaaaaffffffffffffffffffffffffff 15,241 (6,862) aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 8,379 £bn aaaaaffffffffffffffffffffffffff 17.4 26.6 0.2 aaaaaffffffffffffffffffffffffff 44.2 36.5 11.9 0.9 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 93.5 3.14% 9.0% 8.2% 31 December 1999* £m aaaaaffffffffffffffffffffffffff 8,348 6,838 aaaaaffffffffffffffffffffffffff 15,186 (2,588) aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 12,598 £bn aaaaaffffffffffffffffffffffffff 15.7 24.0 0.1 aaaaaffffffffffffffffffffffffff 39.8 31.6 11.6 1.1 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 84.1 3.02% 15.0% 9.9% CAPITAL RATIOS (CONTINUED) Capital: tier 1 : tier 2 Supervisory deductions Total capital Risk-weighted assets: UK Retail Banking Mortgages Insurance and Investments UK Retail Financial Services Wholesale Markets International Banking Central group items Total risk-weighted assets Post-tax return on average risk-weighted assets Risk asset ratios: total capital : tier 1 * restated (page 55, note 1) Notes: a) Tier 1 capital comprises mainly shareholders’ funds and minority interests. b) Tier 2 capital comprises loan capital and the general provision for bad and doubtful debts. c) Supervisory deductions comprise mainly the investment in the insurance businesses. EXCEPTIONAL RESTRUCTURING COSTS Exceptional restructuring costs totalling £188 million were charged to the 2000 proﬁt and loss account. The majority of these costs related to an efﬁciency programme announced in February 2000, but there was also a £21 million restructuring provision to cover the costs of integrating Chartered Trust and Lloyds UDT. The main features of the efﬁciency programme, which is primarily focused on non-customer facing activities, are: • the centralisation of computer operations • the further consolidation of all our large scale processing operations and support functions including the complete removal of all back ofﬁce processing from branches • the further streamlining of the branch network, combined with the expansion of lower cost delivery channels such as telephone banking and internet operations • the further reduction of our purchasing costs • the rationalisation of non-personal banking activities, through the progressive sharing and consolidation of operational functions. During 2000, the restructuring costs relating to the efﬁciency programme comprised mainly severance, consultancy costs and the write-down of equipment. During 2001 we expect restructuring costs relating to the efﬁciency programme to be approximately £200 million, reducing to approximately £130 million in 2002 and £60 million in 2003. Annualised cost beneﬁts resulting from these investments are expected to total approximately £75 million in 2001 rising to £410 million in 2004. Overall, the individual programmes associated with these costs are expected to achieve average payback within three years. LLOYDS TSB GROUP 27 ﬁnancial review INVESTMENT FOR THE FUTURE In 2000, we invested £499 million in premises and equipment, compared with £352 million in 1999. Expenditure on premises and equipment over the past 5 years has totalled £1,650 million. This investment has been mainly in support of UK operations, in the retail businesses and in new technology to enhance future proﬁtability. It has been wholly ﬁnanced by a combination of internally generated funds and disposals. At the end of 2000, there were further capital expenditure commitments of £5 million in respect of premises and equipment. In addition, we incur signiﬁcant costs each year on improving systems and on staff training programmes to enhance customer service and efﬁciency, as well as on the continuing refurbishment and maintenance of premises; these costs are charged to the proﬁt and loss account. SHAREHOLDER RETURNS Dividends of £1,683 million (an increase of 15 per cent per share) are covered 1.6 times by earnings. Proﬁt of £1,041 million will be retained in the business. Total shareholders’ funds grew by £1,156 million, or 13 per cent, to £9,737 million (174p per share) from £8,581 million (155p per share) at the end of 1999. Since the merger between Lloyds Bank and TSB ﬁve years ago, the Group’s share price has risen by 114 per cent. An investment of £1,000 in Lloyds TSB shares on 1 January 1996, with dividends reinvested in each year, was worth £2,500 at the end of 2000, a compound annual growth rate of over 20 per cent. On the same basis, an investment of £1,000 in the FTSE All-Share Index would be worth £1,916. ECONOMIC PROFIT We continue to use economic proﬁt as a measurement of performance, which is the best way to understand the true value being created for shareholders. Economic proﬁt represents the proﬁt attributable to shareholders less a notional charge for the equity invested in the business. In 2000 economic proﬁt increased by 6 per cent to £1,882 million from £1,772 million in 1999. Our calculation of economic proﬁt uses average equity for the year and was based on a cost of equity of 9 per cent in 2000 (1999: 9 per cent). Economic proﬁt instils a rigorous ﬁnancial discipline in determining investment decisions throughout the Group. It enables us to evaluate alternative strategies objectively, with a clear understanding of the value created by each strategy, and then to select the strategy which creates the greatest value. SHORT-TERM FLUCTUATIONS IN INVESTMENT RETURNS In accordance with generally accepted accounting practice in the UK, it is the Group’s accounting policy to carry the investments comprising the reserves held by its life companies at market value. In the past, this has not had a signiﬁcant impact upon the Group’s results because of the limited reserves necessary to support the predominantly unit-linked business of Lloyds TSB Life Assurance and Abbey Life. However, the reserves held to support the with-proﬁts business of Scottish Widows are substantial and changes in market values will result in signiﬁcant volatility in the Group’s embedded value earnings. Consequently, in order to provide a clearer representation of the underlying performance, the results of the life and pensions business have been analysed between an operating proﬁt, which includes investment earnings calculated using longer-term rates of investment return, and a proﬁt before tax, separately identifying the short-term ﬂuctuations in investment returns and other one-off items. This approach is already established practice amongst listed insurance companies in the UK. The longer-term rates of return for the period are consistent with those used by the Group in the calculation of the embedded value at the beginning of the period, which were 8.00 per cent for equities and 5.25 per cent for gilts. These are based upon a long-term view of economic activity and are therefore not adjusted for market movements which are considered to be short term. This approach is considered the most appropriate given the long-term nature of the portfolio of products and achieves consistency in reporting from one period to the next. Lloyds TSB General Insurance also holds investments to support its underwriting business; these are carried at market value and gains and losses included within dealing proﬁts. Consistent with the approach adopted for the life and pensions business, an operating proﬁt for the general insurance business has been calculated including investment earnings normalised using the same long-term rates of return. 28 LLOYDS TSB GROUP ﬁnancial review CHANGES IN THE ECONOMIC ASSUMPTIONS APPLIED TO OUR LONG-TERM ASSURANCE BUSINESS The shareholders’ interest in the long-term assurance business (‘embedded value’) is calculated on the basis of a series of economic and actuarial assumptions. Following the acquisition of the business of Scottish Widows, a detailed review of the economic assumptions used in the embedded value calculation has been carried out, to ensure that these assumptions remain appropriate for the enlarged life and pensions business in the context of forecast long-term economic trends. As a result of this review certain assumptions have been amended, including the risk-adjusted discount rate which has been reduced from 10 per cent to 8.5 per cent. The revised assumptions, which have been used with effect from 1 January 2000 for Abbey Life and the bancassurance operation of Lloyds TSB Life, have resulted in a one-off credit to the proﬁt and loss account of £127 million. The same assumptions have been used for the Scottish Widows business from the date of acquisition. FINANCIAL INSTRUMENTS The Group’s activities can be divided into three broad categories: banking and mortgages, insurance and investments, and trading activities. Banking and mortgage activities represent the most signiﬁcant element of the Group’s business in terms of proﬁt, assets and exposure to risk. These activities are entered into in both the UK and overseas and principally comprise the Group’s core business of lending and deposit taking, involving a full range of personal and corporate customers. In entering into this business, the Group’s objective is to secure a margin between the interest paid to customers on their deposits and interest received on amounts advanced. In order to do this, more complex ﬁnancial instruments, such as derivatives, are used as a means of reducing risk by hedging exposures to movements in exchange rates, interest rates or other market variables. Within its banking activities, the Group has a number of treasury operations that are responsible for utilising surplus funds and meeting funding shortfalls by entering into transactions in the money markets. Portfolios of debt securities and treasury bills are held to provide a source of liquidity; it is the Group’s intention to hold these investments until maturity although in certain circumstances they may be disposed of before then where, for example, the need to hold the investment no longer applies. Any proﬁts or losses arising from a sale of this kind are recognised immediately. Insurance and investment businesses provide general insurance and market savings and investment products both within and outside the banking customer bases. Fund management services are also provided although, whilst involving external clients, this activity is currently dominated by the management of internal group funds. Trading activities are restricted to a few highly specialist authorised trading centres, the principal one being the Group’s Treasury department in London. Most of the Group’s trading activity is to meet the requirements of customers for foreign exchange and interest rate products, from which the Group is able to earn a spread on the rates charged. However, interest rate and exchange rate positions are taken out using derivatives (forward foreign exchange contracts, interest rate swaps and forward rate agreements) and on-balance sheet instruments (mainly debt securities). The objective of these positions is to earn a proﬁt from favourable movements in market rates. Accordingly, these transactions are reﬂected in the accounts at their fair value and gains and losses shown in the proﬁt and loss account as dealing proﬁts. MANAGEMENT OF RISK The board is responsible for determining the long-term strategy of the business, the markets in which the Group will operate and the level of risk acceptable to the Group in each area of its business. Responsibility for the implementation of risk policy and for ensuring that there is an effective top level control framework is delegated to the Director of Group Risk Management and Compliance, who reports to the Group Chief Executive. The board in turn receives regular reports on risk issues prepared by Group Risk Management and Compliance. The Director of Group Risk Management and Compliance implements the policies established by the board through four principal departments: Group Audit, Group Risk, Group Compliance, and Sanctioning and Sovereign Risk. Group Risk’s responsibilities include credit risk, market risk, operational risk, insurance risk and environmental risk; the department also sets risk policy, develops risk methodology and undertakes risk evaluation and reporting. At an operating level, the Group promotes sound internal risk management practices through the directors of its separate business units, who are primarily responsible for measuring, monitoring and controlling the range of portfolio and operating risks within their speciﬁc area of accountability. The directors and management of the business units, as the primary risk LLOYDS TSB GROUP 29 ﬁnancial review MANAGEMENT OF RISK (CONTINUED) managers, are responsible for establishing proper control frameworks within their businesses to ensure that the Group’s activities are conducted effectively but prudently, and within the parameters deﬁned by Group Risk Management and Compliance. They are responsible for ensuring that the risks within their business are identiﬁed, assessed, controlled and monitored, and that the controls and procedures implemented comply with Group policies and standards, which are extensively documented in rule books and procedures manuals. Credit risk Credit risk arises from extending credit in all forms in the Group’s banking and trading activities, where there is a possibility that a counterparty may default. The Group has dedicated standards, policies and procedures to control and monitor all such risks. The Director of Group Risk Management and Compliance heads Group Risk and reports to the Group Chief Executive. Group Risk’s responsibilities in respect of credit risk include the following: • Formulation of high level credit policies designed to ensure a balanced and managed approach to the identiﬁcation and mitigation of credit risk. These policies provide a standard framework within which Group businesses structure their individual policies and rules. Group Risk reviews, approves and monitors credit policy documents established for individual businesses. • Provision of lending guidelines. These deﬁne the responsibilities for lending ofﬁcers and provide a disciplined and focused benchmark for sound credit decisions. Clear guidance is provided on the Group’s attitude towards and appetite for credit exposure on different market sectors, industries and products. • Provision of a group rating system. All business units are required to operate an authorised rating system that complies with the Group’s standard methodology. The Group uses a ‘Master Scale’ rating structure with nine ratings, each corresponding to a probability of future default. • Establishment and maintenance of the Group’s large exposure policy. Exposure to individual counterparties or groups of counterparties is controlled through a tiered hierarchy of delegated sanctioning authorities. Approval requirements for each decision are based on the transaction amount, the customer’s aggregate facilities, credit risk ratings and the nature of the risk. Regular reports on signiﬁcant credit exposures are provided to the group executive committee and board. • Control of bank exposures. In-house proprietary rating systems are used to approve bank facilities on a group basis. • Monitoring of scorecards. The Group utilises statistically-based decisioning techniques (primarily credit scoring and performance scoring) for its main consumer lending portfolios. Authorisations are determined by scorecards tailored to meet the needs of the particular business. Group Risk reviews and monitors new and material changes to scorecards. • Control of cross-border exposures. Country limits are authorised and managed by a dedicated unit, using an in-house rating system which takes into account economic and political factors. • Maintenance of a centralised facilities database. Group Risk operates a centralised database of large corporate, sovereign and bank facilities designed to ensure that a consistent aggregation policy is maintained throughout the Group. • Formulation of concentration limits on certain industries and sectors. Group Risk sets limits and monitors exposures to prevent over-concentration of risk. • Portfolio analysis. In conjunction with Group Risk, group businesses identify and deﬁne portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed in terms of credit risk exposure. This entails the production and analysis of regular portfolio monitoring reports for review by Group Risk. • Communication and provision of general guidance on all credit-related risk issues, including regulatory changes and environmental risk policy, to promote consistent and best practice throughout the Group. Day-to-day credit management and asset quality within each business unit is the primary responsibility of the business unit directors. Each business unit has in place established credit processes involving credit policies, procedures and lending guidelines. Authority to delegate lending discretions within operating divisions rests with ofﬁcers holding divisional lending delegated authority. All material authorities are advised to Group Risk. Specialist units are established within group business units to provide intensive management and control in order to maximise recoveries of doubtful debts. 30 LLOYDS TSB GROUP ﬁnancial review Credit risk (continued) Regular independent audits of credit processes are undertaken by Group Audit. Such audits include consideration of the completeness and adequacy of credit manuals and lending guidelines, together with an in-depth analysis of a representative sample of accounts in the portfolio to assess the quality of the loan book and other exposures. Individual accounts are reviewed to ensure that the facility grade is appropriate, that credit procedures have been properly followed and that, where an account is non-performing, provisions raised are adequate. Market risk Market risk is the risk of losses being incurred as a result of adverse movements in interest or exchange rates or other market variables. Market risk arises in all areas of the Group’s activities and is managed by a variety of different techniques. The Group’s trading activities expose it to the risk of adverse movements in interest rates or exchange rates. Trading activities are restricted to a few highly specialist trading centres and the level of exposure is strictly controlled and monitored within approved limits locally and centrally by Group Risk. These are supplemented by a range of value at risk techniques in use in individual businesses, where suitable methodologies have been developed in consultation with Group Risk to meet the speciﬁc requirements of each centre. At Group level, global positions are incorporated into a central value at risk model, taking into account natural offset positions between different trading centres, and stress tests are carried out to simulate extreme conditions. Various parameters are used to calculate the value at risk on a given portfolio of positions, thus avoiding undue reliance on a single measure. Based on the commonly quoted 95 per cent conﬁdence level, assuming positions are held overnight and using observation periods of the preceding 3 years, during 2000 the value at risk on the Group’s global trading averaged £1.28 million (1999: £1.16 million) with a maximum of £1.67 million (1999: £1.78 million) and a minimum of £0.98 million (1999: £0.77 million). The ﬁgure at 31 December 2000 was £1.17 million (1999: £1.04 million). Group Balance Sheet Management (GBSM) speciﬁcally focuses on the management of interest rate risk in the Group’s retail portfolios, including mortgages, and in the Group’s capital funds. GBSM reports to an Asset and Liability Committee under the chairmanship of the Group Finance Director; other members include the Director of Group Risk Management and Compliance and the managing directors of the Group’s principal business units. The Group’s policy is to optimise the stability of future net interest income, which is achieved by entering into hedging transactions using interest rate swaps and other ﬁnancial instruments. The table shown on page 73 in note 48b) provides an indication of the Group’s interest rate repricing proﬁle at 31 December 2000, excluding the Group’s trading and insurance activities and after taking into account the off-balance sheet hedging transactions referred to above. Items are allocated to time bands by reference to the earlier of the next interest rate repricing date and the maturity date. It should be noted that retail assets are sometimes repaid before their contractual maturity dates, and GBSM’s hedging transactions take into account the likelihood of such prepayments. Structural foreign exchange risk Structural foreign exchange risk arises from the Group’s investments in its overseas operations. The structural position is managed after having regard to the currency composition of the Group’s risk-weighted assets, the objective being to limit the effect of exchange rate movements on the published risk asset ratio. The Group’s structural position at 31 December 2000 is set out on page 74 in note 48d). The position implies that a hypothetical increase of 10 per cent in the value of sterling against all other currencies would lead to a £170 million reduction in reserves. There would be no material impact upon the Group’s risk asset ratio. Liquidity risk To ensure that each business unit can meet its ﬁnancial obligations as they fall due, the Group complies with the Financial Services Authority’s Sterling Stock Liquidity policy in the UK, with similar liquidity policies in place across all trading centres worldwide. Compliance is monitored by regular liquidity returns to Group Risk. The sources and maturities of assets and liabilities are closely monitored and diversiﬁed to avoid any undue concentration. A substantial proportion of deposits is made up of current and savings accounts which, although repayable on demand, have traditionally formed a stable deposit base. LLOYDS TSB GROUP 31 ﬁnancial review Liquidity risk (continued) The Group’s signiﬁcant involvement in the London money market and other ﬁnancial centres, together with the strength of the Group’s earnings and balance sheet, are important factors in assuring the continued availability of wholesale funds at competitive rates. Operational risk Operational risk is the exposure to ﬁnancial or other damage arising through unforeseen events or failure in the Group’s operational processes/systems. Examples include inadequate internal controls and procedures, human error, deliberate malicious acts including fraud, and business interruptions. Business units within the Group are responsible for identifying and managing risks, and Group Risk has developed a standard methodology, which is being implemented by business units throughout the Group. Group Audit provides independent veriﬁcation of the effectiveness of risk control within business units. Internal control techniques include segregation of duties, exception and exposure reporting, business continuity planning, reconciliations, and delegation of authority, and are based on the submission of timely and reliable management reporting. Where appropriate risk is mitigated by way of insurance with third parties. The activities of Group Risk include the approval from a risk perspective of all new products launched throughout the Group, with an objective of ensuring that the risks associated with new products are understood and managed by the business accordingly. Insurance risk The Group offers insurance products to its customers, and actively reviews the extent to which the associated risk is underwritten internally, or reinsured with external underwriters. The Financial Services Authority sets down minimum requirements for solvency and reserving for all classes of insurance, which are carefully monitored by the relevant business units within the Group. The retained risk level is carefully controlled and monitored, with close attention being paid to the analysis of underwriting experience, product design, policy wordings, adequacy of reserves, solvency management and regulatory requirements. Investment strategy is determined by the term and nature of the underwriting liabilities and asset/liability matching positions are actively monitored. General insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements which are broadly spread over different reinsurers. Appropriate reinsurance arrangements also apply within the life and pensions businesses. Environmental risk The Group has a dedicated environmental risk unit which is responsible for the development of environmental policies and procedures, and provides practical advice and guidance on environmental issues to business units. Signiﬁcant progress has been made in developing the Group’s environmental management system, and this is detailed in the environmental report contained in the information pack ‘Lloyds TSB: the community and our business’ (see page 77 for details). Compliance risk The Group conducts business in a range of regulated industries. Primary responsibility for ensuring that regulatory requirements are observed lies with a nominated compliance ofﬁcer within each business unit, who reports directly to the head of the business unit. Additionally, all compliance ofﬁcers have a reporting line to Group Compliance, which has responsibility for monitoring compliance standards and resources across the Group, and provides independent reporting and assessment to the group directors and the board. The Group Compliance Director retains full day-to-day responsibility for Group Compliance, including routine contact with the regulators. He also has access to the Chairman, Group Chief Executive and other members of senior management. 32 LLOYDS TSB GROUP ﬁnancial review DERIVATIVES Derivatives are used to meet the ﬁnancial needs of customers, as part of the Group’s trading activities and to reduce its own exposure to ﬂuctuations in interest and exchange rates. The principal derivatives used by the Group are interest rate and exchange rate contracts; particular attention is paid to the liquidity of the markets and products in which the Group trades to ensure that there are no undue concentrations of activity and risk. Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties to exchange ﬁxed and ﬂoating interest payments, based upon interest rates deﬁned in the contract, without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the difference between a speciﬁed rate of interest and a reference rate, applied to a notional principal amount at a speciﬁc date in the future. At 31 December 2000 the total notional principal amount of interest rate related contracts outstanding was £380.9 billion (1999: £518.3 billion) of which £292.6 billion (1999: £385.0 billion) were interest rate swaps and £48.1 billion (1999: £85.6 billion) were forward rate agreements. Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to buy or sell a speciﬁed amount of foreign currency on a speciﬁed future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. At 31 December 2000 the total notional principal amount of exchange rate related contracts outstanding was £95.1 billion (1999: £95.1 billion) of which £86.7 billion (1999: £86.1 billion) related to futures and forward foreign exchange contracts. The volume of notional principal amounts does not, however, represent the Group’s real exposure to credit risk, which is limited to the current cost of replacing contracts with a positive value to the Group, should the counterparty default. At the end of 2000 the total potential loss (or net replacement cost) on interest rate contracts was £1.0 billion (1999: £1.0 billion) and on exchange rate contracts was £1.3 billion (1999: £1.1 billion). To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure. Equity derivatives are also used by the Group as part of its equity based retail product activity, whereby index-linked equity options are purchased to eliminate the Group’s exposure to ﬂuctuations in various international stock exchange indices. At 31 December 2000 the total notional principal amount of equity contracts was £2.8 billion (1999: £2.4 billion). LLOYDS TSB GROUP 33 ﬁve year ﬁnancial summary Proﬁt and loss account Net interest income Other operating income Total income Operating expenses Trading surplus General insurance claims Provisions Proﬁt (loss) on sale and closure of businesses Proﬁt on ordinary activities before tax Proﬁt on ordinary activities after tax Proﬁt for the year attributable to shareholders Economic proﬁt Results excluding special items Total income excluding special items Operating expenses excluding special items Operating proﬁt excluding special items Special items: Short-term ﬂuctuations in investment returns Changes in economic assumptions applied to long-term assurance business Exceptional restructuring costs Pension provisions Stakeholder pension related charge Guaranteed annuity provision Proﬁt (loss) on sale and closure of businesses Statutory proﬁt before tax 1996 £m aaaaaaasfff 1997 £m aaaaaaasfff 1998 £m aaaaaaasfff 1999 £m aaaaaaasfff 2000 £m aaaaaaasfff 3,795 4,144 4,398 4,783 4,587 3,070 aaaaaaasfff 3,136 aaaaaaasfff 2,726 aaaaaaasfff 3,145 aaaaaaasfff 3,882 aaaaaaasfff 6,865 7,280 7,124 7,928 8,469 (3,947) aaaaaaasfff (4,119) aaaaaaasfff (3,504) aaaaaaasfff (3,417) aaaaaaasfff (3,952) aaaaaaasfff 2,918 (120) (332) 3,161 (145) (424) 3,620 (146) (543) 4,511 (169) (595) 4,517 (142) (489) 2,431 2,746 84 aaaaaaasfff 154 aaaaaaasfff (126) aaaaaaasfff (35) aaaaaaasfff – aaaaaaasfff aaddfff aaddfff aaddfff aaddfff aaddfff 3,886 aaddfff aaddfff aaddfff aaddfff aaddfff 2,773 aaddfff aaddfff aaddfff aaddfff aaddfff 2,724 aaddfff aaddfff aaddfff aaddfff aaddfff 1,882 3,621 2,133 1,655 2,520 2,014 3,015 2,514 2,120 2,000 1,511 1,772 1,417 1,427 1,032 7,376 6,902 aaddfff aaddfff aaddfff aaddfff aaddfff 8,641 aaddfff aaddfff aaddfff aaddfff aaddfff 3,764 4,246 8,002 2,652 3,798 3,768 7,509 3,354 3,466 3,039 3,417 3,821 2 – (149) (39) – – 4 – (351) (100) – – 6 123 (38) (400) – (114) 28 – – (102) – – (119) 127 (188) (100) (80) – (35) aaaaaaasfff – aaaaaaasfff aaddfff aaddfff aaddfff aaddfff aaddfff 3,886 (126) aaaaaaasfff 154 aaaaaaasfff 84 aaaaaaasfff 3,621 2,431 3,015 2,746 Note Figures for 1999 and earlier years have been restated to reﬂect the implementation of FRS12 and FRS15 (relating to provisions and tangible ﬁxed assets) and other minor adjustments. 3,886 3,621 2,746 3,015 2,431 34 LLOYDS TSB GROUP 96 97 98 99 00 STATUTORY PROFIT BEFORE TAX (£M) ﬁve year ﬁnancial summary 1996 £m aaaaaaasfff 1997 £m aaaaaaasfff 1998 £m aaaaaaasfff 1999 £m aaaaaaasfff 2000 £m aaaaaaasfff 100,957 10,825 108,402 12,755 113,739 12,632 119,112 129,745 14,397 14,129 17,216 aaaaaaasfff 16,791 aaaaaaasfff 17,822 aaaaaaasfff 15,928 aaaaaaasfff 23,023 aaaaaaasfff 128,998 137,948 144,193 149,437 166,897 18,139 aaaaaaasfff 23,692 51,085 aaaaaaasfff aaaaaaasfff aaddfff aaddfff aaddfff aaddfff aaddfff 147,137 167,885 217,982 26,542 aaaaaaasfff 20,046 aaaaaaasfff 157,994 175,979 Balance sheet and capital ratios Loans and advances to banks and customers Investments Other assets Long-term assurance assets attributable to policyholders Total assets Deposits by banks and customers and debt securities in issue 107,429 114,000 118,678 122,805 135,372 Other liabilities Subordinated liabilities (loan capital) Minority interests (equity and non-equity) Shareholders’ funds (equity) Long-term assurance liabilities to policyholders Total liabilities Risk asset ratio : total capital : tier 1 capital Share information Earnings per share Dividends per share (net) Dividend cover (times) Market price (year-end) Net assets per share Number of shareholders (thousands) Average shares in issue (millions) Performance measures Post-tax return on average shareholders’ equity Post-tax return on average assets* Post-tax return on average risk-weighted assets* Efﬁciency ratio 12,502 3,919 34 13,557 4,209 40 14,089 4,021 42 11,525 6,493 33 13,726 7,510 552 5,114 aaaaaaasfff 6,142 aaaaaaasfff 7,363 aaaaaaasfff 8,581 aaaaaaasfff 9,737 aaaaaaasfff 128,998 137,948 144,193 149,437 166,897 18,139 aaaaaaasfff 23,692 51,085 aaaaaaasfff aaaaaaasfff aaddfff aaddfff aaddfff aaddfff aaddfff 147,137 167,885 217,982 26,542 aaaaaaasfff 20,046 aaaaaaasfff 175,979 157,994 9.7% 6.6% 10.7% 7.8% 11.2% 8.6% 15.0% 9.9% 9.0% 8.2% 29.9p 13.2p 2.3 430p 95p 1,099 5,054 31.6% 1.24% 2.06% 57.5% 37.4p 17.2p 2.2 789p 113p 1,047 5,341 34.9% 1.49% 2.49% 56.6% 39.3p 22.2p 1.8 855p 134p 1,028 5,400 30.2% 1.53% 2.67% 49.2% 46.2p 26.6p 1.7 774p 155p 1,024 5,445 30.5% 1.70% 3.02% 43.1% 49.6p 30.6p 1.6 708p 174p 1,026 5,487 29.1% 1.75% 3.14% 46.7% * Assets exclude long-term assurance assets attributable to policyholders. Note Figures for 1999 and earlier years have been restated to reﬂect the implementation of FRS12 and FRS15 (relating to provisions and tangible ﬁxed assets) and other minor adjustments. LLOYDS TSB GROUP 35 STATUTORY ACCOUNTS CONTENTS 37 The board 38 Directors’ report 40 Directors’ remuneration 46 Corporate governance 48 Auditors’ report 49 Consolidated profit and loss account 50 Consolidated balance sheet 52 Company balance sheet 53 Other statements 54 Consolidated cash flow statement 55 Notes to the accounts 36 LLOYDS TSB GROUP the board Sir Brian Pitman(cid:3) (retiring at the annual general meeting on 18 April 2001) Chairman Joined Lloyds Bank in 1952. After a number of senior and general management appointments in Lloyds Bank and Lloyds Bank International, appointed a director and group chief executive of Lloyds Bank in 1983. Following the merger with TSB Group in 1995, became group chief executive of Lloyds TSB Group and then chairman in February 1997. Chairman of NEXT PLC and a non-executive director of Carlton Communications, The Carphone Warehouse Group and Tomkins. Aged 69. Maarten A van den Bergh§ (succeeding Sir Brian Pitman as Chairman) Deputy Chairman Joined Lloyds TSB Group in 2000 as deputy chairman. Will succeed Sir Brian Pitman as chairman when Sir Brian retires at the annual general meeting in April 2001. Joined the Royal Dutch/Shell Group of companies in 1968. After a number of senior and general management appointments in that group, became group managing director in July 1992. Appointed president of Royal Dutch Petroleum Company and vice chairman of the committee of managing directors of the Royal Dutch/Shell Group in July 1998 and continued in these roles until June 2000. A non-executive director of Royal Dutch Petroleum Company and British Telecommunications. Aged 58. Alan E Moore CBE*§ Deputy Chairman Joined Lloyds Bank International in 1980. Held a number of senior and general management appointments in that company and in Lloyds Bank before becoming a director of Lloyds Bank in 1989 and deputy chief executive and treasurer in 1994. Following the merger with TSB Group in 1995, became deputy group chief executive of Lloyds TSB Group and then deputy chairman in August 1998. Joined Glyn Mills & Co in 1953, holding senior appointments there until his secondment, as director general, to the Bahrain Monetary Agency from 1974 to 1979. Aged 64. EXECUTIVE DIRECTORS Peter B Ellwood Group Chief Executive Joined TSB Bank in 1989 as chief executive, retail banking. Appointed a director of TSB Group in 1990 and became group chief executive in 1992. Following the merger with Lloyds Bank in 1995, became deputy group chief executive of Lloyds TSB Group and then group chief executive in February 1997. Joined Barclays Bank in 1961 and after a number of senior and general management appointments, became chief executive of Barclaycard in 1985. Former chairman of Visa International. Aged 57. Michael E Fairey Deputy Group Chief Executive Joined TSB Group in 1991 and held a number of senior and general management appointments in the Group before being appointed to the board in 1997 and deputy group chief executive in March 1998. Joined Barclays Bank in 1967 and held a number of senior and general management appointments before becoming managing director of Barclays Direct Lending Services in 1990. Aged 52. Michael D Ross Deputy Group Chief Executive Joined the board in 2000. Joined Scottish Widows in 1964 and following a number of senior and general management appointments became group chief executive of that company in 1991. Aged 54. M Kent Atkinson Group Finance Director Joined Bank of London & South America in 1964, which became a Lloyds Bank subsidiary in 1971, and held a number of senior and general management appointments in the Group, including positions in Latin America and the Middle East, before being appointed to the board in 1997. A non-executive director of Coca-Cola HBC SA. Aged 55. Dennis Holt Group Executive Director, Retail Distribution Joined Lloyds Bank in 1970 and held a number of senior and general management appointments in the Group before being appointed to the board in 2000. Aged 52. Archie G Kane Group Executive Director, IT and Operations Joined TSB Commercial Holdings in 1986 and held a number of senior and general management appointments in the Group before being appointed to the board in 2000. After some 10 years in the accountancy profession, joined General Telephone & Electronics Corporation in 1980, serving as ﬁnance director in the UK from 1983 to 1985. Aged 48. David P Pritchard Group Executive Director, Wholesale and International Banking Joined TSB Group in 1995 as group treasurer. Seconded to the Securities and Investments Board as head of supervision & standards, markets & exchanges, from 1996 to 1998. Appointed to the board in 1998. Held senior and general management appointments with Citicorp from 1978 to 1986 and Royal Bank of Canada from 1986 to 1995. Aged 56. INDEPENDENT NON-EXECUTIVE DIRECTORS Ewan Brown CBE* (** succeeding Mr Linaker) Chairman of Lloyds TSB Scotland A director since 1999. A non-executive director of Lloyds TSB Scotland since 1997. Executive director of Noble Grossart since 1971. Chairman of Dunedin Income Growth Investment Trust and the Court of Heriot-Watt University, and a non-executive director of Stagecoach Holdings. Aged 58. A Clive ButIer‡§(cid:2) A director of TSB Group since 1993. Joined Unilever in 1970 and following a number of senior and general management appointments was appointed an executive director of Unilever in 1992. Aged 54. Sheila M Forbes† A director of TSB Group since 1994. Chairs the board of governors of Thames Valley University and is a civil service commissioner. Head of personnel for Unigate from 1980 to 1988 and personnel director for Storehouse from 1988 to 1992. Director of human resources at Reed Elsevier (UK) from 1992 to 1996. Aged 54. notes to the accounts Christopher S Gibson-Smith† A director since 1999. Joined the British Petroleum Company in 1970 and held senior and general management appointments in the UK, USA, Canada and Europe. Became a managing director of BP in 1997 and managing director and executive vice president of BP Amoco in 1998. Aged 55. L E (Paddy) Linaker**§ (retiring at the annual general meeting on 18 April 2001) A director of TSB Group since 1994. A non-executive director of Wolverhampton and Dudley Breweries. Joined M&G Group in 1963 and held a number of senior and general management appointments, including deputy chairman and group managing director from 1988 to 1994. Chairman of Fisons from 1994 to 1995. Aged 66. Thomas F W McKillop*† A director since 1999. Joined ICI in 1969 and held a number of senior and general management appointments there before the demerger in 1993, when Zeneca was created. Chief executive of Zeneca Pharmaceuticals from 1994 to 1999 and chief executive of AstraZeneca from 1999. Pro-chancellor of Leicester University. Aged 57. The Earl of Selborne KBE FRS Chairman of The Agricultural Mortgage Corporation A director since 1995, having been a director of Lloyds Bank since 1994. Managing director of The Blackmoor Estate, his family business. Chancellor of Southampton University since 1996. President of the Royal Geographical Society from 1997 to 2000. Aged 60. Lawrence M Urquhart* Chairman of Scottish Widows Joined the board in 2000. Chairman of BAA and a non-executive director of Imerys SA. Joined Burmah Castrol in 1977 and held a number of senior and general management appointments in that company before becoming chief executive in 1985 until 1993 and chairman in 1990 until 1998. Former chairman of English China Clays. Aged 65. Company Secretary Alastair J Michie FCIS FCIBS * Member of the audit committee ** Chairman of the audit committee † Member of the remuneration committee ‡ Chairman of the remuneration committee § Member of the nomination committee Chairman of the nomination committee Senior independent director LLOYDS TSB GROUP 37 (cid:3) (cid:2) directors’ report directors’ report Results and dividends Directors The consolidated proﬁt and loss account on page 49 shows a Biographical details of directors are shown on page 37. proﬁt attributable to shareholders for the year ended Particulars of their emoluments and interests in shares in the 31 December 2000 of £2,724 million. Company are given on pages 42 to 45. An interim dividend of 9.3p per ordinary share was paid on Mr Pell left the board on 7 January 2000 and Sir Nicholas 11 October 2000 and a ﬁnal dividend of 21.3p per ordinary Goodison, Mr Nicholson and Dame Bridget Ogilvie left the share will be paid on 2 May 2001. The dividends for 2000 will board at the annual general meeting in April 2000. Mr Linaker absorb £1,683 million. Principal activities and Sir Brian Pitman will retire at the annual general meeting in 2001. The Company is a holding company and its subsidiaries provide Mr Ross and Mr Urquhart joined the board on 3 March 2000. a comprehensive range of banking and ﬁnancial services Mr van den Bergh joined the board on 1 October 2000 and through branches and ofﬁces in the UK and overseas. Group structure The transfer of the business of Scottish Widows’ Fund and Life Assurance Society to the Group’s wholly-owned subsidiaries Scottish Widows plc and Scottish Widows Annuities Limited under the articles of association offers himself for election at the annual general meeting. Mr Atkinson, Professor Brown, Mr Ellwood and Mr Pritchard retire by rotation at the annual general meeting and offer themselves for re-election. was completed on 3 March 2000. Following this acquisition, No director had a material interest at any time during the year the Group is bringing together its life, pensions, unit trust and in any contract of signiﬁcance with the Company or its fund management businesses. subsidiaries. On 1 September 2000, the Group’s subsidiary, Lloyds UDT Employees Finance Limited, completed the acquisition of the whole of the issued share capital of Chartered Trust Group plc and ACL Autolease Holdings Limited, the UK consumer ﬁnance and contract hire subsidiaries of Standard Chartered Bank. Business review and future developments The Group is committed to employment policies which follow best practice, based on equal opportunities for all employees irrespective of sex, race, national origin, religion, colour, disability, sexual orientation, age or marital status. In the UK, the Group supports Opportunity Now and Race for A review of the business and an indication of future Opportunity, campaigns to improve opportunities for women developments are given on pages 2 to 33. and ethnic minorities in the work place. The Group is a Authority to purchase shares The authority for the Company to purchase, in the market, up to 555 million of its shares, representing some 10 per cent of member of the Employers’ Forum on Disability in support of employment of people with disabilities. This recognises the need for ensuring fair employment practices in recruitment and selection, and the retention and career development of disabled the issued ordinary share capital, expires at the annual general staff. meeting. It was not used during the year and shareholders will be asked to give a similar authority at the annual general meeting. Details are contained in the accompanying notice of meeting. Employees are kept closely involved in major changes affecting them through such measures as team meetings, brieﬁngs, internal communications and opinion surveys. There are well established procedures, including regular meetings with recognised unions, to ensure that the views of employees are taken into account in reaching decisions. Proﬁt sharing and share option schemes are available for most staff, to encourage their ﬁnancial involvement in the Group. 38 LLOYDS TSB GROUP Donations The proﬁt and loss account includes a charge for charitable donations totalling £34,790,000 (1999: £31,581,000) including £34,483,333 (1999: £31,336,667) under deeds of covenant to the four Lloyds TSB Foundations, which will be paid during 2001. No payments were made to political parties. Policy and practice on payment of creditors The Company follows ‘The Better Payment Practice Code’ published by the Department of Trade and Industry regarding the making of payments to suppliers. A copy of the code and information about it may be obtained from the address shown on page 77. The Company’s policy is to agree terms of payment with suppliers and these normally provide for settlement within 30 days after the date of the invoice, except where other arrangements have been negotiated. It is the policy of the Company to abide by the agreed terms of payment, provided the supplier performs according to the terms of the contract. As the Company owed no amounts to trade creditors at 31 December 2000, the number of days required to be shown in this report, to comply with the provisions of the Companies Act 1985, is nil. The equivalent ﬁgure for the Lloyds TSB Group in the UK is 23. This bears the same proportion to the number of days in the year as the aggregate of the amounts owed to trade creditors at 31 December 2000 bears to the aggregate of the amounts invoiced by suppliers during the year. Auditors Resolutions concerning the re-appointment of PricewaterhouseCoopers as auditors and authorising the directors to set their remuneration will be proposed at the annual general meeting. On behalf of the board A J Michie Secretary 15 February 2001 directors’ report LLOYDS TSB GROUP 39 directors’ remuneration directors’ remuneration The remuneration committee The remuneration committee, comprising Mr Butler (chairman), Miss Forbes, Dr Gibson-Smith and Dr McKillop, makes recommendations to the board on the framework of executive directors’ remuneration and its cost, and determines, on the board’s behalf, speciﬁc remuneration packages for each of the chairman, the deputy chairmen and the executive directors. Additionally, all the non-executive directors receive the minutes of remuneration committee meetings and have the opportunity Each executive director was eligible to earn an incentive award equal to 50 per cent of salary. The awards for the group chief executive and group ﬁnance director were entirely based on group performance. Other executive directors had part of their award based on group performance and the rest linked to the performance of the sector of the business for which they had responsibility. The awards were based on the attainment of predetermined targets relating to economic proﬁt, revenue growth, expenses and customer service. to comment and have their views taken into account before the The remuneration committee reviewed the attainment of targets committee’s decisions are implemented. and agreed the bonus payments. Executive directors’ remuneration policy The remuneration commitee also considered the bonus The Group aims to ensure that the executive directors’ remuneration arrangements, in line with the Group’s overall practice on pay and beneﬁts, are competitive and designed to attract, retain and motivate executive directors of the highest calibre, who are expected to perform to the highest standards. Account is taken of information, from internal and independent sources, on the remuneration for comparable positions in a opportunities available to executive directors, and has increased these to 75 per cent for executive directors and 100 per cent for the group chief executive, with effect from the performance year 2001. These higher bonus payments will only be payable for superior performance as measured by the achievement of stretching predetermined targets relating to economic proﬁt and revenue growth. wide range of FTSE 100 companies. Medium-term incentive plan The reward package Each year, with the help of external management consultants, the total remuneration package is reviewed, and in 2000 Hay Management Consultants were commissioned by the remuneration committee to conduct the review. In 2000 the package for executive directors comprised the following elements: Basic salary The aim is to ensure that the responsibilities of the role are reﬂected in the salary and that salaries are competitively set in relation to other comparable companies. Annual bonus In April 2000, shareholders approved the introduction of a medium-term incentive plan which gives executive directors (who do not include the chairman or the deputy chairmen) the opportunity of an award, deferred until after the end of 2002 and which is subject to two performance targets, based on the efﬁciency ratio and return on equity. For the group chief executive the maximum award will be equal to 50 per cent of aggregate basic salary for the years 2000-2002 and for other executive directors, the maximum award will be equal to 25 per cent of aggregate basic salary for these three years. The two minimum performance targets are a reduction in the group’s efﬁciency ratio to 37 per cent by the end of 2002 and a return on equity of 28 per cent by the end of 2002. No payment will be made under the plan unless both these The annual bonus scheme was designed to reﬂect speciﬁc goals minimum targets are met. linked to the performance of the business. 40 LLOYDS TSB GROUP directors’ remuneration If by the end of 2002 the group’s efﬁciency ratio is between Pensions 37 per cent and 35 per cent or lower and the return on equity is between 28 per cent and 30 per cent or higher, the sum payable increases on a straight line sliding scale to the maximum award. For the year 2000, the group’s efﬁciency ratio was 46.7 per cent and return on equity was 29.1 per cent. Long-term rewards The Group is committed to the governing objective of maximising shareholder value over time. The board believes that executive share option schemes for senior executives provide an effective method of giving them the incentive to achieve that objective. In 2000 options were granted to executive directors and senior executives within limits set by the rules of the schemes. These limits relate to the number of shares under option and the price payable on the exercise of options. Normally, the limit for the grant of options to an executive in any one year would be equal to one year’s remuneration. Performance conditions are set when the grant of options is made. To meet the performance conditions under the current schemes the Company’s ranking, based on total shareholder return (calculated by reference to both dividends and growth in share price) over the relevant period, should be in the top ﬁfty companies in the FTSE 100. There must also have been growth in earnings per share that is at least equal to the aggregate percentage change in the retail price index, plus three percentage points for each complete year of the relevant period. These are the performance conditions which were conﬁrmed by the shareholders at the annual general meeting in 2000. Proposals will be made to shareholders at the annual general meeting relating to the executive share option scheme, and will include recommendations regarding performance conditions and the time over which options may vest. Details are contained in the accompanying notice of meeting. Executive directors are, like most other employees, entitled to pensions based on salary and length of service with the Group, with a maximum pension of two thirds of ﬁnal salary, unless otherwise disclosed. Other beneﬁts Other beneﬁts include the use of a car, medical and other insurance and participation in the staff proﬁt sharing scheme. Service agreements Mr Atkinson, Mr Ellwood, Mr Fairey, Mr Holt, Mr Kane and Mr Pritchard each has a service agreement which the company may terminate by giving one year’s notice. Mr Ross’s service agreement provides for two years’ notice for the ﬁrst two years of employment with the Group. After that, the notice period will decrease by one month for each month of service. In the fourth year, Mr Ross’s contract will provide for one year’s notice, like those of the other executive directors. None of the other directors has a service agreement with a notice period of one year or more. The remuneration committee has considered the provisions of the UK listing authority’s corporate governance code relating to compensation in the event of early termination of directors’ service contracts and a departing director’s duty to mitigate loss. The committee reviewed the wording of the executive directors’ contracts and felt that as the notice period did not exceed one year, except in the case of Mr Ross as mentioned above, there was no need to provide explicitly for compensation payments on early termination. LLOYDS TSB GROUP 41 directors’ remuneration Directors’ emoluments Current directors who served during 2000: M K Atkinson Ewan Brown A C Butler P B Ellwood M E Fairey S M Forbes C S Gibson-Smith Dennis Holt A G Kane L E Linaker T F W McKillop A E Moore Sir Brian Pitman D P Pritchard M D Ross Lord Selborne L M Urquhart M A van den Bergh Former directors who served during 2000: Sir Nicholas Goodison P C Nicholson Dame Bridget Ogilvie G F Pell Former directors who served during 1999 Salaries/fees £000 1999 £000 aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff Proﬁt sharing £000 2000 Total £000 Other beneﬁts £000 Performance- related payments £000 325 45 33 550 380 34 30 275 300 36 33 185 400 325 302 42 70 63 73 10 8 24 16 135 33 55 38 27 30 20 40 33 30 7 229 154 113 130 124 124 22 24† 13 14 11 48† 14† 12 5† 3 1 509 45 33 856 596 34 30 428 474 36 33 216 488 496 468 42 70 68 83 10 8 25 482 32 32 807 529 45 30 – – 46 30 204 440 450 – 54 – – 329 35 30 453 557 aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aaaaaaffffffffffffffffffffffffff aad aad aad aad aad aad 4,585 5,048 1,009 3,543 313 183 ‘Other beneﬁts’ include the use of a car, medical cover, relocation payment where relevant and in some cases † the annual cost of life insurance cover similar to that provided for employees by the Lloyds TSB Group pension scheme. The total for the highest paid director (Mr Ellwood) was £856,000. (The total for the highest paid director in 1999 (Sir Brian Pitman), including the gain of £3,025,000 on the exercise of share options, mentioned in the table on page 44, was £3,465,000). The gains on the exercise of share options arise from increases in the share price since the options were granted. Shareholders who held shares for the same periods would have gained similarly from these increases. 42 LLOYDS TSB GROUP directors’ remuneration Directors’ pensions Pension beneﬁts earned by the directors: (a) Additional pension earned (excluding inﬂation) during the year ended 31 December 2000 £ aaaaaaasfff (c) Accrued pension entitlement at 31 December 2000 £ aaaaaaasfff aaaaaaasfff (b) Increase in transfer value (excluding inﬂation) £ 20,619 31,320 16,867 79,056 16,888 2,768 37,979 332,217 570,367 272,396 1,150,733 241,065 49,190 574,521 196,527 291,914 105,501 166,981 98,319 18,042 213,976 M K Atkinson P B Ellwood M E Fairey* Dennis Holt A G Kane D P Pritchard M D Ross Column (a) above is the increase in pension built up during the year. It recognises (i) the accrual rate for the additional year’s service based on the pensionable salary in force at the year end and (ii) the effect of pay changes in ‘real’ (inﬂation adjusted) terms on the pension already earned at the start of the year. Column (b) is the additional capital value of column (a) which would arise if the pension were to be transferred to another pension scheme on the director’s leaving the company, based on factors supplied by the actuary of the relevant Group pension scheme in accordance with actuarial guidance note GN11, less (where paid) the director’s contributions. Column (c) is the aggregate pension entitlement based on pensionable service with the Company to 31 December 2000 but payable at normal retirement age. Members of the Group’s pension schemes have the option to pay additional voluntary contributions; neither the contributions nor the resulting beneﬁts are included in the above table. * Includes additional beneﬁts from the separate fund, mentioned in previous annual reports, established to cover pension obligations of those who joined the Group after 1 June 1989 and who are subject to the Inland Revenue earnings cap relating to pensions, introduced by the Finance Act 1989. Mr Pritchard is entitled to additional beneﬁts from the deﬁned contribution section of the separate fund for those who joined the Group after 1 June 1989. The Group pays an annual contribution to the fund in respect of Mr Pritchard of 27 per cent of salary in excess of the earnings cap, which for the year 2000 equates to £63,045 (1999: £54,041). LLOYDS TSB GROUP 43 directors’ remuneration Directors’ interests The directors’ interests, all beneﬁcial, in shares in Lloyds TSB Group were: Shares: M K Atkinson Ewan Brown A C Butler P B Ellwood M E Fairey S M Forbes C S Gibson-Smith Dennis Holt A G Kane Options to acquire shares: At 1 January 2000 (or date of appointment if later) aaaaaaasfff 29,597 2,187 2,000 176,162 70,876 2,000 3,065 18,035 73,458 At 31 December 2000 aaaaaaasfff 31,077 3,274 2,000 177,501 72,218 2,000 3,151 19,264 78,865 At 1 January 2000 (or date of appointment if later) aaaaaaasfff 5,000 1,000 1,041,911 2,576,438 866 – 3,372 – 4,000 At 31 December 2000 aaaaaaasfff 5,000 1,000 1,043,196 2,578,688 2,151 2,500 3,372 2,124 4,000 L E Linaker T F W McKillop A E Moore Sir Brian Pitman D P Pritchard M D Ross Lord Selborne L M Urquhart M A van den Bergh At 1 January 2000 (or date of appointment if later) Granted during the year Weighted average exercise price at during the 31 December 31 December 2000 Exercised/ lapsed 2000 year At 1999 £000 aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff aaaaaaasfff 2000 £000 Amount of gain on exercise** Exercise price of options granted, exercised or lapsed during the year Market price at date of exercise M K Atkinson 350,875 P B Ellwood* 490,486 M E Fairey* 330,982 Dennis Holt 53,237 A G Kane* 253,806 A E Moore Sir Brian Pitman D P Pritchard M D Ross 62,984 4,374 94,687 – 282† 356† 419 682 352 206 237† 269† 218† 187† 376† 136† 127† 125† 3,682 1,015† 562† 59,144 26,136 916 80,364 61,714 85,896 10,931 42,038 10,889 64,786 11,841 4,157 71,519 10,385 265,696 3,245 436,433 441p 632,564 533p 427,809 501p 102,830 626p 329,331 505p 62,984 4,374 176,591 251p 309p 698p 268,941 549p 549.5p 615.5p 442p 718p 580p 549.5p 615.5p 549.5p 615.5p 549.5p 615.5p 164.57p 253p 288p 416p 580p 768p 632p 719p 718p 253p 288p 416p 549.5p 615.5p 442p 178p 768p 719p 549.5p 615.5p 549.5p 520p Gain made by Sir Nicholas Goodison, who retired on 11 April 2000 Gain made by S A Maran, who served during 1999 Gain made by G F Pell, who left the board on 7 January 2000 44 LLOYDS TSB GROUP 8 43 642p 642p 642p 642p 2 3 1 1 640.5p 20 8 3,025 172 27 815 aaaaaaasfff aaaaaaasfff aas aas 27 4,098 directors’ remuneration Directors’ interests (continued) Options to acquire shares (continued) Options outstanding are exercisable between 2001 and 2010. *These directors will receive additional Lloyds TSB Group shares on exercising share options held on 28 December 1995. These shares will compensate them for the special dividend of 68.3p per share which was paid to former TSB Group shareholders following the merger with Lloyds Bank, but which was not paid to optionholders. In that regard Mr Kane received 402 additional shares when he exercised the share options shown above. **This is the difference between the market price of the shares on the day on which the share option was exercised and the price paid for the shares, and includes the value of shares issued to compensate directors for the special dividend mentioned above. †During the year these share options lapsed following termination of savings contracts linked to the staff sharesave option scheme, in accordance with the rules of the scheme. The market price for a share in the Company at 31 December 2000 was 708p. The range of prices between 1 January 2000 and 31 December 2000 was 517p to 742.5p. None of the other directors at 31 December 2000 had options to acquire shares in the Company or its subsidiaries. Scottish Widows loan capital At the end of the year, Mr Ross had an interest in £57,394 of Scottish Widows Group Limited ﬂoating rate unsecured loan notes 2008, issued during the year. Non-beneﬁcial interests Directors had non-beneﬁcial interests as follows: 1. Mr Atkinson, Mr Ellwood, Mr Fairey, Mr Holt, Mr Kane, Mr Moore, Sir Brian Pitman, Mr Pritchard, Mr Ross and Mr van den Bergh together with some 70,000 other employees, were potential beneﬁciaries in the 749,896, 66,536 and 3,100,000 shares held at the end of the year by the Lloyds TSB qualifying employee share ownership trust, the TSB Group employee trust and the Lloyds TSB Group employee share ownership trust, respectively. 1,888,211, 2,574,721 and 3,100,000 shares, respectively, were held by these trusts at the beginning of the year. These holdings were 195,941, 18,489 and 3,100,000, respectively, on 15 February 2001. 2. At the end of the year, Mr Ellwood also had a non-beneﬁcial interest in 7,000 shares held in another trust created during the year. None of those who were directors at the end of the year had any other interest in the capital of the Company or its subsidiaries and there were no changes in their beneﬁcial interests between 31 December 2000 and 15 February 2001. The register of directors’ interests, which is open to inspection, contains full particulars of directors’ shareholdings and options to acquire shares in the Company. LLOYDS TSB GROUP 45 corporate governance The UK listing authority’s rules require companies to make More information about directors’ remuneration is given in the statements on corporate governance in their annual reports. The directors’ remuneration report on pages 40 to 45 and details of following comments are, therefore, included to comply with how the board reviews ﬁnancial and operational controls and these rules. Corporate governance principles The board considers that good governance is central to achieving the Group’s governing objective of maximising shareholder value. That has been uppermost in directors’ minds when applying the governance principles contained in the code risk management generally are shown on page 47 and in the ﬁnancial review on pages 11 to 33. The chairman, the group chief executive and the group ﬁnance director have meetings with representatives of institutional shareholders and all shareholders are encouraged to participate in the Company’s annual general meeting. annexed to the UK listing authority’s listing rules. Compliance with the code The following remarks demonstrate how the board has applied The directors believe that the Company complies with the these principles. The information on page 37 shows that the Company is led and controlled by a board comprising executive and non-executive directors with wide experience. The appointment of directors is considered by the board and, following the provisions in the articles of association, they must retire by rotation, and may stand for re-election by the shareholders, at least every three years. provisions of the code and that it has complied throughout the year with the provisions where the requirements are of a continuing nature. Directors’ responsibilities The directors are required by the Companies Act 1985 to prepare ﬁnancial statements for each ﬁnancial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the year and of the proﬁt or loss for the The board meets eleven times a year and a programme is year. Following discussions with the auditors, the directors prepared and agreed each year, which ensures that the directors consider that in preparing the ﬁnancial statements on pages 49 are able regularly to review corporate strategy and the to 76, the Company has used appropriate accounting policies, operations and results of the business units in the Group and to consistently applied and supported by reasonable and prudent discharge their other duties. The roles of the chairman, the judgements and estimates, and that all accounting standards group chief executive and the board and its governance which they consider applicable have been followed. arrangements are reviewed annually. The directors have responsibility for ensuring that the Company Additionally, the directors meet, informally, four or ﬁve times a keeps accounting records which disclose with reasonable year, to enable them to spend more time than would normally accuracy the ﬁnancial position of the Company and which be available at board meetings in exploring aspects of the enable them to ensure that the ﬁnancial statements comply with Group’s business and to hear from senior executives below the Companies Act 1985. They have general responsibility for board level. The board has a chairman’s committee, comprising the chairman, the two deputy chairmen, the group chief executive taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. and his deputy. The chairman’s committee meets to discuss Going concern current issues and strategy, examine and test proposals and prepare for board meetings. It also has power to deal with routine matters between board meetings. The directors are satisﬁed that the Company and the Group have adequate resources to continue to operate for the foreseeable future and are ﬁnancially sound. For this reason, The board has audit, nomination and remuneration committees they continue to adopt the going concern basis in preparing the which comply with the provisions of the code. Additionally, all accounts. the non-executive directors receive copies of the minutes of the remuneration committee’s meetings and have the opportunity to comment and have their views taken into account before the committee’s decisions are implemented. 46 LLOYDS TSB GROUP Internal control The board of directors is responsible for the Group’s system of internal control, which is designed to ensure effective and efﬁcient operations, internal control, including ﬁnancial reporting, and compliance with laws and regulations. In establishing and reviewing the system of internal control the directors have regard to the materiality of relevant risks, the likelihood of a loss being incurred and the costs of control. It follows, therefore, that the system of internal control can only provide reasonable but not absolute assurance against the risk of material loss. The directors and senior management of the Group are committed to maintaining a control conscious culture across all areas of operation. This is communicated to all employees by way of procedures manuals and regular management brieﬁngs. Key business risks are identiﬁed, and these are controlled by means of procedures such as physical controls, credit, trading and other authorisation limits and segregation of duties. There are well established budgeting and forecasting procedures in place and reports are presented regularly to the board detailing the results of each principal business unit, variances against budget and prior year, and other performance data. Internal controls contain procedures which assist the board in identifying new and emerging risks. The effectiveness of the internal control system is reviewed regularly by the board and the audit committee which also receives reports of reviews undertaken around the Group by the Group’s risk management function, including internal audit and compliance. The audit committee also receives reports from the Company’s auditors, PricewaterhouseCoopers, which include details of signiﬁcant internal control matters that they have identiﬁed and has a discussion with the auditors at least once a year without executives present, to ensure that there are no unresolved issues of concern. corporate governance LLOYDS TSB GROUP 47 corporate governance auditors’ report To the members of Lloyds TSB Group plc Basis of audit opinion We have audited the ﬁnancial statements on pages 42 We conducted our audit in accordance with Auditing Standards to 45 and 49 to 76. Respective responsibilities of directors and auditors The directors are responsible for preparing the annual report. As described on page 46 this includes responsibility for preparing the ﬁnancial statements in accordance with applicable UK Accounting Standards. Our responsibilities, as independent auditors, are established in the UK by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority and our profession’s ethical guidance. We report to you our opinion as to whether the ﬁnancial statements give a true and fair view and are properly prepared in accordance with the UK Companies Act. We also report to you if, in our opinion, the directors’ report is not consistent with the ﬁnancial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information speciﬁed by law or the Listing Rules regarding directors’ issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the ﬁnancial statements. It also includes an assessment of the signiﬁcant estimates and judgements made by the directors in the preparation of the ﬁnancial statements, and of whether the accounting policies are appropriate to the Company and the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the ﬁnancial statements. Opinion remuneration and transactions is not disclosed. In our opinion the ﬁnancial statements give a true and fair view We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the ﬁnancial statements. We review whether the statement on page 46 reﬂects the company’s compliance with the seven provisions of the Combined Code speciﬁed for our review by the Financial of the state of affairs of the Company and the Group as at 31 December 2000 and of the proﬁt and cash ﬂows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London Services Authority, and we report if it does not. We are not 15 February 2001 required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the company’s corporate governance procedures or its risk and control procedures. 48 LLOYDS TSB GROUP consolidated proﬁt and loss account for the year ended 31 December 2000 Interest receivable: Interest receivable and similar income arising from debt securities Other interest receivable and similar income Interest payable Net interest income Other income Fees and commissions receivable Fees and commissions payable Dealing proﬁts (before expenses) Income from long-term assurance business: Income before pension provisions Pension provisions General insurance premium income Other operating income Total income Operating expenses Administrative expenses Exceptional restructuring costs Total administrative expenses Depreciation Amortisation of goodwill Depreciation and amortisation Total operating expenses Trading surplus (deﬁcit) General insurance claims Provisions for bad and doubtful debts Speciﬁc General Amounts written off ﬁxed asset investments Operating proﬁt (loss) Loss on sale and closure of businesses Proﬁt on ordinary activities before tax Tax on proﬁt on ordinary activities Proﬁt on ordinary activities after tax Minority interests: equity : non-equity Proﬁt for the year attributable to shareholders Dividends Retained proﬁt Earnings per share Diluted earnings per share * restated (note 1) Group (excluding Scottish Widows) 2000 £ million aaaaaaffffffffffffffffffffffffff Scottish Widows (from 3 March) (note 49) 2000 £ million aaaaaaffffffffffffffffffffffffff Note aaaffffffffffffffffffff Total 2000 £ million aaaaaaffffffffffffffffffffffffff 1999* £ million aaaaaaffffffffffffffffffffffffff 443 10,511 6,132 aaaaaaffffffffffffffffffffffffff 4,822 – 100 335 aaaaaaffffffffffffffffffffffffff (235) 443 10,611 6,467 aaaaaaffffffffffffffffffffffffff 4,587 430 10,022 5,669 aaaaaafffffffffffffffffffffffffffff 4,783 2,706 (461) 193 447 (100) 399 381 62 (18) 5 268 – – – 2,768 (479) 198 715 (100) 399 381 2,497 (426) 215 329 (102) 390 242 3,565 aaaaaaffffffffffffffffffffffffff 8,387 317 aaaaaaffffffffffffffffffffffffff 82 3,882 aaaaaaffffffffffffffffffffffffff 8,469 3,145 aaaaaafffffffffffffffffffffffffffff 7,928 3,332 129 3,461 364 22 386 46 59 105 – – – 3,378 188 3,566 364 22 386 3,847 aaaaaaffffffffffffffffffffffffff 4,540 142 105 aaaaaaffffffffffffffffffffffffff (23) – 3,952 aaaaaaffffffffffffffffffffffffff 4,517 142 481 (6) – – 481 (6) 475 14 aaaaaaffffffffffffffffffffffffff 3,909 – – aaaaaaffffffffffffffffffffffffff aafffffff aafffffff (23) 475 14 aaaaaaffffffffffffffffffffffffff 3,886 3,140 – 3,140 265 12 277 3,417 aaaaaafffffffffffffffffffffffffffff 4,511 169 588 – 588 7 aaaaaafffffffffffffffffffffffffff 3,747 – aaaaaaffffffffffffffffffffffffff 3,886 1,113 aaaaaaffffffffffffffffffffffffff 2,773 13 36 aaaaaaffffffffffffffffffffffffff 2,724 1,683 aaaaaaffffffffffffffffffffffffff 1,041 (126) aaaaaaffffffffffffffffffffffffffff 3,621 1,101 aaaaaaffffffffffffffffffffffffffffff 2,520 6 – aaaaaaffffffffffffffffff 2,514 1,451 aaaaaafffffffffffffffffffffffffff aafffffff aafffffff 1,063 46.2p 45.3p 49.6p 49.1p 2 32 3 4 26 25 16 5 6 7 9 43 10 11 45 12 12 LLOYDS TSB GROUP 49 consolidated balance sheet at 31 December 2000 Assets Cash and balances at central banks Items in course of collection from banks Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Non-returnable ﬁnance Debt securities Equity shares Intangible ﬁxed assets Tangible ﬁxed assets Own shares Other assets Prepayments and accrued income Long-term assurance business attributable to shareholders Long-term assurance assets attributable to policyholders Total assets * restated (note 1) Note aaaffffffffffffffffffff 2000 £ million aaaaaaaaffffffffffffffffffffffffff 1999* £ million aaaaaaaaffffffffffffffffffffffffff 13 14 15 20 21 25 26 29 30 31 32 32 1,027 1,533 1,709 15,290 114,855 (400) 114,455 13,882 247 2,599 3,037 28 3,576 2,965 6,549 aaaaaaaaffffffffffffffffffffffffff 166,897 51,085 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 217,982 1,276 1,743 2,065 16,963 102,149 – 102,149 14,184 213 231 2,035 35 3,641 2,628 2,274 aaaaaaaaffffffffffffffffffffffffff 149,437 26,542 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 175,979 The directors approved the accounts on 15 February 2001. Sir Brian Pitman Chairman P B Ellwood Group Chief Executive M K Atkinson Group Finance Director 50 LLOYDS TSB GROUP consolidated balance sheet Note aaaffffffffffffffffffff 2000 £ million aaaaaaaaffffffffffffffffffffffffff 1999* £ million aaaaaaaaffffffffffffffffffffffffff 34 35 36 38 39 40 41 42 42 43 44 45 45 45 47 Liabilities Deposits by banks Customer accounts Items in course of transmission to banks Debt securities in issue Other liabilities Accruals and deferred income Provisions for liabilities and charges: Deferred tax Other provisions for liabilities and charges Subordinated liabilities: Undated loan capital Dated loan capital Minority interests: Equity Non-equity Called-up share capital Share premium account Merger reserve Proﬁt and loss account Shareholders’ funds (equity) Long-term assurance liabilities to policyholders Total liabilities Memorandum items Contingent liabilities: Acceptances and endorsements Guarantees and assets pledged as collateral security Other contingent liabilities Commitments: Commitments arising out of sale and option to resell transactions Other commitments * restated (note 1) 16,735 100,738 420 17,899 6,980 4,325 1,559 442 3,391 4,119 37 515 552 1,396 595 343 7,403 17,694 92,851 757 12,260 5,526 3,309 1,459 474 3,294 3,199 33 – 33 1,389 404 343 6,445 9,737 aaaaaaaaffffffffffffffffffffffffff 166,897 51,085 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 217,982 8,581 aaaaaaaaffffffffffffffffffffffffff 149,437 26,542 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 175,979 357 459 3,249 1,541 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 5,147 3 42,586 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 42,589 2,485 1,479 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 4,423 14 27,862 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 27,876 LLOYDS TSB GROUP 51 company balance sheet at 31 December 2000 Fixed assets Investments Shares in group undertakings Loans to group undertakings Own shares Current assets Debtors falling due within one year Amounts owed by group undertakings Other debtors Tax recoverable Cash balances with group undertakings Current liabilities Amounts falling due within one year Short-term borrowings Amounts owed to group undertakings Other creditors Dividend payable Net current liabilities Total assets less current liabilities Creditors Amounts falling due after more than one year Dated loan capital Net assets Capital and reserves Called-up share capital Share premium account Revaluation reserve Proﬁt and loss account Shareholders’ funds (equity) Note aaaffffffffffffffffffff 2000 £ million aaaaaaaaffffffffffffffffffffffffff 1999 £ million aaaaaaaaffffffffffffffffffffffffff 23 23 29 37 42 44 45 45 45 11,152 759 24 11,935 1,233 42 16 66 1,357 1 1,811 62 1,172 3,046 10,197 759 35 10,991 860 47 34 262 1,203 1 1,918 60 1,011 2,990 (1,689) (1,787) aaaaaaaaffffffffffffffffffffffffff aaaaaaaaffffffffffffffffffffffffff 10,246 9,204 512 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 9,734 1,396 595 5,086 2,657 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 9,734 511 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 8,693 1,389 404 4,131 2,769 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 8,693 The directors approved the accounts on 15 February 2001. Sir Brian Pitman Chairman P B Ellwood Group Chief Executive M K Atkinson Group Finance Director 52 LLOYDS TSB GROUP other statements Statement of total recognised gains and losses for the year ended 31 December 2000 Proﬁt attributable to shareholders Currency translation differences on foreign currency net investments Total recognised gains and losses relating to the year Prior year adjustment (note 1) Total gains and losses recognised during the year Historical cost proﬁts and losses for the year ended 31 December 2000 2000 £ million aaaaaaaaffffffffffffffffffffffffff 2,724 (68) aaaaaaaaffffffffffffffffffffffffff 2,656 (112) aaaaaaaaffffffffffffffffffffffffff 2,544aafffffffffffffffffffffffffff 1999 £ million aaaaaaaaffffffffffffffffffffffffff 2,514 (33) aaaaaaaaffffffffffffffffffffffffff 2,481aafffffffffffffffffffffffffff There was no material difference between the results as reported and the results that would have been reported on an unmodiﬁed historical cost basis. Accordingly, no note of historical cost proﬁts and losses has been included. Reconciliation of movements in shareholders’ funds for the year ended 31 December 2000 Proﬁt attributable to shareholders Dividends Retained proﬁt Currency translation differences on foreign currency net investments Issue of shares Goodwill written back on sale and closure of businesses Net increase in shareholders’ funds Shareholders’ funds at beginning of year Prior year adjustment (note 1) Shareholders’ funds at end of year 2000 £ million aaaaaaaaffffffffffffffffffffffffff 2,724 (1,683) aaaaaaaaffffffffffffffffffffffffff 1,041 (68) 74 109 aaaaaaaaffffffffffffffffffffffffff 1,156 8,581 – aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 9,737 1999 £ million aaaaaaaaffffffffffffffffffffffffff 2,514 (1,451) aaaaaaaaffffffffffffffffffffffffff 1,063 (33) 108 80 aaaaaaaaffffffffffffffffffffffffff 1,218 7,475 (112) aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 8,581 LLOYDS TSB GROUP 53 consolidated cash ﬂow statement 2000 £ million aaaaaaaaffffffffffffffffffffffffff 7,558 1999* £ million aaaaaaaaffffffffffffffffffffffffff 1,261 (12) (36) (442) (1) (491) (723) (141) (864) (23,552) 24,756 (1,006) 78 – (11) – (270) – (281) (670) (137) (807) (23,147) 21,921 (595) 83 (220) 276 (1,958) (5,110) 83 (5,027) (1,522) aaaaaaaaffffffffffffffffffffffffff (70) 952 509 74 (55) (4) (27) 3 (24) (1,285) aaaaaaaaffffffffffffffffffffffffff (3,094) 2,769 – 108 (228) (3) 1,476 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff 1,406 2,646 aaaaaaaaffffffffffffffffffffffffff aafffffffffffffffffffffffffff (448) for the year ended 31 December 2000 Net cash inﬂow from operating activities (note 50a) Returns on investments and servicing of ﬁnance: Dividends paid to equity minority interests Payments made to non-equity minority interests Interest paid on subordinated liabilities (loan capital) Interest element of ﬁnance lease rental payments Net cash outﬂow from returns on investments and servicing of ﬁnance Taxation: UK corporation tax Overseas tax Total taxation Capital expenditure and ﬁnancial investment: Additions to ﬁxed asset investments Disposals of ﬁxed asset investments Additions to tangible ﬁxed assets Disposals of tangible ﬁxed assets Capital injection to life fund Net cash inﬂow (outﬂow) from capital expenditure and ﬁnancial investment Acquisitions and disposals: Acquisition of group undertakings (note 50e) Disposal of group undertakings and businesses (note 50g) Net cash outﬂow from acquisitions and disposals Equity dividends paid Net cash outﬂow before ﬁnancing Financing: Issue of subordinated liabilities (loan capital) Issue of preferred securities by subsidiary undertakings Issue of ordinary share capital net of £124 million (1999: £205 million) contribution to the QUEST (note 29) Repayments of subordinated liabilities (loan capital) Capital element of ﬁnance lease rental payments Net cash inﬂow from ﬁnancing Increase (decrease) in cash (note 50c) * restated (note 1) 54 LLOYDS TSB GROUP notes to the accounts 1 Accounting policies c Goodwill Accounting policies are unchanged from 1999, except that the Group has implemented the requirements of Financial Reporting Standard 15 ‘Tangible Fixed Assets’; this has resulted in two changes. The Group’s freehold and long leasehold premises were previously included in the balance sheet at the last valuation on the basis of existing use value; they will now no longer be revalued, and a prior year adjustment has been made to restate the carrying value to historical cost. This has resulted in the carrying value of tangible ﬁxed assets as at 1 January 1999 being reduced by £112 million and an equivalent adjustment being made against reserves. The effect of this change upon the Group’s proﬁt and loss account is not signiﬁcant. In addition, the Group has reassessed the useful economic lives and residual values of its freehold and long leasehold premises and with effect from 1 January 2000, the cost of these properties, after deducting the value of land, is being depreciated over 50 years. Previously it was considered that the residual values were such that depreciation was not signiﬁcant. The effect of this change has been to increase the depreciation charge in 2000 by £8 million. In addition, the Group has implemented the Finance & Leasing Association’s Statement of Recommended Accounting Practice ‘Accounting Issues in the Asset Finance and Leasing Industry’. As a result, the presentation of assets held for leasing to customers under operating lease agreements has been changed. These assets are now included within tangible ﬁxed assets and depreciation charged over their estimated useful economic lives. Rental income received from customers is included within other operating income. Operating lease assets were previously included within loans and advances and the related income within net interest income. This change has no effect on proﬁt before tax. The effect of this change on the balance sheet has been to increase tangible ﬁxed assets by £1,280 million and reduce loans and advances to customers by an equivalent amount (1999: £479 million). Comparative ﬁgures have been restated. The Group has also implemented the requirements of Financial Reporting Standard 16 ‘Current Tax’; the effect has not been signiﬁcant. a Accounting convention The consolidated accounts are prepared under the historical cost convention as modiﬁed by the revaluation of debt securities and equity shares held for dealing purposes (see g) and assets held in the long-term assurance business, in compliance with Section 255A, Schedule 9 and other requirements of the Companies Act 1985, in accordance with applicable accounting standards, pronouncements of the Urgent Issues Task Force and with the Statements of Recommended Accounting Practice the British Bankers’ Association. issued by The accounts of the Company are prepared under the historical cost convention as modiﬁed by the revaluation of shares in group undertakings (see h), in compliance with Section 226, Schedule 4 and other requirements of the Companies Act 1985 and in accordance with applicable accounting standards and pronouncements of the Urgent Issues Task Force. The Group has taken advantage of the dispensation in the Urgent Issues Task Force’s Abstract 17 ‘Employee Share Schemes’ not to apply that Abstract to the Group’s Inland Revenue approved SAYE schemes. b Basis of consolidation Assets, liabilities and results of group undertakings and joint ventures are included in the consolidated accounts on the basis of accounts made up to 31 December. In order to reﬂect the different nature of the shareholders’ and policyholders’ interests in the long-term assurance business, the value of long-term assurance business attributable to shareholders and the assets and liabilities attributable to policyholders are classiﬁed under separate headings in the consolidated balance sheet. Goodwill arising on acquisitions of or by group undertakings is capitalised. For acquisitions prior to 1 January 1998, goodwill was taken direct to reserves in the year of acquisition. As permitted by the transitional arrangements of Financial Reporting Standard 10, this goodwill was not reinstated when the Group adopted the standard in 1998. The useful economic life of the goodwill arising on each acquistition is determined at the time of the acquisition. In the case of the acquisition of Scottish Widows in 2000, in view of the strength of the Scottish Widows brand and the position of the business as one of the leading providers of life, pensions, unit trust and fund management products, the directors consider that it is appropriate to assign an indeﬁnite life to the goodwill. This goodwill is not being amortised through the proﬁt and loss account; however it is subjected to annual impairment reviews in accordance with Financial Reporting Standard 11 ‘Impairment of Fixed Assets and Goodwill’. Should any impairment be identiﬁed, it would be charged to the proﬁt and loss account immediately. Paragraph 28 of Schedule 9 to the Companies Act 1985 requires that all goodwill carried on the balance sheet should be amortised. In the case of the goodwill arising on the acquisition of Scottish Widows, the directors consider that it is appropriate to depart from this requirement in order to comply with the over-riding requirement for the accounts to show a true and fair view. If this goodwill was amortised over a period of 20 years, proﬁt before tax for the year ended 31 December 2000 would be £78 million lower, with a corresponding reduction in reserves; intangible assets on the balance sheet would also be £78 million lower. Goodwill arising on all other acquisitions is amortised on a straight line basis over its estimated useful economic life, which does not exceed 20 years. At the date of the disposal of group or associated undertakings, any unamortised goodwill, or goodwill taken directly to reserves prior to 1 January 1998, is included in the Group’s share of the net assets of the undertaking in the calculation of the proﬁt or loss on disposal. d Income recognition Interest income is recognised in the proﬁt and loss account as it accrues, with the exception of interest on non-performing lending which is taken to income when received (see e). Fees receivable from customers to reimburse the Group for costs incurred are taken to income when due. Fees relating to the ongoing provision of a service or risk borne for a customer are taken to income in proportion to the service provided or risk borne in each accounting period. Fees charged in lieu of interest are taken to income on a level yield basis over the period of the loan. Other fees receivable are accounted for as they fall due. e Provisions for bad and doubtful debts and interest in suspense Provisions for bad and doubtful debts are based on the year-end appraisal of advances. The speciﬁc element relates to identiﬁed risk advances, whereas the general element relates to latent bad and doubtful debts which are present in any portfolio of bank advances but have not been speciﬁcally identiﬁed. Advances are written down to estimated realisable value when the normal banking relationship with the customer has ceased; where it is doubtful that interest earned on loans and advances will be collectable, it is credited to an interest in suspense account and is only released to the proﬁt and loss account when its collectability is no longer subject to signiﬁcant doubt. LLOYDS TSB GROUP 55 notes to the accounts 1 Accounting policies (continued) f Mortgage incentives Payments made under cash gift and discount mortgage schemes, which are recoverable from the customer in the event of early redemption, are amortised as an adjustment to net interest income over the early redemption charge period. Payments cease to be deferred and are charged to the proﬁt and loss account in the event that the related loan is redeemed or becomes impaired. g Debt securities and equity shares Debt securities, apart from those held for dealing purposes, are stated at cost as adjusted for the amortisation of any premiums and discounts arising on acquisition, which are amortised from purchase to maturity in equal annual instalments. Debt securities acquired in exchange for advances to countries experiencing payment difﬁculties, either collateralised or due to be collateralised by US Treasury securities, are included in the Group’s portfolio of investment securities at an amount based on the market value at the date of exchange as adjusted for the amortisation of discount on acquisition. Equity shares, apart from those held for dealing purposes, are stated at cost less amounts written off. Debt securities and equity shares held for dealing purposes are included at market value. Investments held within the long-term assurance fund are included on the following basis: stocks, shares, ﬁxed interest securities and unit trusts held for unit linked funds are valued in accordance with policy conditions at market prices; other stocks and shares and ﬁxed interest securities are valued at middle market price and other unit trusts at bid price; investment properties are included at valuation by independent valuers at existing use value at 31 December 2000, and mortgages and loans are at cost less amounts written off. h Shares in group undertakings k Leasing and instalment credit transactions (continued) Income from instalment credit transactions is calculated by the sum of the digits method. In those cases where the Group is the lessee, operating lease costs are charged to the proﬁt and loss account in equal annual instalments over the life of the lease. l Deferred tax Deferred tax is provided at the appropriate rates of tax where there is a reasonable probability that a liability or asset will crystallise in the foreseeable future. m Pensions and other post-retirement beneﬁts Contributions to the Group’s pension schemes are charged to the proﬁt and loss account so as to spread the expected cost of pensions, calculated in accordance with actuarial advice, on a systematic basis over employees’ working lives. Pension arrangements for most of the staff in the UK and for the majority of those overseas are operated through deﬁned beneﬁt schemes funded by Group companies. The pension cost relating to these schemes is assessed in accordance with the advice of qualiﬁed actuaries, using the projected unit method. Variations from the regular cost are allocated by equal annual instalments over the average remaining service lives of current employees. Pension arrangements for staff joining Lloyds TSB Group Pension Scheme No. 1 (formerly the Lloyds Bank pension scheme) after 1 January 1996 and Lloyds TSB Group Pension Scheme No. 2 (formerly the TSB Group pension scheme) after 1 January 1998 are through money purchase elements of these schemes. Arrangements for pensions of certain staff employed overseas who are not included in funded schemes are made in accordance with local regulations and custom. Shares in group undertakings are stated in the balance sheet of the Company at its share of net tangible assets, with the exception of the life assurance group undertakings which are stated on the basis described in o. Attributable goodwill is included, where this has not been written off directly to reserves. The cost of providing post-retirement beneﬁts other than pensions is charged to the proﬁt and loss account on a systematic basis over employees’ working lives. The unfunded liability is included in provisions in the balance sheet. i Tangible ﬁxed assets n Foreign currency translation Tangible ﬁxed assets are included at cost less depreciation. Land is not depreciated. Leasehold premises with unexpired lease terms of 50 years or less are depreciated by equal annual instalments over the remaining period of the lease. Freehold and long leasehold buildings are depreciated over 50 years. The costs of adapting premises for the use of the Group are separately identiﬁed and depreciated over 10 years, or over the term of the lease if less; such costs are included within premises in the balance sheet total of tangible ﬁxed assets. Equipment is depreciated by equal annual instalments over the estimated useful lives of the assets, which for ﬁxtures and furnishings are 10-20 years and for computer hardware, operating software and application software relating to separable new systems, motor vehicles and other equipment are 3-8 years. Premises and equipment held for letting to customers under operating leases are depreciated over the life of the lease to give a constant rate of return on the net investment, taking into account anticipated residual values. j Vacant leasehold property When a leasehold property ceases to be used in the business or a commitment is entered into which would cause this to occur, provision is made to the extent that the recoverable amount of the interest in the property is expected to be insufﬁcient to cover future obligations relating to the lease. k Leasing and instalment credit transactions Income from both ﬁnance and operating leases is credited to the proﬁt and loss account in proportion to the net cash invested so as to give a constant rate of return over each period after taking account of tax. Unguaranteed residual values in respect of both ﬁnance lease and operating lease assets are reviewed regularly and any impairments identiﬁed are charged to the proﬁt and loss account. Assets, liabilities and results in foreign currencies are expressed in sterling at the rates of exchange ruling on the dates of the respective balance sheets. Exchange adjustments on the translation of opening net assets held overseas are taken direct to reserves. All other exchange proﬁts or losses, which arise from normal trading activities, are included in the proﬁt and loss account. o Long-term assurance business The value placed on the Group’s long-term assurance business attributable to shareholders represents a prudent valuation of future earnings of policies in force, together with the net worth of the business, being the net tangible assets and the surplus retained after allocation within the long-term assurance funds. This value is determined annually in consultation with independent actuaries and is included separately in the balance sheet. Changes in the value placed on long-term assurance business attributable to shareholders, which are determined on a post-tax basis, are included in the proﬁt and loss account. For the purpose of presentation, the change in this value is grossed up at the underlying rate of corporation tax. p General insurance business The underwriting result of the general insurance business is determined annually and included in proﬁt before tax after taking into account premiums, outstanding claims and deferred acquisition costs. Premiums are included net of refunds and a provision for the proportion of premiums written in the year which relate to cover provided for future periods. The provision for claims includes the estimated cost of claims notiﬁed but not settled and claims incurred but not reported at the balance sheet date. 56 LLOYDS TSB GROUP 1 Accounting policies (continued) q Derivatives Derivatives are used in the Group’s trading activities to meet the ﬁnancial needs of customers, for proprietary purposes and to manage risk in the Group’s trading portfolios. Such instruments include exchange rate forwards and futures, currency swaps and options together with interest rate swaps, forward rate agreements, interest rate options and futures. These derivatives are carried at fair value and all changes in fair value are reported within dealing proﬁts in the proﬁt and loss account. Fair values are normally determined by reference to quoted market prices; internal models are used to determine fair value in instances where no market price is available. The unrealised gains and losses on trading derivatives are included within other assets and other liabilities respectively; these items are reported gross except in instances where the Group has entered into legally binding netting agreements, where the Group has a right to insist on net settlement that would survive the insolvency of the counterparty; in these cases the positive and negative fair values of trading derivatives with the relevant counterparties are offset within the balance sheet totals. Derivatives used in the Group’s non-trading activities are taken out to reduce exposures to ﬂuctuations in interest and exchange rates and include exchange rate forwards and futures, currency options together with interest rate swaps, forward rate agreements and options. These derivatives are accounted for on an accruals basis, in line with the treatment of the underlying items which they are hedging. Interest receipts and payments on hedging interest derivatives are included in the proﬁt and loss account so as to match the interest payable or receivable on the hedged item. A derivative will only be classiﬁed as a hedge in circumstances where there was adequate evidence of the intention to hedge at the outset of the transaction and the derivative substantially matches or eliminates the exposure being hedged. Where a hedge transaction is superseded, ceases to be effective or is terminated early the derivative is measured at fair value. Any proﬁt or loss arising is then amortised to the proﬁt and loss account over the remaining life of the item which it was originally hedging. When the underlying asset, liability or position that was being hedged is terminated, the hedging derivative is measured at fair value and any proﬁt or loss arising is recognised immediately. 2 Dealing proﬁts (before expenses) Foreign exchange trading income Securities and other gains 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 141 133 57 82 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 215 198 Dealing proﬁts include the proﬁts and losses arising both on the purchase and sale of trading instruments and from the year-end revaluation to market value, together with the interest income earned from these instruments and the related funding cost. 3 Administrative expenses Salaries and proﬁt sharing Social security costs Other pension costs Staff costs Other administrative expenses 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 1,862 131 (105) 1,700 125 (108) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,888 1,490 1,717 1,423 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,140 3,378 notes to the accounts 3 Administrative expenses (continued) 1999 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 The average number of persons on a headcount basis employed by the Group during the year was as follows: UK Overseas 67,576 67,848 12,599 11,847 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 79,695 80,175 The above staff numbers exclude 6,152 (1999: 4,938) staff employed in the long-term assurance business. Costs of £199 million (1999: £141 million) in relation to those staff are reﬂected in the valuation of the long-term assurance fund. Details of directors’ emoluments, pensions and interests are given on pages 42 to 45. During the year PricewaterhouseCoopers earned the following fees: Statutory audit Due diligence and other audit-related work Audit and similar services Consultancy and advisory services Total fees 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 4 4 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4 7 11 8 25 25 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 36 33 The auditors’ remuneration for the holding company was £50,000 (1999: £50,000). It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where their expertise and experience with the Group are important, principally tax advice and due diligence reporting on acquisitions, or where they are awarded assignments on a competitive basis. It is the Group’s policy to seek competitive tenders for all consultancy projects. There was a net credit in respect of pension costs for the Group in 2000 of £105 million (1999: credit of £108 million), which included a credit of £121 million (1999: credit of £121 million) relating to Lloyds TSB Group Pension Schemes No’s 1 and 2. Full actuarial valuations of the Lloyds TSB Group Pension Schemes No’s 1 and 2 are carried out every three years with interim reviews in the intervening years. At 30 June 1999, the date of the latest full actuarial valuations, the principal actuarial assumptions adopted were that, over the long term, the annual real rate of return on new investments would be 3 per cent higher than the annual increase in pensionable remuneration, 4 per cent higher than the annual increase in present and future pensions in payment, and 3 per cent higher than the annual increase in dividends receivable. The market value of the assets of the schemes at this date was £11,748 million. The actuarial value of the assets represented 125 per cent of the accrued liabilities allowing for future increases in pensions and pensionable remuneration. For funding purposes, the surpluses in the two schemes are being eliminated by means of a contribution holiday. Contribution rates to other schemes have been adjusted to take account of surpluses and deﬁciencies. The pensions prepayment of £768 million (1999: £647 million) for the Group is included in prepayments and accrued income. The Group operates a number of schemes which provide post-retirement health care beneﬁts to certain employees, retired employees and their dependent relatives. The total cost for the Group in 2000 was £3 million (1999: £17 million). For the principal scheme, the latest actuarial valuation of the liability was carried out at 31 December 2000. This valuation showed the Group’s liability to be £72 million, which had been fully provided for at that date. The principal actuarial assumptions adopted were that, over the long term, the valuation discount rate and the rate of increase in medical costs would be 4 per cent and 3 per cent respectively higher than annual price inﬂation. LLOYDS TSB GROUP 57 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 3,295 151 109 3,578 62 59 3 12 193 26 490 195 33 362 Proﬁt on ordinary activities before tax 1999* 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,682 (99) 1,657 – 1,583 1,657 1,447 (119) 127 (59) (100) (80) 873 28 – – (102) – 1,216 799 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,799 2,456 1,250 (30) 1,172 – 1,220 1,172 (133) 119 – (126) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,621 3,886 notes to the accounts 4 Exceptional restructuring costs 7 Proﬁt on ordinary activities before tax Proﬁt on ordinary activities before tax is stated after taking account of: Income from: Aggregate amounts receivable in respect of assets leased to customers and banks under: Finance leases and hire purchase contracts Operating leases Proﬁt less losses on disposal of investment securities Share of results of associated undertakings and joint ventures Charges: Rental of premises Hire of equipment Interest on subordinated liabilities (loan capital) 8 Segment analysis Class of business: UK Retail Banking and Mortgages Proﬁt before exceptional restructuring costs Exceptional restructuring costs Insurance and Investments Operating proﬁt Short-term ﬂuctuations in investment returns Changes in economic assumptions Exceptional restructuring costs Pension provisions Stakeholder pension related charge UK Retail Financial Services Wholesale Markets and International Banking Proﬁt before exceptional restructuring costs Exceptional restructuring costs Central group items Loss on sale and closure of businesses In February 2000 the Group announced a new efﬁciency programme aimed at reducing its overall cost base. The main features of the efﬁciency programme, which is primarily focused on non-customer facing activities, will be the centralisation of computer operations; the further consolidation of large scale processing operations and support functions including the complete removal of all back ofﬁce processing from branches; the further streamlining of the branch network, combined with the expansion of lower cost delivery channels such as telephone banking and internet operations; the further reduction of purchasing costs; and the rationalisation of non-personal banking activities, through the progressive sharing and consolidation of operational functions. The programme is expected to be completed by 2003. During 2000 costs of £108 million were incurred, mainly comprising severance and consultancy costs. Following completion of the acquisition of Scottish Widows in March 2000, the Group has been integrating its businesses with the Group’s existing insurance and investments activities. During 2000 costs of £59 million have been incurred on this integration. In addition, a provision of £21 million has been made to cover the cost of integrating Chartered Trust Group plc and ACL Autolease Holdings Limited following their acquisition in September 2000. 5 Amounts written off ﬁxed asset investments Debt securities Equity shares 6 Loss before tax on sale and closure of businesses Provision for closure of Lloyds TSB Securities Services (tax: nil) Provision for sale of Abbey Life new business capability (including £80 million in respect of goodwill previously written off to reserves) (tax: nil) 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 9 7 5 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 14 7 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m – (28) (98) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff – afffffffffffffffffffffffffff afffffffffffffffffffffffffff (126) – During 1999 the Group announced its decision to withdraw from the global custody and unit trust trusteeship business and the consequential run-down and closure of Lloyds TSB Securities Services. A provision was raised in 1999 for the expected operating losses up to the date of closure and this provision has been released as the operating losses have been incurred over 2000; the closure of Lloyds TSB Securities Services has now been completed. The new business capability of Abbey Life was sold on 1 February 2000. A provision of £98 million was made for the loss on sale in 1999; this loss included £80 million in respect of goodwill previously written off to reserves and other asset write-downs. 58 LLOYDS TSB GROUP 8 Segment analysis (continued) 8 Segment analysis (continued) Operating proﬁt from Insurance and Investments is further analysed as follows: Geographical area:** Domestic 2000 £m Total 2000 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Inter- national 2000 £m Life and pensions Scottish Widows Other Unit trusts Scottish Widows Other Asset management Scottish Widows Other General insurance 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 386 382 768 7 41 48 10 30 – 333 333 – 57 57 – 22 40 591 22 461 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 873 1,447 The operating proﬁt for the life and pensions business shown above reconciles to the income from long-term assurance business shown in the proﬁt and loss account as follows: Life and pensions segmental proﬁt Items separately disclosed: Short-term ﬂuctuations in investment returns Changes in economic assumptions Stakeholder pension related charge Pension provisions Other items Income from long-term assurance business 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 768 333 (92) 127 (80) (100) 6 – – (102) (145) (96) (8) (10) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 227 615 Income from long-term assurance business is further analysed as follows: Income net of claims and technical provisions Pension provisions Operating expenses Tax charged to technical account Surplus emerging Value of in-force business Embedded value after tax Tax gross up Embedded value before tax 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 937 (100) (471) (191) 621 (102) (291) (159) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 175 266 69 89 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 441 158 174 69 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 615 227 notes to the accounts Interest receivable Fees and commissions receivable Dealing proﬁts (before expenses) Income from long-term assurance business General insurance premium income Other operating income 8,927 2,480 149 607 399 270 2,127 11,054 2,768 198 615 399 381 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 288 49 8 – 111 Total gross income Proﬁt on ordinary activities before tax afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 12,832 2,583 15,415 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 459 3,886 3,427 Domestic 1999 £m Total 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Inter- national 1999 £m Interest receivable Fees and commissions receivable Dealing proﬁts (before expenses) Income from long-term assurance business General insurance premium income Other operating income Total gross income Proﬁt on ordinary activities before tax 8,015 2,227 154 219 390 141 2,437 270 61 8 – 101 10,452 2,497 215 227 390 242 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 11,146 2,877 14,023 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,621 3,201 420 Net assets† Assets‡ aaaaaaaaaaaaafff aaaaaaaaaaaaafff Class of business: UK Retail Banking and Mortgages Insurance and Investments Scottish Widows Other businesses UK Retail Financial Services Wholesale Markets and International Banking Central group items 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 2000 £m 1999 £m 2,235 2,127 71,292 64,347 3,555 2,953 – 2,846 6,203 3,234 – 3,032 6,508 3,032 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffff 9,437 2,846 8,743 4,973 80,729 67,379 2,625 84,899 1,269 1,016 3,090 80,851 (2,059) 1,207 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 8,614 166,897 149,437 9,774 Geographical area:** Domestic International 9,129 645 8,269 144,178 128,105 345 22,719 21,332 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 8,614 166,897 149,437 *1999 ﬁgures have been restated to take account of changes in internal cost allocation, a number of organisational changes, and a change in treatment of certain central income items, which were previously allocated to business units but are now reported within central group items. 9,774 ** The geographical distribution of gross income sources, proﬁt on ordinary activities before tax and assets by domestic and international operations is based on the location of the ofﬁce recording the transaction, except for lending by the international business booked in London. †Net assets represent shareholders’ funds plus equity minority interests. Disclosure of information on net assets is an accounting standard requirement (SSAP25); it is not appropriate to relate it directly to the segmental proﬁts above because the business is not managed by the allocation of net assets to business units. ‡Assets exclude long-term assurance assets attributable to policyholders. As the business of the Group is mainly that of banking and insurance, no segment analysis of turnover is given. LLOYDS TSB GROUP 59 notes to the accounts 9 Tax on proﬁt on ordinary activities 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 13 Treasury bills and other eligible bills UK corporation tax Current tax on proﬁts for the year Adjustments in respect of prior years Double taxation relief Foreign tax Current tax on proﬁts for the year Adjustments in respect of prior years Current tax charge Deferred tax 942 3 768 21 945 (72) 789 (45) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 873 744 137 (5) 114 8 132 122 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Investment securities: Treasury bills and similar securities Other eligible bills Other securities: Treasury bills and similar securities Other eligible bills 1,005 108 866 235 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,101 1,113 Included above: Unamortised discounts net of premiums on investment securities Movements in investment securities comprise: 2000 Balance 2000 1999 Valuation £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff sheet Valuation £m £m 1999 Balance sheet £m 121 509 514 683 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,197 119 508 afffffffffffffffffffffffffff 627 515 683 1,198 630 1,032 47 1,079 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,709 857 10 867 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,065 2 12 Premiums and discounts £m Total £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Cost £m At 1 January 2000 Exchange and other adjustments Additions Bills sold or matured Amortisation of premiums and discounts At 31 December 2000 9 – – (50) 45 1,189 3 7,766 (8,332) – 1,198 3 7,766 (8,382) 45 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 630 626 4 Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. The difference between the cost of other securities and market value, where the market value is higher than the cost, is not disclosed as its determination is not practicable. 14 Loans and advances to banks 2000 aaaaaffffffffffffffffffffffffff 1999 aaaaaffffffffffffffffffffffffff £2,724m £2,514m Lending to banks Deposits placed with banks 5,487m 58m 5,445m 101m Total loans and advances to banks Provisions for bad and doubtful debts 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 721 615 16,298 14,731 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 15,346 (56) 17,019 (56) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 15,290 16,963 Repayable on demand Other loans and advances by residual maturity repayable: 3 months or less 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years Provisions for bad and doubtful debts 2,794 1,132 10,352 12,266 1,365 2,780 478 357 490 351 (56) (56) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 15,290 16,963 The charge for tax on the proﬁt for the year is based on an average UK corporation tax rate of 30 per cent (1999: 30.25 per cent). The UK corporation tax charge includes £171 million (1999: £67 million) in respect of notional tax on the shareholders’ interest in the increase in the value of the long-term assurance business. 10 Proﬁt for the ﬁnancial year attributable to shareholders The proﬁt attributable to shareholders includes a proﬁt of £1,699 million (1999: £1,344 million) dealt with in the accounts of the parent company, for which no proﬁt and loss account is shown as permitted by Section 230 of the Companies Act 1985. 11 Ordinary dividends Interim: paid Final: proposed 2000 pence per share £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1999 pence per share 2000 1999 £m 8.1 18.5 9.3 21.3 440 1,011 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,451 511 1,172 1,683 30.6 26.6 12 Earnings per share Proﬁt attributable to shareholders* Weighted average number of ordinary shares in issue during the year** Dilutive effect of options outstanding Diluted weighted average number of ordinary shares in issue during the year Earnings per share Diluted earnings per share 5,545m 49.6p 49.1p 5,546m 46.2p 45.3p *No adjustment was made to proﬁt attributable to shareholders in calculating diluted earnings per share. **The weighted average number of shares for the year has been calculated after deducting 9 million (1999: 11 million) ordinary shares held by TSB Group Holdings (Jersey) Limited, and the trustees of the TSB Group Employee Trust, the Lloyds TSB Group Employee Share Ownership Trust and the Lloyds TSB Qualifying Employee Share Ownership Trust, on which dividends have been waived (note 29). 60 LLOYDS TSB GROUP 15 Loans and advances to customers Lending to customers Hire purchase debtors Equipment leased to customers Total loans and advances to customers Provisions for bad and doubtful debts Interest held in suspense Loans and advances by residual maturity repayable: 3 months or less 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years Provisions for bad and doubtful debts Interest held in suspense Of which repayable on demand or at short notice 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 103,368 5,172 8,122 92,194 3,674 8,448 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 116,662 104,316 (2,067) (100) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff (2,117) (90) 114,455 102,149 afffffffffffffffffffffffffff afffffffffffffffffffffffffff 20,980 17,689 8,286 6,935 24,408 19,342 62,988 60,350 (2,117) (2,067) (90) (100) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 114,455 102,149 afffffffffffffffffffffffffff afffffffffffffffffffffffffff 8,549 9,342 16 Provisions for bad and doubtful debts At 1 January Exchange and other adjustments Adjustments on acquisition Advances written off Recoveries of advances written off in previous years Charge (release) to proﬁt and loss account: New and additional provisions Releases and recoveries At 31 December In respect of: Loans and advances to banks Loans and advances to customers notes to the accounts 2000 Speciﬁc £m 1999 General £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 General £m 1999 Speciﬁc £m 1,762 111 45 (748) 361 (2) 4 – 1,792 (4) – (744) 365 (4) – – 165 – 130 – 1,093 (612) 7 (13) 1,087 (499) 7 (7) 481 (6) – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 361 1,816 1,762 357 588 afffffffffffffffffffffffffff 2,173 56 2,117 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,173 afffffffffffffffffffffffffff 2,123 56 2,067 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,123 The cost of assets acquired during the year for letting to customers under ﬁnance leases and hire purchase contracts amounted to £2,754 million (1999: £3,193 million). Securitisations Certain instalment credit receivables have been securitised and are subject to non-returnable ﬁnancing arrangements. In accordance with Financial Reporting Standard 5, these items have been shown under the linked presentation method. As detailed in note 49b), the Group acquired Chartered Trust Group plc and ACL Autolease Holdings Limited on 1 September 2000. Prior to joining the Group, Chartered Trust plc, a subsidiary undertaking of Chartered Trust Group plc, had entered into transactions whereby it disposed of its interest in portfolios of motor vehicle and caravan instalment credit agreements for a total of £813 million to Cardiff Automobile Receivables Securitisation (UK) No 4 plc (CARS 4). The arrangement relating to these disposals of agreements contained an option to offer further amounts for sale up until 10 December 2000; a further £167 million of receivables were sold between 1 September 2000 and this date. CARS Trustee (UK) No 4 Limited is responsible for the collection and onward payment of all amounts falling due under the terms of the receivables sold to CARS 4. Principal receipts are used either to redeem ﬂoating rate notes or to purchase further receivables; to date all principal receipts have been used to purchase further receivables. Income receipts are applied in the following order of priority: interest due on the ﬂoating rate notes; credit manager fees; payments under swaps; amounts due to third parties; dividends; and residual income to Chartered Trust plc. Chartered Trust plc has been appointed by CARS Trustee (UK) No 4 Limited as credit manager and receives a fee for fulﬁlling this function. It has no liability to the noteholders or any creditor of CARS 4 or CARS Trustee (UK) No 4 Limited other than through failure to meet its obligations as credit manager or for breach of warranties given. Chartered Trust plc has no interest in the share capital of CARS 4 or CARS Trustee (UK) No 4 Limited. Chartered Trust plc and CARS 4 have also entered into interest rate swaps in respect of this transaction, the interest rates payable and receivable under these swaps are set by reference to market rates of interest on an arm’s length basis. 17 Interest held in suspense and non-performing lending At 1 January Exchange and other adjustments Interest written off Interest taken to income Interest suspended during the year At 31 December 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 100 145 – (5) (20) (77) (8) (9) 18 46 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 90 100 All interest held in suspense relates to loans and advances to customers. Non-performing lending comprises: Loans and advances – category 1 Loans and advances – category 2 Provisions Interest held in suspense 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 879 404 719 369 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1,283 1,088 (831) (613) (90) (100) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 375 362 Category 1: This comprises lending where the customer continues to operate the account, but where there is doubt about the payment of interest. Interest continues to be charged to the customer’s account, but it is not applied to income; it is placed on a suspense account and only taken into income if there ceases to be signiﬁcant doubt about its being paid. Category 2: This comprises lending where the operation of the customer’s account has ceased. The lending is managed by specialist recovery departments and has been written down to its estimated realisable value. Interest is not added to the lending nor placed on a suspense account as its recovery is considered unlikely; it is only taken to income if it is received. LLOYDS TSB GROUP 61 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 20 Debt securities 2000 Balance 2000 1999 Valuation £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff sheet Valuation £m £m 1999 Balance sheet £m Investment securities: Government securities Other public sector securities Bank and building society certiﬁcates of deposit Other debt securities Other securities: Government securities Other public sector securities Bank and building society certiﬁcates of deposit Other debt securities Due within 1 year Due 1 year and over Unamortised discounts net of premiums on investment securities Listed: collateralised bonds : other Unlisted Movements in investment securities comprise: At 1 January 2000 Exchange and other adjustments Additions Securities sold or matured Charge for the year Amortisation of premiums and discounts At 31 December 2000 1,006 1 1,204 1 1,196 4 1,349 4 3,034 1,631 4,145 678 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 3,034 1,631 4,153 679 5,672 5,870 6,032 6,176 3,060 131 3,060 131 3,861 65 3,861 65 105 4,914 105 4,914 286 3,940 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 13,882 14,080 14,328 286 3,940 14,184 5,340 8,542 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 13,882 7,095 7,089 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 14,184 afffffffffffffffffffffffffff 409 afffffffffffffffffffffffffff 771 711 8,499 4,672 1,028 7,901 5,399 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 880 8,528 4,672 869 7,907 5,408 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 13,882 14,080 14,184 14,328 Premiums and Total £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff discounts Provisions £m Cost £m £m 5,829 220 17 6,032 113 15,773 (16,238) – (2) – (23) – 3 108 – 15,773 – (16,261) (9) 9 29 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 29 – – afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 5,477 5,672 224 29 Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. The difference between the cost of other securities and market value, where the market value is higher than the cost, is not disclosed as its determination is not practicable. notes to the accounts 18 Concentrations of exposure Loans and advances to customers Domestic: Agriculture, forestry and ﬁshing Manufacturing Construction Transport, distribution and hotels Property companies Financial, business and other services Personal: mortgages* : other Lease ﬁnancing Hire purchase Other Total domestic International: Latin America New Zealand Rest of the world Total international Provisions for bad and doubtful debts** Interest held in suspense** 2,026 3,357 1,016 3,836 2,470 9,295 52,659 11,138 8,070 5,172 2,237 2,183 3,262 754 3,540 2,303 6,614 47,451 10,092 8,369 3,674 1,698 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 101,276 89,940 3,016 7,368 5,002 2,558 7,659 4,159 14,376 15,386 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 116,662 104,316 (2,117) (2,067) (90) (100) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 114,455 102,149 *Includes staff mortgages. **Figures exclude provisions and interest held in suspense relating to loans and advances to banks. The classiﬁcation of lending as domestic or international is based on the location of the ofﬁce recording the transaction, except for certain lending of the international business booked in London. 19 Residual value exposure on leased assets The Group’s residual value exposure in respect of leased assets, all of which are expected to be disposed of at the end of the lease terms, was as follows: 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 134 108 367 301 37 31 45 193 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 306 910 On operating lease assets where the residual value is expected to be recovered in: 1 year or less 2 years or less but over 1 year 5 years or less but over 2 years Over 5 years Total exposure 62 LLOYDS TSB GROUP notes to the accounts 1999 23 Interests in group undertakings (continued) 21 Equity shares 2000 Balance 2000 Valuation £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff sheet Valuation £m £m 1999 Balance sheet £m Investment securities: Listed Unlisted Other securities: Listed Unlisted 7 34 23 56 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 79 45 57 afffffffffffffffffffffffffff 102 10 33 41 43 204 2 206 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 247 168 2 170 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 213 Movements in investment securities comprise: Total £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Cost Provisions £m £m At 1 January 2000 Exchange and other adjustments Additions Disposals Charge for the year 43 1 13 (11) (5) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 41 Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. 55 – 13 (14) – 12 (1) – (3) 5 At 31 December 2000 13 54 The difference between the cost of other securities and market value, where the market value is higher than the cost, is not disclosed as its determination is not practicable. 22 Assets transferred under sale and repurchase transactions Included in the Group’s balance sheet are assets subject to sale and repurchase agreements as follows: 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m Treasury bills and other eligible bills Debt securities 546 3,543 429 3,496 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,925 4,089 These investments have been sold to third parties but, since the Group is committed to reacquire them at a future date and at a predetermined price, they are shown in the balance sheet. 23 Interests in group undertakings At 1 January 2000 Revaluation At 31 December 2000 Company aaarrrrraaaffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffff Loans £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Shares £m 10,197 955 759 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 11,152 759 The Company’s shareholding in a group undertaking is comprised of an investment in an unlisted bank. On an historical cost basis, shares in group undertakings would have been included as follows: Cost Provisions Book value £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff At 1 January 2000 and 31 December 2000 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 6,066 6,066 – The principal group undertakings, all of which have prepared accounts to 31 December and whose results are included in the consolidated accounts of Lloyds TSB Group plc, are: Percentage of equity share capital and voting rights held Nature of business Country of registration / incorporation aaaaaaaffffffffffffffffffffffffff aaaaaaff aaaaaaaaaaaaaaaffff Lloyds TSB Bank plc England 100% Banking and ﬁnancial services Cheltenham & Gloucester plc England †100% Mortgage lending and Lloyds Bank (BLSA) Limited England †100% Banking and ﬁnancial retail investments Lloyds TSB Commercial Finance Limited Lloyds TSB Leasing Limited Lloyds TSB Private Banking Limited The Agricultural Mortgage Corporation Plc The National Bank of New Zealand Limited Lloyds TSB Bank (Jersey) Limited Lloyds TSB Scotland plc England services †100% Credit factoring England England †100% Financial leasing †100% Private banking England †100% Long-term agricultural ﬁnance New Zealand Jersey †100% Banking and ﬁnancial services †100% Banking and ﬁnancial services Scotland †100% Banking and ﬁnancial England Lloyds TSB General Insurance England Limited Scottish Widows Investment Partnership Group Limited Abbey Life Assurance Company Limited Lloyds TSB Insurance Services Limited Lloyds TSB Life Assurance Company Limited Lloyds UDT Finance Limited England England England England Chartered Trust plc England services †100% General insurance †100% Investment management †100% Life assurance †100% Insurance broking †100% Life assurance and other ﬁnancial services †100% Consumer credit, leasing and related services †100% Consumer credit, leasing and related services Scottish Widows plc Scottish Widows Annuities Limited †Indirect interest. Scotland Scotland †100% Life assurance †100% Life assurance The country of registration/incorporation is also the principal area of operation for each of the above group undertakings except as follows: Lloyds TSB Bank plc operates principally in the UK but also through branches in Argentina, Belgium, Brazil, Dubai, Gibraltar, Guatemala, Hong Kong, Honduras, Japan, Luxembourg, Malaysia, Monaco, Netherlands, Panama, Paraguay, Singapore, Spain, Switzerland, Uruguay, the USA and a representative ofﬁce in Iran. Lloyds Bank (BLSA) Limited operates in Ecuador. The National Bank of New Zealand Limited also operates through a representative ofﬁce in Hong Kong. LLOYDS TSB GROUP 63 Cost or valuation: At 1 January 2000 – before prior year adjustment Prior year adjustment (note 1) Amended balance at 1 January 2000 Exchange and other adjustments Adjustments on acquisition Additions Disposals At 31 December 2000 Depreciation: At 1 January 2000 Exchange and other adjustments Charge for the year Disposals At 31 December 2000 Balance sheet amount at 31 December 2000 Balance sheet amount at 31 December 1999 Operating lease assets £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffff Premises Equipment £m £m 1,133 (112) 561 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,208 – 1,021 (22) 11 70 (28) 561 (1) 351 583 (83) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,208 (8) 13 429 (299) 1,052 1,411 aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff aaaaafffffffffffffffffffffffffff 2,343 250 (13) 58 (11) 82 (1) 102 (52) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff 1,423 (1) 204 (272) 284 131 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaafffffffffffffffffffffffff 1,354 768 989 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,280 3,037afffffffffffffffffffffffffff 771 785 afffffffffffffffffffffffffff affffffffffffffffffffffffff affffffffffffffffffffffffffff 479 2,035afffffffffffffffffffffffffff Balance sheet amount of premises comprises: Freeholds Leaseholds 50 years and over unexpired Leaseholds less than 50 years unexpired Land and buildings occupied for own activities 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 490 22 256 500 23 248 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 771 679 768 691 notes to the accounts 24 Joint venture 26 Tangible ﬁxed assets During 2000 the Group was party to the creation of a new payments processing company, Intelligent Processing Solutions Limited (‘iPSL’), in conjunction with Unisys and Barclays Bank. This new company began operating in December 2000 and now handles all of the Group’s UK cheque processing activities, for which fees are charged by iPSL to the Group. The staff previously employed by the Group in its UK cheque processing activities have been transferred to the employment of iPSL. The Group’s investment in iPSL, which comprises 24.5 per cent of the issued ordinary share capital of the company, is being accounted for as a joint venture. The carrying value of the investment at 31 December 2000 was £4 million, which has been included within other assets on the balance sheet. In the year ended 31 December 2000 £4 million of fees payable to iPSL have been included in the Group’s administrative expenses. The Group has also prepaid £7 million of fees in respect of 2001 and this amount is included in prepayments and accrued income; in addition at 31 December 2000 iPSL owed £2 million to the Group, which is included in other assets. Net Cost Amortisation book value £m £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 16 (2) – 22 247 (17) 2,405 – 231 (15) 2,405 (22) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,599 2,635 36 25 Intangible ﬁxed assets Goodwill At 1 January 2000 Exchange and other adjustments Acquisitions Charge for the year At 31 December 2000 64 LLOYDS TSB GROUP 27 Lease commitments 29 Own shares notes to the accounts Annual commitments under non-cancellable operating leases were: 2000 2000 Premises Equipment £m 1999 Premises Equipment £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1999 £m £m Leases on which the commitment is due to expire in: 1 year or less 5 years or less but over 1 year Over 5 years 3 18 184 7 3 2 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 14 41 191 1 2 – afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 205 246 12 3 Obligations under ﬁnance leases were: Amounts payable in: 1 year or less 5 years or less but over 1 year 2000 Equipment £m aaaaaffffffffffffffffffffffffff 20 3 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 23 1999 Equipment £m aaaaaffffffffffffffffffffffffff 2 2 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff 4 28 Capital commitments Capital expenditure contracted but not provided for at 31 December 2000 amounted to £33 million (1999: £41 million), of which £28 million (1999: £33 million) relates to assets to be leased to customers under operating leases. In December 2000 the Group announced that it had agreed to form a joint venture between Goldﬁsh, Centrica’s ﬁnancial services brand, and evolvebank.com, Lloyds TSB’s standalone internet banking operation. Although the amounts are not yet determined, the Group is committed to invest capital into the venture equivalent to 30 per cent of its initial regulatory capital requirement and to provide funds to the venture to cover its lending for the ﬁrst two years of operation. Lloyds TSB Group plc sponsors the TSB Group Employee Trust and the Lloyds TSB Group Employee Share Ownership Trust, two discretionary trusts for the beneﬁt of employees and former employees of the Lloyds TSB Group. The Company has lent £44 million to the trustees, interest free, to enable them to purchase Lloyds TSB Group plc ordinary shares, which are used to satisfy options granted by the Company or to meet commitments arising under other employee share schemes. Under the terms of the trusts, the trustees have waived all but a nominal dividend on the shares they hold. The cost of providing these shares is charged to the proﬁt and loss account on a systematic basis over the period that the employees are expected to beneﬁt. At 31 December 2000, 3 million shares were held by the trustees with a book value of £24 million and a market value of £22 million. (1999: 6 million shares with a book value of £30 million and a market value of £44 million). The Group has also established the Lloyds TSB Qualifying Employee Share Ownership Trust (‘the QUEST’) for the purpose of delivering shares on the exercise of options under certain of the Group’s Save As You Earn (SAYE) share option schemes. During 2000, Lloyds TSB Group plc contributed £122 million to the QUEST, and the trustees subscribed for 30 million shares in the Company for a consideration of £193 million. (During 1999, Lloyds TSB Group plc contributed £210 million and the trustees subscribed for 30 million shares for a consideration of £257 million). At 31 December 2000, 1 million shares were held by the QUEST with a book value of £4 million, (1999: 2 million shares with a book value of £5 million), reﬂecting the exercise price of the options the shares are expected to be used to satisfy. Under the terms of the QUEST’s trust deed, the trustees have waived all but a nominal dividend on the shares they hold. The difference between the amount contributed by the Company and the book value of the shares held by the QUEST at 31 December 2000 has been charged to proﬁt and loss account reserves. In addition, a further 1 million ordinary shares were held by TSB Group Holdings (Jersey) Limited at 31 December 2000 (1999: 1 million shares). These shares, on which the dividend entitlement has been waived, were gifted to the Group some years ago at nil cost and are used to satisfy outstanding options or to meet commitments arising under other employee share schemes. 30 Other assets 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m Foreign exchange and interest rate contracts Other assets 2,688 888 2,742 899 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,641 3,576 31 Prepayments and accrued income Interest receivable Other debtors and prepayments 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 875 2,090 916 1,712 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,965 2,628 Included within other debtors and prepayments is £242 million (1999: £176 million) relating to the deferred element of the expenditure incurred under cash gift and discount mortgage schemes. If these incentives had been written off as incurred net interest income would have been £65 million lower in 2000 (1999: £11 million lower). LLOYDS TSB GROUP 65 32 Long-term assurance business (continued) During 1999, the Financial Services Authority (FSA) published revised assumptions to be incorporated into the calculations of the continuing cost of redress to past purchasers of pension policies. These revised FSA guidelines were based on the assumption that the average life expectancy of pensioners had increased, and lower interest and inﬂation rates to be assumed in calculating the cost of redress. Applying these revised assumptions, the cost of redress was forecast to increase by £102 million and a further provision of this amount was made in 1999, increasing the total provision made for this purpose to £802 million at 31 December 1999. In 2000 the adequacy of the provision has again been reviewed in the light of the changes arising from SERPS adjustments, further experience and improved knowledge as to the number and size of compensation claims likely to be paid. The cost of redress is forecast to increase by £100 million and a provision of this amount has been made, bringing the total provision charged for this purpose to £902 million, of which £654 million had been used at 31 December 2000. The following is a summarised balance sheet for the long-term assurance funds: The long-term assurance assets attributable to policyholders comprise: Investments Value of other shareholders’ interests in long-term assurance funds Premises and equipment Net current assets (liabilities) Long-term assurance business attributable to shareholders 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 52,683 27,718 2,421 20 2,510 1,551 30 (483) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 57,634 28,816 (6,549) (2,274) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 51,085 26,542 Investments shown above comprise: Fixed interest securities Stocks, shares and unit trusts Investment properties Other properties Mortgages and loans Deposits 14,512 31,885 3,098 10 117 3,061 7,415 16,996 1,045 10 50 2,202 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 52,683 27,718 The liabilities to policyholders comprise: Technical provisions: Long-term business provision (net of reinsurance) Claims outstanding (net of reinsurance) Technical provisions for linked liabilities Fund for future appropriations and other liabilities 23,514 172 24,413 2,986 3,025 114 23,372 31 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 51,085 26,542 notes to the accounts 32 Long-term assurance business The value of long-term assurance business attributable to shareholders included in the consolidated balance sheet comprises: Net tangible assets of life companies including surplus Value of other shareholders’ interests in long-term assurance funds 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 4,128 723 2,421 1,551 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 6,549 2,274 The shareholders’ interest in the long-term assurance business has been calculated on the basis of a series of economic and actuarial assumptions. Following the acquisition of the business of Scottish Widows, a detailed review of the economic assumptions used in the embedded value calculation has been carried out, to ensure that these assumptions remain appropriate for the enlarged life and pensions business in the context of forecast long- term economic trends. As a result of this review certain assumptions have been amended, including the risk-adjusted discount rate which has been reduced from 10 per cent to 8.5 per cent. The principal assumptions are shown below, together with those used in 1999: Risk-adjusted discount rate (net of tax) Return on equities (gross of tax) Return on ﬁxed interest securities (gross of tax) Expenses inﬂation 1999 % aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 % 8.50 8.00 5.25 3.00 10.00 8.50 5.25 3.00 The revised assumptions, which have been used with effect from 1 January 2000 for Abbey Life and the bancassurance operation of Lloyds TSB Life, have resulted in a one-off credit to the proﬁt and loss account of £127 million. The same assumptions have been used for the Scottish Widows business from the date of acquisition. A margin over the long-term risk free rate of return is included within the discount rate to reﬂect the shareholders’ overall risk premium; other margins are not included in the proﬁt recognition method. Allowance for tax is made using models which reﬂect the different tax regimes affecting different classes of product; no credit is taken in respect of any reduction in taxes deriving from expenses attributable to future business. The assumptions for mortality and morbidity are derived from published tables adjusted for demographic differences of policyholders; those in respect of lapses are in line with the experience of the companies concerned. 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 6,549 2,274 2,274 1,983 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,275 92 (4,052) – 126 291 (5) – (220) 92 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 158 441 715 (100) 329 (102) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 227 615 The income from long-term assurance business is: Value of long-term assurance business at 31 December Value of long-term assurance business at 1 January Increase in value of long-term assurance business Exchange and other adjustments Acquisitions Capital injections Dividends accrued Income after tax from long-term assurance business Income before pension provisions Pension provisions Income before tax from long-term assurance business 66 LLOYDS TSB GROUP 33 Assets and liabilities denominated in foreign currencies Assets: denominated in sterling : denominated in other currencies Liabilities: denominated in sterling : denominated in other currencies 34 Deposits by banks Repayable on demand Other deposits by banks with agreed maturity dates or periods of notice by residual maturity repayable: 3 months or less 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years 35 Customer accounts Repayable on demand Other customer accounts with agreed maturity dates or periods of notice by residual maturity repayable: 3 months or less 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years 36 Debt securities in issue Bonds and medium-term notes by residual maturity repayable: 1 year or less 2 years or less but over 1 year 5 years or less but over 2 years Over 5 years Other debt securities by residual maturity repayable: 3 months or less 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 126,033 111,076 38,361 40,864 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 166,897 149,437 afffffffffffffffffffffffffff afffffffffffffffffffffffffff 126,136 111,181 38,256 40,761 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 166,897 149,437 afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 4,330 3,594 9,712 1,790 695 208 12,551 1,153 341 55 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 16,735 17,694 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 74,404 68,749 21,064 3,522 1,331 417 20,063 2,544 1,360 135 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 100,738 92,851 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 538 169 472 1,413 309 188 690 407 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,592 1,594 8,574 6,476 241 16 7,644 2,645 362 15 15,307 10,666 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 17,899 12,260 notes to the accounts 37 Short-term borrowings The short-term borrowings of the Company comprise ﬂoating rate unsecured loan notes 2001. These notes are not subordinated and bear interest at rates set periodically in advance based on London Interbank rates. They are repayable, at the noteholders’ option, at six monthly intervals. 38 Other liabilities 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m Foreign exchange and interest rate contracts Current tax Dividends Other liabilities 2,346 631 1,172 2,831 1,981 617 1,011 1,917 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 5,526 6,980 39 Accruals and deferred income 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m Interest payable Other creditors and accruals 40 Deferred tax Short-term timing differences Pensions prepayment Provision for Emerging Markets Debt Accelerated depreciation allowances At 1 January 2000 Exchange and other adjustments Adjustments on acquisition Tax provided At 31 December 2000 Potential tax for which no provision has been made relating to accelerated depreciation allowances on equipment leased to customers 1,670 2,655 1,229 2,080 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,309 4,325 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m (59) 230 (198) 1,586 (94) 185 (212) 1,580 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,459 1,559 £m aaaaaffffffffffffffffffffffffff 1,459 (5) (3) 108 aaaaaffffffffffffffffffffffffff 1,559afffffffffffffffffffffffffff 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 72 72 Provision has been made for the liability to tax on overseas earnings which are expected to be remitted to the UK. No provision has been made for the liability to tax which could arise if premises, to the extent that the tax base cost has been reduced by rollover relief, or group undertakings were disposed of at their balance sheet amounts or investments in associated undertakings and trade investments at their valuation. It is expected that the majority of these assets will be retained in the business and that, in view of the substantial number of assets involved and the law relating to rollover relief, the likelihood of any such material tax liability arising is remote; no useful purpose would be served by attempting to quantify it. LLOYDS TSB GROUP 67 notes to the accounts 41 Other provisions for liabilities and charges At 1 January 2000 Exchange and other adjustments Provisions applied Charge for the year At 31 December 2000 Pension obligations Pension Post- Insurance retirement obligations provisions health care £m Vacant Provision leasehold for closure property of business £m Total £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Other £m £m £m £m 28 – (1) 201 5 (146) 77 – (4) 112 1 (15) 28 – (28) 28 – 474 6 (15) (209) 171 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 142 (2) 21 7 3 – afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 202 442 34 76 96 34 – This represents the Group’s obligations in respect of certain overseas pension schemes. Full actuarial valuations are carried out by independent actuaries every three years. Insurance provisions The Group’s general insurance subsidiaries maintain provisions for outstanding claims which represent the ultimate cost of settling all claims arising from events which have occurred up to the balance sheet date and these include provisions for the cost of claims notiﬁed but not settled and for claims incurred but not yet reported. In addition, in line with the requirements of the Insurance Companies (Reserves) Act 1995, claims equalisation provisions are maintained in relation to property, credit and suretyship business. The majority of provisions in respect of claims will be settled in the following year, although new provisions will then be required in respect of claims arising from that year. The level of the claims equalisation provision will be adjusted annually, taking into account the guidelines contained in the legislation, and such provisions will be held for as long as the Group continues to write the relevant types of general insurance business. Post-retirement health care The Group operates a number of schemes which provide post-retirement health care beneﬁts to certain employees, retired employees and their dependent relatives. The principal scheme relates to former Lloyds Bank staff and under this scheme the Group has undertaken to meet the cost of post-retirement health care for all eligible former employees (and their dependants) who retired prior to 1 January 1996. For retirements subsequent to this date, the Group will meet a reducing proportion of the cost until 31 December 2004, after which date the only obligation will be in respect of the pre 1 January 1996 retirements. The cost of providing all post-retirement health care beneﬁts is charged to the proﬁt and loss account on a systematic basis over employees’ working lives; the provision represents the unfunded obligation and is based on valuations of the Group’s liability by qualiﬁed actuaries. Vacant leasehold property Whenever the Group ceases to occupy a property, or commits itself to doing so, it is the Group’s policy to raise a provision to cover any anticipated shortfall when comparing the recoverable amount of its interest in the property to the future rental and other payments that the Group is obligated to make over the remaining term of the lease. These provisions are made by reference to a prudent estimate of expected sub-let income and the possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on an annual basis and will normally run off over the remaining life of the leases concerned, currently averaging six years; where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released. Provision for closure of business In July 1999 the Group announced its decision to withdraw from the global custody and unit trust trusteeship business. As a result, a provision of £28 million was raised for the anticipated operating losses to be incurred by Lloyds TSB Securities Services until the business was closed. The provision has been released to match losses as they have been incurred over the period of run down of the business; this was completed by the end of 2000. 68 LLOYDS TSB GROUP 42 Subordinated liabilities * Undated loan capital: † Primary Capital Undated Floating Rate Notes: Series 1 (US$750 million) Series 2 (US$500 million) Series 3 (US$600 million) (cid:2) 55⁄8% Undated Subordinated Step-up Notes callable 2009 (E1,250 million) † Undated Step-up Floating Rate Notes callable 2009 (E150 million) ¶ 65⁄8% Undated Subordinated Step-up Notes callable 2010 ✜ Subordinated 5.57% Step-up Coupon Notes callable 2015 (¥20 billion) ¶ 61⁄2% Undated Subordinated Step-up Notes callable 2019 113⁄4% Perpetual Subordinated Bonds † 8% Undated Subordinated Step-up Notes callable 2023 ¶ 61⁄2% Undated Subordinated Step-up Notes callable 2029 Dated loan capital: ‡ Eurocurrency Zero Coupon Bonds 2003 (¥3 billion) § Subordinated Fixed Rate Bonds 2003 (NZ$165 million) † Subordinated Floating Rate Notes 2004 73⁄8% Subordinated Bonds 2004 †❖ Subordinated Floating Rate Notes 2004 † Subordinated Floating Rate Notes 2005 § Subordinated Bonds 2005 § Subordinated Bonds 2006 (NZ$75 million) † Subordinated Floating Rate Notes 2006 81⁄2% Subordinated Bonds 2006 73⁄4% Subordinated Bonds 2007 § Subordinated Fixed Rate Bonds 2007 (NZ$150 million) 51⁄4% Subordinated Notes 2008 (DM750 million) ‡¶ 105⁄8% Guaranteed Subordinated Loan Stock 2008 91⁄2% Subordinated Bonds 2009 † Subordinated Step-up Floating Rate Notes 2009 callable 2004 (US$500 million) (cid:5) 8.36% Subordinated Notes 2010 (NZ$100 million) ✠ 61⁄4% Subordinated Notes 2010 (E400 million) †✠ Subordinated Floating Rate Notes 2010 (US$400 million) ‡ 12% Guaranteed Subordinated Bonds 2011 91⁄8% Subordinated Bonds 2011 43⁄4% Subordinated Notes 2011 (E850 million) (cid:5) 65⁄8% Subordinated Notes 2015 †(cid:5) Subordinated Floating Rate Notes 2020 (E100 million) 95⁄8% Subordinated Bonds 2023 Total subordinated liabilities notes to the accounts Group aaaaffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffaaffffaaaaffffffffffffffffffffffffff 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m Company aaaaffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffaaffffaaaaffffffffffffffffffffffffff 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 502 335 401 774 94 405 117 266 100 199 198 465 310 372 766 93 405 120 266 100 199 198 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 3,294 3,391 15 49 20 399 100 – – 22 100 249 298 44 240 100 99 334 30 250 267 100 148 508 343 62 342 15 65 25 399 100 25 16 24 100 248 298 49 237 100 99 309 – – – 100 148 500 – – 342 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 15 – – – – – – – 100 249 – – – – – – – – – – 148 – – – – 15 – – – – – – – 100 248 – – – – – – – – – – 148 – – – – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 3,199 4,119 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 6,493 7,510 512 afffffffffffffffffffffffffff afffffffffffffffffffffffffff 511 afffffffffffffffffffffffffff afffffffffffffffffffffffffff 511 512 These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. * In certain circumstances, these notes and bonds would acquire the characteristics of preference share capital. † These notes bear interest at rates ﬁxed periodically in advance based on Interbank rates. ‡ Issued by a group undertaking under the Company’s subordinated guarantee and, in the case of the Eurocurrency Zero Coupon Bonds 2003, on-lent to the Company on a subordinated basis. Issued during 2000 primarily to provide capital resources in connection with the acquisition of Chartered Trust. ¶ At the callable date the coupon on these Notes will be reset by reference to the applicable ﬁve year benchmark gilt rate. § These bonds bear interest, to be reset 5 years before redemption date, at a ﬁxed margin over New Zealand Government stocks. In the event that the Notes are not redeemed at the callable date, the coupon will be reset to a ﬂoating rate. In the event that the Notes are not redeemed at the callable date, the coupon will be reset to a ﬁxed margin over the then 5 year Yen swap rate. ❖ Exchangeable at the election of the Group for further subordinated ﬂoating rate notes. Issued during 2000 primarily to ﬁnance the general business of the Group. LLOYDS TSB GROUP 69 ✠ (cid:2) ✜ (cid:5) notes to the accounts 42 Subordinated liabilities (continued) Dated subordinated liabilities are repayable as follows: aafffffaaaaffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffff aafffffaaaaffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffff Group Company 1 year or less 2 years or less but over 1 year 5 years or less but over 2 years Over 5 years 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 2000 £m 1999 £m 5 5 594 2,595 5 5 573 3,536 – – 15 496 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 511 – – 15 497 4,119 3,199 512 43 Non-equity minority interests Non-equity minority interests comprise non-cumulative preferred securities issued by Group undertakings during the year as part of the funding for the Group’s acquisition of Scottish Widows (note 49) Euro Step-up Non-Voting Non-Cumulative Preferred Securities (e430 million)* Sterling Step-up Non-Voting Non-Cumulative Preferred Securities† 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 267 – 248 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff – 515 *These securities constitute limited partnership interests in Lloyds TSB Capital 1 L.P., a Jersey limited partnership in which Lloyds TSB (General Partner) Limited, a wholly owned subsidiary of the Group, is the general partner. Non-cumulative income distributions accrue at a ﬁxed rate of 7.375 per cent per annum up to 7 February 2012; thereafter they will accrue at a rate of 2.33 per cent above EURIBOR, to be set annually. †These securities constitute limited partnership interests in Lloyds TSB Capital 2 L.P., a Jersey limited partnership in which Lloyds TSB (General Partner) Limited, a wholly owned subsidiary of the Group, is the general partner. Non-cumulative income distributions accrue at a ﬁxed rate of 7.834 per cent per annum up to 7 February 2015; thereafter they will accrue at a rate of 3.50 per cent above a rate based on the yield of speciﬁed UK government stock. Both of the above issues were made under the limited subordinated guarantee of Lloyds TSB Bank plc. In certain circumstances these preferred securites will be mandatorily exchanged for preference shares in Lloyds TSB Group plc. Lloyds TSB Group plc has entered into an agreement whereby dividends may only be paid on its ordinary shares if sufﬁcient distributable proﬁts are available for distributions due in the ﬁnancial year on these preferred securities. 44 Called-up share capital (continued) 1999 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 Authorised: Japanese yen Preference shares of ¥25 each ¥m afffffffffffffffffffffffffff afffffffffffffffffffffffffff – During the year the Company reorganised its authorised preference share capital to provide ﬂexibility for the Company to be able to issue preference shares denominated in sterling, US dollars, euro and yen, principally (but not exclusively) in connection with arrangements for raising additional capital for the Group as and when appropriate. ¥m 1,250 Limited voting ordinary shares of 25p each £m Ordinary shares of 25p each £m Total £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 20 – Issued and fully paid: At 1 January 2000 Issued to the QUEST (note 29) 1,369 7 At 31 December 2000 1,389 7 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,396 The limited voting ordinary shares are held by the Lloyds TSB Foundations. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares. 1,376 20 At 31 December 2000, options to acquire 149 million Lloyds TSB Group shares were outstanding under senior executives’ and savings-related share option schemes at prices ranging from 124p to 888p per share exercisable up to 2010. 45 Reserves Share premium account: At 1 January 2000 Premium arising on issue of shares At 31 December 2000 Revaluation reserve: At 1 January 2000 – as previously reported Prior year adjustment (note 1) Amended balance at 1 January 2000 Increase in net tangible assets of subsidiary undertakings Company £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Group £m 404 191 404 191 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 595 595 4,131 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff (206) 206 afffffffffffffffffffffffffff – 4,131 955 aaaaaffffffffffffffffffffffffff 5,086afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 343 – 6,763 (318) 2,769 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 6,445 (68) (124) 109 1,041 2,769 – (128) – 16 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,657 7,403 44 Called-up share capital Authorised: Sterling Ordinary shares of 25p each Limited voting ordinary shares of 25p each Limited voting preference shares of £1 each Preference shares of 25p each US dollars Preference shares of US25 cents each Euro Preference shares of e25 cents each 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m At 31 December 2000 Merger reserve: At 1 January 2000 and 31 December 2000 Proﬁt and loss account: At 1 January 2000 – as previously reported Prior year adjustment (note 1) Amended balance at 1 January 2000 Exchange and other adjustments Shares issued to the QUEST (note 29) Goodwill written back on sale and closure of businesses Retained proﬁt At 31 December 2000 1,728 1,728 20 20 – 300 44 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,048 1,792 US$m US$m afffffffffffffffffffffffffff afffffffffffffffffffffffffff 40 – em afffffffffffffffffffffffffff afffffffffffffffffffffffffff – em 40 70 LLOYDS TSB GROUP 45 Reserves (continued) 48 Derivatives and other ﬁnancial instruments notes to the accounts The Group proﬁt and loss account reserves at 31 December 2000 include £1,396 million (1999: £1,165 million) not presently available for distribution representing the Group’s share of the value of long-term assurance business in force and the surplus retained within the long-term assurance funds. The cumulative amount of premiums on acquisitions written off against reserves during previous years amounts to £2,271 million of which £1,828 million was within the last 10 years. 46 Transactions with related parties At 31 December 2000, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons and with ofﬁcers included: 2000 Number of persons 1999 Total £000 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 1999 Total Number of persons £000 Loans and credit card transactions: Directors and connected persons Ofﬁcers 10 36 119 4,993 13 28 191 2,986 Details of the principal group undertakings are given in note 22. In accordance with FRS 8, transactions or balances with group entities that have been eliminated on consolidation are not reported. The Group enters into certain transactions with its long-term assurance businesses which are not eliminated in the consolidated accounts. At 31 December 2000 Group entities owed £2,126 million (1999: £1,775 million) and were owed £1,164 million (1999: £1,337 million). In addition, fees of £68 million (1999: £42 million) were received, and fees of £29 million (1999: £30 million) were paid, in respect of asset management services. Details of transactions with the Group’s joint venture are set out in note 24. 47 Contingent liabilities and commitments Contingent liabilities: Acceptances and endorsements Guarantees Other: Other items serving as direct credit substitutes Performance bonds and other transaction-related contingencies Other contingent liabilities 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 357 3,249 459 2,485 266 273 1,271 4 1,198 8 1,541 1,479 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 4,423 5,147 Commitments: Documentary credits and other short-term trade-related transactions Forward asset purchases and forward forward deposits placed Undrawn note issuing and revolving underwriting facilities Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year maturity 1 year or over maturity Other commitments 238 247 779 986 53 90 33,815 7,701 3 21,314 5,225 14 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 42,589 27,876 Information about the Group’s use of ﬁnancial instruments and management of the associated risks is given on pages 29 to 33 in the ﬁnancial review. a) Derivatives The Group uses derivatives as part of its trading activities and to reduce its own exposure to ﬂuctuations in interest and exchange rates. Trading The notional principal amounts and fair values (which, after netting, are the carrying values) of trading instruments entered into with third parties were as follows: 31 December 2000 Exchange rate contracts: Spot, forwards and futures Currency swaps Options purchased Options written Interest rate contracts: Interest rate swaps Forward rate agreements Options purchased Options written Futures Equity contracts Effect of netting Balances arising from off-balance sheet ﬁnancial instruments 31 December 1999 Exchange rate contracts: Spot, forwards and futures Currency swaps Options purchased Options written Interest rate contracts: Interest rate swaps Forward rate agreements Options purchased Options written Futures Equity contracts Effect of netting Fair values aasdaaaffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffffds Notional principal amount £m Liabilities £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Assets £m 1,742 304 23 – 86,423 6,049 1,208 1,023 1,940 206 – 19 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 94,703 2,069 2,165 3,484 57 17 – 6 3,438 290,129 64 48,002 – 3,539 8 2,229 34,390 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 378,289 3,564 3,510 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 59 443 2,768 (3,388) (3,388) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,346 2,688 Fair values aasdaaaffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffffds Notional principal amount £m Liabilities £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Assets £m 1,648 261 16 2 85,939 6,371 1,265 1,220 1,529 235 1 9 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 94,795 1,927 1,774 3,939 83 97 – – 382,812 4,002 85,613 67 4,545 – 3,067 72 40,022 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 516,059 4,119 4,141 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 16 646 (3,950) (3,950) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,393 Balances arising from off-balance sheet ﬁnancial instruments afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,981 2,742 LLOYDS TSB GROUP 71 notes to the accounts 48 Derivatives and other ﬁnancial instruments (continued) 48 Derivatives and other ﬁnancial instruments (continued) a) Derivatives (continued) a) Derivatives (continued) The maturity of the notional principal amounts and replacement cost of both trading and non-trading instruments entered into with third parties was: 31 December 2000 Exchange rate contracts: Notional principal amount Net replacement cost Interest rate contracts: Notional principal amount Net replacement cost Equity contracts: Notional principal amount Net replacement cost 31 December 1999 Exchange rate contracts: Notional principal amount Net replacement cost Interest rate contracts: Notional principal amount Net replacement cost Equity contracts: Notional principal amount Net replacement cost Total £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 1 to 5 years £m Over 5 years £m Under 1 year £m 88,288 1,094 4,973 183 1,816 95,077 1,316 39 177,684 159,422 43,783 380,889 1,034 157 731 146 506 68 2,054 343 208 32 2,768 443 90,281 996 4,125 137 671 13 95,077 1,146 258,197 212,598 392 305 47,487 518,282 996 299 204 39 1,776 528 413 79 2,393 646 The notional principal amount does not represent the Group’s real exposure to credit risk, which is limited to the current cost of replacing contracts at current market rates should the counterparties default. An analysis of the net replacement cost of both trading and non-trading instruments entered into with third parties by counterparty type is set out below: 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m OECD banks Other 2,244 549 2,449 339 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,788 2,793 Non-trading Through intra company and intra group transactions the Group establishes non-trading derivatives positions with the Group’s independent trading operations. Similar positions are also established with third parties. The notional principal amounts and fair values of non-trading instruments entered into with third parties were as follows: 31 December 2000 Exchange rate contracts: Spot, forwards and futures Currency swaps Interest rate contracts: Interest rate swaps Forward rate agreements 31 December 1999 Exchange rate contracts: Spot, forwards and futures Currency swaps Fair values aaaaaffffffffffffffffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffffss Notional principal amount £m Negative £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Positive £m 4 5 296 78 4 7 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 11 374 9 96 – 2,466 134 35 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 35 2,600 96 Fair values aaaaaffffffffffffffffffffffffffaaaaaffffffffffffffffffffffffffss Notional principal amount £m Negative £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Positive £m 187 95 1 3 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4 11 afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 282 15 4 Interest rate contracts: Interest rate swaps Forward rate agreements 23 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 23 The Company held non-trading derivatives with a notional principal amount of £400 million (1999: £400 million). 2,203 20 31 – 2,223 31 The aggregate carrying value of non-trading derivatives with a positive fair value was an asset of £23 million (1999: an asset of £1 million) and with a negative fair value was a liability of £1 million (1999: an asset of £1 million). 72 LLOYDS TSB GROUP 48 Derivatives and other ﬁnancial instruments (continued) b) Interest rate sensitivity gap analysis for the non-trading book The table below summarises the repricing mismatches of the Group’s non-trading assets and liabilities. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. notes to the accounts As at 31 December 2000 Assets: Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities and equity shares Other assets Total assets Liabilities: Deposits by banks Customer accounts Debt securities in issue Other liabilities Subordinated liabilities – loan capital Minority interests and shareholders’ funds Total liabilities Net balances with group trading books Off-balance sheet items Interest rate repricing gap Cumulative interest rate repricing gap As at 31 December 1999 Assets: Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities and equity shares Other assets Total assets Liabilities: Deposits by banks Customer accounts Debt securities in issue Other liabilities Subordinated liabilities – loan capital Minority interests and shareholders’ funds Total liabilities Net balances with group trading books Off-balance sheet items Interest rate repricing gap Cumulative interest rate repricing gap 3 months or less £m aaaaaffffffffffffffffffffffffff 6 months or less but over 3 months £m aaaaaffffffffffffffffffffffffff 1 year or less but over 6 months £m aaaaaffffffffffffffffffffffffff 5 years or less but over 1 year £m aaaaaffffffffffffffffffffffffff Over 5 years £m aaaaaffffffffffffffffffffffffff Non- interest bearing £m aaaaaffffffffffffffffffffffffff Total £m aaaaaffffffffffffffffffffffffff 534 13,034 69,266 2,497 40 1,184 4,894 475 22 aaaaaffffffffffffffffffffffffff 630 15,098 114,325 5,713 16,950 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 85,582 31,419 152,716 – 135 (2,075) 51 16,603 aaaaaffffffffffffffffffffffffff 1 241 5,737 1,448 22 aaaaaffffffffffffffffffffffffff 9 112 30,391 902 5 aaaaaffffffffffffffffffffffffff 46 392 6,112 340 47 aaaaaffffffffffffffffffffffffff 251 aaaaaffffffffffffffffffffffffff 14,714 7,449 6,615 6,937 12,854 89,194 8,519 159 1,727 – aaaaaffffffffffffffffffffffffff 1,090 1,955 5,950 – 509 – aaaaaffffffffffffffffffffffffff 604 1,508 1,769 3 – – aaaaaffffffffffffffffffffffffff 396 1,255 623 91 637 – aaaaaffffffffffffffffffffffffff 15,825 100,447 16,943 9,382 7,510 10,269 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 112,453 3,002 160,376 (7,660) 28,417 (26,871) 7,660 6,188 (148) – (10,612) 12,229 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 789 6,141 – 9,127 – 10,269 aaaaaffffffffffffffffffffffffff 92 394 82 2 4,637 – aaaaaffffffffffffffffffffffffff (11,612) – – aaaaaffffffffffffffffffffffffff 2,242 374 (1,021) aaaaaffffffffffffffffffffffffff (2,889) 982 (766) aaaaaffffffffffffffffffffffffff 3,053 264 170 aaaaaffffffffffffffffffffffffff 26,326 3,884 5,207 9,504 (14,790) aaaaaffffffffffffffffffffffffff (2,673) aaaaaffffffffffffffffffffffffff 3,487 aaaaaffffffffffffffffffffffffff 23,993 aaaaaffffffffffffffffffffffffff 1,595 aaaaaffffffffffffffffffffffffff (11,612) aaaaaffffffffffffffffffffffffff – aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff (14,790) (17,463) (13,976) 10,017 11,612 – – 3 months or less £m aaaaaffffffffffffffffffffffffff 6 months or less but over 3 months £m aaaaaffffffffffffffffffffffffff 1 year or less but over 6 months £m aaaaaffffffffffffffffffffffffff 5 years or less but over 1 year £m aaaaaffffffffffffffffffffffffff Over 5 years £m aaaaaffffffffffffffffffffffffff Non- interest bearing £m aaaaaffffffffffffffffffffffffff Total £m aaaaaffffffffffffffffffffffffff 896 13,418 58,410 3,056 230 aaaaaffffffffffffffffffffffffff 108 1,640 3,765 725 – aaaaaffffffffffffffffffffffffff 1,198 16,814 102,098 6,075 9,569 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 76,010 30,374 135,754 – 71 (1,864) 54 9,307 aaaaaffffffffffffffffffffffffff – 277 7,851 1,041 27 aaaaaffffffffffffffffffffffffff 60 334 29,451 524 5 aaaaaffffffffffffffffffffffffff 134 1,074 4,485 675 – aaaaaffffffffffffffffffffffffff 6,368 6,238 9,196 7,568 852 1,586 1,446 – 46 – aaaaaffffffffffffffffffffffffff 15,095 81,298 6,618 149 – – aaaaaffffffffffffffffffffffffff 114 903 1,397 5 – – aaaaaffffffffffffffffffffffffff 17 1,321 1,109 – 685 – aaaaaffffffffffffffffffffffffff 16,823 92,605 10,977 6,964 6,493 8,524 aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 103,160 3,132 142,386 (6,632) 27,242 (27,150) 6,632 4,051 1,372 – (4,280) 3,526 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff – 110 407 2 5,762 – aaaaaffffffffffffffffffffffffff 745 7,387 – 6,808 – 8,524 aaaaaffffffffffffffffffffffffff (15,896) – – aaaaaffffffffffffffffffffffffff 3,949 733 (1,576) aaaaaffffffffffffffffffffffffff 2,915 204 1,803 aaaaaffffffffffffffffffffffffff 2,308 272 527 aaaaaffffffffffffffffffffffffff 23,464 2,419 3,930 6,281 3,107 aaaaaffffffffffffffffffffffffff (22,252) 27,013 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff (22,252) 10,974 – (15,896) aaaaaffffffffffffffffffffffffff 4,922 aaaaaffffffffffffffffffffffffff 3,106 aaaaaffffffffffffffffffffffffff (19,145) (16,039) 15,896 – The table above does not take into account the effect of interest rate options used by the Group to hedge its exposure; details of options are given on page 71 in note 48a). LLOYDS TSB GROUP 73 notes to the accounts 48 Derivatives and other ﬁnancial instruments (continued) 48 Derivatives and other ﬁnancial instruments (continued) c) Fair value analysis e) Unrecognised gains and losses on hedging instruments The table below shows a comparison by category of book values and fair values of the Group’s on-balance sheet ﬁnancial assets and liabilities. As at 31 December 2000 Assets: Treasury bills and other eligible bills Loans and advances to banks and customers Debt securities and equity shares Liabilities: Deposits by banks and customers Debt securities in issue Subordinated liabilities As at 31 December 1999 Assets: Treasury bills and other eligible bills Loans and advances to banks and customers Debt securities and equity shares Liabilities: Deposits by banks and customers Debt securities in issue Subordinated liabilities Trading book Non-trading book aaaaaaaafaaaaffffffffffffffffffffffffff aaaaaaaafaaaaffffffffffffffffffffffffff Fair value £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Book value £m Book value £m Fair value £m 1,079 1,079 630 627 322 8,416 322 8,416 – 5,713 – 5,972 1,201 956 – 1,201 – – 956 16,943 16,982 7,692 7,510 – Trading book Non-trading book aaaaaaaafaaaaffffffffffffffffffffffffff aaaaaaaafaaaaffffffffffffffffffffffffff Fair value £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Book value £m Fair value £m Book value £m The Group uses a variety of ﬁnancial instruments to hedge exposures in its banking book; these hedges are accounted for on an accruals basis, in line with the underlying instruments being hedged. Any gains or losses that would occur if these instruments were carried at market value are therefore not recognised. At 31 December 2000, the unrecognised gains on ﬁnancial instruments used for hedging were £200 million (1999: £161 million) and unrecognised losses were £457 million (1999: £253 million). The net losses arising in 1999 and earlier years and recognised in 2000 amounted to £32 million. Net losses of £200 million arose in 2000 but were not recognised in the year. Of the net losses of £257 million at 31 December 2000, £55 million of net losses are expected to be recognised in the year ending 31 December 2001 and £202 million of net losses in later years. f) Value at risk in trading activities Details of value at risk in the Group’s global trading activities are given on page 31 in the ﬁnancial review. 867 867 1,198 1,197 200 8,322 200 8,322 – 6,075 – 6,214 1,116 1,283 – 1,116 1,283 – – 10,977 6,493 – 10,971 6,667 49 Acquisitions a) On 3 March 2000, the Group completed the transfer of the business of Scottish Widows’ Fund and Life Assurance Society to its wholly owned subsidiaries Scottish Widows plc and Scottish Widows Annuities Limited; the results of Scottish Widows have been consolidated in full from that date. The premium on acquisition of £1,870 million has been capitalised and the directors have determined that it has an indeﬁnite useful life (see note 1c). A summarised proﬁt and loss account for Scottish Widows for the period from 1 January 2000 to 2 March 2000 is set out below: Earned premiums (net of reinsurance) Other income and charges Net investment returns Claims paid (net of reinsurance) Change in technical provisions Operating expenses Transfer from fund for future appropriations Tax attributable to long-term business account £m aaaaaffffffffffffffffffffffffff 477 10 (295) (419) (393) (57) 653 (12) aaaaaffffffffffffffffffffffffff Loss after tax for the period to 2 March 2000 (36)afffffffffffffffffffffffffff 333afffffffffffffffffffffffffff All recognised gains and losses are included in the proﬁt and loss account. Proﬁt after tax for the year ended 31 December 1999 The disclosures in this note cover all on-balance sheet ﬁnancial instruments held in the trading book together with those held in the banking book for which there is a readily obtainable market price. Fair values of all derivative instruments are disclosed above. Fair values are determined by reference to quoted market prices or, where no market price is available, using internal models which discount expected future cashﬂows at prevailing interest rates. d) Currency exposures Structural currency exposures The Group’s main overseas operations are in New Zealand, the Americas and Europe. Details of the Group’s structural foreign currency exposures are as follows: Functional currency of Group operation New Zealand dollar Euro (and component former currencies) US dollar Swiss franc Other non-sterling Total 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 703 289 194 120 397 716 335 160 108 371 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,690 1,703 Non-structural currency exposures All foreign exchange exposures in the non-trading book are transferred to the trading area where they are monitored and controlled. Information about the management of market risk in the Group’s trading activities is given on page 31. 74 LLOYDS TSB GROUP 49 Acquisitions (continued) 49 Acquisitions (continued) notes to the accounts The balance sheet of Scottish Widows at 3 March 2000 was as follows: Investments Assets held to cover linked liabilities Other assets Prepayments and accrued income Loans and advances to banks Loans and advances to customers Long-term assurance business attributable to shareholders Long-term assurance assets attributable to policyholders Fund for future appropriations Technical provisions Technical provisions for linked liabilities Customer accounts Accruals and deferred income Other liabilities Long-term assurance liabilities to policyholders Net assets acquired Goodwill Consideration Costs of acquisition Book value at Fair value Fair value at 3 March adjustments acquisition £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff £m £m 23,799 (23,799) (3,062) (1,230) (155) – – 3,062 1,250 189 160 632 – – 20 34 160 632 – 4,052 4,052 (6,541) 6,541 (18,084) 18,084 3,062 – 9 575 – 24,166 24,166 – – – (709) (12) (100) – (24,166) (24,166) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff (3,062) (709) (21) (675) 1,870 aaaaaffffffffffffffffffffffffff 5,947afffffffffffffffffffffffffff 5,846 101 aaaaaffffffffffffffffffffffffff 5,947afffffffffffffffffffffffffff b) On 1 September 2000 the Group’s subsidiary, Lloyds UDT Finance Limited, completed the acquisition of Chartered Trust Group plc and ACL Autolease Holdings Limited (together ‘Chartered Trust’), the UK consumer ﬁnance and contract hire subsidiaries of Standard Chartered Bank; the results of these businesses have been consolidated in full from that date. The premium on acquisition of £508 million has been capitalised and will be written off to the proﬁt and loss account over its estimated useful life of 20 years. A summarised proﬁt and loss account for Chartered Trust for the period from 1 January 2000 to 31 August 2000 is set out below: Net interest income Net fees and commissions Other income Total income Operating expenses Provisions for bad and doubtful debts Proﬁt on ordinary activities before tax Tax Proﬁt after tax for the period to 31 August 2000 £m aaaaaffffffffffffffffffffffffff 122 (17) 17 aaaaaffffffffffffffffffffffffff 122 (84) (23) aaaaaffffffffffffffffffffffffff 15 (8) aaaaaffffffffffffffffffffffffff 7afffffffffffffffffffffffffff 23afffffffffffffffffffffffffff Book value at Fair value at 1 September adjustments acquisition £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff Fair value £m £m 143 1,860 375 114 (1,798) (336) (249) (3) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 143 – 1,860 – 414 (39) 114 – (1,798) – (336) – (249) – (3) – afffffffffffffffffffffffffff afffffffffffffffffffffffffff (39) 145 106 508 aaaaaffffffffffffffffffffffffff 614afffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 4,077 – 4,077 Proﬁt after tax for the year ended 31 December 1999 All recognised gains and losses are included in the proﬁt and loss account. The balance sheet of Chartered Trust at 1 September 2000 was as follows: As a mutual life assurance society, Scottish Widows prepared accounts under the modiﬁed statutory solvency basis; this is different to the Lloyds TSB Group accounting policy, which is set out in note 1o). The fair value adjustments above are required to: i) show the net assets of Scottish Widows in accordance with the Group’s accounting policy; and ii) reﬂect the fair value of assets and liabilities. Loans and advances to banks Loans and advances to customers Tangible ﬁxed assets Other assets and prepayments Deposits by banks Customer accounts Other liabilities and accruals Minority interests – equity The Scottish Widows business is complex and whilst no further fair value adjustments are expected, in accordance with the requirements of paragraph 27 of Financial Reporting Standard 6, it is noted that the fair value of the net assets of Scottish Widows and the goodwill arising shown above are provisional. Net assets acquired Goodwill Consideration Under the terms of the transfer of Scottish Widows’ business, as set out in the Policyholder Circular dated 19 November 1999, a separate memorandum account was created within the With Proﬁts Fund on 3 March 2000 called the Additional Account with a balance of £1.7 billion. This account included £1.3 billion which is available to meet any additional costs of meeting guaranteed beneﬁts including annuity beneﬁts on transferred policies allocated to the With Proﬁts Fund and any unexpected liabilities which arise in the future but relate (with certain exceptions) to the operations of Scottish Widows and its subsidiaries prior to 3 March. The assets allocated to the Additional Account include certain hedge assets which are intended to protect the With Proﬁts Fund against the consequences of a future fall in interest rates including increases in the costs of meeting policy guarantees. The consideration was settled in cash. The fair value adjustments principally reﬂect provision for anticipated losses in respect of residual values on certain operating lease assets. c) On 28 April 2000 the Group’s French subsidiary, Lloyds Bank S.A. completed the purchase of the private client business of CPR Gestion Privée for a cash consideration of £27 million. The premium on acquisition of £27 million has been capitalised and will be written off to the proﬁt and loss account over its estimated useful life of 20 years. There were no fair value adjustments made to the assets acquired. The results of this business have been consolidated in full from the date of acquisition, the effect on the results of the Group is not material. LLOYDS TSB GROUP 75 notes to the accounts 50 Consolidated cash ﬂow statement a Reconciliation of operating proﬁt to net cash inﬂow from operating activities Operating proﬁt Increase in prepayments and accrued income Increase in accruals and deferred income Provisions for bad and doubtful debts Net advances written off Restructuring costs incurred General insurance claims General insurance claims paid Amounts written off ﬁxed asset investments Income from long-term assurance business Interest on subordinated liabilities (loan capital) Interest element of ﬁnance lease rental payments Depreciation and amortisation Other non-cash movements Net cash inﬂow from trading activities Net increase in loans and advances Net (increase) decrease in investments other than investment securities Net decrease in other assets Net (decrease) increase in deposits by banks Net increase in customer accounts Net increase in debt securities in issue Net increase (decrease) in other liabilities Net increase in items in course of collection/transmission Other non-cash movements Net cash inﬂow from operating activities 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 3,886 (121) 830 475 (583) – 142 (146) 14 (615) 490 1 386 (192) 3,747 (231) 183 588 (614) (62) 169 (145) 7 (227) 362 – 277 (186) aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,567 3,868 (6,528) (6,253) (355) 20 (2,794) 7,081 4,738 569 461 1,737 827 3,147 551 (3,066) (126) 386 (60) 49 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 1,261 7,558 b Analysis of cash as shown in the balance sheet 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m Cash and balances with central banks Loans and advances to banks repayable on demand 1,276 1,132 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,408 The Group is required to maintain balances with the Bank of England which, at 31 December 2000, amounted to £142 million (1999: £128 million). 1,027 2,794 3,821 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 2,408 2,856 1,406 (448) 7 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,408 3,821 Share capital (including premium and merger reserve) 1999 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2,136 198 1,823 313 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 2,334 2,136 c Analysis of changes in cash during the year At 1 January Net cash inﬂow (outﬂow) before adjustments for the effect of foreign exchange movements Effect of foreign exchange movements At 31 December d Analysis of changes in ﬁnancing during the year At 1 January Cash inﬂow from ﬁnancing At 31 December 76 LLOYDS TSB GROUP 50 Consolidated cash ﬂow statement (continued) d Analysis of changes in ﬁnancing during the year (continued) Preferred securities issued by subsidiary undertakings 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m At 1 January Effect of foreign exchange movements Cash inﬂow from ﬁnancing At 31 December At 1 January Effect of foreign exchange movements Cash inﬂow from ﬁnancing Capital repayments Adjustments on acquisition At 31 December e Analysis of the net cash outﬂow in respect of the acquisition of group undertakings Cash consideration paid Cash acquired Net cash outﬂow f Acquisition of group undertakings Net assets acquired: Loans and advances Long-term assurance business Other assets Tangible ﬁxed assets Deposits by banks, customer accounts and other liabilities Goodwill arising on consolidation Satisﬁed by: Issue of loan notes Cash Payments pending settlement g Disposal of group undertakings and businesses Net assets disposed of: Interests in associated undertakings Other net assets Goodwill written back on disposal (Loss) proﬁt on sale Cash consideration received – 6 509 – – – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff affffffffffffffffffffffff afffffffffffffffffffffffffff – 515 Subordinated liabilities and ﬁnance leases 1999 2000 £m £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 6,497 120 897 (4) 23 4,028 (69) 2,541 (3) – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff affffffffffffffffffffffff afffffffffffffffffffffffffff 7,533 6,497 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 5,110 27 – – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 27 5,110 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 2,827 4,052 168 375 – – 1 – (3,239) 4 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 4,183 2,405 5 22 aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff affffffffffffffffffffffffff afffffffffffffffffffffffffff 6,588 27 1,077 5,110 401 – 27 – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 27 6,588 1999 £m aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff 2000 £m 2 – – aaaaaffffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff – 2 93 95 2 (12) 1 aaaaafffffffffffffffffffffffff aaaaaffffffffffffffffffffffffff afffffffffffffffffffffffffff afffffffffffffffffffffffffff 83 3 information for shareholders ANALYSIS OF SHAREHOLDERS at 31 December 2000 Size of shareholding Shareholders aaaasfffaafaaaaasfffasfffaafafaafaaaaafff % aaasfffaafaaaaafff Number aaasfffaafaaaaafff Number of ordinary shares aaaasfffaafaaaaasfffasfffaafafaafaaaaafff % aaasfffaafaaaaafff Millions aaasfffaafaaaaafff 1 – 99 100 – 499 500 – 999 1,000 – 4,999 5,000 – 9,999 10,000 – 49,999 50,000 – 99,999 100,000 – 999,999 1,000,000 and over 65,162 486,383 305,026 132,401 19,687 14,714 961 1,345 489 aaasfffaafaaaaafff 0.04 2.97 3.45 4.62 2.45 4.87 1.20 7.88 72.52 aaasfffaafaaaaafff aassfffs aassfffs aassfffs aassfffs 100.00 2.0 163.7 190.0 254.6 135.1 268.0 65.8 434.0 3,994.2 aaasfffaafaaaaafff 6.35 47.40 29.72 12.90 1.92 1.43 0.10 0.13 0.05 aaasfffaafaaaaafff 1,026,168 5,507.4* 100.00 FINANCIAL CALENDAR 2001 16 February Results for 2000 announced 28 February Ex-dividend date for 2000 ﬁnal dividend 2 March Record date for ﬁnal dividend 4 April Final date for joining or leaving the dividend reinvestment plan for the ﬁnal dividend * Includes 833 million shares (15%) registered in the names of some 882,000 individuals. 190 million shares (3%) are held by over 63,000 staff and Group pensioners, or on their behalf by the trustee of the staff proﬁt sharing schemes. 18 April Annual general meeting in Edinburgh Substantial shareholdings At the date of this report notiﬁcation had been received that The Capital Group Companies, Inc has an interest in 4% of the nominal value of the issued share capital. No other notiﬁcation had been received that anyone has an interest in 3% or more of the nominal value of the issued share capital. Share price information In addition to information published in the ﬁnancial pages of the press, the latest price of Lloyds TSB shares on the London Stock Exchange can be obtained by telephoning 0906 8771515. These telephone calls are charged at 60p per minute, including VAT. Share dealing facilities The Company provides a low cost, execution only, postal dealing service for the purchase and sale of Lloyds TSB shares through Lloyds TSB Registrars. The current rate of commission for purchases is 0.75%, minimum £10, and for sales is 0.75%, no minimum. For full details please contact Lloyds TSB Registrars. Telephone 01903 702321. The Company also provides a telephone dealing service through Lloyds TSB Stockbrokers for the purchase and sale of Lloyds TSB shares on preferential commission terms. The current rate for both purchases and sales is 0.75%, minimum £18.50 maximum £75, for transactions up to £75,000. For full details please contact Lloyds TSB Stockbrokers. Telephone 0845 7888100. American Depositary Receipts (ADRs) Lloyds TSB shares are traded in the USA through a sponsored ADR facility, with The Bank of New York as the depositary. The ADRs are traded on the over-the-counter market under the symbol LLDTY. The CUSIP number is 539439109 and the ratio of ADRs to ordinary shares is 1:4. For details please contact ADR Department, The Bank of New York, 101 Barclay Street, 22nd Floor West, New York, NY 10286. Telephone (1) 888 BNY ADRS (US toll free); outside the US (908) 769 9835. Individual Savings Accounts (ISAs) The Company provides a facility for investing in Lloyds TSB shares through an ISA. For details please contact Lloyds TSB Private Banking, Freepost, PO Box 149, Haywards Heath, West Sussex RH16 3BR. Telephone 0345 418418. Lloyds TSB: the community and our business Information about the Group’s role in the community and copies of the Group’s code of business conduct and its environmental report may be obtained by writing to Public Affairs, Lloyds TSB Group plc, 71 Lombard Street, London EC3P 3BS. This information is also available on the Group’s website (see below). The Better Payment Practice Code A copy of the code and information about it may be obtained from: The Department of Trade and Industry 1 Victoria Street London SW1H 0ET Shareholder enquiries The Company’s share register is maintained by Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA. Telephone 0870 6003990; textphone 0870 6003950. Please contact them if you have enquiries about your Lloyds TSB shareholding, including those concerning the following matters: • change of name or address • loss of share certiﬁcate, dividend warrant or tax voucher • to obtain a form for dividends to be paid directly to your bank or building society account (tax vouchers will still be sent to your registered address unless you request otherwise) • to obtain details of the dividend reinvestment plan which enables you to use your cash dividends to buy Lloyds TSB shares in the market • request for copies of the report and accounts in alternative formats for shareholders with disabilities. Lloyds TSB Registrars operates a web based enquiry and portfolio management service for shareholders. Visit www.shareview.co.uk for details. 2 May Final dividend paid 27 July Results for half-year to 30 June 2001 announced 8 August Ex-dividend date for 2001 interim dividend 10 August Record date for interim dividend 12 September Final date for joining or leaving the dividend reinvestment plan for the interim dividend 10 October Interim dividend paid Head ofﬁce 71 Lombard Street London EC3P 3BS Registered ofﬁce Henry Duncan House 120 George Street Edinburgh EH2 4LH Registered in Scotland no 95000 Registrar Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA Internet www.lloydstsb.com The information about Lloyds TSB Stockbrokers’ services is approved by Lloyds TSB Stockbrokers Limited. Lloyds TSB Stockbrokers is a member of the London Stock Exchange and is regulated by SFA. Designed by Starling Design/The Team. Printed in the UK by Burrups Ltd, St Ives plc. This document is printed on paper produced from sustainable managed forests using an elemental chlorine free process. LLOYDS TSB GROUP 77

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