Lloyds Banking Group PLC Annual Report 2003

FY2003 Annual Report · Lloyds Banking Group PLC
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AnnualReport and Accounts 2003

Forward looking statements

This annual report includes certain forward looking statements with respect to the business, strategy and plans of Lloyds TSB Group and
its  current  goals  and  expectations  relating  to  its  future  ﬁnancial  condition  and  performance.  Statements  that  are  not  historical  facts,
including statements about Lloyds TSB Group’s or management’s beliefs and expectations, are forward looking statements. Words such
as ‘believes’, ‘anticipates’, ‘estimates’, ‘expects’, ‘intends’, ‘aims’, ‘potential’, ‘will’, ‘could’, ‘considered’, ‘likely’, ‘estimate’ and variations of
these words and similar expressions are intended to identify forward looking statements but are not the exclusive means of identifying
such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon
circumstances that will occur in the future.

Examples  of  such  forward  looking  statements  include,  but  are  not  limited  to, projections  or  expectations  of  proﬁt  attributable  to
shareholders, provisions, economic proﬁt, dividends, capital structure or any other ﬁnancial items or ratios; statements of plans, objectives
or goals of Lloyds TSB Group or its management; statements about the future trends in interest rates, stock market levels and demographic
trends  and  any  impact  on  Lloyds  TSB  Group;  statements  concerning  any  future  UK  or  other  economic  environment  or  performance
including  in  particular  any  such  statements  included  in  this  annual  report;  statements  about  strategic  goals,  competition,  regulation,
dispositions and consolidation or technological developments in the ﬁnancial services industry and statements of assumptions underlying
such statements.

Factors that could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in
such  forward  looking  statements  made  by  Lloyds  TSB  Group  or  on  Lloyds  TSB  Group’s  behalf  include,  but  are  not  limited  to, general
economic  conditions  in  the  UK  and  internationally;  inﬂation,  interest  rate,  exchange  rate,  market  and  monetary  ﬂuctuations;  changing
demographic  developments,  adverse weather  and  similar  contingencies  outside  the  Lloyds  TSB  Group’s  control;  inadequate  or  failed
internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; changes
in laws, regulations or taxation; changes in competition and pricing environments; the ability to secure new customers and develop more
business from existing customers; the ability to achieve value-creating mergers and/or acquisitions at the appropriate time and prices and
the success of the Lloyds TSB Group in managing the risks of the foregoing.

Lloyds TSB Group plc may also make or disclose written and/or oral forward looking statements in reports ﬁled with or furnished to the
Securities and Exchange Commission (‘SEC’), Lloyds TSB Group plc’s annual review, proxy statements, offering circulars, prospectuses,
press releases and other written materials and in oral statements made by the directors, ofﬁcers or employees of Lloyds TSB Group plc to
third parties, including ﬁnancial analysts. The forward looking statements contained in this annual report are made as of the date hereof,
and Lloyds TSB Group undertakes no obligation to update any of its forward looking statements.

Contents

Forward looking statements

Operating and ﬁnancial review and prospects

2003 highlights

2

Five year ﬁnancial summary

Proﬁt before tax by main businesses

3  

The board

Presentation of information

3  

Directors’ report

Chairman’s statement

Group chief executive’s review

The community and our business

4

6

9

Corporate governance

Statement of directors’ responsibilities

Directors’ remuneration report

Description of business

10

Report of the independent auditors

Introduction and development

10

Financial pages

Strategy of Lloyds TSB Group

10

Notes to the accounts

Businesses and activities

10

Shareholder information

Management and resources

12

Taxation

Employees

12

Other information

Competitive environment

13

Glossary

Risk factors

15

Reference information for shareholders

16

68

70

72

74

76

78

88

89

95

176

178

181

183

185

LLOYDS TSB GROUP   1

Can my business succeed?

We serve our business customers in
the UK with dedicated relationship
managers in over 500 locations

Dividends per share
(pence)

26.6 30.6 33.7 34.2 34.2

2003 highlights

Results

Proﬁt before tax
increased by £1,730 million,
or 66 per cent, to
£4,348 million.

Final dividend
of 23.5p per share, making
a total of 34.2p for the year
(2002: 34.2p).

Excluding changes in economic
assumptions, investment
variance and proﬁt on sale 
of businesses:

Proﬁt attributable to
shareholders
increased by £1,464 million,
or 82 per cent, to 
£3,254 million.

Earnings per share
increased by 82 per cent to
58.3p.

Post-tax return on average
shareholders’ equity
38.5 per cent.

Total capital ratio
11.3 per cent, tier 1 capital
ratio 9.5 per cent.

Customer lending and deposits
excluding the impact of
disposals, customer lending
grew by 10 per cent to
£135 billion and customer
deposits increased by
6 per cent to £116 billion.

Market share
the Group has improved its
market share in many key
product areas, including credit
cards, bank savings, and life,
pensions and long-term savings.

Proﬁt before tax
decreased by £126 million, 
or 4 per cent, to
£3,380 million.

Earnings per share
decreased by 6 per cent to
41.5p.

Economic proﬁt
increased by 4 per cent to
£1,553 million.

Post-tax return on average
shareholders’ equity
27.4 per cent. 

2 LLOYDS TSB GROUP

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We offer RouteMap, a unique
business development programme,
to our business customers

Pre-tax proﬁts in Lloyds TSB Asset
Finance increased by 145 per cent
to £162 million in 2003

Record levels of new acquisition
ﬁnance deals and commitments
were achieved in 2003

Lloyds TSB Registrars’ share of the
registration market for FTSE 100
companies in 2003 was 59 per cent

Proﬁt before tax

Presentation
of information

By main businesses

2003
£ million

2002*
£ million

UK Retail Banking and Mortgages

Insurance and Investments

Wholesale and International Banking

Central group items

1,021

1,094

1,330

(65)

1,008

1,230

1,264

4

Proﬁt before tax, excluding changes 
in economic assumptions, 
investment variance and proﬁt on
sale of businesses

Changes in economic assumptions†

Investment variance†

Proﬁt on sale of businesses†

Proﬁt before tax

Earnings per share

3,380

3,506

(22)

125

865

4,348

58.3p

55

(943)

–

2,618

32.1p

* Restated to reﬂect a change in accounting policy following the issue of new

accounting guidance in Urgent Issues Task Force Abstracts 37 ‘Purchases and
sales of own shares’ and 38 ‘Accounting for ESOP trusts’, the reclassiﬁcation of
Business Banking earnings from UK Retail Banking and Mortgages to Wholesale
and International Banking, and changes in internal transfer pricing arrangements.
The Lloyds TSB Group has also changed its accounting policy relating to the
deferral of certain expenses incurred in connection with the acquisition of
new asset ﬁnance and unit trust business. These costs are now charged to the 
proﬁt and loss account as incurred, rather than over the expected life of the 
related transactions.

† Changes in economic assumptions and investment variance relate to Insurance

and Investments, proﬁt on sale of businesses relates to Wholesale and
International Banking.

This report comprises the
Report and Accounts of Lloyds
TSB Group plc for the year
ended 31 December 2003 and
includes certain ﬁnancial and
other information that the
company is required to provide
to the Securities and Exchange
Commission (‘SEC’) in the
United States on Form 20-F.
In this report, references to
‘Lloyds TSB Group’ are to
Lloyds TSB Group plc and its
subsidiary and associated
undertakings; references to
‘company’ are to Lloyds TSB
Group plc; and references to
‘Lloyds TSB Bank’ are to 
Lloyds TSB Bank plc.

Lloyds TSB Group publishes its
ﬁnancial statements in pounds
sterling (‘sterling’ or ‘£’). The
abbreviations ‘£m’ and ‘£bn’
represent millions and
thousands of millions of
pounds sterling respectively
and references to ‘pence’ and
‘p’ are to one-hundredth of 
one pound sterling. References
to ‘US dollars’, ‘US$’ or ‘$’ are
to United States (‘US’) dollars.
The abbreviations ‘$m’ and
‘$bn’ represent millions and
thousands of millions of US
dollars respectively and
references to ‘cent’ are to 

one-hundredth of one
US dollar. References to ‘euro’
or ‘c’ are to the European
single currency and the
abbreviations ‘cm’ and ‘cbn’
represent millions and
thousands of millions of euros
respectively. 

In order to provide a clearer
representation of the underlying
performance, the results of the
Lloyds TSB Group’s life and
pensions and general insurance
businesses include investment
earnings calculated using
longer-term rates of return and,
in the life and pensions
business, annual management
charges based on unsmoothed
fund values. Management
separately analyse the
difference between these
normalised earnings and the
actual return (‘the investment
variance’) together with the
impact of changes in the
economic assumptions used 
in the embedded value
calculation.

In this report the terms
‘UK GAAP’ and ‘US GAAP’ 
refer to generally accepted
accounting principles (‘GAAP’)
in the UK and the US
respectively.

LLOYDS TSB GROUP   3

What about household insurance?

We are a market leader in the
distribution of household insurance
in the UK

Chairman’s statement

2003 has been a year of
considerable change for the
Lloyds TSB Group. We have
refocused our strategic direction,
to concentrate on our core
businesses, and put in place
many of the building blocks for
proﬁtable franchise growth in
2004 and beyond. One of the
signiﬁcant challenges that we
face is that growth in the
ﬁnancial services industry is
expected to slow over the next
couple of years. This means
that for us to grow proﬁtably
we will need to win a greater
share of new and existing
customers’ business. To do this
we are placing much greater
emphasis on developing our
relationship management skills in
each of the Lloyds TSB Group’s
businesses, so we better
understand and meet our
customers’ needs and create
more value for them than our 

competitors can. At the same
time, we continue to improve
our products and services and
build on the progress we have
made in 2003.

Economic outlook

We expect economic growth in
the UK to strengthen in 2004,
helped by a recovery in the
global economy. The UK’s
manufacturing sector has had 
a difﬁcult last few years but is
now emerging from recession
and that should continue this
year, boosting the overall UK
economy. This, we believe, will
create a better balance to UK
economic growth, which has
been led by consumer spending
for some years. The recent
buoyant growth in mortgage
and consumer credit markets
may ease back to more normal
levels in 2004 as the combined
effect of higher interest rates 

and slower growth in personal
disposable incomes lowers
demand. The expected overall
strengthening in UK economic
growth is likely to lead to higher
interest rates but, whilst
inﬂation remains low, only a
modest increase is expected.
Over the next few years the
ﬁnancial services industry will
face signiﬁcant challenges as 
a result of the continuing
burden of European and UK
regulation. Some of this is
potentially very damaging to
the competitiveness of the UK
ﬁnancial services sector.

Results 

The Lloyds TSB Group has
delivered a satisfactory
performance in 2003. This has
been achieved as a result of
growth in our income, through
building stronger relationships
with our customers whilst at 

Maarten van den Bergh

4 LLOYDS TSB GROUP

Scottish Widows’ share of the UK
life and pensions market grew to
5.7 per cent in 2003

The Group has over 9 million
personal lines general insurance
policies in force

Scottish Widows is one of the most
strongly capitalised life companies
in the UK

In the 2003 IFA Service Awards,
Scottish Widows achieved 5-star
ratings in all categories

the same time maintaining
strict cost control. A number
of actions have also been
taken to reduce risk and
earnings volatility. We also
made good progress in 2003
in enhancing overall customer
service, supported by the
introduction of new products
and improved processes. 

Capital and dividend

Lloyds TSB Group’s capital
ratios improved signiﬁcantly
during 2003, partly as a result
of gains on business disposals,
and the Group continues to
generate strong cash ﬂows
from its banking operations.
Lloyds TSB Bank remains one
of the most proﬁtable major
banks in the world and is one
of only two large commercially
owned banks in the world,
and the only UK bank, to have
a ‘triple A’ rating from Moody’s. 

The Lloyds TSB Group’s 
capital management policy is
focused on optimising value for
shareholders. There is a clear
focus on delivering organic
growth and expected capital
retentions are sufﬁcient to
support planned levels of
growth. However, we also 
wish to maintain the ﬂexibility
to make value enhancing
‘in market’ acquisitions such 
as the recent acquisition of 
the Goldﬁsh credit card and
personal loan businesses, 
asset ﬁnance businesses and
Chartered Trust. At this stage,
therefore, the board has
decided not to implement a
share buyback programme but
will, of course, continue to keep
all options for the utilisation 
of capital under review.

The board has decided to
maintain the ﬁnal dividend at
23.5p per share to make a
total for the year of 34.2p
(2002: 34.2p). The board
continues to recognise the
importance attached by
shareholders to the Group’s
dividend which in 2003
represented a dividend yield 
of 7.6 per cent, calculated
using the 31 December 2003
share price of 448p.

Our people

Our people are the key to 
our success. To support our
objective to become a
consistently high performance
organisation, every one of our
staff needs to know what they
can do to be more successful.
Our staff have played a very
important role in the
implementation of many
positive changes during 2003,
and I thank them for their
continuing support. During
2003 we have made great
strides in embedding, via a
balanced scorecard approach
to performance management,
greater clarity and accountability
for performance in each
business and, in doing so,
have devolved greater decision
making and responsibility 
from the Group centre to 
our managers nearer to 
the customer.

The quality of our delivery is
also vital. Excellent execution 
is one of the key attributes 
that distinguishes successful
companies over time and high
quality delivery will ensure we
improve our relationships with
our customers. By ensuring
that we put our customers at

the heart of everything that we
do, we can create better and
deeper long-term relationships
and ensure that our future
growth is proﬁtable and
sustainable, thereby
maximising value for our
shareholders.

Board changes

In May 2003, we welcomed
Wolfgang Berndt and
Angela Knight to the board as
non-executive directors. We are
also pleased that Helen Weir
will join us on 26 April 2004
as group ﬁnance director. 
Two executive directors,
Mike Ross and Philip Hampton,
left the board in September
2003 and January 2004
respectively. Lord Selborne, a
non-executive director, will be
leaving the board at the annual
general meeting. We thank
them all for their contribution
to the Group.

Realising our potential

Our key objective is to build
strong customer franchises,
and the guiding ﬁnancial
principle will be measuring and
managing on economic proﬁt
growth. The result, we believe,
will be top quartile shareholder
return. In 2003, we have
changed the strategic direction
of the Lloyds TSB Group to
improve our focus on our core
customer franchises and to
build sustainable competitive
positions. The Group has also
signiﬁcantly strengthened its
management team with a
number of senior executive
appointments to support the
implementation of the new
strategy. As a result, I believe
Lloyds TSB Group has a real

opportunity to reap the rewards
of the very substantial efforts
made by everyone in 2003,
and thereby to realise the
Lloyds TSB Group’s full potential.

Maarten van den Bergh
Chairman
5 March 2004

LLOYDS TSB GROUP   5

Do your banking products 
meet my needs?

Lloyds TSB continues to improve its
products and services. Over 800,000
new customers joined the bank in 2003

Group chief executive’s review

Lloyds TSB Group’s headline
results in 2003 showed a
66 per cent rise in proﬁt before
tax to £4,348 million,
compared to £2,618 million in
2002. This increase does not
appropriately reﬂect our
performance, as it was, in
large part, the result of the
strategic repositioning of our
business portfolio and the
greater stability in global
financial markets. Excluding the
proﬁt on the sale of businesses,
investment variance and changes
in economic assumptions, the
Lloyds TSB Group’s proﬁt before
tax was down 4 per cent, or
£126 million, to £3,380 million.
On the same basis, proﬁt before
tax increased by 3 per cent in
the second half of 2003,
compared to the ﬁrst half of 
the year, supported by
improvements in each of the
main business units.

When viewing our trading
performance for the year, a
number of other factors need to
be taken into account to allow
for a better understanding and
comparison with 2002.
In particular, the reduction of
£131 million in the Lloyds TSB
Group’s pension scheme
related income, and the
introduction of the Competition
Commission’s remedies for
small and medium-sized
enterprises which reduced proﬁt
before tax by £174 million
in 2003.

Whilst it is important to
recognise that these are
ongoing parts of the business,
the year-on-year comparison
excluding these factors shows
earnings growth, with a modest
income uplift and continued
tight control over expenses.
Growth in income was
supported by good quality 

growth in customer lending
and deposits which, excluding
the impact of disposals, grew
by 10 per cent and 6 per cent
respectively. The rate of decline
in the net interest margin has
slowed, despite intense
competition within the UK
financial services market, as we
improved the mix of assets. The
Group net interest margin in
2003 was 3.04 per cent,
compared with 3.20 per cent in
2002, and we continue to
budget for further gradual
product margin erosion.

Our cost performance reﬂected
good progress in a number of
efﬁciency related initiatives,
together with a reduction of
some 1,200 in total stafﬁng,
after allowing for the
acquisition and disposal of
businesses. Provisions for bad
and doubtful debts reduced by
8 per cent, as a result of lower

Eric Daniels

6 LLOYDS TSB GROUP

Net new mortgage lending in 2003
was a record £8.3 billion

Credit card balances grew by 
36 per cent to £6.7 billion

In Retail Banking, current and
savings account deposits increased
by 10 per cent

Over 4 million customers have
chosen accounts from our 
added value current account range

charges in the corporate and
international businesses. Asset
quality across the Lloyds TSB
Group remains strong and total
non-performing lending
reduced by 14 per cent during
the year, partly as a result of
business disposals. Our return
on equity, excluding disposal
gains, investment variance 
and changes in economic
assumptions, was
27.4 per cent. 

Management priorities

In 2003, the management
team set a series of priorities 
to guide the Lloyds TSB Group
and provide a framework to
build the franchise. The three
key themes are: 

• to actively manage the

portfolio of businesses and 
to reduce risk and earnings
volatility,

• to maintain and build

proﬁtability, and, 

• to position the Group to

deliver proﬁtable growth from
within our retail and corporate
customer franchises.

The key achievements against
these priorities are summarised
below.

Managing the business
portfolio

During the year, we reviewed
the strategic options for a
number of our businesses.
The criteria used in our
evaluation process were the
strategic ﬁt with the Lloyds TSB
Group and the prospects for
long-term economic proﬁt
growth. As a result of the
review, we sold The National
Bank of New Zealand,
substantially all of our
businesses in Brazil and our
French operations. We have 

also announced the sale of our
Central American businesses,
pending approval from the
regulatory authorities.
Our emerging markets debt
portfolio, which totalled
£1.1 billion at the end of
2002, was also sold. We have
removed signiﬁcant earnings
volatility and are now more
focused on our core franchises,
and are conﬁdent the quality of
our future earnings will improve.

In our life assurance business,
we continue to keep close
control over earnings risk and
have put plans in place to
deliver capital efﬁcient growth.

In 2003, we implemented a
new risk infrastructure across
all our business units and
maintained tight control over
our risk positions and credit
quality, which is in part
reﬂected in our lower charge
for bad and doubtful debts 
and reduced levels of 
non-performing lending. 

We have also put in place new
sales management processes
and incentive plans designed to
guide the organisation to build
deep, long-term customer
relationships, and to underpin
our commitment to treating our
customers fairly. We are
determined to avoid future
lapses in our sales processes
which, in the ﬁrst half of
2003, required us to raise a
£300 million provision to
provide redress to customers.

Maintaining and building
proﬁtability

Our key ﬁnancial measures 
of performance are economic
proﬁt growth and return on
economic equity. During 2003,
the Lloyds TSB Group delivered

an economic proﬁt increase of
4 per cent and maintained a
high post-tax return on equity,
excluding disposal gains,
investment variance and changes
in economic assumptions at
27.4 per cent.

In 2003, we established an
increased focus on economic
capital management, supported
by the introduction of a more
rigorous, Basel 2 compliant,
equity attribution model.
This has changed the way we
allocate capital, and has been
reﬂected in the mix of our
balance sheet growth during
2003. We have seen good
growth in consumer lending
and a reduction in our portfolio
of ﬁner margin loans and debt
securities. The improvement 
in our mix of assets has
supported an increase in the
Group’s net interest margin in
the fourth quarter of the year.

In line with our plans to
maximise the use of our capital
resources, we have reviewed
the performance of our life,
pensions and investments
product portfolio. The new
business margin rose from
19.3 per cent to 21.6 per cent
whilst growing market share
from 5.2 per cent to
5.7 per cent. Scottish Widows
remains one of the most
strongly capitalised life
assurance companies in the
UK and is on track to pay a
2004 dividend to Lloyds TSB.
During the year Scottish
Widows’ free asset ratio, a 
key measure of life assurance
companies’ ﬁnancial strength,
increased to an estimated
13.5 per cent, from
12.2 per cent in 2002.

Cost control continues to
have high priority throughout
the Lloyds TSB Group. The
increasing use of straight
through processing, and our
introduction of a Sigma
approach to quality, currently
covering almost 30 per cent of
our transactions, has started to
improve our cost effectiveness
and customer service levels.
We intend to extend this
programme over the next year.
We have also embarked on a
programme of outsourcing a
number of our processing and
back ofﬁce operations.  

Positioning the Lloyds TSB
Group for growth

The Lloyds TSB Group’s
principal focus is on growth
from within the franchise.
Our objective is to build
valuable long-term
relationships with customers
in both the retail and corporate
markets. We will, however,
continue to review
opportunities for ‘in-market’
purchases, such as the
successful acquisition of
Goldﬁsh. The Lloyds TSB
Group’s capital position has
strengthened considerably
during 2003, providing the
capital ﬂexibility to make value
creating acquisitions to support
this focus on organic growth.

The emphasis on developing
the core franchise has resulted
in a robust performance in UK
Retail Banking and Mortgages
in 2003, with proﬁt before tax
increasing by 21 per cent
as revenues increased by
9 per cent whilst costs were
held ﬂat, excluding the
customer redress provision 
of £200 million.

LLOYDS TSB GROUP   7

Is the website worth a visit?
LloydsTSB.com is one of the most
visited ﬁnancial websites in Europe
(2.4 million registered customers)

sales per month, up
80 per cent on 2002.
This reﬂects the successful
development of our
multi-channel distribution
strategy. Overall, sales from
direct channels amounted to
nearly 40 per cent of total 
retail banking sales in 2003,
representing a signiﬁcant
increase over the prior year.

Scottish Widows has made
good market share gains in the
UK life and pensions market,
particularly through the
Independent Financial Advisor
distribution channel, with new
business contribution up by
13 per cent and the margin 
on new business increasing
signiﬁcantly, following the
focus on the distribution of
more proﬁtable and capital
efﬁcient products. 

Work is also underway to
improve the overall
performance through our
branch channels. Proﬁtability
from existing business fell, 

largely as a result of changes
in actuarial assumptions.
Our general insurance business
continued to perform well with
good income growth in the
home insurance market.

In Wholesale and International
Banking, positive results are
emerging from the improved
co-ordination between our
Corporate and Financial
Markets businesses. There was
an uplift in foreign exchange
and interest rate management
product sales to Corporate
customers in the second half
of 2003, and the pipeline
for new business continues
to expand. 

Even after absorbing the
£174 million reduction 
in income as a result of the
Competition Commission’s 
SME ruling and excluding the
£865 million proﬁt on sale of
businesses, proﬁt before tax
in Wholesale and International
Banking grew 5 per cent
during 2003.

Looking forward

During 2003 we have made
good progress both strategically
and ﬁnancially. We have
brought a sharper focus on
maintaining and building
proﬁtability and we are
beginning to deliver growth
in our substantial retail and
corporate customer franchises.
We remain conﬁdent of
delivering further improved
performance by the second
half of 2004.

Finally, I would like to extend
my thanks to our staff for their
commitment and support and,
in particular, their desire to
serve our customers.
The positive way in which
they have embraced the
change programme lends
further conﬁdence to my belief
that we will grow our business
in line with our expectations.

J Eric Daniels
Group Chief Executive
5 March 2004

There has been strong balance
growth in many key areas,
particularly credit cards, up
18 per cent, and personal
loans, up 9 per cent, excluding
the Goldﬁsh acquisition, retail
banking current accounts,
savings and investments, up
10 per cent, and mortgages,
up 13 per cent. Over
1.8 million customers have
beneﬁted from the roll out of
enhanced relationship
management offers, Premier
and Privilege, that have begun
to have a positive impact on
income generation and
customer loyalty. 

In our mortgage business,
we increased our outstanding
balances but our share of 
net new lending fell in the
second half of 2003, given 
the uneconomic nature of
some products. Product sales
via the internet distribution
channel continue to grow
rapidly with an average of
more than 70,000 product

8 LLOYDS TSB GROUP

A network of over 2,200 branches in
the UK

One of the largest telephone banking
operations in Europe

Our customers can access and
manage their accounts online in
real-time, 365 days a year

Internet product sales increased by
80 per cent during 2003

The community and our business

As one of the UK’s leading
ﬁnancial services companies,
Lloyds TSB believes that
business success should go
hand-in-hand with corporate
citizenship. This commitment
is demonstrated by our position
as one of the UK’s largest
corporate givers; our award-
winning policies in the ﬁelds of
employee relations, training and
development, diversity and
ﬁnancial inclusion; as well as
our role in leading innovation
in the management of change
and environmental risk. However,
our commitment also involves
the day-to-day business of
listening to and serving all our
stakeholders, because good
corporate citizenship is an
essential part of building a
successful business.

In support of the community
we serve as a business, the
four independent Lloyds TSB
Foundations will receive
£31 million in 2004 to
distribute to grassroots charities
throughout the UK, which
focus on improving the lives 
of disabled and disadvantaged
people. The Foundations
receive 1 per cent of the
Group’s pre-tax proﬁts adjusted
for certain items, averaged over
three years, instead of the
dividend on their shareholding. 

Thousands of our employees
are committed to good causes.
In 2003, £1.3 million was set
aside by the trustees of the
Lloyds TSB Foundations to
match money raised and time
given by our employees to
charities that meet the

Foundations’ broad grant-giving
criteria. And over £1 million
was raised for Help the
Hospices, our charity of the
year. Ten winners of the Lloyds
TSB Group’s 2003 Community
Awards scheme each received
a £1,000 cheque for their
nominated organisation.

More than £50 million was
spent on training and
development in 2003. The
University for Lloyds TSB
(UfLTSB) provided over
71,000 face-to-face training
days, in excess of 26,000
places on residential training
courses, and a Group-wide
network of more than 2,000
multimedia training PCs giving
local access to a range of
learning materials
supplementing internet and
intranet sites. 2.4 million hits
were received on the UfLTSB
intranet site in 2003 compared
with 1.8 million in 2002.

Training and development are
integral to improving the
performance of our people.
And we seek to recognise that
performance with a competitive
range of salaries and an
innovative beneﬁts package.
Flavours is our response to
changes in the rules governing
taxable beneﬁts for employees
and comprises cash
allowances, life and medical
insurance, redemption
vouchers, ﬂexible beneﬁts, an
opportunity to share in the
Lloyds TSB Group’s proﬁt
through share schemes and an
ability to obtain free company
shares. Over 84,000 products

have now been selected by
our employees and Flavours
received Employee Beneﬁts
magazine’s most successful new
beneﬁts launch award in 2003.

By encouraging diversity in our
workforce, we are better able to
serve the community in which
our business is rooted. With
more women, ethnic minority
and disabled employees, and
their increasing representation
at management level, we can
ensure that we leverage the best
available talent for our business. 

All the evidence shows that
these policies and practices,
more fully described in our
corporate social responsibility
report, The Community & our
Business, are fundamental to
creating employee motivation
and performance, customer
satisfaction and loyalty,
community endorsement and
appreciation, and supplier
commitment. And all, of
course, lead directly to
long-term value creation 
for shareholders.

Cumulative distribution to the Lloyds TSB Foundations
(£m)

13

35

61

92

127

163

197

228

6
9
9
1

7
9
9
1

8
9
9
1

9
9
9
1

0
0
0
2

1
0
0
2

2
0
0
2

3
0
0
2

LLOYDS TSB GROUP   9

Description of business

Introduction and development

Lloyds TSB Group is a leading UK-based ﬁnancial services group, which was created in 1995 following the merger of the TSB Group and the Lloyds Bank
Group, the history of which can  be traced back to the 18th century when the banking  partnership of  Taylor and Lloyds was established  in  the UK. Its
businesses provide a wide range of banking and ﬁnancial services in the UK and overseas, principally through branches of Lloyds TSB Bank and its wholly
owned subsidiaries, Cheltenham & Gloucester and Lloyds TSB Scotland. In 2000, Lloyds TSB Group acquired Scottish Widows; this transaction positioned
Lloyds TSB Group as one of the leading suppliers of long-term savings and protection products in the UK. 

During 2003, the Lloyds TSB Group disposed of a number of its overseas operations, as part of the process of managing its portfolio of businesses to focus
on its core markets. The sale of the Lloyds TSB Group’s French fund management and private banking businesses completed on 30 June 2003; the sale
of The National Bank of New Zealand completed on 1 December 2003; and the sale of substantially all of the Lloyds TSB Group’s Brazilian businesses
completed  on  15  December  2003.  In  addition,  on  1  December  2003  the  Lloyds  TSB  Group  announced  the  disposal  of  its  businesses  in  Guatemala,
Honduras and Panama; these transactions are still subject to regulatory approval but are expected to complete during 2004. These disposals have resulted
in a signiﬁcant reduction in the size of the Lloyds TSB Group’s international business. 

At 31 December 2003 total Lloyds TSB Group assets were £252 billion and Lloyds TSB Group had over 71,500 employees. Lloyds TSB Group plc’s market
capitalisation at that date was some £25.1 billion. The proﬁt on ordinary activities before tax for the 12 months to 31 December 2003 was £4,348 million
and the risk asset ratios as at that date were 11.3 per cent for total capital and 9.5 per cent for tier 1 capital.

Strategy of Lloyds TSB Group 

The  governing  objective  of  Lloyds  TSB  Group  is  to  maximise  shareholder  value  over  time.  In  an  environment  of  increasing  competition  and  empowered
customers, Lloyds TSB Group believes that this shareholder value objective can best be achieved by:

• focusing on markets where we can build and sustain competitive advantage,

• developing business strategies for those markets which are founded on being proﬁtably different in the way we create customer value, and

• building a high-performance organisation focused on the right goals and the best possible execution of those strategies. 

Markets

Lloyds TSB Group continues to focus on building competitive advantage in its core markets by seeking opportunities to consolidate its position in businesses
where it is already strong through a combination of organic growth and acquisitions and by divesting businesses in markets where it is not a leader and
cannot aspire reasonably to leadership. The acquisition of Scottish Widows in March 2000 has greatly enhanced Lloyds TSB Group’s market position in the
life assurance and investment markets. Whilst these markets have been hit by weak share prices in the recent past, in the longer term they are expected to
exhibit strong demand growth driven by demographics and regulation. Within Asset Finance, Lloyds TSB Group has acquired Chartered Trust, First National
Vehicle Holdings, Abbey National Vehicle Finance and the Dutton-Forshaw Group to enhance its leading positions in the UK point of sale motor ﬁnance and
contract hire markets. Lloyds TSB Group has recently divested its businesses in New Zealand, Brazil and France which were markets in which Lloyds TSB
Group did not expect to be able to build and sustain competitive advantage. 

Customer value

In an increasingly competitive ﬁnancial services market, and with customers able to exercise choice amongst alternative providers, shareholder value creation
is closely linked to customer value creation. Shareholder value can only be created by attracting and retaining customers and winning a greater share of their
ﬁnancial services business. This requires a focus on strategies which create the most value for customers, and convert more of that value into business
value. Across its main businesses, Lloyds TSB Group has strong core banking franchises, but smaller market shares in associated product areas. The Lloyds
TSB Group’s strategy is focused on being differentiated in the creation of customer value to win a bigger share of our customers’ total ﬁnancial services spend.

Lloyds  TSB  Group  continues  to  develop  new  strategies  to  leverage  the  strength  of  its  brands  and  its  multi-channel  distribution  capability,  its  enhanced
understanding of what its customers want and its cost advantage to deliver greater value to customers.

High performance organisation

Even  the  best  strategies  will  fail  to  deliver  shareholder  value  if  poorly  executed.  Lloyds  TSB  Group  has  restructured  its  businesses  and  reinvigorated  its
governance and performance management processes to link plans and budgets much more closely to the highest value strategy for each business, to ensure
maximum clarity and accountability for execution within all levels of its management team, and to link reward much more closely to performance. 

Lloyds TSB Group measures value internally by economic proﬁt growth, an important measure of performance which signals where value is being created
or destroyed. It has developed a framework to be able to measure economic capital requirements across all its businesses, taking into account market, credit,
business and operational risk. Economic proﬁt is measured by applying a charge for this economic equity to post-tax earnings. Using economic proﬁt as the
key performance measure enables the Group to understand which products, channels and customer segments are destroying value and which are creating
the most value and to make better strategic choices as a result. 

Lloyds TSB Group remains alert for opportunities to grow through acquisitions that complement its organic strategies and help provide new opportunities for
proﬁtable growth, both in the UK and overseas. Lloyds TSB Group’s strategy is to focus initially on improving performance in its core markets and by doing
so build an advantaged platform for subsequent expansion into new markets. 

Businesses and activities

Lloyds  TSB  Group’s  activities  are  organised  into  three  businesses:  UK  Retail  Banking  and  Mortgages,  Insurance  and  Investments, and  Wholesale  and
International Banking. The main activities of Lloyds TSB Group’s three businesses are described below.

UK Retail Banking and Mortgages

Services provided by UK Retail Banking and Mortgages encompass the provision of banking and other ﬁnancial services, private banking, stockbroking and
mortgages to personal customers. During 2003 services were provided to some 15 million customers through a wide range of products and channels and
with over 2,200 branches of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester at the end of 2003, Lloyds TSB Group provides wide-
reaching  geographic  branch  coverage  in  England,  Scotland  and  Wales.  The  proﬁt  before  tax  of  UK  Retail  Banking  and  Mortgages  in  2003  was

10 LLOYDS TSB GROUP

Description of business

£1,021 million. In September 2003, Lloyds TSB Group acquired the credit card and personal loan portfolios of Goldﬁsh Bank, which amounted to some
£1.0 billion.

Internet banking. Internet banking provides online banking facilities for personal customers and enables them to conduct their ﬁnancial affairs without the
need to use the branch network. Some 2.4 million customers have registered to use Lloyds TSB Group’s internet banking services.

Telephone  banking. Telephone  banking  continues  to  grow  and  Lloyds  TSB  Group  provides  one  of  the  largest  telephony  services  in  Europe,  in  terms  of
customer numbers. At the end of 2003, some 4.1 million customers had registered to use the services of PhoneBank and the automated voice response
service PhoneBank Express. Lloyds TSB Group’s telephone banking contact centres handled some 59 million calls during 2003.

Cash machines. Lloyds TSB Group has one of the largest cash machine networks of any leading banking group in the UK and, at 31 December 2003,
personal customers of Lloyds TSB Bank were able to withdraw cash and check balances through some 4,200 ATMs at branches and external locations
around the country. In addition, they have access to some further 43,000 cash machines via LINK in the UK and to cash machines worldwide through the
VISA and MasterCard networks.

Current accounts. The retail branches of Lloyds TSB Bank and Lloyds TSB Scotland offer a wide range of current accounts, including interest-bearing current
accounts and a range of added value accounts.

Savings  accounts. Lloyds  TSB  Bank  and Lloyds TSB Scotland offer a  wide  range  of  savings  accounts  and  Cheltenham  &  Gloucester  provides  retail
investments through their branch networks and a postal investment centre.

Personal loans. Lloyds TSB Bank and Lloyds TSB Scotland offer a range of personal loans through their branch networks and directly to the customer via
the internet and telephone.

Card services. Lloyds TSB Group provides a range of card-based products and services, including credit and debit cards and card transaction processing
services for retailers. Lloyds TSB Group is a member of both the VISA and MasterCard payment systems and had a 12.6 per cent share of outstanding card
balances at 31 December 2003.

UK  Wealth  Management. Private  Banking  provides  a  range  of  tailor-made  wealth  management  services  and  products  to  individuals  from  39  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 individual savings account (ISA) products. At 31 December 2003, client funds under management totalled some
£11 billion.

Mortgages. Cheltenham  &  Gloucester  is  Lloyds  TSB  Group’s  specialist  residential  mortgage  provider,  offering  a  range  of  mortgage  products  to  personal
customers through its own branches and those of Lloyds TSB Bank in England and Wales, as well as through the telephone, internet and postal service,
C&G TeleDirect. Lloyds TSB Group also provides mortgages through Lloyds TSB Scotland and Scottish Widows Bank. Lloyds TSB Group is the third largest
residential mortgage lender in the UK on the basis of outstanding balances, with mortgages outstanding at 31 December 2003 of £70.8 billion, representing
a market share of 9.2 per cent. 

Insurance and Investments

Insurance and Investments offers life assurance, pensions and investment products, general insurance and fund management services. The operating proﬁt,
calculated as explained under ‘Operating and ﬁnancial review and prospects – Line of business information – Summary’, of Insurance and Investments in
2003 was £1,094 million. 

Life assurance, pensions and investments. Scottish Widows is Lloyds TSB Group’s specialist provider of life assurance, pensions and investment products,
which are distributed through Lloyds TSB Bank’s branch network, through independent ﬁnancial advisors and directly via the telephone and the internet.
The Scottish Widows brand is the sole brand for new sales of Lloyds TSB Group’s life, pensions, unit trust and other long-term savings products.

In common with other life assurance companies in the UK, the life and pensions business of each of the life assurance companies in the Lloyds TSB Group
is written in a long-term business fund. The long-term business fund is divided into With-Proﬁts and Non-Participating sub-funds.

With-proﬁts  life  and  pensions  products  are  written  from  the  With-Proﬁts  sub-fund.  The  beneﬁts  accruing  from  these  policies  are  designed  to  provide  a
smoothed return to policyholders who hold their policies to maturity through a mix of annual and ﬁnal (or terminal) bonuses added to guaranteed basic
beneﬁts. The guarantees generally only apply on death or maturity. The actual bonuses declared will reﬂect the experience of the With-Proﬁts sub-fund.

Other life and pensions products are generally written from the Non-Participating sub-fund. Examples include unit-linked policies, annuities, term assurances
and health insurance (under which a predetermined amount of beneﬁt is payable in the event of an insured event such as death). The beneﬁts provided by
such linked policies are wholly or partly determined by reference to a speciﬁc portfolio of assets known as unit-linked funds.

General Insurance. Lloyds TSB General Insurance provides general insurance through the retail branches of Lloyds TSB Bank and Cheltenham & Gloucester,
and through a direct telephone operation and the internet. Lloyds TSB General Insurance is a market leader in the distribution of household insurance in the UK.

Scottish  Widows  Investment  Partnership. Scottish  Widows  Investment  Partnership  manages  funds  for  Lloyds  TSB  Group’s  retail  life,  pensions  and
investment products. Clients also include corporate pension schemes, local authorities and other institutions in the UK and overseas. At 31 December 2003
funds under management amounted to some £77 billion. 

Wholesale and International Banking

Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks and ﬁnancial institutions, and
small and medium-sized UK businesses, including venture capital ﬁnance. It also provides asset ﬁnance and share registration services to personal and
corporate  customers,  manages  Lloyds  TSB  Group’s  activities  in  ﬁnancial  markets  through  its  treasury  function  and  provides  banking  and  ﬁnancial
services overseas. 

Wholesale 

The proﬁt before tax of Wholesale in 2003 was £890 million.

Financial Markets. Lloyds TSB Group is a leading participant in the sterling money market. It is also active in currency money markets, foreign exchange
markets  and  in  certain  derivatives  markets,  primarily  to  meet  the  needs  of  customers.  It  also  plays  a  central  role  in  the  funding,  cash  and  liquidity
management of Lloyds TSB Group. 

LLOYDS TSB GROUP   11

Description of business

Corporate. Lloyds TSB Group provides a relationship-based ﬁnancial and advisory service to the corporate marketplace through dedicated ofﬁces in the UK
and a number of locations overseas, including New York. Customers have access to our capital and expertise in a broad range of ﬁnancial solutions, including
correspondent banking and trade ﬁnance, foreign exchange and interest rate management instruments, short and long-term lending, structured asset ﬁnance
including large value lease and other asset based ﬁnance, securitisation, acquisition ﬁnance, capital markets and share registration. Lloyds TSB Development
Capital provides venture capital ﬁnance to developing companies.

Asset Finance. Lloyds TSB Group’s asset ﬁnance businesses provide individuals and companies with ﬁnance through leasing, hire purchase and contract
hire packages. Hire purchase, or instalment credit, is a form of consumer ﬁnancing where a customer takes possession of goods on payment of an initial
deposit but the legal title to the goods does not pass to the customer until the agreed number of instalments have been paid and the option to purchase has
been exercised. Through its invoice discounting and factoring subsidiary Lloyds TSB Commercial Finance, Lloyds TSB Group provides working capital ﬁnance
for customers by releasing to the customer up to 90 per cent of the value of their unpaid invoices, with the balance payable, after deduction of a service
fee, once the invoices have been settled. Invoice discounting differs to factoring in that the customer retains control of the debt collection and the credit risk.
Specialist personal lending, store credit, small/medium ticket leasing and the Dutton-Forshaw motor dealership complete this group of businesses. 

Business Banking. Relationships with some 560,000 small businesses are managed by around 1,700 dedicated business managers based in over 500
locations throughout the UK supported by nearly 2,000 business customer advisers in branches. Lloyds TSB Group is one of the leading banks for new
business  start-ups  with  around  one  in  ﬁve  opening  accounts  with  Lloyds  TSB  Bank.  Customers  have  access  to  Lloyds  TSB  Group’s  unique  business
development programme RouteMap and a wide range of solutions to business problems such as Debtor Management service, providing legal support to help
customers recover debts, and Prospect Finder, providing customers with a tailored list of potential customers for their business. The main activity of the
Agricultural Mortgage Corporation is to provide long-term ﬁnance to the agricultural sector.

International Banking

Following the disposal of the Lloyds TSB Group’s operations in New Zealand, Brazil and France during 2003, the extent of the activities of International
Banking has been signiﬁcantly reduced. The proﬁt before tax of International Banking in 2003 was £1,305 million, including a proﬁt on the disposal of
businesses of £865 million. These businesses contributed £318 million to proﬁt in 2003.

Europe. Lloyds TSB Group has private banking operations for wealthy individuals outside their country of residence. The business is conducted through
branches  of  Lloyds  TSB  Bank  located  in  Switzerland,  Luxembourg,  Monaco  and  Gibraltar.  There  are  also  private  and  corporate  banking  operations  in
Belgium, Netherlands and Spain.

Offshore  banking. The  Lloyds  TSB  Group’s  offshore  banking  operations  comprise  ofﬁces  in  the  UK,  the  Channel  Islands,  the  Isle  of  Man  and  overseas
representative ofﬁces in the Middle East, Asia and the Americas. The business provides a wide range of retail banking, wealth management and expatriate
services to local island residents, UK expatriates, foreign nationals and to other customers requiring offshore ﬁnancial services.

The Americas. Following the disposal of substantially all of its Brazilian operations, the Lloyds TSB Group continues to have ofﬁces in Argentina, Colombia,
Ecuador, Paraguay and Uruguay; the sales of branches in Guatemala, Honduras and Panama are expected to be completed in 2004 after receipt of the
required regulatory approvals. In addition Lloyds TSB Group has private banking and investment operations in the US. In Argentina, where Lloyds TSB Bank
has 36 branches, and Colombia, where Lloyds TSB Bank’s subsidiary Lloyds TSB Bank S.A. has 17 branches, Lloyds TSB Group provides corporate banking
services,  including  trade  ﬁnance,  working  capital  loans,  import  ﬁnance,  term  deposits  and  money  transmission.  It  also  provides  retail  banking  services
through a network of branches, including current and savings accounts, credit cards, personal loans and mortgages.

Middle East and Asia. There are banking operations in Hong Kong, Singapore, Tokyo, Malaysia and Dubai.

Management and resources 

Lloyds TSB Group recognises that it will create value for its shareholders if it creates value for its customers. Its constant aim is to meet the rapidly changing
needs and expectations of its customers. Lloyds TSB Group believes that success depends upon service, consistency and commitment. Nothing is more
important to Lloyds TSB Group’s business than maintaining the trust and conﬁdence of its customers and Lloyds TSB Group aims, wherever possible, to
maintain long-term relationships with its customers. 

Lloyds  TSB  Group  operates  in  a  marketplace  which  is  continually  changing.  No  organisation  can  successfully  manage  change  without  the  support  and
commitment of its staff. The pace and scope of change will not diminish as competition in the ﬁnancial services market continues to increase. Lloyds TSB
Group recognises that it is the staff of the organisation who have delivered, and will continue to deliver, its success and considers that one of its greatest
competitive advantages is the ability of its people to adapt to rapid and far reaching change. The knowledge and skills of Lloyds TSB Group’s employees are
a key element in its success and therefore it invests signiﬁcantly in training, ensuring that training is accessible by everyone in the organisation.

Lloyds TSB Group recognises that long-term success depends on the quality of its management. It is therefore committed to developing the potential of all
managers; in particular ensuring that it has the succession management capability to meet future needs for top management. On 1 June 2003 Eric Daniels,
formerly  group  executive  director,  UK  Retail  Banking,  succeeded  Peter  Ellwood  upon  his  retirement  as  group  chief  executive;  Peter  Ayliffe  succeeded
Eric Daniels  as  group  executive  director,  UK  Retail  Banking.  On  10  March  2003  Steve  Targett  joined  the  board  and  on  16  April  2003  he  succeeded
David Pritchard upon his retirement as group executive director, Wholesale and International Banking. 

On 30 September 2003 Mike Ross, group executive director, Insurance and Investments, left the board and was replaced by Archie Kane, previously group
executive director, IT and Operations. Chris Wiscarson, formerly managing director, International Banking, assumed the responsibilities of director of Group
IT and Operations and joined the group executive committee but did not become a member of the board. On 12 January 2004 Philip Hampton, group
ﬁnance director, left the board. Helen Weir, formerly group finance director of Kingﬁsher, has been appointed group ﬁnance director from 26 April 2004. In
the meantime, the ﬁnance director’s duties are being carried out by Mike Fairey, deputy group chief executive. On 1 February 2004, Frans Hijkoop joined
the Lloyds TSB Group as director of Group Human Resources and became a member of the group executive committee but did not become a member of
the board. On 1 March 2004, Carol Sergeant, formerly managing director, Regulatory Process and Risks Directorate for the UK Financial Services Authority,
joined the Lloyds TSB Group as chief risk director and also became a member of the group executive committee but did not become a member of the board.

Employees

At 31 December 2003, Lloyds TSB Group employed 71,609 people (full-time equivalent), compared with 79,537 at 31 December 2002; the reduction in
staff  numbers  during  the  year  is  largely  as  a  result  of  the  disposal  of  the  Lloyds  TSB  Group’s  businesses  in  New  Zealand,  France  and  Brazil. 
At 31 December 2003, 68,017 employees were located in the UK, 2,327 in the Americas, 962 in continental Europe and 303 in the rest of the world. 

12 LLOYDS TSB GROUP

Description of business

At the same date, 44,478 people were employed in UK Retail Banking and Mortgages, 5,783 in Insurance and Investments, 19,414 in Wholesale and
International Banking, and 1,934 in other functions. Lloyds TSB Group has gone through substantial changes in recent years; adjusting for the effect of
acquisitions and disposals underlying staff numbers have reduced by 16,209 since 1995. However, during this time no material strikes or work stoppages
have occurred.

Competitive environment 

Lloyds TSB Group operates in a ﬁnancial services world that is experiencing consolidation at national and, to a lesser extent, international levels. The last
few years have seen the beginnings of pan-European consolidation and considerable consolidation within the US.

Globalisation and developments in technology continue to expand Lloyds TSB Group’s range of competitors. The rising intensity of competition is expected
to put Lloyds TSB Group’s margins under further pressure with many products becoming increasingly commoditised. Wholesale markets are integrating more
rapidly across the European Union than their retail counterparts, leading to a deeper, more liquid, and more competitive corporate securities market, and
the gradual disintermediation of traditional bank lending.

Lloyds TSB Group expects competition within the industry to continue to be based on service and relationships as well as price, particularly for core banking
services. Lloyds TSB Group has signiﬁcant strengths, in its portfolio of strong brands, its existing customer franchises in both retail and corporate, commercial
and business banking, its multi-channel distribution capability and its knowledge and understanding of its customers.

Lloyds TSB Group’s key markets are in the UK, in both the retail and corporate, commercial and business banking sectors, where the markets for basic
ﬁnancial  and  banking  services  are  relatively  mature.  Retail  banking  markets  have  shown  strong  rates  of  growth  in  recent  years,  notably  in  consumer
borrowing and mortgages, but the resultant high rates of consumer indebtedness are expected to restrain future growth. The markets for life and pensions
and  general  insurance  products  are expected  to  show  strong  rates  of  growth  in  a  number  of  key  areas,  although  stock  market  weakness  has  depressed
demand for some equity-based products in the recent past, and a considerable amount of uncertainty exists about the impact of regulatory change.

Lloyds TSB Group’s competitors include all the major financial services and fund management companies operating in the UK. De-mutualised building
societies  which  have  become  banks  and  life  assurers  which  have  entered  the  banking  market  have  become  direct  competitors  in  the  provision  of
banking products. 

In  the  mortgage  market, competitors  include  the  traditional  banks  and  building  societies  and  new  entrants  to  the  market,  with  the  market  becoming
increasingly competitive as both new entrants and incumbents endeavour to gain market share. Lloyds TSB Group’s competitors in the credit card market
again include both the traditional banks and new entrants, including overseas companies. In the last few years a signiﬁcant share of new business has been
acquired by US and new UK competitors. 

In the distribution of life, pensions and investments products Lloyds TSB Group has seen increased competition from new market entrants, such as traditional
retailers, primarily in specialist areas. The fragmented nature of the life, pensions and investments market in the UK has resulted in some consolidation
within the sector; government regulations on product charges and competitive pressures are likely to drive further consolidation as providers seek to achieve
the beneﬁts of economies of scale. Proposed changes to the regulation of life, pensions and investment products are expected to favour distributors, including
banks, rather than product providers.

In  the  general  insurance  sector,  the  market  has  seen  signiﬁcant  consolidation  amongst  underwriters  but  continued  fragmentation  in  distribution  and  an
increasing number of new market entrants including both overseas insurers and direct operators.

In commercial and corporate markets, margins are typically ﬁner than in retail, but probably under less downward pressure. Nevertheless, traditional forms
of bank ﬁnance face increasing competition from market-based products as companies increasingly access those markets directly.

In addition to the challenging competitive environment, the UK ﬁnancial services industry is characterised by recent government intervention and regulation.
Lloyds TSB Group is currently facing over 120 potential legislative issues which may have an impact on its business, over half of which emanate from Europe
as part of the Financial Services Action Plan or in the shape of EU social legislation. Many of the reviews instigated by the UK government into the ﬁnancial
services sector have been against a backdrop of increased consumerism, driven by support for open competition and a fair deal for the consumer.

In 1998, the UK government commissioned an investigation into competition in the banking industry whose ﬁndings were published in March 2000. The
investigation speciﬁcally examined the levels of innovation, competition and efﬁciency in various sub-markets within the industry. The investigation found
that the small and medium-sized business market was not sufﬁciently competitive, with barriers to entry existing for new players. The provision of banking
services to this sector was referred to the UK Competition Commission under the Fair Trading Act 1973 for a full competition inquiry. 

On 14 March 2002, the Competition Commission’s report into the competitiveness of banking for small and medium-sized enterprises (SMEs) was published
by the government. The Competition Commission concluded that a number of speciﬁc practices had the effect of restricting or distorting price competition
between the main banks. The government has accepted in full the recommendations made by the Competition Commission, which include a requirement
that  banks  should  offer  any  SME  customer  either  a  current  account  that  pays  interest  of  at  least  the  Bank  of  England  Base  Rate minus 
2.5 per cent, or a current account free of money transmission charges, or a choice between the two. The principal behavioural remedies intended to reduce
barriers to entry and expansion are measures to ensure fast error-free switching of accounts between banks. In addition, measures have been proposed
limiting the bundling of services and improving market information and transparency. 

In  the  credit  card  market,  the  Ofﬁce  of  Fair  Trading  (OFT)  has  recently  reached  a  preliminary  conclusion  that  an  agreement  between  MasterCard’s  UK
members on transaction charges infringes the Competition Act 1998. In the absence of justiﬁcation of the existing agreement from MasterCard, a decision
is expected in March or April that will require MasterCard to cease its infringement of the Competition Act.

The OFT has also recommended changes to the banking codes with regard to payments. In particular, it recommends that the banking system should no
longer have an interest-free ﬂoat while certain electronic payments are cleared: customers should receive relevant interest. And the OFT also recommends
there should be greater clarity for customers about clearing times for payments and receipts of funds.

As announced by the government in November 2003, the OFT is also reviewing the impact of the Financial Services and Markets Act 2000 on competition
in UK ﬁnancial services.

Other recent reviews into the financial services sector include:

• The Sandler Review into the UK’s long-term retail savings industry which was commissioned to identify structural ﬂaws in the ﬁnancial services industry
which  might  prevent  customers  from  saving.  The  report’s  core  recommendation  is  the  introduction  of  simple  regulated  products  with  capped  charges,
restrictions on investment proﬁle and the ability to exit on reasonable terms.

LLOYDS TSB GROUP   13

Description of business

• The Pickering Review of Pensions, published in July 2002, which focused on the simpliﬁcation of the pensions framework. Core recommendations included
a new Pensions Act to consolidate all existing pensions legislation; a new, more pro-active regulator; a more targeted approach to communicating with
pension scheme members; and allowing employers to make membership of their occupational pension schemes a condition of employment.

Lloyds TSB Group has always supported the principle of competition and agrees with the importance of building consumer conﬁdence in ﬁnancial services.
Lloyds TSB Group has concerns about the introduction of price controls, which would be a barrier to entry and believes that voluntary codes, rather than
statutory regulation, are in the best interests of consumers and competition.

Lloyds  TSB  Group  also  operates  in  other  countries where  it  is  exposed  to  different  competitive  pressures.  During  2003,  Lloyds  TSB  Group  sold  its
businesses in New Zealand and substantially all of its business in Brazil; the disposals of its operations in Guatemala, Honduras and Panama are pending
regulatory approvals. As a result of these disposals Lloyds TSB Group has signiﬁcantly reduced its exposure to businesses outside the UK.

14 LLOYDS TSB GROUP

Risk factors

Set out below are certain risk factors which could affect the Lloyds TSB Group’s future results and cause them to be materially different from expected results.
The factors discussed in this report should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties.

Lloyds  TSB  Group’s  businesses  are  subject  to  inherent  risks  concerning  borrower  credit  quality  as  well  as  general  UK  and  international  economic
conditions. Development of adverse conditions in the UK or in other major economies could cause proﬁtability to decline.

Lloyds TSB Group’s businesses are subject to inherent risks regarding borrower credit quality as well as general UK economic conditions. Each of these can
change the level of demand for, and supply of, Lloyds TSB Group’s products and services. Changes in the credit quality of Lloyds TSB Group’s UK and/or
international  borrowers  and  counterparties  could  reduce  the  value  of  Lloyds  TSB  Group’s  assets,  and  increase  provisions  for  bad  and  doubtful  debts.  In
addition, changes in economic conditions may result in a deterioration in the value of security held against lending exposures and increase the risk of loss
in the event of borrower default. Any signiﬁcant increase in the UK unemployment rate would reduce proﬁts from the insurance business. Furthermore, a
general deterioration in the UK economy would also reduce Lloyds TSB Group’s proﬁt from both its UK banking and ﬁnancial services businesses. A general
deterioration in any other major world economy could also adversely impact Lloyds TSB Group’s proﬁtability.

Lloyds TSB Group’s businesses are inherently subject to the risk of market ﬂuctuations, which could reduce proﬁtability.

Lloyds TSB Group’s businesses are inherently subject to the risk of market ﬂuctuations. The most signiﬁcant market risks Lloyds TSB Group faces are interest
rate risk and foreign exchange risk in its banking businesses and equity risk and matters arising from the treatment of with-proﬁts options and guarantees in
its insurance businesses. See ‘Operating and financial review and prospects – Risk management – Market risk’, ‘Operating and ﬁnancial review and prospects –
Risk management – Insurance risk’ and ‘Operating and ﬁnancial review and prospects – With-proﬁts options and guarantees’ for a discussion of these risks.
The Lloyds TSB Group’s pension schemes are also subject to market risks, principally equity risk and interest rate risk; adverse market movements would have
an effect upon the ﬁnancial condition of the pension schemes which would be reﬂected in the Lloyds TSB Group’s ﬁnancial statements.

Lloyds TSB Group’s insurance businesses are subject to inherent risks relating to changing demographic developments, adverse weather and similar
contingencies outside its control. Development of adverse conditions could reduce proﬁtability.

Lloyds  TSB  Group’s  insurance  businesses are subject  to  inherent  risk  relating  to  changing  demographic  developments,  adverse  weather  and  similar
contingencies outside its control, both in the UK and overseas. Such contingencies can change the risk proﬁle and proﬁtability of such products and services.

Adverse experience in the operational risks inherent in Lloyds TSB Group’s businesses could have a negative impact on its results of operations. 

Operational risks are present in Lloyds TSB Group’s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and
external processes, documentation, people and systems or from external events. Lloyds TSB Group’s businesses are dependent on their ability to process
accurately and efﬁciently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to
a number of different legal and regulatory regimes. Lloyds TSB Group’s systems and processes are designed to ensure that the operational risks associated
with its activities are appropriately controlled, but Lloyds TSB Group realises that any weakness in these systems could have a negative impact on its results
of  operations  during  the  affected  period.  See  ‘Operating  and  financial  review  and  prospects  –  Operations  risk’  and  ‘Operating  and  financial  review  and
prospects – Legal and regulatory risk’.

Terrorist acts and other acts of war could have a negative impact on the business and results of operations of Lloyds TSB Group.

Terrorist acts, and other acts of war or hostility and responses to those acts, may create economic and political uncertainties, which could have a negative
impact on UK and international economic conditions generally, and more speciﬁcally on the business and results of operations of Lloyds TSB Group in ways
that cannot be predicted. 

Lloyds  TSB  Group’s  businesses  are  subject  to  substantial  regulation,  regulatory  and  governmental  oversight.  Any  signiﬁcant  adverse  regulatory
developments or changes in government policy could have a negative impact on Lloyds TSB Group’s results of operations.

Lloyds  TSB  Group  conducts  its  businesses  subject  to  ongoing  regulation  and  associated  regulatory  risks,  including  the  effects  of  changes  in  the  laws,
regulations, policies, voluntary codes of practice and interpretations in the UK and the other markets where it operates. Future changes in regulation, ﬁscal
or other policies are unpredictable and beyond the control of Lloyds TSB Group. For additional information, see ‘Operating and ﬁnancial review and prospects
– Supervision and regulation’.

Lloyds TSB Group runs the risk of misselling ﬁnancial products, acting in breach of regulatory requirements and giving negligent advice, any of which
could have a negative impact on its results or its relations with its customers.

Some of these issues involve the possibility of alleged misselling of pension and other life assurance policies, savings and other products. There is a risk that
further provisions may be required as a result of these issues. See ‘Operating and ﬁnancial review and prospects – Customer remediation payments’. 

Lloyds TSB Group’s businesses are conducted in highly competitive environments. Creation of an appropriate return for shareholders depends upon
management’s ability to respond effectively to competitive pressures.

The market for UK ﬁnancial services and the other markets within which Lloyds TSB Group operates are highly competitive, and management expects such
competition to intensify in response to consumer demand, technological changes, the impact of consolidation, regulatory actions and other factors, which
could result in a reduction in proﬁt margins. Lloyds TSB Group’s ability to generate an appropriate return for its shareholders depends signiﬁcantly upon the
competitive environment and management’s response to it. See ‘Description of business – Competitive environment’.

Lloyds  TSB  Group  is  devoting  considerable  time  and  resources  to  securing  new  customers  and  developing  more  business  from  existing  customers.
If Lloyds TSB Group is unsuccessful, its organic growth prospects will decline.

Lloyds TSB Group seeks to achieve further organic growth by securing new customers and developing more business from existing customers. Lloyds TSB
Group is currently expending signiﬁcant resources and effort to bring about this growth, particularly with respect to its UK retail ﬁnancial services business.
If these expenditures and efforts do not meet with success, its operating results would grow more slowly or decline. 

Lloyds TSB Group’s businesses are conducted in a marketplace that is consolidating and signiﬁcant cross-border mergers and acquisitions may happen
in the coming years. Lloyds TSB Group’s ability to generate an appropriate return for its shareholders over the long term may depend upon whether
management is able or permitted by either regulatory bodies or its shareholders to achieve value-creating mergers and/or acquisitions at the appropriate
times and prices.

In  addition  to  its  important  strategy  of  organic  growth,  one  of  Lloyds  TSB  Group’s  aims  is  to  remain  alert  for  opportunities  to  participate  in  the  further
consolidation of the ﬁnancial services industry, both in the UK and overseas. Management believes that under current conditions Lloyds TSB Group may ﬁnd
it difﬁcult to make a signiﬁcant acquisition in the UK in any business line where it already has a signiﬁcant market share. Lloyds TSB Group’s ability to generate
an  appropriate  return  for  its  shareholders  over  the  long  term  may  depend  upon  whether  management  is  able  to  achieve  value-creating  mergers  and/or
acquisitions at the appropriate times and prices. Lloyds TSB Group cannot be sure that it will ultimately be able to make any such mergers or acquisitions.

LLOYDS TSB GROUP   15

Operating and financial review and prospects

Contents

Overview and trend information

17

Risk management

Critical accounting policies

17

Liquidity

Results of operations

Economic proﬁt

18

Supervision and regulation

26

Customer remediation payments

Line of business information

27

With-proﬁts options and guarantees

Future accounting developments

37

Capital resources

UK compared with US GAAP

38

Corporate social responsibility

Average balance sheet and net interest income

39

Investment portfolio, maturities, deposits, short-term borrowings

Changes in net interest income – volume and rate analysis 

41

42

58

60

62

63

63

65

65

The results discussed below are not necessarily indicative of Lloyds TSB Group’s results in future periods. The following information contains certain forward
looking statements. For a discussion of certain cautionary statements relating to forward looking statements, see ‘Forward looking statements’.

The following discussion is based on and should be read in conjunction with the ﬁnancial statements and the related notes thereto included elsewhere in this
report. For a discussion of the accounting policies used in the preparation of the ﬁnancial statements, see ‘Accounting policies’ in note 1 to the ﬁnancial
statements. The ﬁnancial statements are prepared in accordance with UK GAAP, which varies in certain signiﬁcant respects from US GAAP. A discussion of
such differences and a reconciliation of certain UK GAAP amounts to US GAAP is included in note 50 to the ﬁnancial statements.

16 LLOYDS TSB GROUP

Operating and financial review and prospects

Overview and trend information

Lloyds TSB Group has operations in both the UK and overseas, however, its earnings are heavily dependent upon its domestic activities. In 2003, 81 per cent
of Lloyds TSB Group’s operating proﬁt was derived from its UK operations and, following the disposal in the second half of the year of its operations in New
Zealand and substantially all of its business in Brazil, this proportion is likely to increase in 2004 and beyond. The state of the UK economy, therefore, has
signiﬁcant implications for the way in which the Lloyds TSB Group runs its business and its performance.

During 2003 the UK economy has showed signs of recovery; manufacturing output has been on a gentle upward trend resulting in an increase in business
investment spending and the service sector has continued to grow steadily, however liabilities remain high relative to income. Low interest rates have reduced
the burden of repayments resulting in a lower level of corporate failures, although problems have remained in speciﬁc sectors. Interest rates were increased
towards the end of 2003 and the improving economic conditions may result in further increases in 2004, although this is expected to be gradual and therefore
should not have a signiﬁcant effect upon the number of companies failing. Consumer spending has continued to be the principal driver of the economy
although spending trends have slowed as a result of weaker growth in disposable incomes and a levelling-off of improvements in the unemployment rate.
Unsecured lending has remained at high levels and despite a slowdown in the housing market, mortgage lending has accelerated further as a result of an
increase in equity withdrawal. The effect has been a further increase in levels of personal indebtedness which has resulted in higher numbers of personal
bankruptcies; further increases in interest rates may cause this trend to continue.

Against this economic backdrop, within the UK banking businesses of the Lloyds TSB Group there has been continued growth in consumer lending and
mortgage balances; lending to the corporate and commercial sectors has remained largely unchanged. The implementation of the Competition Commission’s
remedies in respect of the Lloyds TSB Group’s SME business resulted in a reduction in the net interest margin although the effect on net interest income was
more  than  offset  by  volume  growth.  There  has  been  some  deterioration  in  the  arrears  position  within  the  personal  lending  portfolio  which  has  been  a
contributory factor to a signiﬁcant increase in the bad debt charge in this area of the business although there was a reduction in the charge against mortgages
and corporate and commercial portfolios.

Exposure to the equity market continues to have a signiﬁcant effect upon the Lloyds TSB Group’s insurance and investment businesses. Although the recovery
in stock market values during 2003 has resulted in an increase in the value of the investments held to support the long-term assurance funds, partially
reversing the losses of earlier years, consumer conﬁdence in long-term savings products remains weak and sales, particularly through the branch network,
continue to be subdued. Steps have been taken to reduce Lloyds TSB Group’s exposure to reductions in equity market levels; however, the future performance
of this business is, to a certain extent, dependent upon a further recovery in these markets.

Overseas, much of the growth in proﬁtability during 2003 was attributable to the performance of The National Bank of New Zealand which was disposed of
at the beginning of December. There was a reduction in the loss incurred by the Lloyds TSB Group’s operations in Argentina as economic conditions in that
country have stabilised although the outlook remains uncertain. The Lloyds TSB Group’s exposure to Latin America has been reduced during 2003 following
the disposal of substantially all of its operations in Brazil and will be further reduced following, subject to regulatory approval, the completion of the sale of its
operations in Guatemala, Honduras and Panama in 2004.

Critical accounting policies 

Introduction

The results of Lloyds TSB Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its ﬁnancial statements.
The accounting policies used in the preparation of the ﬁnancial statements are set out in note 1 to the ﬁnancial statements. In preparing the accounts, the
directors are required to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent.
Where UK GAAP allows a choice of policy, Financial Reporting Standard 18 ‘Accounting Policies’ requires Lloyds TSB Group to adopt those policies judged to
be most appropriate to its particular circumstances for the purpose of giving a true and fair view. 

The accounting policies that are deemed critical to the Lloyds TSB Group’s results and ﬁnancial position, based upon materiality and signiﬁcant judgements
and estimates, are discussed below.

Provisions for bad and doubtful debts

In circumstances where there is signiﬁcant doubt over the recoverability of speciﬁc loans and advances, provisions are made to reduce the carrying value of
those advances to their expected ultimate net realisable value; at 31December 2003, the Lloyds TSB Group held speciﬁc provisions totalling £1,313 million.
The methodology used to calculate the required provision varies according to the type of lending portfolio. For portfolios of smaller balance homogenous loans,
such as residential mortgages, personal loans and credit card balances, speciﬁc provisions are calculated using formulae which take into account factors such
as the length of time that the customer’s account has been delinquent, historic loss rates and the value of any collateral held. The variables used in the formulae
are kept under regular review to ensure that as far as possible they reﬂect the current economic circumstances, although actual experience may differ from
that assumed.

For the Lloyds TSB Group’s other lending portfolios, provisions are calculated on a case-by-case basis having regard to expected future cash ﬂows including
those arising from the realisation of collateral. The determination of these provisions often requires the exercise of considerable judgment by management
involving matters such as future economic conditions and the resulting trading performance of the customer and the value of collateral, for which there may
not be a readily accessible market. As a result these provisions can be subject to signiﬁcant variation as time progresses and the circumstances of the customer
become clearer.

The Lloyds TSB Group also maintains a general provision to cover latent bad and doubtful debts which are present in any portfolio of advances but which
have not been speciﬁcally identiﬁed; at 31December 2003, the general provision amounted to £382 million. The calculation of the general provision requires
a signiﬁcant amount of judgement to assess the level of losses inherent in the portfolio and is based upon factors such as the level of watchlist or potential
problem  debt,  the  propensity  for  such  debt  to  become  impaired  and  historic loss  rates.  The  general  provision  is  allocated to business  units which are
responsible for reviewing the balance on a regular basis to ensure that it remains appropriate in prevailing economic conditions and in the light of the perceived
level of credit risk within their lending portfolios.

Customer remediation provisions

The Lloyds TSB Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases
where the original sales processes are found to have been deﬁcient. The ultimate cost is inherently uncertain and in determining the level of provisions required
it is necessary for management to exercise signiﬁcant judgment. The principal assumptions underlying the provisions relate to the number of cases requiring
redress and the estimated average cost of redress per case; these will be affected by external factors beyond the control of management, such as regulatory
actions and the performance of the ﬁnancial markets. Therefore over time it is possible that adjustments will be necessary to the level of provisions held.

LLOYDS TSB GROUP   17

Operating and financial review and prospects

Goodwill impairment

Lloyds TSB Group reviews the goodwill arising on the acquisition of subsidiary undertakings when events or changes in economic circumstances indicate that
impairment may have taken place and at the end of the ﬁrst full year after an acquisition. In addition, since the goodwill arising on the acquisition of Scottish
Widows is considered to have an indeﬁnite useful life, because of the strength of the brand and the position of the business as one of the leading providers
of life, pensions, unit trust and fund management products, and is therefore not amortised, the Lloyds TSB Group is required under UK GAAP to perform an
annual review to determine whether an impairment has occurred.

The impairment review is performed by projecting future cash ﬂows, excluding ﬁnance and tax, based upon budgets and plans and making appropriate
assumptions about rates of growth and discounting these using a rate approximating to the weighted average cost of capital after making adjustment for the
risk inherent in the cash ﬂows. If the present value of the projected cash ﬂows were to be materially less than the carrying value of the underlying net assets
and related goodwill an impairment would have occurred and a charge would be made to the proﬁt and loss account. This calculation requires the exercise
of signiﬁcant judgement by management; if the estimates made prove to be incorrect or changes in Scottish Widows’ performance affect the amount and
timing of future cash ﬂows, the goodwill may become impaired in future periods.

Embedded value

Lloyds TSB Group accounts for the value of the shareholder’s interest in the long-term assurance business using the embedded value basis of accounting,
which is UK GAAP for banking groups owning life assurance operations. The embedded value is comprised of the net tangible assets of the life assurance
subsidiaries and the present value of the projected future surplus arising on the in-force business, which is calculated by projecting these surpluses and other
net cash ﬂows attributable to the shareholder arising from business written by the balance sheet date and discounting the result at a rate which reﬂects the
shareholder’s overall risk premium.

Future surpluses will depend on experience in a number of areas such as investment returns, lapse rates, mortality and investment expenses. Surpluses are
projected by making assumptions about future experience, having regard to both actual experience and forecast long-term economic trends. Changes to these
assumptions may cause the present value of future surpluses to differ from those assumed at the balance sheet date and could signiﬁcantly affect the value
attributed to the in-force business. In note 30 to the ﬁnancial statements the effect of illustrative changes in the principal economic assumptions upon the
embedded value included in the balance sheet and new business income is set out.

The value of the in-force business could also be affected by unpredicted changes in investment market levels and other in-period variances between expected
and actual experience. Investment market levels principally affect annual management charges and other fees levied on policyholders, which are reﬂected in
the proﬁt and loss account using unsmoothed fund values. In addition, to the extent that actual experience is different from that assumed, for example with
respect to mortality or persistency, the effect will be recognised in the proﬁt and loss account for the period. The effect of changes in the underlying assumptions
and variations between actual and assumed experience on the results of the current and prior periods are disclosed in note 30 in the ﬁnancial statements.

Results of operations

Summary

Net interest income
Other ﬁnance income
Other income

Total income
Operating expenses

Trading surplus
General insurance claims
Provisions for bad and doubtful debts
Amounts written off ﬁxed asset investments

Operating proﬁt
Share of results of joint ventures
Proﬁt on sale 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 attributable to shareholders

Economic proﬁt1

2003
£m

5,255
34
4,619

9,908
(5,173)

4,735
(236)
(950)
(44)

3,505
(22)
865

4,348
(1,025)

3,323

(22)
(47)

3,254

2,493

2002*
£m

5,171
165
3,551

8,887
(4,913)

3,974
(229)
(1,029)
(87)

2,629
(11)
–

2,618
(766)

1,852

(19)
(43)

1,790

830

2001*
£m.

4,922
307
3,659

8,888
(4,769)

4,119
(174)
(747)
(60)

3,138
(10)
39

3,167
(877)

2,290

(17)
(40)

2,233

1,123

1 Lloyds TSB Group deﬁnes economic proﬁt as the earnings on the equity invested in the business less a notional charge for the cost of the equity invested in that

business. See ‘Operating and ﬁnancial review and prospects – Economic proﬁt’.

* Figures for 2002 and 2001 have been restated to reﬂect changes in accounting policy adopted in 2003; for further details see note 1 to the financial statements.

18 LLOYDS TSB GROUP

Operating and financial review and prospects

2003 compared with 2002

In 2003, Lloyds TSB Group’s proﬁt before tax increased by £1,730 million, or 66 per cent, to £4,348 million from £2,618 million in 2002; this increase in
proﬁtability largely reﬂects net gains of £865 million recognised in 2003 following the disposal of a number of businesses and a £934 million improvement
in the return from the assets supporting the long-term assurance funds. Proﬁt attributable to shareholders was 82 per cent higher at £3,254 million and
earnings per share increased by 82 per cent to 58.3p. Shareholders’ equity increased by £1,681 million to £9,624 million. The post-tax return on average
shareholders’ equity was 38.5 per cent, compared to 16.8 per cent in 2002. Economic proﬁt increased by £1,663 million to £2,493 million; see ‘Operating
and ﬁnancial review and prospects – Economic proﬁt’.  The  post-tax  return  on  average  assets  was  1.57  per  cent,  and  the  post-tax  return  on  average 
risk-weighted assets was 2.63 per cent.

Total income was £1,021 million higher at £9,908 million, compared to £8,887 million in 2002. Lloyds TSB Group’s net interest income increased by
£84 million, or 2 per cent, to £5,255 million. Average interest-earning assets increased by £11,078 million, or 7 per cent, to £172,896 million, adding
£284 million to net interest income. In the UK, average personal lending and mortgage balances increased by £10,140 million driven by the strong residential
housing market and the continuing demand for consumer credit. Wholesale balances were £1,558 million higher as a result of increased asset ﬁnance lending
and the full year effect of structured ﬁnance transactions entered into during 2002. Average balances overseas decreased by £720 million, following the
reclassiﬁcation at the end of 2002 to trading assets of the Lloyds TSB Group’s portfolio of emerging markets debt securities. The effect of volume growth was
partly  offset  by  a  16  basis  point  fall  in  the  net  interest  margin,  reducing  net  interest  income  by  £259  million;  the  implementation  of  the  Competition
Commission’s SME report remedies caused the margin to reduce by 10 basis points. Favourable exchange movements increased net interest income by
£59 million.

Other ﬁnance income, at £34 million, was down £131 million from £165 million in 2002. The expected return on pension scheme assets was £121 million
lower, reﬂecting the signiﬁcant reduction in market value of scheme assets at the end of 2002, as a result of stock market conditions. The interest charge in
respect of the unwinding of the discount on scheme liabilities was £10 million higher, as the effect of the increased level of scheme liabilities at the start of
2003 has been partly offset by a lower discount rate. 

Other income was £1,068 million, or 30 per cent, higher at £4,619 million compared to £3,551 million in 2002. Income from long-term assurance business
was £747 million higher, mainly as a result of improved returns from the investments supporting the life funds. Dealing proﬁts were £372 million higher, as
a  result  of  increases of  £55  million  in  foreign  exchange  income  and  £317  million  in  gains  from  securities  trading  reﬂecting  earnings  from  the  sale  of
Lloyds TSB’s portfolio of emerging markets debt investments. General insurance premiums were £49 million higher as a result of strong growth in home
insurance products. However, net fees and commissions receivable fell by £31 million as a reduction in income from insurance broking and higher fees
payable within the asset ﬁnance and mortgage businesses more than offset growth in income from current accounts and credit and debit cards. Other operating
income  decreased  by  £69  million,  following  the  recognition of  earnings  on  the  emerging  markets  debt  portfolio  in  2003  in dealing  proﬁts following its
reclassiﬁcation to trading assets at the end of 2002, and a reduction of £28 million in proﬁts on the sale and leaseback of premises. This more than offset
the effect of the inclusion of a full year’s income from the Dutton-Forshaw Group which was acquired in December 2002, and higher disposal gains within
the wholesale businesses.

Operating expenses were £260 million, or 5 per cent, higher at £5,173 million compared to £4,913 million in 2002, as a result of a £200 million provision
for customer redress and the inclusion for a full year of the costs of businesses acquired in 2002 which increased operating expenses by £110 million in
2003. Administrative expenses were £264 million higher than in 2002. Staff costs increased by £71 million as the impact of acquisitions and the annual
pay review more than offset the beneﬁts of reductions in staff numbers and lower levels restructuring costs. Premises and equipment costs were £1 million
higher and other expenses increased by £192 million reﬂecting the inclusion of the customer redress provision. The efﬁciency ratio improved to 52.2 per cent
from 55.3 per cent.

General insurance claims increased by £7 million to £236 million, as the effect of the increase in the size of the portfolio was offset by the beneﬁcial effect
of generally mild weather conditions.

The charge for bad and doubtful debts was 8 per cent lower at £950 million compared with £1,029 million in 2002. In UK Retail Banking and Mortgages
the provisions charge increased by £98 million, or 20 per cent, to £594 million, mainly as a result of continued asset growth in the personal loan and credit
card portfolios, however there was some deterioration in the arrears position and an increase in fraud related losses in the personal loan portfolio. In Wholesale
and International Banking the provisions charge decreased by £171 million to £369 million. In Wholesale, provisions against the corporate lending portfolio
decreased by £86 million as a small number of large provisions made in 2002 were not repeated. Within International Banking provisions fell by £93 million
mainly as a result of lower provisions being required against the Lloyds TSB Group’s exposures in Argentina.

Amounts written off ﬁxed asset investments decreased by £43 million to £44 million in 2003. The charge in 2002 included £30 million in respect of Argentine
emerging market bonds which were disposed of in 2003, and there was a reduction in the charge within the wholesale businesses.

In 2003, a proﬁt of £865 million arose on the sale of The National Bank of New Zealand, substantially all of Lloyds TSB Group’s businesses in Brazil and its
French fund management and private banking businesses.

At  the  end  of  2003,  the  total  capital  ratio  increased  to  11.3  per  cent  principally  as  a  result  of  proﬁt  retentions  and  the  effect  of  a  £4,679  million,  or 
4 per cent, reduction in risk-weighted assets to £117,732 million, from £122,411 million at the end of 2002. The effect of growth in personal lending, partly
as a result of the acquisition of the personal loan and credit card portfolios of Goldﬁsh Bank, and mortgage lending was more than offset by a reduction of
£10,110 million as a result of disposals. Balance sheet assets decreased by £549 million to £252,012 million; the effect of the disposals during 2003
reduced total assets by £14,602 million and there was therefore an underlying increase of £14,053 million. This underlying increase is largely attributable
to growth in loans and advances to customers with higher period end UK mortgage and personal lending balances.

2002 compared with 2001

In 2002, Lloyds TSB Group’s proﬁt before tax decreased by £549 million, or 17 per cent, to £2,618 million from £3,167 million in 2001. Proﬁt attributable
to shareholders was 20 per cent lower at £1,790 million and earnings per share decreased by 21 per cent to 32.1p. Shareholders’ equity decreased by
£2,383 million to £7,943 million following a reduction of £2,331 million in the value of the Group’s pension schemes, largely caused by the signiﬁcant fall
in equity market values. The post-tax return on average shareholders’ equity was 16.8 per cent, compared to 18.1 per cent in 2001. Economic proﬁt decreased
by 26 per cent to £830 million. The post-tax return on average assets was 0.93 per cent, and the post-tax return on average risk-weighted assets was
1.62 per cent.

Total  income  was  £1  million  lower  at  £8,887  million,  compared  to  £8,888  million  in  2001.  Lloyds  TSB  Group’s  net  interest  income  increased  by
£249 million, or 5 per cent, to £5,171 million. Average interest-earning assets increased by £16,873 million, or 12 per cent, to £161,818 million, adding
£655 million to net interest income. In the UK, average personal lending and mortgage balances increased by £6,737 million driven by the strong residential

LLOYDS TSB GROUP   19

Operating and financial review and prospects

housing market and the low interest rate environment; wholesale balances were £7,190 million higher with increased corporate term and money market
lending and a number of new structured ﬁnance transactions. Average balances overseas increased by £3,215 million, with the majority of the growth being
in New Zealand reﬂecting a strengthening exchange rate and increased mortgage and agricultural lending. The effect of this volume growth was partly offset
by a 20 basis point fall in the net interest margin, reducing net interest income by £290 million, reﬂecting the reduced beneﬁts accruing from the Lloyds TSB
Group’s low interest and interest-free liabilities and a change in mix toward ﬁner margin products. Adverse exchange movements reduced net interest income
by £116 million.

Other ﬁnance income, at £165 million, was down £142 million, or 46 per cent, from £307 million in 2001. The expected return on pension scheme assets
was £27 million lower, reﬂecting the lower market value of scheme assets at the start of 2002, as a result of stock market conditions. The interest charge in
respect of the unwinding of the discount on scheme liabilities was £115 million higher, due to the increased level of scheme liabilities at the start of 2002
mainly reﬂecting the greater longevity of the members of the schemes. 

Other income was £108 million, or 3 per cent, lower at £3,551 million compared to £3,659 million in 2001. Income from long-term assurance business
was £264 million lower, mainly as a result of the depressed stock market conditions reducing the returns from the investments supporting the life funds and
the capitalised value of annual management charges, together with a £135 million increase in provisions for redress to past purchasers of endowment and
pension products. There was also a charge of £57 million to reﬂect the implementation of revised mortality assumptions. Dealing proﬁts were £45 million
lower, largely as a result of less favourable market conditions. These factors more than offset an increase in net fees and commissions receivable which were
£88 million higher. Growth in general insurance broking income and income from credit and debit cards was only partly offset by reduced levels of stock
market related fees. General insurance premium income was £58 million higher and other operating income increased by £55 million as reductions in venture
capital gains and proﬁts from sale and leasebacks of premises were more that offset by increased operating lease rental income, mainly reﬂecting the impact
of acquisitions during 2002.

Operating expenses were £144 million, or 3 per cent, higher at £4,913 million compared to £4,769 million in 2001. Administrative expenses were £7 million
lower than in 2001. Staff costs reduced by £32 million as the beneﬁts of reductions in staff numbers and lower levels of pension scheme augmentation costs
more than offset the impact of acquisitions, the annual pay review and increased severance costs. Premises and equipment costs were £26 million higher as
a result of increased rental costs and repairs and maintenance expenditure. Depreciation was £131 million higher, largely reﬂecting a £95 million increase
in respect of operating lease assets as a result of acquisitions and organic growth in the Lloyds TSB Group’s existing businesses. Goodwill amortisation was
£20 million higher. The efﬁciency ratio increased to 55.3 per cent from 53.7 per cent.

General insurance claims increased by £55 million, or 32 per cent, to £229 million, reﬂecting volume related increases in property claims and a higher level
of weather and ﬂood related insurance claims.

The charge for bad and doubtful debts was 38 per cent higher at £1,029 million compared with £747 million in 2001. In UK Retail Banking and Mortgages
the provisions charge increased by £139 million, or 39 per cent, to £496 million, largely as a result of volume related asset growth in the personal loan and
credit card portfolios, which grew by 15 per cent and 27 per cent respectively and the non-recurrence of one-off releases recognised in 2001. In Wholesale
and International Banking the provisions charge increased by £144 million to £540 million. In Wholesale, provisions against the corporate lending portfolio
increased by £145 million as a result of a small number of large provisions against certain US customers following the discovery of accounting or other
operational irregularities and higher provisions against exposures in speciﬁc sectors of the UK economy which experienced a slowdown in activity. Within
International Banking provisions fell mainly as a result of lower speciﬁc provisions in Losango, Lloyds TSB Group’s consumer ﬁnance business in Brazil, largely
reﬂecting exchange rate movements. The general provision held against the Lloyds TSB Group’s exposure to Argentina was increased by £50 million, compared
to a charge of £55 million in 2001.

Amounts written off ﬁxed asset investments increased by £27 million, or 45 per cent, to £87 million in 2002, compared to £60 million in 2001. There was
a £21 million write down following operating irregularities on one speciﬁc securitisation issue and a £21 million increase in the charge in respect of the venture
capital business in the UK, reﬂecting portfolio growth. These increases were partly offset by a £15 million reduction in the charge in respect of Argentine
government debt.

In 2001, a proﬁt of £39 million arose on the sale of the Lloyds TSB Group’s Brazilian fund management and private banking businesses.

At the end of 2002, the total capital ratio increased to 9.6 per cent as new issues of tier 1 and tier 2 capital instruments during the year more than offset the
effect of a £14,550 million, or 13 per cent, increase in risk-weighted assets to £122,411 million, from £107,861 million at the end of 2001. Balance sheet
assets increased by £17,060 million, or 7 per cent, to £252,561 million. Loans and advances to customers increased by £11,539 million, mainly reﬂecting
growth in UK mortgage and personal period end lending balances, which increased by £8,036 million, and growth of £2,012 million in New Zealand. Debt
securities were £5,089 million higher due to further growth in the Lloyds TSB Group’s asset-backed portfolio. 

20 LLOYDS TSB GROUP

Operating and financial review and prospects

Net interest income

The yields, spreads and margins in the table below are those relating to the banking business only.

2003

2002

2001

Lloyds TSB Group
Net interest income £m
Average interest-earning assets £m
Average rates:
– Gross yield on interest-earning assets %1
– Interest spread %2
– Net interest margin %3
Domestic 4
Net interest income £m 
Average interest-earning assets £m
Average rates:
– Gross yield on interest-earning assets %1
– Interest spread %2
– Net interest margin %3
International4
Net interest income £m
Average interest-earning assets £m
Average rates:
– Gross yield on interest-earning assets %1
– Interest spread %2
– Net interest margin %3

5,255
172,896

5.87
2.91
3.04

4,556
146,700

5.79
3.04
3.11

699
26,196

6.33
2.07
2.67

5,171
161,818

6.52
2.94
3.20

4,425
134,902

6.10
3.08
3.28

746
26,916

8.63
2.12
2.77

4,922
144,945

7.84
3.00
3.40

4,202
121,244

7.38
3.11
3.47

720
23,701

10.19
2.43
3.04

1 Gross yield is the rate of interest earned on average interest-earning assets.

2 Lloyds TSB Group interest spread is the difference between the rate of interest earned on total average interest-earning assets and the rate of interest paid on total
average interest-bearing liabilities. The domestic interest spread is the difference between the rate of interest earned on domestic average interest-earning assets
and the rate of interest paid on domestic average interest-bearing liabilities. The international interest spread is the difference between the rate of interest earned
on international average interest-earning assets and the rate of interest paid on international average interest-bearing liabilities.

3 The net interest margin represents the interest spread together with the contribution of interest-free liabilities. It is calculated by expressing net interest income

as a percentage of average interest-earning assets.

4 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.

2003 compared with 2002

Lloyds  TSB  Group  net  interest  income  increased  by  £84  million,  or  2  per  cent,  to  £5,255  million,  representing  53  per  cent  of  total  income  compared  to 
58 per cent in 2002; businesses disposed of during 2003 contributed £511 million of this total. Average interest-earning assets increased by £11,078 million,
or 7 per cent, to £172,896 million, adding £284 million to net interest income. Within UK Retail Banking and Mortgages, continued strong growth led to
increases of £2,173 million in average personal lending and credit card balances and £7,424 million in average mortgage balances. Within Wholesale and
International Banking, average interest-earning assets increased by £2,010 million, reﬂecting growth in asset ﬁnance balances and the full year effect of structured
ﬁnance transactions entered into during 2002 which have more than offset a reduction in balances within the Lloyds TSB Group’s treasury operations due to
fewer market opportunities in 2003. Overseas, growth in balances in New Zealand, principally due to exchange rate movements, was partly offset by reductions
in Latin America as the Lloyds TSB Group’s exposures to Brazil and Argentina have been further reduced. There was also a reduction of £1,207 million following
the reclassiﬁcation as trading assets and subsequent disposal of the Lloyds TSB Group’s portfolio of emerging markets debt securities.

The net interest margin fell by 16 basis points to 3.04 per cent from 3.20 per cent in 2002, reducing net interest income by £259 million. The implementation
of the Competition Commission’s SME report remedies caused a reduction in the Group net interest margin of 10 basis points costing £169 million. There
was some margin erosion within the mortgages business and it was further reduced by both the continuing change in the composition of the lending portfolio
towards ﬁner margin products and the disposal of the high yielding emerging markets investments; there was also a lower contribution from interest-free
liabilities, caused by lower average UK interest rates in 2003. Favourable exchange rate movements, principally in New Zealand, increased net interest income
by £59 million.

Domestic net interest income increased by £131 million, or 3 per cent, to £4,556 million; this represents 87 per cent of consolidated net interest income.
Average interest-earning assets increased by £11,798 million, or 9 per cent, to £146,700 million, adding £360 million to net interest income. Within UK
Retail Banking and Mortgages, balances increased by £9,590 million largely as a result of growth in the consumer lending and mortgages portfolios, helped
by the acquisition during the year of the credit card and personal loan portfolios of Goldﬁsh Bank. In Wholesale balances increased by £1,558 million mainly
due to growth in asset ﬁnance balances and the full year effect of structured ﬁnance transactions entered into during 2002.

The domestic net interest margin decreased by 17 basis points, reducing net interest income by £229 million. In UK Retail Banking and Mortgages there was
a 19 basis point decrease in the net interest margin caused by ﬁner margins being earned in the mortgages business as a result of competitive pressures and
the effect of lower average interest rates reducing the beneﬁt of low cost and interest-free funds. This was partly offset by improved margins on personal loans
reﬂecting the lower funding cost. Within Wholesale the margin fell by 21 basis points as a result of the implementation of the Competition Commission’s SME
report remedies. If this is excluded there was an increase of 5 basis points; an improved margin in the asset ﬁnance business offset the inclusion for a full
year of the ﬁner margin structured ﬁnance transactions entered into in 2002.

LLOYDS TSB GROUP   21

Operating and financial review and prospects

Net interest income from international operations decreased by £47 million, or 6 per cent, to £699 million, representing 13 per cent of consolidated net
interest income. In sterling terms, average interest-earning assets fell by £720 million, or 3 per cent, to £26,196 million, reducing net interest income by
£79 million. Balances in Latin America fell by £765 million as the Lloyds TSB Group has sought to reduce its exposure to this region and wholesale balances,
principally in the US, fell by £456 million as growth in local currency terms was more than offset by movements in exchange rates. The reclassiﬁcation to
trading assets and subsequent disposal of the Lloyds TSB Group’s portfolio of emerging markets debt securities reduced average interest-earning assets by
£1,207 million. This more than offset an increase in average balances in New Zealand of £1,974 million mainly reﬂecting positive exchange rate movements.

The net interest margin from international operations reduced by 10 basis points, leading to a fall of £27 million in net interest income largely as a result of
the sale of the relatively higher margin portfolio of emerging markets debt securities. 

2002 compared with 2001

Lloyds TSB Group net interest income increased by £249 million, or 5 per cent, to £5,171 million, representing 58 per cent of total income compared to
55 per cent in 2001. Average interest-earning assets increased by £16,873 million, or 12 per cent, to £161,818 million, adding £655 million to net interest
income. Within UK Retail Banking and Mortgages, growth lead to increases of £2,256 million in average personal lending and credit card balances and
£4,481 million in average mortgage balances. Within Wholesale and International Banking, average interest-earning assets increased by £10,347 million,
reﬂecting growth in corporate and money market lending and increased levels of structured ﬁnance transactions. Overseas, growth in balances in New Zealand
was partly offset by reductions in Latin America as exchange rates weakened and the Lloyds TSB Group’s exposures to Brazil and Argentina reduced.

The net interest margin fell by 20 basis points to 3.20 per cent from 3.40 per cent in 2001, reducing net interest income by £290 million. Reductions in
interest rates in the UK in the second half of 2001 resulted in a reduced beneﬁt from Lloyds TSB Group’s low interest rate deposits and interest-free liabilities.
There was also a continuing shift in the mix of average interest-earning assets towards high quality, but ﬁner margin, corporate and wholesale lending. Adverse
exchange rate movements, principally in Latin America, reduced net interest income by £116 million.

Domestic net interest income increased by £223 million, or 5 per cent, to £4,425 million. This represented 86 per cent of consolidated net interest income.
Average interest-earning assets increased by £13,658 million, or 11 per cent, to £134,902 million, adding £449 million to net interest income. Average
personal lending and mortgage balances grew by £6,737 million and wholesale balances increased by £7,190 million.

The domestic net interest margin decreased by 19 basis points, reducing net interest income by £226 million, as a result of a reduction in the contribution
of interest-free liabilities and the continuing shift in the mix of average interest-earning assets towards ﬁner margin corporate and wholesale lending. In UK
Retail Banking and Mortgages there was a 7 basis point decrease in the net interest margin. In Wholesale there was a 20 basis point reduction caused by
the further growth in ﬁner margin corporate lending.

Net interest income from international operations increased by £26 million, or 4 per cent, to £746 million, representing 14 per cent of consolidated net interest
income. In sterling terms, average interest-earning assets increased by £3,215 million, or 14 per cent, to £26,916 million, adding £206 million to net interest
income. Average balances in New Zealand increased by £2,420 million reﬂecting both organic growth and positive exchange rate movements; growth in US
structured ﬁnance and government guaranteed export credit transactions increased average interest-earning assets by a further £1,277 million. Balances in
Latin America fell by £841 million as modest growth in local currency terms, principally in the Brazilian consumer ﬁnance business, was more than offset by
the effect of exchange rate movements. 

The net interest margin from international operations reduced by 27 basis points, leading to a fall of £64 million in net interest income, as a result of lower
margins in the Lloyds TSB Group’s Latin American and US structured ﬁnance businesses which more than offset an improved margin in New Zealand. 

Other income

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
General insurance premium income
Other operating income

2003
£m

623
1,173
604
460
239
3,099
(722)

228
332
560
453
535
694

2002*
£m

579
1,163
647
414
250
3,053
(645)

173
15
188
(294)
486
763

2001*
£m.

573
1,220
528
332
269
2,922
(602)

158
75
233
(30)
428
708

4,619

3,551

3,659

* Figures for 2002 and 2001 have been restated to reﬂect changes in accounting policy adopted in 2003; for further details see note 1 to the ﬁnancial statements.

2003 compared with 2002

Other income increased by £1,068 million, or 30 per cent, to £4,619 million; of this total businesses disposed of during 2003 accounted for £142 million.

Fees and commissions receivable increased by £46 million mainly as a result of good growth in UK current account fees and improved income from credit
and debit card transactions, which has more than offset a reduction in insurance broking commissions. UK current account fee income rose by £44 million,
reﬂecting increased fee income from added value current accounts due to both a growth in the number of accounts and higher monthly charges; returned
cheque fees also increased as the number of returned items has risen.

22 LLOYDS TSB GROUP

Operating and financial review and prospects

Other UK fees and commissions increased by £10 million. Fees earned by the mortgages business rose by £20 million reﬂecting the growth in new mortgage
lending during 2003 and an increase in the arrangement fee charged to customers. There was a £14 million increase in the fees charged in connection
with  the  early  settlement  of  personal  loans  following  their  introduction  in  the  second  half  of  2002  and  fees  from  large  corporate  and  factoring  activity
increased by £16 million. There was also an increase in fees receivable within the asset ﬁnance business; acceptance fees were £7 million higher and
collection fees grew by £8 million as a result of volume growth. This growth has been largely offset by a further reduction of £27 million in unit trust and
asset management fees reﬂecting lower average fund values and the continued weakness of the long-term savings market. Fee income from stockbroking
activities reduced reﬂecting lower transaction volumes in weak market conditions and income from the company registration business also fell as levels of
corporate activity have remained subdued. Income from credit and debit card services increased by £46 million mainly as a result of a growth in interchange
income, partly reﬂecting the acquisition of the Goldﬁsh credit card portfolio during 2003, higher overseas use commissions and other fees.

Insurance broking commission income decreased by £43 million as a result of a £75 million fall in income from creditor insurance, reﬂecting a reduction in
the level of sales achieved through the branch network and an increase in the allowance of £35 million in respect of the clawback of commissions relating to
personal loans which are being settled early, which more than offset a £55 million increase in retrospective commissions. International fees and commissions
reduced by £11 million mainly due to the disposal of the Lloyds TSB Group’s businesses in France and lower fund management fees in other locations.

Fees and commissions payable were £77 million higher compared to last year as a result of a £36 million increase in commissions paid to motor dealers
by  the  asset  ﬁnance  operation,  reﬂecting  growth  in  the  levels  of  new  business,  and  higher  costs  relating  to  legal  expenses  and  valuation  fee  incentives
supporting the strong mortgage growth. Fees payable in respect of the credit and debit card business also increased, mainly reﬂecting volume growth and
the cost of customer incentives, and there was also an increase in fees payable in connection with the Lloyds TSB Group’s added value accounts as volumes
have increased.

Dealing proﬁts increased substantially by £372 million compared with 2002 as a result of an increase of £55 million in foreign exchange income and an
increase of £317 million in gains from securities trading, largely reﬂecting proﬁts from the disposal of the Lloyds TSB Group’s portfolio of emerging markets
debt investments which, at the end of 2002, was reclassiﬁed as a trading asset. In 2002, earnings from emerging markets debt investments were primarily
reported within other operating income. 

Income from long-term assurance business increased by £747 million reﬂecting the improved performance of stock markets during 2003 as the return on
the investments held to support the long-term assurance funds grew by £934 million. Although there was only limited growth in overall product sales, new
business contribution increased by £14 million largely reﬂecting an improved new business margin caused by a shift to more proﬁtable regular premium
products. Proﬁts from existing business fell by £111 million mainly as a result of a £168 million reduction in beneﬁts from experience variances and actuarial
assumption changes, and the expected return reduced by £48 million; however, provisions for customer redress were £105 million lower. The beneﬁts from
economic assumption changes also reduced by £77 million.

Premium income from general insurance underwriting increased by £49 million, or 10 per cent, to £535 million, compared to £486 million in 2002. There
was growth of £60 million in premiums from home insurance products, reﬂecting successful cross-selling to the Lloyds TSB Group’s mortgage customers
and the continued strength of the UK housing market, partly offset by a £7 million increase in reinsurance premiums due to increased rates in the reinsurance
market and higher underwritten premiums.

Other  operating  income  decreased  by  £69  million  to  £694  million  mainly  due  to  the  change  in  treatment  of  earnings  from  the  emerging  markets debt
investments portfolio following the reclassiﬁcation of the portfolio as a trading asset at the end of 2002. There was also a further £28 million reduction in
proﬁts from the sale and leaseback of premises, which in 2003 totalled £4 million. These factors more than offset the effect of the inclusion of income from
the sale of cars by the Dutton-Forshaw Group following its acquisition in December 2002 which increased by £51 million and a £26 million increase in
the gains on realisation of venture capital investments by Lloyds TSB Development Capital. There were also gains of £34 million following the sale of a
number of leases by Lloyds TSB Leasing where the tax attributes could be used by the purchasers.

2002 compared with 2001

Other income decreased by £108 million, or 3 per cent, to £3,551 million although after adjusting for the effect of acquisitions made during 2002 there
was a reduction of £221 million or 6 per cent. 

Fees and commissions receivable increased by £131 million, or 4 per cent, to £3,053 million, mainly due to increases in income from insurance broking
and card services. Insurance broking commission income increased by £119 million, with continued strong growth in creditor insurance products, reﬂecting
the increased lending volumes in the branch network, and higher levels of retrospective commission income. Income from credit and debit card services
increased by £82 million, mainly as a result of higher merchant service charges and fees. UK current account fee income rose by £6 million, reversing the
downward trend experienced in recent years; a £37 million increase in fee income from added value current accounts more than offset a reduction in service
charges following their partial withdrawal during 2001. This more than offset a reduction in other UK fees and commissions of £57 million, or 5 per cent,
from £1,220 million to £1,163 million following a £59 million reduction in unit trust and asset management fees, as the continued fall in the level of stock
markets during 2002 have reduced the level of funds under management and signiﬁcantly reduced customer demand for equity-based products. There was
also a fall in the level of recharges to Goldﬁsh Bank, Lloyds TSB Group’s joint venture with Centrica plc, which were down £10 million, and a reduction of
£6 million in income from the company registration business, as the exceptionally high levels of corporate transactions in 2001 were not repeated.

Fees and commissions payable increased by £43 million, or 7 per cent, compared to 2001 as a result of higher reciprocity fees and an increase in package
costs relating to a number of products. Commissions paid to motor dealers by the asset ﬁnance business also increased, in line with business volumes.

Dealing proﬁts decreased by £45 million, or 19 per cent, compared with 2001 as a result of a reduction of £60 million in gains from securities trading;
there were reduced opportunities for the Lloyds TSB Group’s London treasury department, due to less favourable market conditions, and losses resulting
from the economic turmoil in Brazil. Foreign exchange trading income improved by £15 million as a result of an improved performance from Lloyds TSB
Group’s UK operations.

Income from long-term assurance business decreased by £264 million however, excluding the effect of changes in the economic assumptions used in the
embedded value calculation, which in 2002 resulted in proﬁts of £55 million, and the impact of a £135 million increase in provisions for redress to past
purchasers of endowment and pension products, income was £184 million lower. Falling stock markets increased the losses from the investment portfolio
supporting the long-term assurance funds by £36 million and reduced the capitalised value of annual management charges by a further £66 million. The
expected return from existing business was £36 million lower, reﬂecting the lower value of in-force business at the start of the year as a result of the reduction
in stock market levels during 2001. There was also a reduction of £55 million in beneﬁts from experience variances and actuarial assumption changes,
largely reﬂecting the implementation of revised actuarial mortality assumptions which resulted in a one-off cost of £57 million. Despite the difﬁcult market
conditions  sales  of  life  and  pensions  products  grew,  with  an  improved  performance  in  the  more  proﬁtable  products.  This  resulted  in  a  £9  million  or 
7 per cent increase in new business contribution. 

LLOYDS TSB GROUP   23

Operating and financial review and prospects

Premium income from general insurance underwriting increased by £58 million, or 14 per cent, to £486 million compared to £428 million in 2001. There
was growth of £69 million in premiums from home insurance products, reﬂecting successful cross-selling to Lloyds TSB Group’s mortgage customers and
the strength of the UK housing market. This has been partly offset by a further small decline in creditor insurance as this portfolio is now in run-off, following
the outsourcing of the card protection book in 2000. Re-insurance premiums payable increased by £7 million following the decision to mitigate risks on
policies with large sums assured.

Other operating income increased by £55 million, or 8 per cent, to £763 million. Increases of £25 million in earnings on the sale and restructuring of
emerging markets debt investments and £111 million in operating lease rentals, largely as a result of the acquisition of First National Vehicle Holdings and
Abbey National Vehicle Finance, were offset by a £35 million reduction in the realisation of venture capital gains by Lloyds TSB Development Capital and
a reduction of £25 million in proﬁts on the sale and leaseback of premises. 

Operating expenses 

Administrative expenses
Staff:
– Salaries
– 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
– Provisions for customer redress
– Other

Administrative expenses
Depreciation
Amortisation of goodwill

Efﬁciency ratio (%)

2003
£m

1,801
143
353
57
234
2,588

281
18
127
118
544

446
172
123
200
403
1,344

4,476
646
51

5,173

52.2

2002*
£m

2001*
£m

1,758
134
318
105
202
2,517

280
18
131
114
543

446
147
113
–
446
1,152

4,212
642
59

4,913

55.3

1,776
140
347
69
217
2,549

261
18
115
123
517

483
154
110
–
406
1,153

4,219
511
39

4,769

53.7

* Figures for 2002 and 2001 have been restated to reﬂect changes in accounting policy adopted in 2003; for further details see note 1 to the ﬁnancial statements.

2003 compared with 2002

Total  operating  expenses  increased  by  £260  million,  or  5  per  cent,  to  £5,173  million;  of  this  total,  businesses disposed  of  during  2003  accounted  for
£272 million. The impact of acquisitions made in 2002 increased operating expenses during 2003 by £110 million, and there was a £200 million provision
for customer redress.

Administrative expenses increased by £264 million to £4,476 million, largely reﬂecting the £200 million provision for customer redress. Staff costs were
£71 million higher at £2,588 million. Salaries were £43 million, or 2 per cent, higher as the impact of the annual pay review and the acquisitions made
during 2002 have more than offset the effect of an underlying reduction in staff numbers of 1,209 (full time equivalent); the cost of bonuses and other
performance related payments remained broadly unchanged. National Insurance costs grew by £9 million reﬂecting the higher overall salary bill and the
increase in employers’ contribution rates which took effect in April 2003. Pension costs increased by £35 million, or 11 per cent, reﬂecting a growth in the
current service cost as interest rates have fallen and an increase in the level of cash contributions being made into deﬁned contribution schemes in the UK.
Other staff costs grew by £32 million because of increased use of agency and other contract staff to support a number of major IT development projects and
a signiﬁcant increase in training costs, particularly for staff working in the branch network. These factors have been partly offset by a £48 million reduction
in severance and related costs following the completion of a number of major restructuring initiatives.

Premises and equipment costs were £1 million higher; there was little change in costs during 2003 as the effect of branch closures offset the impact of
acquisitions made during 2002.

Other expenses increased by £192 million, largely as a result of the £200 million provision for customer redress and related costs in respect of past sales of
mortgage endowment and long-term savings products, including the Extra Income & Growth Plan. Advertising expenditure increased by £25 million mainly
reﬂecting promotional expenditure incurred in connection with the credit card and mortgage businesses and also wider use of television advertising during
2003;  professional  fees  increased  by  £10  million  due  to  greater  use  of  external  consultants  on  a  number  of  major  projects.  This  has  been  offset  by  a
£43 million reduction in other expenses. There has been a reduction in the processing charges paid to iPSL, Lloyds TSB Group’s clearings joint venture, and
reduced credit and debit card fraud losses.

24 LLOYDS TSB GROUP

Operating and financial review and prospects

Depreciation rose by £4 million. Operating lease depreciation increased by £19 million as an accelerated charge was recorded following the reassessment of
the carrying value of a small number of big ticket operating lease assets; the effect of the acquisition of First National Vehicle Holdings during 2002 was largely
offset by the reduction in the size of the existing portfolios. This was offset by a £15 million reduction in the charge on other ﬁxed assets, mainly reﬂecting
the accelerated write-off of certain software development costs in 2002. Goodwill amortisation was £8 million lower. 

The efﬁciency ratio was 52.2 per cent, compared to 55.3 per cent in 2002.

2002 compared with 2001

Total operating expenses increased by £144 million, or 3 per cent, to £4,913 million compared to £4,769 million in 2001; acquisitions added £105 million
to costs in 2002. 

Administrative expenses of £4,212 million in 2002 were £7 million lower than in 2001. Staff costs reduced by £32 million or 1 per cent. Salaries and proﬁt
sharing were £18 million lower as the impact of the annual pay review and the effect of acquisitions during the year were more than offset by the effect of an
underlying reduction of 4,191 staff (full time equivalent) and lower levels of accruals for bonuses and proﬁt related payments. Pension costs were £29 million
lower as an increased current service cost, reﬂecting the impact of changes in the mortality assumptions made at the end of 2001, and higher costs relating
to staff taking early retirement, were more than offset by the non-repetition of costs of £82 million incurred in 2001 in relation to beneﬁt improvements.
Severance costs were £36 million higher at £105 million, but other staff costs were £15 million lower, reﬂecting a £22 million reduction in agency staff costs.

Premises and equipment costs were £26 million, or 5 per cent, higher as a result of higher rental costs on branch and head ofﬁce premises, in part reﬂecting
the sale and leaseback of a number of properties in 2001, and increased repairs and maintenance expenditure reﬂecting costs incurred in advance of vacating
a number of central properties. This was partly offset by a reduction in other premises and equipment costs.

Other expenses reduced by £1 million. Communications and external data processing costs were £37 million lower as a result of reduced levels of expenditure
on the development of the Lloyds TSB Group’s e-commerce and real-time banking systems. Other costs were £40 million higher, reﬂecting the impact of
acquisitions and increased charges from iPSL.

Depreciation was £131 million, or 26 per cent, higher reﬂecting a £95 million increase in operating lease depreciation. Of this amount £33 million relates to
the Lloyds TSB Group’s existing operations, reﬂecting both organic growth and the non-repetition of a one-off beneﬁt of £23 million recognised in 2001 in
respect of certain ship leases, and £62 million relates to the businesses acquired during 2002. The remaining increase in the charge reﬂects the accelerated
write-off of certain software development costs and the ongoing impact of the signiﬁcant investment in computers, software and other equipment made by
the Lloyds TSB Group in recent years. Goodwill amortisation increased by £20 million, reﬂecting the acquisitions made in the year.

The efﬁciency ratio in 2002 was 55.3 per cent compared to 53.7 per cent in 2001.

Charge for bad and doubtful debts

UK Retail Banking and Mortgages
Wholesale and International Banking
Central group items

Total charge

Speciﬁc provisions
General provisions

Total charge

Charge as % of average lending:
– Domestic
– International
– Total charge

2003 compared with 2002

2003
£m

594
369
(13)

950

946
4

950

%
0.69
0.40
0.66

2002
£m

496
540
(7)

1,029

965
64

1,029

%
0.70
1.28
0.77

2001
£m.

357
396
(6)

747

736
11

747

%
0.54
1.10
0.62

The total charge for bad and doubtful debts decreased by £79 million, or 8 per cent, to £950 million; businesses disposed of during 2003 accounted for
£63 million of this charge. In UK Retail Banking and Mortgages the provisions charge increased to £594 million from £496 million in 2002. The charge
within UK Retail Banking increased by £115 million mainly due to an increase in the provisions required against the personal loan and credit card portfolios.
This is largely attributable to the growth in the size of these portfolios although there has also been some deterioration in arrears levels and an increase in
fraud related losses within the personal lending portfolio. There was a net release from the provisions held against the mortgages portfolio of £18 million
compared to a net release of £1 million in 2002, reﬂecting an improved arrears position and an increase in the value of the property held as security. 

In Wholesale and International Banking the provisions charge fell by £171 million to £369 million. The charge within Wholesale fell by £78 million as the
level of new provisions required against corporate customers reduced. In 2002 provisions totalling some £100 million were made against large US exposures
which have not been repeated to the same extent during 2003. In the asset ﬁnance businesses the provisions charge was largely unchanged despite strong
lending growth during 2003 as the high level of voluntary terminations experienced in 2002 were not repeated during 2003. Within International Banking
the charge fell by £93 million mainly as a result of a reduction of £79 million in the new provisions required against the Lloyds TSB Group’s exposures in
Argentina as the economic conditions in that country have started to stabilise. There has also been a reduction in the charge in other Latin American operations
as speciﬁc cases requiring provisions in 2002 have not been repeated.

Within Central group items there was a net release of provisions of £13 million from the provisions held against medium-term debt in the emerging markets
portfolio. This portfolio has now either been disposed of or the lending has been repaid.

The Group’s charge for bad and doubtful debts as a percentage of average lending decreased to 0.66 per cent, compared to 0.77 per cent in 2002.

LLOYDS TSB GROUP   25

Operating and financial review and prospects

2002 compared with 2001

The total charge for bad and doubtful debts increased by £282 million, or 38 per cent, to £1,029 million from £747 million in 2001. In UK Retail Banking
and Mortgages the provisions charge increased by £139 million, from £357 million in 2001, to £496 million, as a result of asset growth in the personal loan
and credit card portfolios and a lower level of recoveries and releases, following the non-recurrence of the release of surplus provisions in 2001.

In Wholesale and International Banking the provisions charge increased by £144 million, or 36 per cent, to £540 million from £396 million in 2001. The
charge in respect of corporate banking operations was £145 million higher partly as a result of provisions against the Group’s exposure to certain large US
corporate customers which totalled some £100 million compared to £30 million in 2001. There was also an increase in the provisions charge against the
UK corporate lending portfolio, reﬂecting the slowdown in activity in certain sectors of the UK economy. The charge in respect of the Lloyds TSB Group’s asset
ﬁnance businesses increased by £11 million, mainly reﬂecting volume growth and a high level of voluntary terminations. There was a £27 million reduction
in the speciﬁc provisions charge in Losango, the Lloyds TSB Group’s consumer ﬁnance business in Brazil, largely reﬂecting exchange rate movements. The
general provision against the Lloyds TSB Group’s exposure to Argentina was increased by £50 million, compared to a charge of £55 million in 2001.

In Central group items there was a credit of £7 million, little changed from a credit of £6 million in 2001; these credits represent the release of provisions
following the repayment of medium-term debt in the emerging markets portfolio.

The Group’s charge for bad and doubtful debts as a percentage of average lending increased to 0.77 per cent, compared to 0.62 per cent in 2001.

Taxation

The rate of tax is inﬂuenced by the geographic and business mix of proﬁts. In the absence of special factors, Lloyds TSB Group does not expect the tax rate
to vary signiﬁcantly from the average UK corporation tax rate.

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
Associated undertakings and joint ventures

Total charge

2003
£m

1,079
(72)
1,007
(223)

784

144
(15)
129

913
119
(7)

1,025

2002*
£m

786
12
798
(129)

669

216
(15)
201

870
(106)
2

766

2001*
£m.

769
(14)
755
(87)

668

179
(17)
162

830
46
1

877

* Figures for 2002 and 2001 have been restated to reﬂect changes in accounting policy adopted in 2003; for further details see note 1 to the ﬁnancial statements.

2003 compared with 2002

The effective rate of tax in 2003 was 23.6 per cent, compared to an effective rate of tax of 29.3 per cent in 2002 and the corporation tax rate in 2003 of 30 per cent.
The lower effective rate of tax in 2003 was primarily due to the gain on disposal of The National Bank of New Zealand, which was exempt from taxation and a
reduction in the non-allowable element of foreign taxes paid creditable against the UK corporation tax charge. This was partly offset by the withdrawal of tax
relief on payments to the Lloyds TSB Group qualifying share ownership trust (‘QUEST’) to satisfy Save As You Earn options. See note 9 to the ﬁnancial statements.

2002 compared with 2001

The  effective  rate  of  tax  in  2002  was  29.3  per  cent,  slightly  lower  than  the  corporation  tax  rate  of  30  per  cent,  compared  to  an  effective  rate  of  tax  of
27.7 per cent in 2001. The higher effective rate of tax in 2002 is largely due to a lower level of tax relief on payments to the QUEST and a lower level of gains
on the disposal of properties which were sheltered by capital losses. There was also a higher effective rate of tax in the Lloyds TSB Group’s life and pensions
businesses because of increased losses on the investment portfolio. 

Economic proﬁt

In pursuit of our aim to maximise shareholder value over time, management has for the last eleven years used a system of value based management as a
framework to identify and measure value creation. Management uses economic proﬁt, a non-GAAP measure, as a measure of performance, and believes that
it provides important information for investors, because it captures both growth in investment and return; proﬁt before tax is the comparable GAAP measure
used by management. Lloyds TSB Group deﬁnes economic proﬁt as the earnings on the equity invested in the business less a notional charge for the cost of
the equity invested in that business.

Lloyds TSB Group believes that economic proﬁt instils ﬁnancial discipline in determining investment decisions throughout Lloyds TSB Group and that it enables
Lloyds TSB Group 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. Awards to senior executives under Lloyds TSB Group’s annual bonus arrangements are partly determined by the achievement
of economic proﬁt targets.

Management changes its estimates of the cost of equity only to reﬂect signiﬁcant changes in long-term interest rates and other external market factors which
are considered sustainable. The principal factor in estimating the cost of equity is sustainable long-term interest rates. If long-term interest rates increase,
management will consider raising its estimate of the cost of equity; if long-term interest rates fall, management will consider reducing its estimate of the cost

26 LLOYDS TSB GROUP

Operating and financial review and prospects

of equity. The principal other external market factors considered are equity risk premium and Lloyds TSB Group’s share price volatility relative to the UK stock
market as a whole. Any change to the estimated cost of equity will be disclosed. For the last three years, management has used a cost of equity of 9 per cent
to reﬂect the shareholders’ minimum required rate of return on equity invested.

The table below summarises Lloyds TSB Group’s calculation of economic proﬁt for the periods indicated.

Average shareholders’ equity

Proﬁt attributable to shareholders
Less: notional charge

Economic proﬁt

2003
£m

8,460

3,254
(761)

2,493

2002*
£m

10,672

1,790
(960)

830

2001*
£m.

12,338

2,233
(1,110)

1,123

* Figures for 2002 and 2001 have been restated to reﬂect changes in accounting policy adopted in 2003; for further details see note 1 to the ﬁnancial statements.

The notional charge has been calculated by multiplying average shareholders’ equity by the cost of equity.

2003 compared with 2002

Economic  proﬁt  increased  by  £1,663  million  from  £830  million  in  2002  to  £2,493  million  in  2003.  Proﬁt  attributable  to  shareholders  increased  by
£1,464 million, or 82 per cent, to £3,254 million; the notional charge on average equity was £199 million lower, as a result of a 21 per cent reduction in
average equity to £8,460 million from £10,672 million in 2002.

2002 compared with 2001

Economic  proﬁt  fell  by  £293  million  or  26  per  cent  from  £1,123  million  in  2001  to  £830  million  in  2002.  Proﬁt  attributable  to  shareholders  fell  by
£443 million (20 per cent) to £1,790 million; however the notional charge on average equity was £150 million lower, as a result of a 14 per cent fall in
average equity to £10,672 million from £12,338 million in 2001.

Line of business information

Summary 

In order to provide a clearer representation of the underlying performance, the results of the Insurance and Investments segment include investment earnings
calculated  using  longer-term  rates  of  return  and  annual  management  charges  based  on  unsmoothed  fund  values.  Management  separately  analyse  the
difference  between  these  normalised  earnings  and  the  actual  return  (‘the  investment  variance’)  together  with  the  impact  of  changes  in  the  economic
assumptions used in the embedded value calculation. The results of the businesses are set out below:

UK Retail Banking and Mortgages
Insurance and Investments
Wholesale and International Banking
Central group items

Changes in economic assumptions
Investment variance

Proﬁt before tax

2003
£m

1,021
1,094
2,195
(65)

4,245
(22)
125

4,348

2002
£m

1,008
1,230
1,264
4

3,506
55
(943)

2,618

2001
£m.

1,064
1,424
1,452
87

4,027
–
(860)

3,167

Comparative ﬁgures have been restated to reﬂect a change in accounting policy following the issue of Urgent Issues Task Force Abstract 37 ‘Purchases and
sales of own shares’ and Urgent Issues Task Force Abstract 38 ‘Accounting for ESOP trusts’, the reclassiﬁcation of Business Banking earnings from UK Retail
Banking and Mortgages to Wholesale and International Banking, and changes in internal transfer pricing arrangements. The Lloyds TSB Group has also
changed its accounting policy relating to the deferral of certain expenses incurred in connection with the acquisition of new asset ﬁnance and unit trust business.
These costs are now charged to the proﬁt and loss account as incurred, rather than over the expected life of the related transactions. For further details of these
changes in accounting policy see note 1 to the ﬁnancial statements.

LLOYDS TSB GROUP   27

Operating and financial review and prospects

UK Retail Banking and Mortgages

The UK retail businesses of Lloyds TSB Group provide banking and ﬁnancial services to personal customers, private banking and stockbroking. Lloyds TSB
Group’s  UK  mortgage  business  is  conducted  through  Cheltenham  &  Gloucester,  Lloyds  TSB  Bank,  Lloyds  TSB  Scotland,  Scottish  Widows  Bank  and
C&G TeleDirect.

2003
£m

2002
£m

2001
£m.

Net interest income
Other income

Total income
Operating expenses

Trading surplus
Provisions for bad and doubtful debts
Share of results of joint ventures

Proﬁt before tax

Efﬁciency ratio
Total assets (year-end)
Total risk-weighted assets (year-end)

2003 compared with 2002

3,137
909

4,046
(2,409)

1,637
(594)
(22)

1,021

2,890
837

3,727
(2,212)

1,515
(496)
(11)

1,008

2,690
911

3,601
(2,170)

1,431
(357)
(10)

1,064

59.5%
£90,272m
£53,846m

59.4%
£79,629m
£48,313m

60.3%
£71,707m
£42,390m

Proﬁt before tax from UK Retail Banking and Mortgages increased by £13 million, or 1 per cent, to £1,021 million, compared to £1,008 million in 2002.
The results in 2003 have been adversely affected by a £200 million provision for remediation payments to customers in respect of past sales of mortgage
endowment and long-term savings products, principally the Extra Income & Growth Plan. Adjusting for this provision there was a £213 million or 21 per cent
growth in proﬁt.

Total income increased by £319 million, or 9 per cent, to £4,046 million. Net interest income increased by £247 million, or 9 per cent, to £3,137 million
as continued growth in lending and deposit balances added £379 million to net interest income partly offset by a reduction of £132 million caused by a
19 basis point reduction in the net interest margin. There was good organic growth in the personal loan and credit card businesses with outstanding balances
increasing by 9 per cent and 18 per cent respectively over the year; after taking account of the impact of the acquisition of the Goldﬁsh Bank portfolios,
outstanding personal loan balances had increased by 10 per cent and credit card balances by 36 per cent by the end of December 2003. Within UK Retail
Banking balances on current and savings and investment accounts grew by 10 per cent reﬂecting the growth in the number of added value accounts and the
success of new savings products launched during 2003. Over the last twelve months, mortgage balances outstanding have increased by 13 per cent to
£70,750 million as net new lending increased to £8,283 million from £5,889 million; this represents an improved market share of 8.6 per cent although it
remains below the Lloyds TSB Group’s market share of outstanding mortgages.

The net interest margin was 19 basis points lower. There has been margin contraction in the mortgages business as competitive pressures have caused a
move to discounted and ﬁner margin products; the margin on retail savings products has also fallen as the full effect of interest rate falls has not been passed
on to customers and the beneﬁt of low interest and interest-free current accounts has been reduced. This has been partly offset by an improved margin on
personal loans, which has beneﬁted from lower funding costs.

Other income increased by £72 million to £909 million. Fees earned from current account activity grew by £44 million reﬂecting increased volumes of added
value accounts and higher monthly charges; returned cheque fees have also increased as the number of returned items has risen. There was also improved
income from credit and debit card transactions, which increased by £46 million, mainly as a result of a growth in interchange income, higher overseas use
commissions and other fees. This was partly offset by higher fees payable in respect of the credit card business, mainly reﬂecting volume growth and the cost
of  customer  incentives,  and  increased  package  costs  incurred  on  the  added  value  account  range  as  volumes  have  risen.  A  growth  in  fee  income  in  the
mortgages business as lending volumes have grown and charges increased, has been offset by the higher cost of customer incentives.

Operating expenses were £197 million, or 9 per cent higher, at £2,409 million compared to £2,212 million in 2002 as a result of the £200 million provision
for customer redress; if this is excluded operating expenses fell by £3 million. There was an increase in salary and pension costs, largely reﬂecting the effects
of the annual pay review and falling interest rates on the cost of providing post-retirement beneﬁts, and the increased cost of agency staff and other contractors
which have been offset to an extent by lower severance and related costs following the completion of a number of major restructuring initiatives. Advertising
expenditure also increased particularly in the credit card and mortgage businesses and there was wider use of TV advertising; however there was a reduction
in the level of operational losses and lower clearings costs. The efﬁciency ratio was largely unchanged.

Bad debt provisions increased by £98 million to £594 million as a result of an increase in the provisions required against the personal lending and credit card
portfolios mainly reﬂecting volume growth during the year but also some deterioration in the arrears levels within the personal loan portfolio and an increase
in fraud related losses. There was a net release of £18 million from the provisions held against the mortgage portfolio compared to a net release of £1 million
in 2002, as the arrears position has improved and the value of the underlying security increased. The provisions charge as a percentage of average lending
for  personal  loans  and  overdrafts  increased  to  4.25  per  cent  from  3.73  per  cent  in  2002,  while  the  charge  in  the  credit  card  portfolio  decreased  to 
3.19 per cent from 3.52 per cent the previous year.

The Lloyds TSB Group’s share of the results of its joint venture operations in 2003 was a loss of £22 million compared to £11 million in 2002. Following
the purchase by the Lloyds TSB Group of the personal loan and credit card portfolios of Goldﬁsh Bank, the remaining business is being wound down resulting
in increased losses from asset write-downs and closure provisions.

2002 compared with 2001

Proﬁt before tax from UK Retail Banking and Mortgages decreased by £56 million, or 5 per cent, to £1,008 million, compared with £1,064 million in 2001.

Total income increased by £126 million, or 3 per cent, to £3,727 million. Net interest income increased by £200 million, or 7 per cent, to £2,890 million.
Growth in lending and deposit balances added £247 million to net interest income, which was only partly offset by a reduction of £47 million caused by a
7 basis  points  fall  in  the  overall  margin.  Since  31  December  2001,  personal  loans  and  credit  card  lending  increased  by  15  per  cent  and  27  per  cent

28 LLOYDS TSB GROUP

Operating and financial review and prospects

respectively  and,  within  Retail  Banking,  balances  on  current  accounts  and  savings  and  investment  accounts  grew  by  10  per  cent.  Mortgage  balances
outstanding increased by 10 per cent to £62,467 million representing a market share of 9.3 per cent. Gross new mortgage lending increased by 36 per cent
to £19,039 million, compared with £13,986 million a year ago. Net new lending increased to £5,889 million resulting in a market share of net new lending
of 7.5 per cent; the Lloyds TSB Group’s market share of net new lending in the second half of 2002, at 8.8 per cent, was considerably better than in the ﬁrst
half of the year. Mortgages offer the Lloyds TSB Group the opportunity to sell a range of additional products and, during 2002, the Lloyds TSB Group’s key
objective in the mortgage business was to achieve an appropriate balance between market share and proﬁtability. 

The net interest margin fell by 7 basis points, reducing net interest income by £47 million. The margin on retail lending products was 3 basis points lower
than in 2001, with an improved personal loan margin being offset by reduced margins on personal overdrafts and credit card lending. The deposit margin
was 13 basis points lower as the full impact of interest rate reductions in the second half of 2001 has not been reﬂected in the rate of interest paid on some
savings products and the beneﬁt of interest-free and low interest current accounts has been reduced.

Other income decreased by £74 million, or 8 per cent, to £837 million. There was an improvement in income earned from credit and debit cards, and
increased income from added value current accounts, but this was offset by a higher level of fees and commissions payable and a reduction of £57 million
in proﬁts from the sale and leaseback of premises, as the Lloyds TSB Group’s strategy of converting much of its branch portfolio from freehold tenure to
leasehold is almost complete. 

Operating expenses were £42 million, or 2 per cent, higher at £2,212 million compared to £2,170 million in 2001. Costs associated with the Lloyds TSB
Group’s efﬁciency programme totalled £175 million compared to £134 million in 2001, an increase of £41 million, as the Lloyds TSB Group continues to
invest in initiatives to enhance Retail Banking performance and rationalise software and systems. There were also increased staff costs particularly within the
Mortgages business as additional staff were taken on in order to maintain customer service levels in the expanding portfolio. These increases and the effect
of annual pay awards were partly offset by reduced headcount in the branch network and lower development costs in respect of internet banking and other
initiatives. The efﬁciency ratio, however, improved to 59.4 per cent from 60.3 per cent in 2001.

Provisions for bad and doubtful debts were £139 million, or 39 per cent, higher at £496 million, compared to £357 million in 2001, as a result of volume
related asset growth in the personal loan and credit card portfolios and a lower level of recoveries and releases following the non-recurrence of the release of
surplus provisions of £72 million in 2001. Excluding these provision releases, the charge as a percentage of average lending for personal loans and overdrafts
decreased to 3.73 per cent from 3.88 per cent in 2001, and the charge in the credit card portfolio decreased to 3.52 per cent from 3.60 per cent in 2001.
Overall the arrears position remained stable.

Lloyds TSB Group’s share of the results of its joint venture operations was a loss of £11 million, little changed from 2001.

Insurance and Investments

Lloyds TSB Group’s insurance and investments activities comprise the life, pensions and unit trust businesses of Scottish Widows and Abbey Life, general
insurance underwriting and broking, and Scottish Widows Investment Partnership.

Net interest income
Other income

Total income
Operating expenses

Trading surplus
General insurance claims

Operating proﬁt
Changes in economic assumptions
Investment variance

Proﬁt before tax

2003 compared to 2002

2003
£m

81
1,653

1,734
(404)

1,330
(236)

1,094
(22)
125

1,197

2002
£m

74
1,865

1,939
(480)

1,459
(229)

1,230
55
(943)

342

2001
£m

80
2,006

2,086
(488)

1,598
(174)

1,424
–
(860)

564

The  operating  proﬁt  from  Insurance  and  Investments,  calculated  as  explained  under  ‘Operating and ﬁnancial review and prospects – Line  of  business
information – Summary’, fell by £136 million to £1,094 million from £1,230 million in 2002.

Total income was £205 million, or 11 per cent lower, at £1,734 million as a £212 million fall in other income more than offset a modest improvement in
net interest income of £7 million. Other income was £1,653 million compared to £1,865 million in 2002. Income from long-term assurance business,
excluding the effects of changes in economic assumptions and the investment variance, was £177 million lower. Income from existing business was lower
as the beneﬁt from experience variances and actuarial assumption changes reduced by £168 million, reﬂecting updated assumptions in respect of staff costs
to support existing business and beneﬁts recognised in 2002 from changes in the assumed shareholder tax rate and from the valuation of unmodelled products
which have not been repeated; the expected return reduced by £48 million reﬂecting a reduction in the value of business in-force and a lower discount rate.
There  was  also  a  reduction  of  £61 million  in  normalised  investment  earnings  reﬂecting  lower  market  rates  of  return.  This  has  been  partly  offset  by  a
£105 million reduction in provisions for customer redress. See ‘Operating and ﬁnancial review and prospects – Customer remediation payments’.

Insurance broking income fell by £43 million reﬂecting lower levels of creditor insurance and an increased allowance for the clawback of commissions by the
insurance underwriters due to the early settlement of loans. There was also a £27 million reduction in income from unit trust and asset management activities
as a result of lower average fund values and the continued weakness of the long-term savings market.  This has been partly offset by a £49 million increase
in general insurance premiums as income from the sale of home contents insurance has improved, helped by the buoyant housing market.

Operating expenses decreased by £76 million, or 16 per cent, to £404 million. There was a £42 million reduction in the costs related to the restructuring of
the Scottish Widows business and the increased proportion of overall sales represented by life and pensions products has resulted in more of the cost base
being accounted for within embedded value income. These factors have more than offset the effect of an increase in costs within the general insurance
business to support expansion.

LLOYDS TSB GROUP   29

Operating and financial review and prospects

General insurance claims increased by £7 million to £236 million, as the effect of the increase in the size of the portfolio was largely offset by a reduction in
claims caused by the generally mild weather conditions.

2002 compared to 2001

The operating proﬁt from Insurance and Investments at £1,230 million, was £194 million, or 14 per cent, lower than 2001.

Net interest income was £6 million, or 8 per cent, lower at £74 million, compared to £80 million in 2001, largely reﬂecting the impact of lower interest rates
on the cash balances held in the general insurance business.

Other  income  was  £141  million,  or  7  per  cent,  lower  at  £1,865  million,  compared  to  £2,006  million  in  2001.  Income  from  the  long-term  assurance
businesses, excluding the effects of changes in economic assumptions and the investment variance, was £245 million lower. New business income was
£40 million higher, as a result of sales growth, but this was partly offset by a £28 million increase in distribution costs. The expected return on existing business
reduced by £34 million, partly reﬂecting the lower average value of in-force business caused by the fall in the stock market in 2001, and investment earnings
were £33 million lower, as a result of the reduction in the value of the investments supporting the long-term assurance funds. Following a review carried out
in conjunction with the Financial Services Authority into past sales made by the Abbey Life sales force, a provision of £165 million was established in 2002
for the estimated cost of redress due to customers. In addition a further provision of £40 million was made in respect of compensation payable to past
purchasers of pension policies, compared to £70 million in 2001. There was a reduction of £55 million in beneﬁts from experience variances and actuarial
assumption changes, largely reﬂecting the implementation of revised mortality assumptions which resulted in a one-off charge of £57 million. Fee income
from the unit trust and asset management businesses fell by £59 million, reﬂecting the continued fall in the level of stock markets during 2002. This more
than offset an increase in premium income from general insurance underwriting which was £58 million higher, as a result of strong growth in home products;
commissions from insurance broking were £119 million higher, with continued growth in creditor insurance products.

Operating expenses, at £480 million, were down slightly from £488 million in 2001. Cost reductions resulting from lower levels of sales and marketing
activities in the unit trust and asset management operations have been largely offset by higher client service costs and increased costs in the general insurance
business, to manage the signiﬁcant increase in volumes. 

General insurance claims were £55 million, or 32 per cent, higher at £229 million compared to £174 million in 2001. The increase in claims reﬂects the
signiﬁcant growth in the size of the underwritten portfolio together with higher claims due to ﬂood and storm damage during the early part of 2002.

Area of business

Life, pensions and unit trusts:
– Scottish Widows
– Abbey Life
– Provisions for customer redress

General Insurance
Scottish Widows Investment Partnership

Operating proﬁt
Changes in economic assumptions
Investment variance

Proﬁt before tax

2003 compared to 2002

2003
£m

379
93
(100)

372
720
2

1,094
(22)
125

1,197

2002
£m

590
92
(205)

477
753
–

1,230
55
(943)

342

2001
£m.

643
190
(70)

763
651
10

1,424
–
(860)

564

The operating proﬁt from life, pensions and unit trusts decreased by £105 million, or 22 per cent, to £372 million from £477 million in 2002. Operating
proﬁt at Scottish Widows was £211 million lower at £379 million compared to £590 million in 2002. Proﬁt from existing business was £171 million lower
reﬂecting a reduction of £174 million in beneﬁts from experience variances and actuarial assumption changes; within the expected return a reduction of
£39 million reﬂecting the lower value of in-force business and a lower discount rate was offset by lower restructuring costs. Normalised investment earnings
fell by £56 million due to lower expected investment returns and £13 million of development costs were incurred. This more than offset an increase in new
business contribution which grew by £15 million or 13 per cent as a result of an improved product mix. Proﬁts from the unit trust business increased by
£14 million, largely reﬂecting the absence of restructuring related costs in 2003.

Abbey Life’s operating proﬁt increased by £1 million to £93 million. Proﬁts from existing business were largely unchanged. A £6 million improvement in the
beneﬁt from experience variances and actuarial assumption changes offset a reduction in income from investments.

The provisions charge in respect of customer redress payments was £105 million lower in 2003. In 2002 a charge of £165 million was made in respect of
sales of mortgage endowment and other long-term savings products made by the Abbey Life sales force, between 1988 and the disposal of the sales force in
early 2000. This provision was increased by some £20 million in 2003 as greater experience has allowed management to reﬁne the underlying assumptions.
A further provision of some £35 million has been made in respect of sales made by the Abbey Life sales force prior to 1988. In 2002 there was also a charge
of  £40 million  to  increase  the  provisions  held  in  respect  of  redress  payments  to  past  purchasers  of  pension  policies;  in  2003  a  further  charge  of  some
£45 million has been made as the review now nears completion. See ‘Operating and ﬁnancial review and prospects – Customer remediation payments’.

The operating proﬁt from the general insurance businesses fell by £33 million, or 4 per cent, to £720 million. Proﬁt from the broking business was £54 million
lower reﬂecting both a reduction in commission income and an increase in operating expenses, principally in relation to staff costs as a result of the annual
pay review and increased numbers to support new business volumes and other initiatives. Within the underwriting business, proﬁts improved by £21 million
supported by growth in income coupled with a reduction in the claims ratio to 42.4 per cent from 45.7 per cent in 2002. See ‘Operating and ﬁnancial review
and prospects – Line of business information – General Insurance’.

Pre-tax  proﬁt  from  Scottish  Widows  Investment  Partnership  (‘SWIP’)  improved  to  £2  million  reﬂecting an increase  in new business and a  lower  level  of
investment expenditure.

30 LLOYDS TSB GROUP

Operating and financial review and prospects

2002 compared to 2001

The operating proﬁt from life, pensions and unit trusts decreased by £286 million, or 37 per cent, from £763 million in 2001 to £477 million in 2002.
Operating proﬁt at Scottish Widows was £53 million lower at £590 million, compared to £643 million in 2001. Life and pensions new business income
increased by £40 million, or 11 per cent, to £398 million, following a 7 per cent increase in weighted sales and a change in mix towards more proﬁtable
products. Investment earnings were £27 million lower, reﬂecting reduced asset values at the start of 2002, and life and pensions distribution costs rose
£28 million, in line with sales. Unit trust proﬁts were £36 million lower reﬂecting lower sales and reduced management income, both as a result of adverse
stock market conditions.

Abbey Life’s operating proﬁt reduced by £98 million to £92 million in 2002. This reduction in proﬁtability principally reﬂected reduced expected return from
existing business and investment earnings as a result of lower asset levels at the start of 2002 and a reduction in beneﬁts from experience variances and
actuarial assumption changes, which were £73 million lower, as a number of one-off beneﬁts in 2001 were not repeated.

The  operating  proﬁt  from  the  general  insurance  businesses  increased  by  £102  million  or  16  per  cent,  to  £753  million  from  £651  million  in  2001.
Proﬁt from the broking business was £118 million higher as a result of increases in commission income, particularly in respect of creditor products, and
higher levels of retrospective commissions. However, there was a £16 million reduction in operating proﬁts from the underwriting business as a result of an
increase in weather related claims following ﬂoods and storms early in 2002 and increased distribution and administration expenses, as a result of higher
transaction volumes.

SWIP achieved a break-even result, compared to a proﬁt of £10 million in 2001, the reduction in proﬁtability being driven primarily by lower stock market
levels and signiﬁcant investment in new infrastructure to support future business growth. At the end of 2002 SWIP had some £70 billion of funds under
management compared to £78 billion at the end of 2001; the decline reﬂected the continued fall in stock market levels over 2002. 

Changes in economic assumptions

Lloyds TSB Group accounts for the value of the shareholder’s interest in the long-term assurance business using the embedded value basis of accounting.
The embedded value comprises the net tangible assets of the life assurance subsidiaries and the present value of the in-force business. The present value of
the in-force business is calculated by projecting future surpluses and other net cash ﬂows attributable to the shareholder and discounting the result at a rate
which reﬂects the shareholder’s overall risk premium.

When projecting future surpluses and other net cash ﬂows Lloyds TSB Group makes a series of assumptions about long-term economic conditions. Prior to
2002, these assumptions were only updated infrequently for changes that were considered sustainable. In order to achieve greater comparability with other
listed insurers in the UK, in 2002 the Lloyds TSB Group changed its practice and now revises these assumptions at each reporting date.

The economic assumptions have been revised at 31 December 2003 as follows:

Risk-adjusted discount rate (net of tax)
Return on equities (gross of tax)
Return on ﬁxed interest securities (gross of tax)
Expenses inﬂation

2003
%

7.60
7.45
4.85
3.80

2002
%

7.35
7.10
4.50
3.30

2001
%.

8.50
8.00
5.25
3.00

The  revised  assumptions  have  resulted  in  a  net  charge  to  the  proﬁt  and  loss  account  in  2003  of  £22  million  (2002: a  credit  of  £55  million)  of  which
£21 million is attributable to the increase in the rate of expenses inﬂation from 3.30 per cent to 3.80 per cent. 

Investment variance

In accordance with generally accepted accounting practice in the UK, it is Lloyds TSB Group’s accounting policy to carry the investments comprising the
reserves held by its life companies at market value. The reserves held to support the with-proﬁts business of Scottish Widows are substantial and changes in
market values cause signiﬁcant volatility in the Group’s embedded value earnings, which are beyond the control of management. Consequently, in order to
provide a clearer representation of the underlying performance, the results of the life and pensions business are separately analysed to show an operating
proﬁt including investment earnings calculated using longer-term investment rates of return, and annual management charges based on unsmoothed fund
values. The investment variance represents the difference between the actual investment return in the year on investments backing shareholder funds and
the expected return based upon the economic assumptions made at the beginning of the year, and the effect of these ﬂuctuations on the value of in-force
business. The effects of other changes in economic circumstances beyond the control of management are also reﬂected in the investment variance. A similar
approach has been adopted for Lloyds TSB Group’s general insurance business. 

In 2003, there was a positive investment variance of £125 million (2002: negative £943 million, 2001: negative £860 million) reﬂecting the recovery in
stock market values during 2003; the FTSE All-Share index increased by 17 per cent in 2003 compared with a 24 per cent fall in 2002. The beneﬁt of
improving stock markets was limited by the lower equities content in the long-term assurance funds and a reduction in the values of ﬁxed interest investments.

Life, pensions and unit trusts operating proﬁt

The operating proﬁt of the life, pensions and unit trust businesses is analysed in the following table. The basis of this analysis is as follows:

The life and pensions results are split into ﬁve elements:

• New business income: this represents the value recognised at the end of each ﬁnancial year from the new business written during that year after taking into
account the cost of establishing technical provisions and reserves. This is shown before the signiﬁcant costs of acquiring that new business, which are shown
separately as ‘Distribution costs’.

• Distribution costs: the costs of acquiring the new business generated in the year. These comprise the cost of selling products through Lloyds TSB Bank’s
branch  network;  the  commissions  paid  to  independent  ﬁnancial  advisors  and  related  costs  of  sales  through  this  channel;  and  the  costs  of  other  direct
sales channels.

• Existing business: this comprises the following elements:

– the expected return arising from the unwinding of the discount applied to the expected cash ﬂows at the beginning of a year;
– experience variances caused by differences between the actual experience during the year and the expected experience; 
– the effects of changes in assumptions, other than economic assumptions, and other items; and
– provisions for customer redress.

LLOYDS TSB GROUP   31

Operating and financial review and prospects

• Development costs: these costs represent the investment made during the year in Sandler products and depolarisation developments, and the development

of e-commerce relationships with IFAs.

• Investment  earnings:  this  represents  the  expected  investment  return  on  both  the  net  tangible  assets  and  the  value  of  the  shareholder’s  interest  in  the 

long-term business account, based upon the economic assumptions made at the beginning of the year.

Unit trust income is shown before the acquisition costs of new business which are separately disclosed.

New business income
Life and pensions distribution costs
New business contribution
Existing business:
– Expected return 
– Experience variances
– Assumption changes and other items
– Provisions for customer redress

Development costs
Investment earnings

Unit trusts
Unit trust distribution costs

Operating proﬁt of life, pensions and unit trusts

Changes in economic assumptions
Investment variance

Proﬁt (loss) before tax

2003
£m

457
(327)
130

276
(16)
(75)
(100)
85
(13)
153

355

71
(54)
17

372

(22)
112

462

2002
£m

398
(283)
115

273
(1)
78
(205)
145
–
214

474

92
(89)
3

477

55
(883)

(351)

2001
£m

358
(255)
103

307
37
95
(70)
369
–
247

719

144
(100)
44

763

–
(814)

(51)

The table below shows the level of new business premium income and unit trust sales. Management monitor these ﬁgures because they provide an indication
of both the performance and the proﬁtability of the business.

2003
£m

2002
£m

2001
£m

New business premium income and unit trust sales
Regular premiums
Single premiums
Unit trusts:
– Regular premiums
– Single premiums
Total unit trusts

337.9
2,638.3

41.0
907.3
948.3

286.3
3,089.0

71.5
1,009.5
1,081.0

282.0
2,741.0

65.0
1,335.5
1,400.5

Weighted sales is a UK insurance industry standard which measures the new business volumes; the weighting is made towards regular premium policies to
reﬂect the long-term nature of these contracts. There are four main distribution channels for the sale of Lloyds TSB Group’s life, pension and unit trust products
and the table below shows the relative importance of each.

2003
£m

2002
£m

2001
£m

Weighted sales (regular + 1/10 single) by distribution channel
Branch network
Independent ﬁnancial advisors
Direct
International and other

278.8
391.6
61.6
1.4

733.4

350.6
335.4
67.9
13.7

767.6

376.2
269.6
87.2
21.7

754.7

2003 compared to 2002

The operating proﬁt of the life, pensions and unit trust businesses in 2003 fell by £105 million to £372 million.

New business income increased by £59 million, or 15 per cent, to £457 million. Weighted sales of life and pensions products increased by 1 per cent as
sales volumes were affected by weak demand as consumer conﬁdence in long-term savings products remained low. However there was a further change in
the product mix towards higher margin regular premium protection policies with the emphasis upon sales of lower margin single premium life products being
reduced. The new business margin, deﬁned as new business contribution divided by weighted sales, improved to 21.6 per cent compared to 19.3 per cent
in 2002. The increase in distribution costs was also higher than sales volumes. Costs were up £44 million, or 16 per cent, to £327 million partly reﬂecting

32 LLOYDS TSB GROUP

Operating and financial review and prospects

the increase in the proportion of sales made through the comparatively more expensive independent ﬁnancial advisor (‘IFA’) channel and also the higher levels
of commission payable on sales of the more proﬁtable products.

Regular premium sales amounted to £337.9 million, or 56 per cent of total life and pensions weighted sales, compared to £286.3 million, or 48 per cent of
the total in 2002, an increase of £51.6 million. Weighted sales of regular premium pension products increased by £24.0 million as improved sales through
the IFA channel, reﬂecting both Scottish Widows’ marketing initiatives and investment in this channel, more than offset a reduction in sales through the branch
network which have been affected by weak demand. Sales of regular premium life products increased by £27.6 million mainly as a result of higher sales of
term assurance and savings products; sales of mortgage-related products providing life cover on repayment mortgages continued to improve, reﬂecting the
buoyant housing market and the resulting strong growth in mortgage lending.

Sales of single premium products fell by £450.7 million, or 15 per cent, from £3,089.0 million in 2002 to £2,638.3 million in 2003. Single premium life
product sales decreased by £685.1 million as a result of further reductions in sales of investment bonds due to low stock market values and adverse media
comment and the closure of an investment trust in the ﬁrst half of 2003 due to a lack of suitable quality investment opportunities. This was partly offset by
strong growth in single premium pension business; sales rose by £218.9 million or 21 per cent as a result of the improved performance of stakeholder pension
products. Sales of single premium annuity business increased by £15.5 million, or 3 per cent, following pricing changes in 2002.

Unit  trust  sales  were  £132.7  million,  or  12  per  cent,  lower  at  £948.3  million  compared  to  £1,081.0  million  in  2002  as  consumers  continue  to  view
investments in equity-based products with caution.

Weighted sales of life, pensions and unit trust products were £733.4 million compared to £767.6 million in 2002. By distribution channel, sales through the
branch network fell by £71.8 million, or 20 per cent, to £278.8 million mainly reﬂecting the signiﬁcant reductions during 2003 in sales of single premium
life and pensions products and unit trusts. Sales of regular premium products were broadly unchanged as initiatives within the branch network resulted in an
increase in term assurance sales, which offset a fall in sales of pension products. Branch network sales during 2003 were affected by signiﬁcant restructuring
activity in the personal sector regulated sales force, to reﬂect lower levels of new business and improved cost efﬁciency, which has resulted in a reduction in
its size of almost one third. Direct sales decreased by £6.3 million as a result of lower single premium product sales in difﬁcult market conditions. However,
sales through the IFA channel improved by £56.2 million, or 17 per cent, to £391.6 million with particularly strong growth in regular premium products
reﬂecting the beneﬁts of the investment made into this channel in 2002 and earlier. In the 2003 IFA Service Awards, Scottish Widows achieved a ﬁve-star
rating in all categories.

Existing business proﬁts fell by £60 million, or 41 per cent, to £85 million from £145 million in 2002. Within the expected return a reduction of £39 million
reﬂecting a reduction in the value of in-force business and a lower discount rate was offset by lower restructuring costs in 2003. There was a reduction of
£168 million in the beneﬁts from changes in actuarial assumptions and experience variances. It is common practice for life assurance companies to regularly
review the detailed assumptions that support the embedded value calculations having regard to recent experience. In 2003 there was a charge of £75 million
in respect of actuarial assumption changes compared to a credit of £78 million in 2002, reﬂecting the capitalisation of pension scheme contributions, following
their recommencement in 2003, within the Lloyds TSB Group’s embedded value calculations and beneﬁts in 2002 from revisions to the assumed shareholder
tax rate and the valuation of unmodelled products which have not been repeated. Experience variances were £15 million worse as a result of a deterioration
in lapse and persistency rates. These factors have been partly offset by a £105 million reduction in the level of additional provisions required for redress
payments to customers.

Normalised investment earnings fell by £61 million, or 29 per cent, to £153 million from £214 million in 2002 reﬂecting a reduction in the expected rates
of return in the low interest rate environment in the UK.

Unit trust proﬁts were £17 million compared to £3 million in 2002. Income in the unit trust business is derived from both initial charges at the point of sale
and annual management fees which are calculated as a percentage of the unit trust funds. During 2003 overall unit trust income fell by 23 per cent broadly
in line with the reduction in weighted average sales, which were 24 per cent lower. However, new business income only fell by 10 per cent as a result of a
shift in the mix of business towards higher margin products with the remainder of the reduction reﬂecting lower annual management charges as the depressed
stock markets have caused fund values to reduce. Unit trust distribution costs have fallen by 39 per cent as a result of the fall in sales volumes and the absence
of restructuring related costs in 2003.

2002 compared to 2001

The operating proﬁt of the life, pensions and unit trust businesses in 2002 was £477 million, compared to £763 million in 2001, a decrease of £286 million,
or 37 per cent.

New business income from the life and pensions businesses was £40 million, or 11 per cent, higher at £398 million. This increase in proﬁts reﬂects a
7 per cent increase in weighted sales from life and pensions products, and an improved performance in the more proﬁtable life products. The life and pensions
new business margin improved to 19.3 per cent from 18.5 per cent in 2001. The improvement largely arose from an improved product mix, as a result of
the  growth  in  sales  of  higher  margin  term  assurance  and  regular  premium  life  products.  Distribution  costs  increased  by  £28  million,  or  11 per cent,  to
£283 million from £255 million partly due to the growth in weighted sales but also because of the increasing proportion of sales made through independent
ﬁnancial advisors.

Regular premium sales, at £286.3 million, were £4.3 million, or 2 per cent, higher than 2001. Regular premium mortgage-related product sales, providing
life cover on repayment mortgages, were £10.3 million higher as a result of the buoyant housing market in the UK and successful cross-selling to mortgage
customers in the branch network. Sales of non-mortgage related life products were also higher reﬂecting strong sales of term assurance products following a
number of sales initiatives in the branch network. These increases, however, were partly offset by a £20.1 million reduction in sales of regular premium
pension products. Sales of the stakeholder pension product had been strong since the launch in April 2001, as the lower charges on this product continued
to make it attractive; however this growth was more than offset by reduced sales of the older pension products, reﬂecting the less attractive charging structures
and adverse stock market conditions.

Single premium sales were £348.0 million, or 13 per cent, higher at £3,089.0 million, compared to £2,741.0 million in 2001. Sales of single premium life
products were £152.4 million lower, reﬂecting reduced sales of investment bond products which had been affected by low stock market levels and adverse
press comment. Annuity sales, however, were £158.4 million higher; Scottish Widows had improved their position in the annuity market by maintaining rates,
in the face of competitor reductions, and through the launch of a number of new products. Single premium pension sales increased by £342.0 million,
beneﬁting from an increase in Department of Social Security rebates.

Overall sales of unit trust products were £319.5 million lower. There was a large fall in sales of equity-based Individual Savings Accounts, as a result of the
continuing volatility in global stock markets throughout 2002.

LLOYDS TSB GROUP   33

Operating and financial review and prospects

Weighted sales of life and pensions and unit trust products were £767.6 million compared to £754.7 million in 2001. By distribution channel, weighted
sales through the branch network have fallen by 7 per cent, with decreases in sales of life and pension products, particularly investment bond products which
had been affected by low stock market levels and adverse press comment, and lower unit trust sales as a result of the depressed market conditions. Weighted
sales by independent ﬁnancial advisors increased by 24 per cent as a result of the strong sales of single premium stakeholder pensions and annuities products.
Direct sales were down 22 per cent, partly a result of market conditions; in particular volumes of pension and annuity product sales have fallen with customers
preferring to purchase these products from independent ﬁnancial advisors.

Existing business earnings fell by 61 per cent to £145 million, from £369 million in 2001. The expected return from existing business was £34 million lower
at £273 million reﬂecting the lower value of in-force business at the beginning of 2002, caused by the effect of lower stock markets on annual management
charges. In addition, there was a reduction of £55 million in beneﬁts from experience variances and actuarial assumption changes, largely reﬂecting the
implementation of revised actuarial mortality assumptions. There was a £30 million reduction in provisions for redress to past purchasers of pension policies,
although this was more than offset by a £165 million provision for possible redress to past purchasers of endowment policies.

Life and pensions investment earnings, at £214 million, were £33 million, or 13 per cent, lower than in 2001. This fall reﬂected the lower asset level at the
start of 2002, following poor stock market performance in the latter part of 2001.

Unit trust proﬁts in 2002, at £3 million, were down signiﬁcantly from £44 million in 2001. During 2002, unit trust income, before distribution costs, reduced
by 36 per cent compared to 2001. This reduction reﬂects a fall in income from initial charges, following a 13 per cent fall in weighted sales, and a £32 million
decrease in annual management fee income, as global stock market conditions have reduced the value of the funds managed. Unit trust distribution costs
have fallen in line with the reduced sales.

General Insurance

The following table shows premium income from underwriting and commission income from insurance broking.

Premium income from underwriting:
Creditor
Home
Health
Reinsurance premiums

Commissions from insurance broking:
Creditor
Home
Health
Other

Operating proﬁt
Investment variance

Proﬁt before tax

2003 compared to 2002

2003
£m

104
410
43
(22)

535

351
30
16
207

604

720
13

733

2002
£m

107
350
44
(15)

486

426
44
17
160

647

753
(60)

693

2001
£m

110
281
45
(8)

428

323
41
22
142

528

651
(46)

605

The operating proﬁt, calculated as explained under ‘Operating and ﬁnancial review and prospects – Line of business information – Summary’ from general
insurance was £720 million, a reduction of £33 million, or 4 per cent, compared to 2002. This comprised a proﬁt of £219 million from the general insurance
underwriting operations and £501 million from the broking operations.

The operating proﬁt of the underwriting business at £219 million was £21 million, or 11 per cent, higher than in 2002. Premium income increased by
£49 million, or 10 per cent, to £535 million as a result of continued strong growth in income from the sale of home insurance products which rose by
£60 million. An increase in average sums assured has more than offset a decline in sales volumes, particularly through the IFA channel, as commission rates
became uncompetitive; sales volumes started to improve in the ﬁnal quarter of 2003 as commissions payable were increased. Creditor insurance premiums
were  £3 million  lower  and  reinsurance  premiums  increased  by  £7 million due to increased rates in the reinsurance market and higher
underwritten premiums.

Costs were £12 million higher. Operating expenses increased by £6 million as a growth in salary costs was partly offset by a reduction in advertising and
severance related costs. There was also a £6 million increase in commissions payable reﬂecting the growth in premium income.

General insurance claims were £7 million higher at £236 million compared to £229 million in 2002. The claims ratio fell from 45.7 per cent to 42.4 per cent
reﬂecting the beneﬁcial effect of generally mild weather conditions although this did cause an increase in subsidence related claims in the second half of 2003.

The operating proﬁt of the general insurance broking business was £54 million, or 10 per cent lower, at £501 million compared to £555 million in 2002.
Commission income fell by £43 million reﬂecting a £75 million reduction in income from creditor insurance products as personal loan sales volumes within
the branch network have started to slow and an allowance of £35 million has been made against the clawback of commissions by the insurance underwriters
as loans are settled early. Income from sales of home insurance products fell by £14 million due to more competitive offers from other market participants.
These  factors  have  been  partly  offset  by  a  £47  million  improvement  in  other  commissions  reﬂecting  a  signiﬁcant  increase  in  the  level  of  retrospective
commissions receivable from underwriters as the favourable economic conditions have improved the proﬁtability of the policies written. There was a £4 million
increase in operating expenses principally reﬂecting higher staff costs due to both the annual pay review and increased numbers to support new business
volumes and other initiatives.

34 LLOYDS TSB GROUP

Operating and financial review and prospects

2002 compared to 2001

The operating proﬁt from general insurance was £753 million in 2002, up £102 million or 16 per cent from £651 million in 2001. This comprised a proﬁt
of £198 million from general insurance underwriting and £555 million from broking activities.

The operating proﬁt of the underwriting business, at £198 million, was down £16 million, or 7 per cent, from £214 million in 2001. Premium income
increased by £58 million, or 14 per cent, to £486 million, principally driven by a £69 million increase in income from home protection products reﬂecting
the strength of the housing market in the UK and success in cross-selling home insurance products to mortgage customers. Creditor insurance premiums were
£3 million lower, due to the continuing impact of the outsourcing of the card protection book in 2000. Reinsurance premiums payable have increased by
£7 million to £15 million, following a decision to mitigate the risks on policies with large sums assured.

Operating expenses increased in line with sales, as more staff were taken on to deal with the increased business volumes, and commissions expense increased
by £18 million as a result of increased sales volumes and, in particular, higher levels of afﬁnity sales.

Claims were £55 million, or 32 per cent, higher at £229 million compared to £174 million in 2001. The overall claims ratio at 45.7 per cent was higher
than in 2001 (39.9 per cent) largely as a result of increased property claims, due to a 26 per cent growth in the home underwritten portfolio, and higher
weather and ﬂood related insurance claims.

The operating proﬁt of the general insurance broking business,  at £555 million, was £118 million, or 27 per cent, higher than £437 million in 2001,
principally reﬂecting a £119 million increase in broking commission income to £647 million in 2002. Creditor insurance commissions were £103 million
higher at £426 million reﬂecting improved penetration into the Lloyds TSB Group’s personal credit portfolios, coupled with the beneﬁt of higher volumes of
personal  loans  and  credit  card  outstandings.  There  has  also  been  a  beneﬁt  from  the  Lloyds  TSB  Group’s  continuing  shift  towards  broking  more  general
insurance  business.  Other  commission  income  was  £18  million  higher  as  increased  commissions  on  motor  and  other  smaller  products,  together  with
increased levels of retrospective commissions on a number of products, more than offset the impact of the non-repetition of a one-off beneﬁt of £30 million
in 2001 which resulted from a change in broking arrangements.

Wholesale and International Banking

Lloyds TSB Group’s Wholesale and International Banking business comprises 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 small and medium-sized UK businesses, and other forms of asset ﬁnance. It also includes banking and ﬁnancial services overseas; following
the disposal of Lloyds TSB Group’s operations in New Zealand these activities are now in three main areas (the Americas, Europe and Offshore Banking).

Net interest income 
Other income

Total income
Operating expenses

Trading surplus
Provisions for bad and doubtful debts
Amounts written off ﬁxed asset investments

Proﬁt on sale of businesses

Proﬁt before tax

Efﬁciency ratio
Total assets (period-end) 
Total risk-weighted assets (period-end) 

2003 compared to 2002

Continuing
operations
£m

Discontinued
operations
£m

1,876
1,514

3,390
(2,028)

1,362
(306)
(44)

1,012
–

511
142

653
(272)

381
(63)
–

318
865

2003
£m

2,387
1,656

2002
£m

2,458
1,588

2001
£m.

2,359
1,432

4,043
(2,300)

4,046
(2,185)

3,791
(1,960)

1,743
(369)
(44)

1,330
865

1,861
(540)
(57)

1,264
–

1,831
(396)
(22)

1,413
39

1,012

1,183

2,195

1,264

1,452

56.9%

54.0%

51.7%
£101,555m £117,066m £107,034m
£63,065m £73,000m £64,464m

The proﬁt before tax of Wholesale and International Banking increased by £931 million to £2,195 million including a proﬁt on the disposal of businesses
in New Zealand, Brazil and France of £865 million. If this gain is excluded there was an underlying improvement in proﬁt of £66 million to £1,330 million;
of this amount the businesses which have now been disposed of contributed £318 million compared to £279 million in 2002.

Total income decreased by £3 million to £4,043 million. Net interest income fell by £71 million to £2,387 million. Within the Wholesale businesses net
interest income fell by £74 million reﬂecting the implementation of the Competition Commission’s SME report remedies: the provision of interest-bearing
current accounts to small business customers has caused the margin to fall by 24 basis points, reducing net interest income by £169 million. There was
also lower income from treasury activities as the interest rate cut in the early part of the year and ﬂattening of the yield curve reduced market opportunities.
This more than offset the effects of strong growth within the asset ﬁnance operations which resulted in an increase in net interest income of £99 million;
average asset ﬁnance balances increased by £991 million, mainly due to the continued demand for consumer credit in the UK and the margin widened by
48 basis points. There was also an increase in income from structured ﬁnance transactions following the growth in balances during 2002. In International
Banking there was a modest increase in net interest income of £3 million. There was a £44 million improvement in net interest income from New Zealand
as volume growth and favourable exchange rate movements have more than offset the effect of some margin erosion. In other areas, however, net interest
income has fallen as balances have been reduced, particularly in Latin America, as the Lloyds TSB Group has sought to reduce its exposure to these economies.

LLOYDS TSB GROUP   35

Operating and financial review and prospects

Other income increased by £68 million, or 4 per cent, to £1,656 million as a result of a £109 million increase within Wholesale. This principally reﬂects
the inclusion of income from the sale of cars by the Dutton-Forshaw Group following its acquisition in December 2002, increasing income by £51 million,
and gains of £34 million on the sale of a number of leases by Lloyds TSB Leasing where the tax attributes could be used by the purchasers. There have
also been increases in the level of gains realised on the sale of venture capital investments and fees from corporate, asset ﬁnance and factoring activity;
however, this has been partly offset by a £36 million increase in commissions paid to motor dealers by the asset ﬁnance operation, reﬂecting the growth in
levels of new business, and lower income from company registration activities. In International Banking, other income fell by £41 million mainly as a result
of a £28 million reduction in proﬁts from the sale and leaseback of premises. There was also a reduction in fund management fees, partly due to the disposal
of the business in France, and lower income from Argentina as the level of activity has been reduced, which has more than offset improvements in Brazil
and New Zealand, principally from treasury operations.

Operating expenses increased by £115 million or 5 per cent. In Wholesale there was an increase of £121 million; the inclusion of the Dutton-Forshaw Group
accounted for £44 million of this increase. Within Corporate Banking there was a £39 million increase in costs. Operating lease depreciation increased by
£19 million as an accelerated charge was recorded following the reassessment of the carrying value of a small number of operating lease assets and there
were higher staff and risk management costs, although this was partly offset by lower reorganisation costs. There were smaller increases in other areas of
Wholesale principally relating to staff and consultancy costs to support a number of major projects. In International Banking operating expenses reduced by
£6 million as higher costs in Brazil and New Zealand, mainly reﬂecting exchange rate movements, have been offset by lower costs in the European operations
following the disposal of the Lloyds TSB Group’s businesses in France.

The provisions charge fell by £171 million to £369 million. The charge within Wholesale fell by £78 million as the level of new provisions required against
corporate customers reduced. In 2002 provisions totalling some £100 million were made against large US exposures which have not been repeated to the
same extent during 2003. In the asset ﬁnance business the provisions charge was largely unchanged despite strong lending growth during 2003, as the
high level of voluntary terminations experienced in 2002 were not repeated during 2003. Within International Banking the charge fell by £93 million mainly
as a result of a reduction of £79 million in the new provisions required against the Lloyds TSB Group’s exposures in Argentina as the economic conditions
in  that  country  have  started  to  stabilise.  There  has  also  been  a  reduction  in  the  charge  in  other  Latin  American  operations  as  speciﬁc  cases  requiring
provisions in 2002 have not been repeated.

Amounts written off ﬁxed asset investments fell by £13 million to £44 million reﬂecting lower charges against both corporate and venture capital investments.

In 2003, a proﬁt of £865 million arose on the sale of The National Bank of New Zealand, substantially all of Lloyds TSB Group’s businesses in Brazil and
its French fund management and private banking businesses.

2002 compared to 2001

The proﬁt before tax of Wholesale and International Banking decreased by £188 million, or 13 per cent, to £1,264 million in 2002 from £1,452 million
in 2001. The acquisition during the year of First National Vehicle Holdings, Abbey National Vehicle Finance and the Dutton-Forshaw Group had a signiﬁcant
impact on the trends in income and expenses within Wholesale and International Banking. In 2002 these acquisitions contributed £101 million of income,
and £102 million of operating expenses, including goodwill amortisation of £3 million, resulting in a loss before tax of £1 million. 

Total  income  increased  by  £255  million,  or  7  per  cent,  to  £4,046  million.  Excluding  the  impact  of  acquisitions,  total  income  was  £154  million,  or 
4  per  cent,  higher.  Net  interest  income  was  £99  million  higher  at  £2,458  million.  Growth  in  interest-earning  assets  more  than  offset  a  24 basis  point
reduction in the net interest margin and the effect of adverse exchange rate movements, which reduced net interest income by £116 million. 

Total assets were £10,032 million, or 9 per cent, higher at £117,066 million. Of this increase, some £4,700 million resulted from a growth in debt securities
within Wholesale, reﬂecting an increase in the Lloyds TSB Group’s portfolio of asset backed securities, most of which are triple A rated. The portfolio allows
the Lloyds TSB Group to provide a securitised asset funding service for its corporate clients (see ‘Operating and financial review and prospects – Liquidity’),
and to participate in structured deals with a limited number of global ﬁnancial institutions. Customer lending balances increased by some £2,600 million
with growth in lending to large corporates and asset ﬁnance balances as these businesses have sought to grow their balance sheets. There was an increase
in interbank lending of some £2,400 million mainly as a result of deposits made by the Lloyds TSB Group’s Treasury department in London as part of its
liquidity management activities. Within International Banking, total assets decreased by £109 million as strong growth in New Zealand, where total assets
increased by £2,370 million in sterling terms, was offset by reductions in the Lloyds TSB Group’s exposure to Brazil and Argentina.

Other income increased by £156 million, or 11 per cent, to £1,588 million. Operating lease rentals were £111 million higher; of this growth £83 million
was due to the acquisitions made during the year, with the balance due to organic growth in the Lloyds UDT and Lloyds TSB Leasing portfolios. A higher
level of insurance commission income within the asset ﬁnance business and a £20 million increase in corporate banking and factoring fees were offset by
a  £35  million  reduction  in  the  realisations  of  venture  capital  gains.  Fee  income  in  the  company  registration  business  was  £6  million  lower,  as  the
exceptionally high levels of company transactions in 2001 were not repeated. Overseas, other income increased by £29 million mainly as a result of proﬁts
on the sale and leaseback of premises totalling £32 million.

Operating expenses increased by £225 million, or 11 per cent, to £2,185 million. Excluding the effect of acquisitions made during the year, the underlying
increase was £123 million. Of this increase £33 million was due to increased operating lease depreciation as a result of organic growth in the Lloyds UDT
and Lloyds TSB Leasing portfolios and the non-repetition of a one-off beneﬁt of £23 million recognised in 2001 in respect of certain ship leases. There was
increased investment spend in corporate and commercial banking activities to support business growth and increased staff and other costs in the UK asset
ﬁnance and business banking businesses. Overseas, costs were little changed as increases in New Zealand, to support recent business growth, and the
effect of annual pay awards and increased pension costs, were offset by favourable exchange movements.

Provisions for bad and doubtful debts were £144 million, or 36 per cent, higher at £540 million compared to £396 million in 2001. The charge in respect
of corporate banking operations was £145 million higher following a charge of some £100 million in respect of certain large US corporates, caused by
accounting and operational irregularities, and an increased charge from the UK corporate lending portfolio reﬂecting the slowdown in activity in certain sectors
of the UK economy. The charge in respect of the asset ﬁnance businesses increased by £11 million mainly as a result of volume growth and a high level of
voluntary terminations. Within International Banking, the charge was £21 million lower as a result of lower speciﬁc provisions in Losango, the Lloyds TSB
Group’s consumer ﬁnance business in Brazil, largely reﬂecting exchange rate movements. There was a general provision charge of £50 million in relation
to the Lloyds TSB Group’s exposure to Argentina, compared to £55 million in 2001.

Amounts written off ﬁxed asset investments were £35 million higher at £57 million. There was a £21 million charge following operating irregularities on
one securitisation issue and a £21 million increase in the charge in respect of the Lloyds TSB Group’s development capital business, following the signiﬁcant
growth in the portfolio over recent years. These increases were partly offset by the non-repetition of a charge of £7 million incurred in 2001, in respect of
Argentine government debt instruments held within International Banking.

36 LLOYDS TSB GROUP

Operating and financial review and prospects

Central group items

Included within Central group items are the costs of Lloyds TSB Group support functions, the accrual for the annual payment to the Lloyds TSB Foundations,
other ﬁnance income arising on the Lloyds TSB Group’s post-retirement deﬁned beneﬁt schemes together with the cost of any beneﬁt augmentations in those
schemes, the net earnings on that part of Lloyds TSB Group’s capital base which is not required to support the operations of the businesses together with
earnings on the emerging markets debt investment portfolio, and other items of income and expenditure managed centrally.

Accrual for payment to Lloyds TSB Foundations
Other ﬁnance income
Pension scheme beneﬁt augmentations
Earnings on surplus capital and the emerging markets debt investment portfolio
Abbey National offer costs
Central costs and other unallocated items

(Loss) proﬁt before tax

2003 compared to 2002

2003
£m

(31)
34
–
(50)
–
(18)

(65)

2002
£m

(33)
165
–
(105)
–
(23)

4

2001
£m.

(36)
307
(82)
(39)
(16)
(47)

87

The four independent Lloyds TSB Foundations support registered charities throughout the UK that enable people, particularly disabled and disadvantaged,
to play a fuller role in society. The Foundations receive 1 per cent of the Lloyds TSB Group’s pre-tax proﬁt after adjusting for gains and losses on the disposal
of  businesses and pre-tax minority interests,  averaged  over  three  years,  instead  of  the  dividend  on  their  shareholdings.  In  2003,  the  Group  accrued
£31 million for payment to the Lloyds TSB Foundations, a reduction of £2 million compared to 2002. Although there has been a recovery in proﬁtability
during  2003  after  making  adjustment  for  disposal  gains,  there  has  been  a  continued  fall  in  the  three  year  rolling  average  further  reducing  the  amount
payable. See note 41 to the ﬁnancial statements. 

Other ﬁnance income represents income from the expected return on the Group’s pension fund assets after a charge for the unwinding of the discount on
the pension fund liabilities. The signiﬁcant reduction in income in 2003 reﬂects the combined impact of a reduction in the expected return on lower pension
scheme assets as a result of the continuing weakness in global equity markets, and increased pension fund liabilities at the beginning of the year.

Earnings on surplus capital and the emerging markets debt investment portfolio reﬂect earnings on capital held at the Group centre, less the funding cost of
recent acquisitions, and proﬁts from the Group’s investment portfolio of emerging markets debt securities. During the ﬁrst half of 2003 improved secondary
bond market conditions allowed the Group to sell its portfolio of emerging markets debt securities. Proﬁts on bond sales, and certain closed foreign exchange
positions, in 2003 totalled some £295 million compared to £212 million in 2002. The Group will not achieve any further contribution from the emerging
markets debt portfolio. This beneﬁt has been partly offset by lower earnings on the investment of the Lloyds TSB Group’s capital reﬂecting the reduction in
average UK interest rates since 2002.

2002 compared to 2001

The reduction in the charge in respect of the payment to the Lloyds TSB Foundations in 2002 reﬂected the continued fall in Lloyds TSB Group proﬁts during
the year. 

Other ﬁnance income at £165 million was £142 million, or 46 per cent, lower than in 2001, as a result of a reduced expected return on the pension scheme
assets following the fall in their value during 2001, together with an increased charge in respect of the unwinding of the discount on the scheme liabilities.
Costs of £82 million in 2001 in respect of beneﬁt augmentations in the Lloyds TSB Group’s main pension schemes were not repeated in 2002.

Earnings on surplus capital and the emerging markets debt investment portfolio were £66 million lower due to increased interest expense following issues
of subordinated debt during 2002 and a reduction in the level of surplus capital because of dividend payments and increased investment in the business
units. Beneﬁts realised in 2001 of £30 million from changes in interest rate hedging arrangements were not repeated. 

Future accounting developments 

In common with other listed companies governed by the law of an EU member state, for ﬁnancial years beginning on or after 1 January 2005 the Lloyds
TSB Group will be required to prepare its ﬁnancial statements in accordance with international accounting standards adopted at the European level (endorsed
IASs or IFRSs). This requirement will therefore ﬁrst be effective for the Lloyds TSB Group’s 2005 ﬁnancial statements. A signiﬁcant amount of work has
already been performed to prepare for the transition to international accounting standards. Detailed analyses have been performed within each of the Lloyds
TSB  Group’s  principal businesses to  identify  those  areas  where  changes  to  existing  accounting  practice  will  be  required  and  plans  developed to  make
amendments to the systems and processes to address the revised requirements.

The international accounting standards likely to have the most signiﬁcant effect upon the ﬁnancial statements of the Lloyds TSB Group are IAS 32 ‘Financial
Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’. Implementation of these standards will result
in  changes  to  the  way  in  which  many  of  the  transactions  entered  into  by  the  Lloyds  TSB  Group  are  accounted  for  and  presented  in  the  balance  sheet.
In particular,  these  standards  will  require  a  much  wider  use  of  fair  values  within  the  ﬁnancial  statements  which  is  likely  to  result  in  greater  volatility  in
both earnings  and  shareholders’ equity.  Neither  IAS  32  nor  IAS  39  have  yet  been  endorsed  by  the  European  Commission  and  the  International
Accounting Standards Board (‘IASB’) is still considering possible amendments to the standards; therefore their eventual content and timing of implementation
remains uncertain.

The IASB’s proposals in the area of insurance accounting are also likely to have an effect upon the Lloyds TSB Group’s ﬁnancial statements. An exposure
draft has been issued setting out a limited revision to the accounting framework pending the completion of a more wide-ranging review, which is not expected
to be before 2007. The requirements in the exposure draft will result in some products, which are currently accounted for as insurance using the embedded
value basis of accounting, being accounted for as ﬁnancial instruments. The IASB is still considering the responses that it has received to the exposure draft
and the eventual requirements of the resulting IFRS remain uncertain.

Information concerning other future accounting developments is provided in note 50 to the ﬁnancial statements.

LLOYDS TSB GROUP   37

Operating and financial review and prospects

UK compared with US GAAP

Under  US  GAAP,  Lloyds  TSB  Group’s  net  income  for  the  year  ended  31  December  2003  was  £3,231 million  (2002:  £1,753 million)  compared  to
£3,254 million (2002: £1,790 million) under UK GAAP. Reconciliations between the UK GAAP and US GAAP ﬁgures, together with detailed explanations
of the accounting differences, are included in note 50 to the ﬁnancial statements. 

The most signiﬁcant areas of difference between UK GAAP and US GAAP which affect net income are as follows:

Insurance  accounting. Under  UK  GAAP  applicable  to  banking  groups,  life  assurance  activities  are  accounted  for  using  the  embedded  value  basis  of
accounting which requires the recognition of the discounted value of the projected future net cash ﬂows attributable to the shareholder at the point of sale.
UK GAAP therefore results in a substantial proportion of the net proﬁt accruing on a portfolio of life assurance polices being recognised at their inception.
Under US GAAP income is recognised in the proﬁt and loss account in the period in which it is earned and expenses in the period in which they are incurred.
This results in a more even recognition of proﬁt over the life of the related policies.

Goodwill and intangible assets. Under US GAAP, following the full implementation of SFAS No. 142 in 2002, goodwill is no longer amortised through the
proﬁt  and  loss  account.  Goodwill  continues  to  be  amortised  under  UK  GAAP,  however  the  charge  in  the  Lloyds  TSB  Group’s  proﬁt  and  loss  account  is
relatively small since the directors have decided that it is not appropriate to amortise the goodwill that arose on the acquisition of Scottish Widows in 2000.
In 2001 and earlier years, prior to the full implementation of SFAS No. 142, the US GAAP amortisation charge was signiﬁcantly higher than under UK GAAP,
since US GAAP then required the amortisation of the Scottish Widows goodwill balance and of the goodwill arising, under US GAAP, from the business
combination of Lloyds Bank Plc and TSB Group plc in 1995. Under UK GAAP the combination of Lloyds Bank Plc and TSB Group plc was accounted for
as a merger with no goodwill arising.

However, US GAAP net income is lower due to an amortisation charge in respect of customer related intangibles, the intangible assets representing the value
of customer relationships associated with acquisitions, which are separately established under US GAAP.

Derivatives. Under UK GAAP, derivatives held for risk management purposes are accounted for on an accruals basis, in line with the underlying instruments
being hedged. Under US GAAP, because Lloyds TSB Group has elected not to satisfy the more onerous hedging criteria of SFAS No. 133 ‘Accounting for
Derivative Instruments and for Hedging Activities’ in respect of derivative contracts, these instruments are treated as being held for trading purposes, with
the unrealised mark-to-market gains and losses taken to income as they arise and the resulting assets or liabilities recorded on the balance sheet. As Lloyds
TSB  Group  will  continue  to  hold  a  signiﬁcant  number  of  derivatives  which  are  hedge  accounted  under  UK  GAAP  this  means  that  net  income  and
shareholders’ equity under US GAAP will be subject to greater volatility.

38 LLOYDS TSB GROUP

Operating and financial review and prospects

Average balance sheet and net interest income

The following average balance sheet excludes the long-term assurance business assets and liabilities attributable to policyholders. The interest yields and
costs for foreign ofﬁce assets and liabilities are affected by Lloyds TSB Group’s operations in Latin America. The countries in which Lloyds TSB Group operates
are periodically subject to comparatively high rates of interest, which in certain instances in the tables below has had the effect of producing unusually high
yields and costs.

2003
Average
balance
£m

2003
Interest
income
£m

2003

Yield
%

2002
Average
balance
£m

2002
Interest
income
£m

2002

Yield
%

2001
Average
balance
£m

2001
Interest
income
£m

2001

Yield
%

Assets
Treasury bills and other eligible bills:
– Domestic ofﬁces
– Foreign ofﬁces
Loans and advances to banks:
– Domestic ofﬁces
– Foreign ofﬁces
Loans and advances to customers:
– Domestic ofﬁces
– Foreign ofﬁces
Debt securities:
– Domestic ofﬁces
– Foreign ofﬁces
Lease and hire purchase receivables:
– Domestic ofﬁces
– Foreign ofﬁces

Total interest-earning assets of
banking book
Total interest-earning assets of 
trading book

2,237
541

11,831
2,487

68
5

412
117

3.04
0.92

3.48
4.70

2,608
906

11,839
2,275

85
211

470
129

111,340
18,491

6,877
1,434

6.18
7.76

100,087
17,695

6,494
1,761

9,863
4,664

11,429
13

350
102

783
1

3.55
2.19

6.85
7.69

8,661
6,022

11,707
18

347
220

830
2

3.26
23.29

1,858
1,641

3.97
5.67

6.49
9.95

4.01
3.65

12,086
2,308

90,752
15,316

4,394
4,397

7.09
11.11

12,154
39

91
423

692
153

4.90
25.78

5.73
6.63

7,028
1,532

7.74
10.00

230
300

909
6

5.23
6.82

7.48
15.38

172,896

10,149

5.87

161,818

10,549

6.52

144,945

11,364

7.84

17,622

666

3.78

15,518

602

3.88

12,252

544

4.44

7.58

Total interest-earning assets
Provisions for bad and doubtful debts
Non-interest earning assets:
– Domestic ofﬁces
– Foreign ofﬁces

190,518
(1,846)

18,973
3,353

10,815

5.68

177,336
(1,623)

19,941
2,822

11,151

6.29

157,197
(1,489)

11,908

20,653
2,255

Total average assets and interest income 210,998

10,815

5.13

198,476

11,151

5.62

178,616

11,908

6.67

Percentage of assets applicable to 
foreign activities (%) 

13.8

2003
Average
interest
earning
assets
£m

2003

2003

Net
interest
income
£m

Net
interest
margin
%

14.8

2002
Average
interest
earning
assets
£m

2002

Net
interest
income
£m

2002

Net
interest
margin
%

14.3

2001
Average
interest
earning
assets
£m

2001

Net
interest
income
£m

Average interest-earning assets and net 
interest income:
– Banking business
– Trading business

172,896
17,622

5,255
–

3.04
–

161,818
15,518

5,171
–

3.20
–

144,945
12,252

4,922
–

Net yield on interest-earning assets

190,518

5,255

2.76

177,336

5,171

2.92

157,197

4,922

2001

Net
interest 
margin
%

3.40
–

3.13

LLOYDS TSB GROUP   39

Operating and financial review and prospects

Liabilities and shareholders’ equity
Deposits by banks:
– Domestic ofﬁces
– Foreign ofﬁces
Liabilities to banks under sale 
and repurchase agreements:
– Domestic ofﬁces
– Foreign ofﬁces
Customer accounts:
– Domestic ofﬁces
– Foreign ofﬁces
Liabilities to customers under sale and
repurchase agreements:
– Domestic ofﬁces
– Foreign ofﬁces
Debt securities in issue:
– Domestic ofﬁces
– Foreign ofﬁces
Subordinated liabilities:
– Domestic ofﬁces
– Foreign ofﬁces

Total interest-bearing liabilities 
of banking book
Total interest-bearing liabilities 
of trading book

Total interest-bearing liabilities
Interest-free liabilities
Minority interests and shareholders’ funds:
– Domestic ofﬁces
– Foreign ofﬁces
Non-interest bearing customer accounts:
– Domestic ofﬁces
– Foreign ofﬁces
Other interest-free liabilities:
– Domestic ofﬁces
– Foreign ofﬁces

2003
Average
balance
£m

2003
Interest
expense
£m

2003

Cost
%

2002
Average
balance
£m

2002
Interest
expense
£m

2002

Cost
%

2001
Average
balance
£m

2001
Interest
expense
£m

2001

Cost
%

13,610
5,333

259
113

1.90
2.12

12,587
4,234

322
137

2.56
3.24

13,452
3,949

1,449
253

29
37

2.00
14.62

2,799
457

80
77

2.86
16.85

1,547
671

658
288

74
110

95,994
8,637

2,281
450

2.38
5.21

82,009
11,265

2,240
993

2.73
8.81

72,633
10,877

2,724
924

2,990
156

16,793
7,959

12,241
198

148
3

606
345

611
12

4.95
1.92

3.61
4.33

4.99
6.06

2,898
140

14,750
7,953

10,921
190

135
4

498
355

526
11

4.66
2.86

3.38
4.46

4.82
5.79

1,552
128

12,716
6,052

9,333
158

73
4

713
359

506
9

4.89
7.29

4.78
16.39

3.75
8.49

4.70
3.13

5.61
5.93

5.42
5.70

165,613

4,894

2.96

150,203

5,378

3.58

133,068

6,442

4.84

17,622

666

3.78

15,518

602

3.88

12,252

544

183,235

5,560

3.03

165,721

5,980

3.61

145,320

6,986

4.44

4.81

6,133
3,064

2,745
845

12,282
2,694

8,522
2,801

5,985
789

13,118
1,540

10,609
2,225

6,182
595

12,721
964

Total liabilities

210,998

5,560

2.64

198,476

5,980

3.01

178,616

6,986

3.91

Percentage of liabilities 
applicable to foreign activities (%)

12.9

14.2

Net interest margin for the banking book

Domestic ofﬁces
Foreign ofﬁces
Group margin

14.1

2002
%

3.28
2.77
3.20

2001
%

3.47
3.04
3.40

2003
%

3.11
2.67
3.04

Loans and advances to banks and customers include non-performing loans. Interest receivable on such loans has only been included to the extent to which
cash payments have been received, in accordance with Lloyds TSB Group’s policy on income recognition.

Approximately 85 per cent of the value of the balances are calculated on a daily basis with balances held by Lloyds TSB Group’s leasing and asset ﬁnance
businesses averaged on a monthly basis. Management believes that the interest rate trends are substantially the same as they would be if all balances were
averaged on the same basis.

40 LLOYDS TSB GROUP

Operating and financial review and prospects

Changes in net interest income – volume and rate analysis

The following table allocates changes in net interest income between volume and rate for 2003 compared with 2002 and for 2002 compared with 2001.
Where variances have arisen from both changes in volume and rate these are allocated to volume.

Interest receivable and similar income
Treasury bills and other eligible bills:
– Domestic ofﬁces
– Foreign ofﬁces
Loans and advances to banks:
– Domestic ofﬁces
– Foreign ofﬁces
Loans and advances to customers:
– Domestic ofﬁces
– Foreign ofﬁces
Debt securities:
– Domestic ofﬁces
– Foreign ofﬁces
Lease and hire purchase receivables:
– Domestic ofﬁces
– Foreign ofﬁces

Total banking book interest receivable and similar income
Total trading book interest receivable and similar income

2003 compared with 2002
Increase/(decrease)

2002 compared with 2001
Increase/(decrease)

Total change
£m

Volume
£m

Rate
£m

Total change
£m

Volume
£m

Rate
£m

(17)
(206)

(58)
(12)

383
(327)

3
(118)

(47)
(1)

(400)
64

(11)
(3)

–
10

695
62

43
(30)

(19)
–

747
80

(6)
(203)

(58)
(22)

(312)
(389)

(40)
(88)

(28)
(1)

(1,147)
(16)

(6)
(212)

(222)
(24)

(534)
229

117
(80)

(79)
(4)

(815)
58

24
(171)

(10)
(2)

606
237

171
59

(32)
(2)

880
127

(30)
(41)

(212)
(22)

(1,140)
(8)

(54)
(139)

(47)
(2)

(1,695)
(69)

Total interest receivable and similar income

(336)

827

(1,163)

(757)

1,007

(1,764)

Interest payable
Deposits by banks:
– Domestic ofﬁces
– Foreign ofﬁces
Liabilities to banks under sale and repurchase agreements:
– Domestic ofﬁces
– Foreign ofﬁces
Customer accounts:
– Domestic ofﬁces
– Foreign ofﬁces
Liabilities to customers under sale and repurchase agreements:
– Domestic ofﬁces
– Foreign ofﬁces
Debt securities in issue:
– Domestic ofﬁces
– Foreign ofﬁces
Subordinated liabilities:
– Domestic ofﬁces
– Foreign ofﬁces

Total banking book interest payable
Total trading book interest payable

Total interest payable

(63)
(24)

(51)
(40)

19
23

(27)
(30)

(82)
(47)

(24)
(10)

41
(543)

332
(137)

(291)
(406)

8
(1)

34
(10)

19
1

13
(1)

108
(10)

85
1

(484)
64

(420)

5
–

74
–

66
–

325
80

405

(336)
(151)

6
(33)

(484)
69

62
–

(215)
(4)

20
2

(22)
9

36
(36)

256
34

63
–

69
85

76
2

(314)
(160)

(30)
3

(740)
35

(1)
–

(284)
(89)

(56)
–

(809)
(16)

(1,064)
58

572
127

(1,636)
(69)

(825)

(1,006)

699

(1,705)

LLOYDS TSB GROUP   41

Operating and financial review and prospects

Risk management

Lloyds  TSB  Group  uses  an  enterprise-wide  framework  for  the  identiﬁcation,  assessment,  measurement  and  management  of  risk,  designed  to  meet  its
customers’ needs and maximise value for shareholders over time by aligning risk management with the corporate strategy; assessing the impact of emerging
risks from new technologies or markets; and developing risk tolerances and mitigating strategies.

Enterprise-wide  risk  management  (EWRM)  is  founded  on  four  principal  concepts:  strong  risk  governance;  empowerment;  competitive  advantage;  and
common risk language.

Strong risk governance

The changing regulatory environment faced by Lloyds TSB Group businesses, and developments in best practice, prompted the Lloyds TSB Group during
2003 to review its risk governance structures to deliver more effective risk management. The process of embedding these changes continues. In particular,
the review focused on the role of key risk committees, executive accountabilities for risk and the mechanisms by which the board and management carry
out their oversight and control responsibilities.

The resulting risk oversight responsibilities of the board, audit committee and risk oversight committee are shown in the corporate governance section on
page 75, whilst further key risk oversight roles are described below.

The group executive committee, assisted by its sub-committees the group business risk committee and the group asset and liability committee, supports the
group  chief  executive  in  ensuring  the  development,  implementation  and  effectiveness  of  the  Lloyds  TSB  Group’s  risk  management  framework,  the  clear
articulation  of  the  Lloyds  TSB  Group’s  risk  policies  and  reviews  the  Lloyds  TSB  Group’s  aggregate  risk  exposures  and  concentrations  of  risk.  The  group
executive committee’s duties are described more fully on page 75.

The chief risk director, a member of the group executive committee, oversees and promotes the development and implementation of a consistent global risk
management framework and provides objective challenge to both the group executive committee and the risk oversight committee. Group Risk Management
supports the chief risk director in performing the role.

Divisional risk ofﬁcers provide oversight of risk management activity within each of the Lloyds TSB Group’s operating divisions. Reporting directly to the group
executive directors responsible for the divisions, their day-to-day contact with business management, business operations and risk initiatives, provides an
effective risk oversight mechanism. They meet regularly with the chief risk director to enable best practice to be shared and to provide a comprehensive and
current perspective on material risks facing the Lloyds TSB Group.

The  director  of  group  audit  provides  the  required  independent  assurance  to  the  board  and  audit  committee  that  risks  within  the  Lloyds  TSB  Group  are
recognised,  monitored  and  managed  within  acceptable  parameters.  Group  Audit  is  fully  independent  of  Group  Risk  Management,  ensuring  objective
challenge to the effectiveness of the risk governance framework.

Accountability of line management has also been reinforced in relation to the  management of risks arising from its business and in developing the risk
awareness and risk management capability of its staff. A key objective is to ensure that business decisions strike an appropriate balance between risk and
reward, consistent with the Lloyds TSB Group’s risk appetite. As shown on page 43, business management forms part of a tiered risk management model,
with the divisional risk ofﬁcers providing oversight and challenge, as described above, and the chief risk director and group committees establishing the
Group-wide perspective.

The model provides the Lloyds TSB Group with an effective mechanism for developing and promulgating risk policies and risk management strategies which
are aligned with the risks faced by its businesses. It also facilitates more effective communication on these matters across the Lloyds TSB Group. These
arrangements will enable the Lloyds TSB Group better to anticipate and pre-empt risks, and to manage those risks which crystallise more effectively.

42 LLOYDS TSB GROUP

Operating and financial review and prospects

During 2003, Group Risk Management has reviewed internal governance procedures in many businesses to assess compliance with Lloyds TSB Group
standards  and  achieve  greater  consistency  in  risk  governance.  Where  appropriate,  these  have  prompted  the  creation  of  business  risk  committees  and
dedicated risk management functions.

Board and committees

LTSB board

Audit committee

Risk oversight committee

Group executive committee

Group chief executive

Group executive directors

Chief risk director

Group asset and liability
committee

Group business risk
committee

Risk management oversight

Business risk management

Director of group audit

Divisional risk officers

Group risk management

Business risk functions

Board and board committees

Direct reporting line

Management committees

Functional reporting line to support committees

Personnel

Functions

Empowerment

Functional reporting line for divisional risk officers to chief risk director

Directors of the Lloyds TSB Group’s businesses have primary responsibility for measuring, monitoring and controlling risks within their areas of accountability
and  are  empowered  to  establish  control  frameworks  for  their  businesses  that  are  consistent  with  the  Lloyds  TSB  Group’s  high  level  policies  and  within
parameters set and overseen by Group Risk Management and the divisional risk ofﬁcers.

Reﬂecting the importance the Lloyds TSB Group places on risk management, risk is one of the ﬁve principal criteria that it includes in its balanced scorecard
on which individual staff performance is judged. Business executives have speciﬁed risk management objectives, and incentive schemes take account of
performance against these.

The Lloyds TSB Group provides risk training to improve staff risk awareness and develop the risk culture in line with its EWRM goals. 

Intranet based risk management training has been developed to help staff understand the principal risks faced by the Lloyds TSB Group and identify and
manage  effectively  the  risks  that  they  face  in  their  roles.  The  University  for  Lloyds  TSB  has  validated  the  training  to  enable  the  awarding  of  internal
qualiﬁcations to those staff completing it.

Group Risk Management facilitated executive risk workshops in many Lloyds TSB Group businesses during 2003 to enhance risk awareness, assist the
identiﬁcation and mitigation of key risks to achievement of business objectives, and to establish or further reﬁne their risk appetite.

There is an annual control self assessment exercise under which businesses across the Lloyds TSB Group review speciﬁc controls and provide certiﬁcation
that these meet the requirements of the Lloyds TSB Group.

Competitive advantage

The EWRM model strengthens the Lloyds TSB Group’s ability to identify and assess risks; aggregate risks and deﬁne the corporate risk appetite; develop
solutions for reducing or transferring risk, where appropriate; and exploit risks to gain competitive advantage, thereby increasing shareholder value.

Greater consistency has been brought to the assessment and classiﬁcation of risk through use of 11 common risk drivers (shown below). Business and
divisional  risk  functions  are  increasingly  using  this  format  when  reporting  risks  centrally to  enable  risk  aggregation,  and  assessing  risk  levels of  new
products, change initiatives or business plans. Business executive committees, with divisional oversight, monitor their risk levels against their risk appetite;
ensuring effective mitigating action is being taken where appropriate. Divisional risk proﬁle reports are reviewed by the group business risk committee to
ensure that group executive directors and the chief risk director are aware of risk exposures and are comfortable these are being effectively managed.

The Lloyds TSB Group is developing an improved quantiﬁcation approach towards its risk appetite (deﬁned as the extent and categories of risk which the
board regards as appropriate and acceptable for the Lloyds TSB Group to bear). Adoption of the metrics under development has the objective of enabling
the Lloyds TSB Group to improve its risk management processes. This work is ongoing.

LLOYDS TSB GROUP   43

Operating and financial review and prospects

Common risk language

The Lloyds TSB Group has adopted a risk language in which all risks are classiﬁed by one or more of the following 11 risk drivers:

Sub-risks have been developed for these high level risks to further reﬁne the identiﬁcation and classiﬁcation of risk to enable risk events to be accurately
categorised to facilitate analysis of root causes. 

Governance, people and organisation risk, operations risk, customer treatment risk, legal and regulatory risk, and change management risk are collectively
managed as operational risks. A third level of risk language has been identiﬁed for these operational risks.

The Lloyds TSB Group’s high level policies and reporting to the group business risk committee, risk oversight committee, audit committee and board
have been aligned to the risk drivers. Roll-out of the risk language to the business was completed during 2003 providing consistency in classifying and
describing risks.

Governance, people and organisation

This is the risk of loss from poor corporate governance at Lloyds TSB Group and business level. It includes sub-optimal organisational structuring, or failure
to  recruit,  manage  and  retain  appropriately  skilled  staff  to  achieve  business  objectives.  Lloyds  TSB  Group  policy  for  managing  governance,  people  and
organisation risk is deﬁned in the Group Policy Manual. It deﬁnes the way the Lloyds TSB Group is organised, the need for tight ﬁnancial and operating
controls, maintenance of a strong risk management and control culture, the need to benchmark against industry best practice and for businesses to conduct
themselves with integrity, due skill, care and diligence.

Management of risks

The Lloyds TSB Group sets high standards for the conduct of its business and values its reputation. Responsibility for establishing an effective organisational
structure  is  vested  in  Group  and  business  management.  Sound  internal  risk  management  practices  are  promoted  through  business  directors  who  are
ultimately responsible for identifying, measuring, monitoring and controlling the risks within their speciﬁc areas of accountability.

The Lloyds TSB Group seeks to identify and classify risks in a timely manner. The likelihood of risks crystallising and the signiﬁcance of the consequent
impact on the business, the Lloyds TSB Group and its customers are evaluated. The Lloyds TSB Group’s business control environment seeks to ensure
effective and efﬁcient operational management; reliability, integrity and consistency of ﬁnancial and other reporting; and compliance with governing laws and
regulations. Business directors seek to ensure that material risks are reported to the relevant divisional risk ofﬁcer, group executive director and to Group Risk
Management.

Information and communication

It is the Lloyds TSB Group’s policy for the board and senior management at both Lloyds TSB Group and business level to receive relevant, reliable and timely
management information in line with business objectives to seek to ensure that activities are appropriately controlled, key risks are identiﬁed and monitored,
decisions are implemented and regulatory obligations are met.

Audit responsibilities and rights

Group Audit has unrestricted access to all functions, property, records and staff. It independently reviews adherence to the policies and processes that make
up the control environment, disseminating best practices throughout the Lloyds TSB Group in the course of its monitoring and corrective action activities.
The director of group audit reports to and meets regularly with the group chief executive and periodically with the audit committee. 

People

The  Lloyds  TSB  Group’s  approach  to  people  management  is  to  employ  skilled,  committed  staff,  working  as  a  team  for  the  beneﬁt  of  customers  and
shareholders,  who  are  given  the  opportunity  to  fulﬁl  their  potential;  employ  the  highest  ethical  standards  of  behaviour  and  best  practice  management
principles; and recruit on the basis of ability and competence.

Standards of behaviour

During 2003, Lloyds TSB Group revised its code of business conduct, which applies to the group chief executive, the deputy group chief executive, who is
acting as the group ﬁnance director and principal accounting ofﬁcer, and all other employees. It seeks  to  ensure  that employees act with integrity and
endeavour to deliver high levels of customer service. It promotes a working environment free from discrimination, harassment, bullying or victimisation of
any kind. Employees are encouraged and expected to alert management to suspected misconduct, fraud or other serious malpractice. The code as amended
from time to time is available to the public on the Lloyds TSB Group’s website at www.lloydstsb.com.

44 LLOYDS TSB GROUP

Operating and financial review and prospects

Performance and reward management

The  Lloyds  TSB  Group  seeks  to  ensure  that  all  employees  understand  their  role,  the  purpose  of  the  role  and  where  it  ﬁts  into  the  wider  team  and
organisational context. It manages and measures employees’ performance and contribution to collective goals and recognises the contribution of individuals
in the context of the pay market and the performance of the business in which they work, and rewards appropriately.

Training and development

The Lloyds TSB Group believes that long-term success depends on the quality and skills of its staff and that it has a joint responsibility with employees for
their personal and career development to improve current performance and to enhance future prospects.

Strategy risk

This  comprises  the  risks  arising  from  the  adoption  of  the  Lloyds  TSB  Group’s  agreed  strategy  and  its  implementation  at  corporate  or  business  level. 
At corporate and business level these risks are managed through a number of processes.

Processes

A  common  approach  is  applied  across  the  Lloyds  TSB  Group  to  assess  the  creation  of  shareholder  value.  This  is  measured  by  economic  proﬁt  (the
proﬁt attributable  to  shareholders,  less  a  notional  charge  for  the  equity  invested  in  the  business).  The  focus  on  economic  proﬁt  allows  the  Lloyds  TSB
Group to compare the returns being made on capital employed in each business. The use of risk-based economic capital and regulatory capital is closely
monitored  at  business  and  Lloyds  TSB  Group  level.  The  Lloyds  TSB  Group’s  economic  capital  model  covers  credit,  market,  insurance,  business  and
operational risks.

An annual strategic planning process is conducted at Lloyds TSB Group and business level and includes a quantitative and qualitative assessment of the
risks in the Lloyds TSB Group plan.

The Lloyds TSB Group’s strategy and those of its constituent businesses are reviewed and approved by the board. Regular reports are provided to the group
executive committee and the board on the progress of the Lloyds TSB Group’s key strategies and plans.

Revenue and capital investment decisions require additional formal assessment and approval. Formal risk assessment is conducted as part of the ﬁnancial
approval process.

Signiﬁcant  company  mergers  and  acquisitions  require  speciﬁc  approval  by  the  board.  In  addition  to  the  standard  due  diligence  conducted  during  a
merger or acquisition,  Group  Risk  Management  conducts  an  independent  risk  assessment  of  the  target  company  and  its  proposed  integration  into  the
Lloyds TSB Group.

Credit risk

This is the risk of loss arising from counterparty default subsequent to the provision of credit facilities (both on- and off-balance sheet). The Lloyds TSB Group
has dedicated standards, policies and procedures for the measurement, control and monitoring of credit and related risks. 

Measurement

Group rating system. All business units operate an authorised rating system complying with the Lloyds TSB Group’s standard methodology. The Lloyds TSB
Group uses a ‘Master Scale’ rating structure with ratings corresponding to a range of probability of future default.

Portfolio analysis. With Group Risk Management, 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 Management.

To enhance further the ability to measure and predict future risk, the Lloyds TSB Group continues to develop new policies and risk management systems.

Limits

Counterparty limits. Exposure to individual counterparties, groups of counterparties or customer risk segments 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 and term of the risk. Regular reports on signiﬁcant credit exposures are provided to the group executive committee and board.

Cross-border  and  cross-currency  exposures. Country  limits  are  authorised  and  managed  by  a  dedicated  unit  taking  into  account  economic  and
political factors.

Concentration risk. Formulation of concentration limits on certain industries and sectors. Group Risk Management sets sector caps that reﬂect risk appetite,
and monitors exposures to prevent excessive concentration of risk.

Credit derivatives. These are a method of transferring credit risk from one counterparty to another and of managing exposure to selected counterparties.
Credit derivatives include credit swaps, credit spread options and credit linked notes. Lloyds TSB Group has limited exposure to such instruments.

Credit risk arising from the use of derivatives. Note 47 on page 137 shows the total notional principal amount of interest rate, exchange rate and equity
contracts outstanding at 31 December 2003. The notional principal amount does not, however, represent the Lloyds TSB Group’s real exposure to credit
risk,  which  is  limited  to  the  current  cost  of  replacing  contracts  with  a  positive  value  to  the  Lloyds  TSB  Group,  should  the  counterparty  default.  This
replacement cost is also shown in note 47. To reduce credit risk the Lloyds TSB Group uses a variety of credit enhancement techniques such as netting and
collateralisation, where security is provided against the exposure.

Policies and processes

A number of tools, including Group-level credit policy where appropriate, are used to control the Lloyds TSB Group’s exposure to undue levels of credit risk:

• High-level credit policies designed to ensure a balanced and managed approach to the identiﬁcation and mitigation of credit risk.

• Lending guidelines deﬁning the responsibilities of lending ofﬁcers seek to provide a disciplined and focused benchmark for credit decisions.

• Independent review of credit exposures at divisional and Group level. 

• Sector caps, encompassing both industry sectors and speciﬁc product types are established by Group Risk Management to communicate the Lloyds TSB

Group’s risk appetite for speciﬁc types of business, primarily in the non-retail markets.

LLOYDS TSB GROUP   45

Operating and financial review and prospects

• Establishment and maintenance of the Lloyds TSB Group’s large exposure and provisioning policies, in accordance with regulatory reporting requirements. 

• Monitoring of scorecards. The Lloyds TSB Group uses statistically-based decisioning techniques (primarily credit scoring and performance scoring) for its

principal consumer lending portfolios. Group Risk Management reviews and monitors new and material changes to scorecards.

• Maintenance of a facilities database. Group Risk Management operates a centralised database of large corporate, sovereign and bank facilities designed to

monitor aggregate exposure throughout the Lloyds TSB Group.

• Monitoring and controlling residual value risk exposure. The Lloyds TSB Group’s appetite for such exposure is communicated to the business by a series of

time referenced sector caps, seeking to ensure an acceptable distribution of 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 Lloyds TSB Group.

Day-to-day  credit  management  and  asset  quality  within  each  business  is  primarily  the  responsibility  of  the  relevant  business  director.  Businesses have
established  credit  policies  and  processes  reﬂecting  Lloyds  TSB  Group  policy.  Businesses’ lending  authorities  are  delegated  by  ofﬁcers  holding  divisional
lending authority. All material authorities are advised to Group Risk Management.

Credit quality is supported by specialist units established within Lloyds TSB Group businesses to provide, for example: intensive management and control;
security perfection, maintenance and retention; expertise in documentation for lending and associated products; sector-speciﬁc expertise; and legal services
applicable to the particular market place and product range offered by the business.

Loan portfolio

Analysis of loans and advances to customers and banks 

The following table analyses loans to banks and customers by geographical area and type of loan at 31 December for each of the ﬁve years listed.

Domestic
Loans and advances to banks
Loans and advances to customers:
– Mortgages
– Other personal lending
– Agriculture, forestry and ﬁshing
– Manufacturing
– Construction
– Transport, distribution and hotels
– Financial, business and other services
– Property companies
– Lease ﬁnancing
– Hire purchase
– Other

Total domestic loans

Foreign
Loans and advances to banks
Loans and advances to customers:
– Mortgages
– Other personal lending
– Agriculture, forestry and ﬁshing
– Manufacturing
– Construction
– Transport, distribution and hotels
– Financial, business and other services
– Property companies
– Lease ﬁnancing
– Other
Total foreign loans

Total loans
Provision for loan losses
Interest held in suspense

2003
£m

2002
£m

2001
£m

2000
£m

1999
£m

13,671

15,291

12,737

13,165

14,341

70,750
20,139
2,025
3,211
1,497
4,741
9,652
4,577
6,470
4,701
3,351

62,467
16,579
2,076
3,373
1,482
4,696
8,352
4,008
7,285
4,342
3,397

56,578
13,765
2,074
3,321
1,309
4,440
8,736
2,907
7,552
4,364
2,992

52,659
11,863
2,026
3,357
1,016
3,836
9,295
2,470
8,070
4,447
2,526

47,451
10,092
2,183
3,262
754
3,540
6,614
2,303
8,369
3,674
2,127

144,785

133,348

120,775

114,730

104,710  

1,894

2,239

2,489

2,131

2,628

331
263
40
926
124
1,423
1,866
74
–
795
7,736

4,763
1,098
2,220
1,608
328
2,459
3,196
1,117
15
1,436
20,479

3,467
1,672
1,708
2,004
304
2,570
2,631
896
33
1,148
18,922

3,490
1,602
1,528
1,730
190
2,166
2,174
637
53
807
16,508

3,558
1,784
1,606
945
158
1,638
2,553
470
79
581
16,000

152,521
(1,695)
(28)

153,827
(1,767)
(57)

139,697
(1,468)
(70)

131,238
(1,426)
(90)

120,710
(1,414)
(100)

Total loans and advances net of provisions and interest held in suspense

150,798

152,003

138,159

129,722

119,196

46 LLOYDS TSB GROUP

Operating and financial review and prospects

Analysis of foreign loans by region
Loans and advances to customers:
– New Zealand
– Latin America
– USA
– Europe
– Rest of the world 

Loans and advances to banks:
– New Zealand
– Latin America
– USA
– Europe
– Rest of the world 

Total foreign loans

2003
£m

2002
£m

2001
£m

2000
£m

1999
£m

–
557
2,681
1,981
623

10,447
1,591
3,412
2,142
648

8,435
2,347
3,059
2,118
474

7,368
2,222
2,502
1,734
551

7,659
1,761
1,941
1,477
534

5,842

18,240

16,433

14,377

13,372

–
143
95
1,408
248

622
52
227
1,164
174

534
209
158
1,379
209

357
105
121
1,353
195

467
190
39
1,551
381

1,894

2,239

2,489

2,131

2,628

7,736

20,479

18,922

16,508

16,000

The  classiﬁcation  of  lending  as  domestic  or  foreign  is  based  on  the  location  of  the  ofﬁce  recording  the  transaction,  except  for  certain  lending  of  the
international business booked in London.

LLOYDS TSB GROUP   47

Operating and financial review and prospects

Summary of loan loss experience

The following table analyses the movements in the allowance for loan losses for each of the ﬁve years listed.

2003
£m

2002
£m

2001
£m

2000
£m

1999
£m

1,344
423

1,162
306

1,129
297

1,134
280

1,126
336

1,767

1,468

1,426

1,414

1,462

(1)
(54)

(58)
3

(14)
–

2
49

(49)
–

(1)
(691)
(11)
(30)
(11)
(40)
(11)
(36)
(4)
(44)
(47)

(926)
(219)

(21)
(554)
(2)
(25)
(17)
(27)
(53)
(19)
(17)
(50)
(2)

(787)
(91)

(23)
(456)
(9)
(18)
(8)
(34)
(44)
(21)
(11)
(68)
(9)

(701)
(184)

(35)
(401)
(12)
(13)
(9)
(27)
(28)
(17)
(12)
(67)
–

(621)
(124)

(30)
(364)
(14)
(33)
(10)
(46)
(40)
(24)
(14)
(29)
(6)

(610)
(134)

(1,145)

(878)

(885)

(745)

(744)

2
103
2
6
2
7
7
6
1
6
–

142
36

178

5
83
3
17
3
12
13
10
3
15
1

165
38

203

17
81
4
5
2
10
11
6
4
22
3

165
29

194

12
63
2
6
2
11
10
5
5
24
–

140
25

165

11
60
2
11
1
7
6
7
5
10
1

121
9

130

(784)
(183)

(622)
(53)

(536)
(155)

(481)
(99)

(489)
(125)

(967)

(675)

(691)

(580)

(614)

Balance at beginning of period
Domestic
Foreign

Exchange and other adjustments
Acquisition and disposal of businesses
Advances written off:
Domestic
Loans and advances to customers: 
– Mortgages
– Other personal lending
– Agriculture, forestry and ﬁshing
– Manufacturing
– Construction
– Transport, distribution and hotels
– Financial, business and other services
– Property companies
– Lease ﬁnancing
– Hire purchase
– Other

Total domestic
Foreign

Recoveries of advances written off:
Domestic
Loans and advances to customers:
– Mortgages
– Other personal lending
– Agriculture, forestry and ﬁshing
– Manufacturing
– Construction
– Transport, distribution and hotels
– Financial, business and other services
– Property companies
– Lease ﬁnancing
– Hire purchase
– Other

Total domestic
Foreign

Net advances written off:
Domestic
Foreign

48 LLOYDS TSB GROUP

Operating and financial review and prospects

Provision for loan losses charged against income for the year:
Domestic
Loans and advances to customers:
– Mortgages
– Other personal lending
– Agriculture, forestry and ﬁshing
– Manufacturing
– Construction
– Transport, distribution and hotels
– Financial, business and other services
– Property companies
– Lease ﬁnancing
– Hire purchase
– Other speciﬁc provisions
– General provisions
Loans and advances to banks

Total domestic
Foreign

Balance at end of period
Domestic
Foreign

2003
£m

2002
£m

2001
£m

2000
£m

1999
£m

(19)
679
8
–
11
26
49
22
2
40
32
9
16

875
75

950

(5)
514
–
31
14
28
107
(1)
3
57
38
14
–

800
229

1,029

2
423
3
40
(2)
28
39
4
5
47
23
(42)
–

570
177

747

(4)
328
(6)
21
1
3
12
8
8
47
15
(7)
–

426
115

541

9
379
(4)
28
5
23
16
4
14
31
(5)
–
–

500
115

615

1,468
227

1,344
423

1,162
306

1,129
297

1,134
280

1,695

1,767

1,468

1,426

1,414

Ratio of net write-offs during the period to average loans outstanding during the period

0.7%

0.5%

0.6%

0.5%

0.6%

LLOYDS TSB GROUP   49

Operating and financial review and prospects

The following table analyses the coverage of the allowance for loan losses by category of loans.

2003

Allowance
£m

2003
Percentage of
loans in each
category to
total loans
%

2002

Allowance
£m

2002
Percentage of
loans in each
category to
total loans
%

2001

Allowance
£m

2001
Percentage of
loans in each
category to
total loans
%

2000

Allowance
£m

2000
Percentage of
loans in each
category to
total loans
%

1999

Allowance
£m

1999
Percentage of
loans in each
category to
total loans
%

Balance at period end
applicable to:
Domestic
Loans and advances
to banks
Loans and advances
to customers:
Mortgages
Other personal lending
Agriculture, forestry
and ﬁshing
Manufacturing
Construction
Transport, distribution
and hotels
Financial, business
and other services
Property companies
Lease ﬁnancing
Hire purchase
Other

Total domestic
Foreign
General provision

16

9.0

–

9.9

–

9.1

–

10.0

–

11.9

7
622

9
97
9

60

179
–
6
77
50

46.4
13.2

1.3
2.1
1.0

3.1

6.3
3.0
4.2
3.1
2.2

25
495

10
121
7

67

136
8
7
75
65

1,132
181
382

94.9
5.1
–

1,016
318
433

40.7
10.8

44
452

40.5
9.9

48
404

40.1
9.0

75
358

39.3
8.4

1.3
2.2
1.0

3.1

5.4
2.6
4.7
2.8
2.2

86.7
13.3
–

9
98
7

54

65
18
18
53
30

848
251
369

1.5
2.4
0.9

3.2

6.3
2.1
5.4
3.1
2.1

86.5
13.5
–

11
71
15

50

59
29
20
52
15

774
295
357

1.5
2.6
0.8

2.9

7.1
1.9
6.2
3.4
1.9

87.4
12.6
–

27
57
21

63

65
33
16
49
9

773
280
361

1.8
2.7
0.6

2.9

5.5
1.9
6.9
3.0
1.8

86.7
13.3
–

1,695

100.0

1,767

100.0

1,468

100.0

1,426

100.0

1,414

100.0

Risk elements in the loan portfolio

The following discussion consists of an analysis of credit risk elements by categories which reﬂect US lending and accounting practices. These differ from
those employed in the UK. In particular:

Suspended interest and non-performing lending

In accordance with the UK British Bankers’ Association Statement of Recommended Practice on Advances, Lloyds TSB Group continues to accrue interest,
where appropriate, on doubtful debts when there is a realistic prospect of recovery. This interest is charged to the customer’s account but it is not credited
to income; it is placed on a suspense account and only taken to income if there ceases to be signiﬁcant doubt about its being paid. Loans are transferred
to non-accrual status where the operation of the customer’s account has ceased. This lending is managed by specialist recovery departments and is written
down to its estimated realisable value. Interest is not added to the lending or placed on a suspense account as its recovery is considered unlikely; it is only
taken to income if it is received.

In the US, it is the normal practice to stop accruing interest when payments are 90 days or more past due or when recovery of both principal and interest
is  doubtful.  When  the  loans  are  transferred  to  non-accrual  status,  accrued  interest  is  reversed  from  income  and  no  further  interest  is  recognised  until  it
becomes probable that the principal and interest will be repaid in full. Loans on which interest has been accrued but suspended would be included in risk
elements as loans accounted for on a non-accrual basis. 

In addition, in the US non-performing loans and advances are typically written off more quickly than in the UK. Consequently a UK bank may appear to
have a higher level of non-performing loans and advances than a comparable US bank although the reported income is likely to be similar in both the US
and the UK.

Troubled debt restructurings

In the US, loans whose terms have been modiﬁed due to problems with the borrower are required to be separately disclosed. If the new terms were in line
with market conditions at the time of the restructuring and the restructured loan remains current as to repayment of principal and interest then the disclosure
can be discontinued at the end of the ﬁrst year.

There are no similar disclosure requirements in the UK.

Potential problem loans

Potential problem loans are loans where known information about possible credit problems causes management to have concern as to the borrowers’ ability
to comply with the present loan repayment terms. Interest continues to be accrued to the proﬁt and loss account until, in the opinion of management, its
ultimate recoverability becomes doubtful.

There are no similar disclosure requirements in the UK.

50 LLOYDS TSB GROUP

Operating and financial review and prospects

Assets acquired in exchange for advances 

In most circumstances in the US, title to property securing residential real estate transfers to the lender upon foreclosure. The loan is written off and the
property acquired in this way is reported in a separate balance sheet category with any recoveries recorded as an offset to the provision for loan losses
recorded in the period. Upon sale of the acquired property, gains or losses are recorded in the income statement as a gain or loss on acquired property. 

In the UK, although a bank is entitled to enforce a ﬁrst charge on a property held as security, it typically does so only to the extent of enforcing its power of
sale. In accordance with UK GAAP and industry practice, Lloyds TSB Group takes control of a property held as collateral on a loan at repossession but title
does not transfer to it. Loans subject to repossession continue to be reported as loans in the balance sheet although the accrual of interest is suspended.
Any gains or losses on sale of the acquired property are recorded within the provision for loan losses during the reporting period.

The  difference  in  practices  has  no  effect  on  net  income  reported  in  the  UK  compared  to  that  reported  in  the  US  but  it  does  result  in  a  difference  in
classiﬁcation of losses and recoveries in the income statement. It also has the effect of causing UK banks to report an increased level of non-performing
loans compared with US banks. 

The following table analyses risk elements in the loan portfolio as at 31 December for the last ﬁve years.

Loans accounted for on a non-accrual basis
Domestic ofﬁces
Foreign ofﬁces

Total non-accrual loans

Accruing loans on which interest is being placed in suspense
Domestic ofﬁces
Foreign ofﬁces

Total suspended interest loans

Accruing loans on which interest is still being accrued and taken to proﬁt, 
and against which speciﬁc provisions have been made
Domestic ofﬁces
Foreign ofﬁces

2003
£m

2002
£m

2001
£m

2000
£m

1999
£m

480
105

585

545
88

633

421
241

662

553
199

752

278
101

379

637
206

843

223
181

404

617
238

855

209
139

348

502
217

719

1,199
23

1,217
66

1,265
75

1,713
101

1,924
74

Total accruing loans against which speciﬁc provisions have been made

1,222

1,283

1,340

1,814

1,998

Accruing loans on which interest is still being accrued and taken to proﬁt, 
the lending is contractually past due 90 days or more as to principal or 
interest, but against which no provisions have been made
Domestic ofﬁces
Foreign ofﬁces

Total accruing loans against which no provisions have been made

Troubled debt restructurings
Domestic ofﬁces
Foreign ofﬁces

Total troubled debt restructurings

Total non-performing lending
Domestic ofﬁces
Foreign ofﬁces

Total non-performing lending

875
–

875

1
–

1

776
34

810

1
2

3

693
37

730

1
9

10

520
33

553

2
12

14

506
15

521

10
10

20

3,100
216

2,968
542

2,874
428

3,075
565

3,151
455

3,316

3,510

3,302

3,640

3,606

LLOYDS TSB GROUP   51

Operating and financial review and prospects

Interest foregone on non-performing lending

The table below summarises the interest foregone on loans accounted for on a non-accrual basis and troubled debt restructurings.

Domestic lending
Interest income that would have been recognised under original contract terms
Interest income included in proﬁt

Interest foregone

Foreign lending
Interest income that would have been recognised under original contract terms
Interest income included in proﬁt

Interest foregone

Potential problem loans

2003
£m

18
(19)

(1)

8
(6)

2

In addition to the non-performing lending disclosed above, lendings which were current as to payment of interest and principal but where concerns existed
about the ability of the borrowers to comply with loan repayment terms in the near future were as follows:

Potential problem lending

2003
£m

2002
£m

2001
£m

2000
£m

1,696

1,734

1,423

1,142

1999
£m

936

The ﬁgures shown for potential problem lending are not indicative of the losses that might arise should the credit quality of this lending deteriorate since
they do not take into account security held.

Cross border outstandings

The business of Lloyds TSB Group involves signiﬁcant exposures in non-local currencies. These cross border outstandings comprise loans (including accrued
interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated
in non-local currency. The following tables analyse, by type of borrower, foreign outstandings which individually represent in excess of 1 per cent of Lloyds
TSB Group’s total assets.

As at 31 December 2003:
Germany
Italy
Belgium
United States of America
Netherlands

As at 31 December 2002:
Germany
United States of America
Italy
France

As at 31 December 2001:
Germany
United States of America
Italy

Governments
and ofﬁcial
institutions
£m

Total
£m

Banks
and other
ﬁnancial
institutions
£m

Commercial,
industrial and
other
£m

% of assets

2.3
1.7
1.4
1.2
1.2

3.1
1.8
1.5
1.0

2.0
1.8
1.7

4,553
3,510
2,746
2,371
2,343

6,511
3,655
3,013
2,075

3,756
3,403
3,170

284
2,411
1,460
45
431

57
207
1,912
99

59
151
1,834

3,851
759
1,236
1,109
950

5,624
1,274
909
1,187

2,920
1,290
1,052

418
340
50
1,217
962

830
2,174
192
789

777
1,962
284

As at 31 December 2003, Germany had commitments of £1,086 million, Italy had commitments of £166 million, Belgium had commitments of £21 million,
United States of America had commitments of £1,762 million and Netherlands had commitments of £450 million.

As at 31 December 2003, the country with cross border outstandings of between 0.75 per cent and 1 per cent of assets, amounting to £1,828 million in
total was France.

As at 31 December 2002 the countries with cross border outstandings of between 0.75 per cent and 1 per cent of assets, amounting to £5,080 million in
total were Japan, the Netherlands and Belgium. As at 31 December 2001, the countries with cross border outstandings of between 0.75 per cent and 
1 per cent of assets, amounting to £3,504 million in total were Japan and the Netherlands. 

52 LLOYDS TSB GROUP

Operating and financial review and prospects

Market risk

Market risk is the risk of loss arising from unexpected changes in ﬁnancial prices, including interest rates, exchange rates and bond, commodity and equity
prices. It arises in all areas of Lloyds TSB Group’s activities and is managed by a variety of different techniques. The Lloyds TSB Group’s banking activities
expose it to the risk of adverse movements in interest rates or exchange rates, with little or no exposure to equity or commodity risk; this is covered in detail
in this section. The Lloyds TSB Group’s insurance activities also expose it to market risk (see ‘Insurance risk’ below).

Measurement 

Measurement techniques – a variety of techniques are used to quantify the market risk arising from the Lloyds TSB Group’s banking and trading activities.
These reﬂect the nature of the business activity, and include simple interest rate gapping, open exchange positions, sensitivity analysis and value at risk.
Stress testing and scenario analysis are also used in certain portfolios, and at Lloyds TSB Group level, to simulate extreme conditions to supplement these
core measures.

Trading value at risk (VaR) – VaR can be calculated using a number of different methodologies and at different conﬁdence intervals. Lloyds TSB Group
utilises more than one methodology for comparative purposes, thus avoiding undue reliance on a single measure. 

The predominant measure within Lloyds TSB Group is the variance/covariance (VcV) methodology, which incorporates the volatility of relevant market prices
and  the  correlation  of  their  movements.  Based  on  the  commonly  used  95  per  cent  conﬁdence  level,  assuming  positions  are  held  overnight  and  using
observation periods of the preceding three years, the value at risk based on Lloyds TSB Group’s global trading positions was as detailed in the table below.

The following table shows closing, average, maximum and minimum VaR for the years ended 31 December 2003 and 2002.

Interest rate risk
Foreign exchange risk
Equity risk
Total VaR

31 December 2003

31 December 2002

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

0.7
0.3
0.0
1.0

0.8
0.7
0.0
1.5

1.8
1.0
0.1
2.6

0.3
0.3
0.0
0.9

0.5
0.5
0.0
1.0

0.7
0.5
0.0
1.2

1.5
0.9
0.1
2.1

0.4
0.3
0.0
0.9

The risk of loss measured by the VaR model is the potential loss in earnings. The total and average trading VaR does not assume any diversiﬁcation beneﬁt
across the three risk types. The maximum and minimum VaR reported for each risk category did not necessarily occur on the same day as the maximum
and minimum VaR reported as a whole. 

There are some limitations to the VcV methodology which are covered below:

• The model assumes that changes in the underlying asset returns can be modelled by a normal distribution. This assumption is an approximation of reality

that may not reﬂect all circumstances.

• The use of a conﬁdence limit does not convey any information about potential losses on occasions when the conﬁdence limit is exceeded. In times of
extreme market movements actual losses may be several times greater than the VaR number. Stress testing is used to supplement VaR to estimate the
impact of extreme events.

• Any model that forecasts the future based on historic data is implicitly assuming that the conditions that generated the data will remain true in the future.

Stress testing and using more than one VaR methodology for some local markets form part of the wider market risk framework. 

• Periods of severe market illiquidity, both in terms of the extent of the illiquidity and the time that it lasts, could mean that it might not be possible to hedge,

or close, all positions in the timescales assumed in the VaR model.

• VaR is calculated at the close of business each day, which excludes the proﬁt and loss impact of intra-day trading. 

• The VcV approach to VaR is not well suited to options positions. As a result these positions are controlled by additional sensitivity limits. 

In summary, although VaR is an important component of Lloyds TSB Group’s approach to managing trading market risk, it is supplemented by position and
sensitivity limits and stress testing. 

Interest rate exposures. Comprise those originating in treasury trading activities and structural interest rate exposures, which arise from the commercial and
retail banking activities of Lloyds TSB Group. 

Trading interest rate risk. The VaR relating to interest rate trading positions is set out in ‘Market risk – Measurement – Trading value at risk (VaR)’.

Structural interest rate risk. In Lloyds TSB Group’s retail portfolios, including mortgages, and in Lloyds TSB Group’s capital funds, arises from the different
repricing characteristics of Lloyds TSB Group’s banking assets and liabilities and is managed by the Group Balance Sheet Management department under
the direction of the group asset and liability committee.

Liabilities arising in the course of business from Lloyds TSB Group’s retail banking business fall into two broad categories:

• those which are insensitive to interest rate movements, non-interest bearing liabilities such as shareholders’ funds and interest-free or very low interest

current account deposits; and

• those which are sensitive to interest rate movements, primarily savings deposits bearing interest rates which are varied at Lloyds TSB Group’s discretion

(‘managed rate liabilities’) but which for competitive reasons generally reﬂect changes in the Bank of England’s base rate.

There is a relatively small volume of naturally arising banking liabilities whose interest rate is contractually ﬁxed typically for periods of up to two years.

Most banking assets, with the exception of such non-interest earning items as premises, are sensitive to interest rate movements. There is a large volume
of managed rate assets such as variable rate mortgage loans, and these may be considered as a natural offset to managed rate liabilities. However many
assets, such as personal loans and ﬁxed rate mortgages, bear interest which is contractually ﬁxed for periods of up to ﬁve years or longer.

LLOYDS TSB GROUP   53

Operating and financial review and prospects

Interest rate risk arises from the mismatch between interest rate insensitive liabilities and interest rate sensitive assets, and between the differing contractual
periods for which interest rates are ﬁxed on interest rate sensitive assets and liabilities. Group Balance Sheet Management manages this risk centrally by
offsetting  against  each  other  any  matching  interest  rate  sensitive  assets  and  liabilities; acquiring  new  ﬁnancial  assets  and  liabilities  as  matching  hedges
against net balances of mismatched interest rate sensitive banking liabilities and assets, respectively; and acquiring new ﬁnancial assets with interest rates
contractually ﬁxed for a range of periods up to ﬁve years as hedges for net balances of interest rate insensitive liabilities.

The ﬁnancial assets and liabilities referred to above are acquired by way of internal transactions between Group Balance Sheet Management and the Lloyds
TSB Group’s Financial Markets Division in London, typically in the form of interest rate swaps and loans or deposits.

Structural interest rate risk can also arise from the wholesale banking books in the UK, where it is managed by the Lloyds TSB Group’s Financial Markets
Division in London, and internationally, where it is managed by an authorised local treasury operation in each overseas centre. The levels of exposure within
these books are controlled and monitored within approved limits locally and centrally as set out in ‘Market risk – Limits – Market risk limits’. Limits are issued
to the international businesses on interest rate gaps or, where more appropriate, VaR.

Lloyds TSB Group’s non-trading exposure is summarised in the form of an interest rate repricing table, as set out in note 47b to the ﬁnancial statements.
Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. However, the table does
not take into account the effect of interest rate options used by Lloyds TSB Group to hedge its exposure.

The simulation models used by Lloyds TSB Group include assumptions about the relationships between customer behaviour and the level of interest rates;
the anticipated level of future business is also taken into account. The accuracy of these assumptions will impact the efﬁciency of hedging transactions.
The assumptions are regularly updated and the projected exposure is actively managed in accordance with Lloyds TSB Group’s group asset and liability
committee policy.

It is estimated that a hypothetical immediate and sustained 100 basis point increase in interest rates on 1 January 2004 would decrease net interest income
by £88.3 million for the 12 months to 31 December 2004, while a hypothetical immediate and sustained 100 basis point decrease in interest rates would
increase net interest income by £84.0 million.

UK
£m

North
America
£m

Asia &
Australasia
£m

Latin

Europe &
America Middle East
£m

£m

Total
2004
£m

Total
2003
£m

Change in net interest income from a +100 basis point 
shift in yield curves
Change in net interest income from a –100 basis point 
shift in yield curves

(56.4)

(0.5)

(1.3)

(0.4)

(29.7)

(88.3)

(37.9)

52.1

0.5

1.3

0.4

29.7

84.0

30.3

The analysis above is subject to certain simplifying assumptions including, but not limited to, all rates of all maturities worldwide move simultaneously by
the same amount; all positions in the wholesale books run to maturity; and there is no management action in response to movements in interest rates. 

In practice, positions in both the retail and wholesale books are actively managed and actual impact on net interest income may be different to the model.

Foreign  exchange  risk. Exposures  comprise  those  originating  in  treasury  trading  activities  and  structural  foreign  exchange  exposures,  which  arise  from
investment in Lloyds TSB Group’s overseas operations.

Trading foreign exchange. The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. These risks
reside in the authorised trading centres who are allocated exposure limits as set out in ‘Market risk – Limits – Market risk limits’. The limits are monitored
daily by the local centres and reported to Group Treasury. Group Treasury calculates the associated VaR as shown in the table in ‘Market risk – Measurement –
Trading value at risk (VaR)’.

Structural foreign exchange. Risk arises from Lloyds TSB Group’s investments in its overseas operations. Lloyds TSB Group’s structural foreign currency
exposure  is  represented  by  the  net  asset  value  of  the  holding  company’s  foreign  currency  exchange  equity  and  subordinated  debt  investments  in  its
subsidiaries and branches. Gains or losses on structural foreign currency exposures are taken to retained earnings.

The structural position is managed by Lloyds TSB Group Capital Funds having regard to the currency composition of Lloyds TSB Group’s risk-weighted assets
and  reported  to  the  group  asset  and  liability  committee  on  a  monthly  basis.  The  objective  is  to  limit  the  effect  of  the  exchange  rate  movements  on  the
published risk asset ratio. 

Lloyds  TSB  Group’s  structural  position  at  31 December  2003  is  set  out  in  note 47d to  the  financial  statements.  The  position  implies  that  at
31 December 2003 a hypothetical increase of 10 per cent in the value of sterling against all other currencies would have led to an £85 million reduction
in reserves, and vice versa. On this basis, there would have been no material impact on Lloyds TSB Group’s risk asset ratios.

Equity exposure. A small number of Lloyds TSB Group’s authorised centres can incur equity risk in dealings with their retail and commercial customers.
Limits on these equity exposures are controlled and monitored by Group Treasury. Group Treasury calculates VaR on these equities positions as set out in
the trading VaR table in ‘Market risk – Measurement – Trading value at risk (VaR)’.

Limits

Market risk limits (trading). Limits to control market risk in respect of trading positions are recommended by the group asset and liability committee, subject
to review by Group Risk Management, to the group executive committee and authorised in total by the board. A combination of position and sensitivity limits
is  used,  depending  on  the  nature  of  the  business  activity.  The  group  asset and  liability  committee,  through  Group  Treasury  for  trading  centres,  ensures
appropriate delegation to businesses. 

Market risk limits (structural). Limits to control interest rate risk within the Lloyds TSB Group’s UK retail portfolios are set out in the policy for Group Balance
Sheet Management, which is established by the group asset and liability committee and ratiﬁed by the Lloyds TSB Group board. The policy is to optimise
the stability of future net interest income, and this is achieved by entering into hedging transactions using interest rate swaps and other ﬁnancial instruments.
Both short and long-term interest rate parameters are applied to management of the balance sheet. Limits to control market risk in respect of UK wholesale
banking and overseas centres are recommended by the group asset and liability committee, subject to review by Group Risk Management, to the group
executive committee and authorised in total by the board, as described above. Some centres have, in addition, adopted benchmark proﬁles for investment
of interest rate insensitive liabilities as approved by Group Treasury.

54 LLOYDS TSB GROUP

Operating and financial review and prospects

Processes

Trading activities. Trading is restricted to a number of specialist centres, authorised by Group Treasury, the most important centre being the Lloyds TSB Group’s
Financial Markets Division in London. The level of exposure is strictly controlled and monitored within approved limits locally and centrally by Group Treasury.
Most of the Lloyds TSB Group’s trading activity is undertaken to meet the requirements of customers for foreign exchange and interest rate products. However,
some  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), with the objective of earning a proﬁt from favourable movements in market rates.
Accordingly, these transactions are reﬂected in the accounts at their fair value and gains and losses are shown in the proﬁt and loss account as dealing proﬁts. 

Wholesale Banking. Market risk in the wholesale banking books is managed in the UK by the Lloyds TSB Group’s Financial Markets Division in London,
and internationally by an authorised local treasury operation in each overseas centre. The levels of exposure within these books are controlled and monitored
within approved limits, both locally and also centrally by Group Treasury. Active management of the book is necessary to meet customer requirements and
changing market circumstances.

Retail portfolios and Capital Funds. Market risk in the Lloyds TSB Group’s retail portfolios and in the Lloyds TSB Group’s capital funds arises from the
different  repricing  characteristics  of  the  Lloyds  TSB  Group’s  banking  assets  and  liabilities  and  is  managed  by  Group  Balance  Sheet  Management.  The
simulation models used by Group Balance Sheet Management include assumptions about the relationships between customer behaviour and the level of
interest rates; the anticipated level of future business is also taken into account. The accuracy of these assumptions will impact the efﬁciency of hedging
transactions. The assumptions are regularly updated and the projected exposure is actively managed in accordance with the policy.

Derivatives. These are used to meet customers’ ﬁnancial needs; as part of the Lloyds TSB Group’s trading activities; and to reduce the Lloyds TSB Group’s
own exposure to ﬂuctuations in interest and exchange rates. The principal derivatives used by the Lloyds TSB Group are interest rate contracts (including
interest rate swaps, forward rate agreements and options) and exchange rate contracts (including forward foreign exchange contracts, currency swaps and
options). Particular attention is paid to the liquidity of the markets and products in which the Lloyds TSB Group trades to ensure that there are no undue
concentrations of activity and risk. 

Insurance risk 

The risk of loss arising from the sensitivity of proﬁts to movements in claims experience and expectation; movements in the market value of invested assets
which are not matched by similar movements in the value of insurance liabilities; the presence of options and guarantees in insurance products; and changes
in the legal, regulatory and ﬁscal environment as applicable to the insurance businesses.

Measurement

Financial risks are measured through deterministic studies of the impact of different insurance and investment market scenarios on the future free assets of
the business as well as some stochastic modelling.

The composition, and value, of both the non-participating fund and the General Insurance portfolio are reported to Group Risk Management on a monthly
basis and a VaR is calculated. Stress testing is also used to supplement the VaR models.

The risk of loss measured by the VaR model is the potential loss in earnings over a given time horizon. The VaR methodology used is a VcV approach which
is the same in all respects to that used for the traded risk in banking activities, except that in the case of equity risk, the model maps the portfolio composition
onto a series of appropriate indices by region and sector. The ﬁgures quoted below are the sum of the two portfolios with no allowance for diversiﬁcation
between portfolios or asset classes and represents the potential loss in earnings.

The following table shows closing, average, maximum and minimum VaR for the years ended 31 December 2003 and 2002 on a 95 per cent conﬁdence
one day basis.

31 December 2003

31 December 2002

Interest rate risk
Foreign exchange risk
Equity risk
Total VaR

Processes

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

3.4
0.8
11.7
15.9

3.7
0.9
14.0
18.6

5.5
1.0
18.0
24.1

3.0
0.7
11.6
15.9

3.1
1.0
17.4
21.5

3.2
1.4
19.9
24.5

3.7
1.8
22.6
28.1

2.8
1.0
17.4
21.5

Insurance risks are both retained and reinsured with external underwriters. 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.

General Insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements which are broadly spread over
different reinsurers. Detailed modelling, including that of the probable maximum loss under various catastrophe scenarios, supports the choice of reinsurance
arrangements. Appropriate reinsurance arrangements also apply within the life and pensions businesses.

Investment strategy is determined by the term and nature of the underwriting liabilities, and asset/liability matching positions are actively monitored. The
aim is to invest in assets such that the cash ﬂows on the investments will match those on the projected future liabilities. Actuarial tools are used to project
and match the cash ﬂows. It is not possible to eliminate risk completely as the timing of mortality is uncertain, and bonds are not available at all of the
required maturities. As a result the cash ﬂows cannot be precisely matched and so sensitivity tests are used to test the extent of the mismatch. 

Investment strategy for surplus assets held in excess of liabilities takes account of the regulatory and internal business requirements for capital to be held to
support the business now and in the future. Surplus assets are held primarily in two portfolios: the surplus in the Scottish Widows non-participating fund
and an investment portfolio within the General Insurance business.

The surplus in the long-term non-participating fund of Scottish Widows plc exists to provide the long-term funds with liquidity and working capital. The
surplus also forms a capital reserve to support the investments managed on behalf of the with-proﬁts policies which were transferred from Scottish Widows
Fund  and  Life  Assurance  Society.  With-proﬁts  business  involves  guaranteed  beneﬁts;  in  adverse  market  conditions  the  surplus  could  be  called  upon  to
support with-proﬁts beneﬁts. As a consequence this fund is currently invested in a mix of equities, investment properties, ﬁxed interest investments and cash
that  takes  into  account  the  mix  in  the  With-Proﬁts  Fund.  This  investment  policy  maintains  the  value  of  the  reserve  as  a  proportion  of  the  underlying 

LLOYDS TSB GROUP   55

Operating and financial review and prospects

With-Proﬁts Fund. The existence and investment mix of the surplus in the non-participating fund can therefore be considered as structural rather than as a
traded portfolio. Under UK GAAP the portfolio is shown at market value and gains and losses are recognised in the proﬁt and loss account.

The General Insurance portfolio is invested in a mixture of assets: cash, bonds and equities. The investment policy together with appropriate limits including
the limit to be applied to the equity component are approved by group asset and liability committee supported by Group Risk Management.

Equity derivatives are used by the Lloyds TSB Group to match equivalent liabilities arising from some of its retail products. Derivatives may also be used for
efﬁcient portfolio management purposes in client funds where such activity is in accordance with approved policy and the customer mandate.

With-proﬁts life and pensions business involves guaranteed beneﬁts that create a contingent market risk to the Lloyds TSB Group. Accordingly, in adverse
investment  market  conditions  the  surplus  assets  in  the  life  and  pensions  business  could  be  called  upon  to  support  with-proﬁts  beneﬁts.  Options  and
guarantees are incorporated in new insurance products only after careful consideration of the risk management issues that they present. This occurs as part
of the new product approval process (see ‘Product and Service risk’ below).

Operations risk

The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. For internal purposes, reputational impact
is also included.

Processes

Businesses have primary responsibility for identifying and managing their operations risks. They employ internal control techniques to reduce their likelihood
or impact to tolerable levels within the Lloyds TSB Group’s risk appetite. Where appropriate, risk is mitigated by way of insurance. 

The Lloyds TSB Group has deﬁned high-level operations risk policies to seek to ensure a wide-ranging and consistent approach to the identiﬁcation and
management of operations risk and a standard methodology to ensure consistency in the identiﬁcation, assessment and management of operations risk.

Group Risk Management provides general guidance on operations risk related issues, including regulatory changes and developments in the measurement
and management of operations risk, to promote best practice throughout the Lloyds TSB Group. It keeps under continuous review  and improvement all
aspects of operations risk management to reﬂect developments in industry best practice and regulatory requirements.

The Lloyds TSB Group applies appropriate new product review processes to provide assurance that risks inherent in new products have been identiﬁed and
mitigated.

Group  Risk  Management  carries  out  formal  risk  reviews,  covering  speciﬁc  risks,  activities,  business  sectors  or  products,  and  ensuring  that  prompt  and 
pre-emptive action is taken to address any actual or perceived risks that may emerge, whether speciﬁc to the Lloyds TSB Group or to the industry generally.

In response to the ongoing threat of external fraud, Lloyds TSB Group established a central fraud unit during 2003. This supports businesses in combating
fraud by providing data mining expertise and fraud intelligence; investigating pan Lloyds TSB Group fraud cases; coordinating  the development of fraud
detection  and  prevention  software;  and  acting  as  an  interface  to  law  enforcement  agencies  and  industry  bodies.  Group  Risk  Management  retains
responsibility for oversight of fraud management.

Product and service risk

The risk of loss arising from the inherent characteristics, management or distribution of products or services, or from failure to meet or exceed customer
expectations and competitor offerings. For the Lloyds TSB Group to achieve its objective to maximise value for shareholders over time, product life cycles
must be effectively managed and new products developed to meet customer needs.

The Lloyds TSB Group is committed to the fair treatment of its customers. This is embedded into the processes indicated below to ensure businesses have
developed customer centric strategies for product and business development, marketing, selling and after sales service.

Processes

Businesses maintain a range of products to meet customers’ needs and the business strategy, are responsible for managing and controlling product risks
and compliance with applicable regulations.

Product planning and development. Businesses have formal processes for reviewing the range of their product portfolios and subject all product development
to rigorous assessment. The assessment includes seeking to ensure that the product meets clearly deﬁned customer needs.

Product promotion, distribution and sales. Businesses have a deﬁned channel distribution strategy for products, consistent with the Lloyds TSB Group’s
distribution strategy. Businesses launching new products are responsible for ensuring compliance with all applicable regulations, and that the proposed sales
activity is appropriate for the type of customer and their attitude to risk. 

All advertising and marketing material is required to comply with the Lloyds TSB Group’s governing policy on business conduct. Businesses are required to
have procedures in place to ensure that the material is fair, clear and not misleading bearing in mind the knowledge and sophistication of the customer. Any
statement of fact should be substantiated through documentary evidence; any comparison should be made in a fair and balanced way; and any reference
to past performance should clearly state the basis of measurement.

Businesses are required, prior to publication of any sales material, to seek conﬁrmation that it complies with the regulatory and legal requirements of the
jurisdiction in which the product is offered and marketed. Terms and conditions (to include mandates, agreements and other documentation) are approved
by legal advisors and reviewed periodically.

New product approval. The Lloyds TSB Group deﬁnes a new product as a new or amended product that introduces a signiﬁcantly different risk proﬁle at
Lloyds TSB Group or business level. In line with deﬁned policy, businesses provide Group Risk Management with details of new products at an early stage
of product or service development to ensure compliance with the Lloyds TSB Group’s risk appetite and strategy. Businesses are required to demonstrate that
new products meet clearly deﬁned customer needs and that the sales process mitigates the risks of unsuitable sales.

Where appropriate, technical advice/approval is sought from specialist functions. Only new products carrying the approval of Group Risk Management and
the businesses involved in their manufacture/delivery are offered to customers.

Product performance. Businesses establish and monitor performance standards for all marketed products across a range of indicators, for example sales
volumes, customer service and risk proﬁle. Signiﬁcant deviations from these standards are investigated and appropriate action taken.

56 LLOYDS TSB GROUP

Operating and financial review and prospects

Financial risk

The risk of ﬁnancial failure arising from lack of capital or liquidity, poor management or poor quality/volatile earnings.

Measurement

The international standard for measuring capital adequacy is the risk asset ratio, which relates to on- and off-balance sheet exposures weighted according
to broad categories of risk. The Lloyds TSB Group’s capital ratios, calculated in line with the requirements of the Financial Services Authority, are set out in
detail on page 64.

Liquidity policy. A policy is in place which requires a common methodology to measuring liquidity across the Lloyds TSB Group. The methodology derives
a liquidity ratio calculated by taking the sum of liquid assets, ﬁve-day wholesale inﬂows and back-up lines, and then dividing this by the sum of ﬁve-day
wholesale outﬂows and a percentage of retail maturities and contingent claims drawable over the next ﬁve days.

Accounting policies. The Lloyds TSB Group seeks to use appropriate accounting policies, consistently applied and supported by reasonable and prudent
judgements and estimates.

Limits

The Lloyds TSB Group and its regulated subsidiary banks have been allocated an Individual Capital Ratio by the Financial Services Authority, and the board
has agreed a formal buffer to be maintained in addition to the Individual Capital Ratio. Actual or prospective breaches of the formal buffer must be notiﬁed
to the Financial Services Authority, together with proposed remedial action; no such notiﬁcations have been made during 2003. Informally, a further buffer
is  maintained.  In  addition,  the  Board  has  agreed  a  maximum  limit  of  the  proportion  of  debt  instruments  in  the  capital  base.  Risk-weighted  assets  are
monitored by businesses, while capital is controlled centrally.

The liquidity policy requires all authorised local treasury operations to maintain a liquidity ratio of over 100 per cent, in addition to ensuring compliance with
local regulatory requirements. 

Processes

Capital ratios are a key factor in the Lloyds TSB Group’s budgeting and planning processes, and updates of expected ratios are prepared regularly during the
year. Capital raised takes account of expected growth and currency of risk assets, and also allows for the sensitivity of the Lloyds TSB Group’s capital to
movements in equity markets. 

Each reporting entity within the Lloyds TSB Group has a ﬁnance function which is responsible for the production of ﬁnancial, management and regulatory
information. It is the responsibility of Group Finance to produce consolidated information for use internally and to meet external regulatory and statutory
reporting requirements. Group Finance requires businesses and reporting entities to follow common processes and reporting standards.

Businesses or  reporting  entities  have  formal  month-end  and  quarter-end  procedures  in  place  for  preparation  of  management  and  ﬁnancial  accounts
respectively, review and formally approve management accounts at a determined level of detail, ensuring consistency with ﬁnancial accounts and prepare
forecasts  and  detailed  annual  budgets  that  are  subject  to  formal  review  and  approval.  They  are  further  required  to  implement  measures  to  monitor
performance at local level to identify signiﬁcant ﬂuctuations or unusual activity.

It is the responsibility of local line management to ensure that the liquidity policy is met, and the sources and maturities of assets and liabilities are continually
managed and appropriately diversiﬁed to avoid any undue concentration as market conditions evolve. Compliance is monitored by regular liquidity returns
to Group Risk Management.

Customer treatment risk

The risk of ﬁnancial loss or reputational damage arising from inappropriate or poor customer treatment or failure to treat customers fairly.

Measurement

Lloyds TSB Group is committed to the fair treatment of its customers. A range of management information measures is in place across the Lloyds TSB Group
to support the tracking of key customer treatment indicators. Group Risk Management and Group Audit are required to report regularly on customer treatment
risk, management information trends and on compliance with the Lloyds TSB Group’s standards.

Service improvements are monitored by customer satisfaction surveys. The results of the research are fed into the Lloyds TSB Group’s CARE Index, which
measures ongoing performance against ﬁve principal objectives: customer understanding; accessibility; responsibility; expertise; and overall service quality
improvement.

Processes

A framework is in place to guide the consideration and documentation of customer treatment risk when developing policies and procedures. The Lloyds TSB
Group has deﬁned benchmark standards in all the key areas. The divisions are required to meet or exceed these standards. 

Trends across all the CARE Index categories are monitored and fed into a programme of continuous customer service improvement. Lloyds TSB Group also
provides its staff with clear Financial Services Authority compliant guidelines and processes for dealing with customer complaints.

Legal and regulatory risk 

The risk of ﬁnancial loss or reputational damage arising from failing to comply with the laws, regulations or codes applicable to the ﬁnancial services industry.

Processes

The  Lloyds  TSB  Group’s  business  is  regulated  overall  by  the  Financial  Services  Authority,  and  additionally  by  local  regulators  in  offshore  and  overseas
jurisdictions.

Each business has a nominated individual with ‘compliance oversight’ responsibility under Financial Services Authority rules. The role of such individuals is
to ensure that management has in place within the business a control structure which creates awareness of the rules and regulations to which the Lloyds
TSB Group is subject, and to monitor and report on adherence to these rules and regulations.

Group Compliance. All compliance personnel also have a reporting line to Group Compliance, which sets compliance standards across the Lloyds TSB Group
and provides independent reporting and assessment to the board and business directors.

LLOYDS TSB GROUP   57

Operating and financial review and prospects

Financial crime. Group Compliance includes a dedicated unit, led by the group ﬁnancial crime director, which is responsible for ensuring that the Lloyds TSB
Group has effective processes in place to identify and report on suspicious transactions and customers, in support of the worldwide ﬁght against ﬁnancial crime.

The group compliance director has access to the chairman, group chief executive and members of senior management.

Change management risk

The risk of ﬁnancial loss or reputational damage arising from programmes or projects failing to deliver to requirements, budget or timescale; or failing to
implement change effectively.

Processes

To deliver the Lloyds TSB Group’s strategic aims, change must be managed in an effective, risk-aware and appropriately controlled manner throughout the
organisation.  The  Lloyds  TSB  Group’s  Change  Management  Standards  provide  consistency  of  approach  across  its  project  portfolio, and the  approach is
regularly benchmarked against other organisations around the world.

Changes that signiﬁcantly impact customers or staff are managed as part of an overall change plan managed by the Lloyds TSB Group change management
committee. The committee ensures that the aggregate impact of the implementation of change on customers, staff and systems is understood, managed
and controlled.

Liquidity

Liquidity risk is deﬁned as the risk of a loss arising from Lloyds TSB Group’s inability to meet its ﬁnancial obligations as they fall due. These obligations
include  the  repayment  of  deposits  on  demand  or  at  their  contractual  maturity;  the  repayment  of  loan  capital  and  other  borrowings  as  they  mature;  the
payment of insurance policy beneﬁts, claims and surrenders; the payment of lease obligations as they become due; the payment of operating expenses and
taxation; the payment of dividends to shareholders; the ability to fund new and existing loan commitments; and the ability to take advantage of new business
opportunities. Lloyds TSB Group complies with the Financial Services Authority’s liquidity requirements, and with similar liquidity policies in place across
all  trading  centres  worldwide.  Compliance  is  monitored  by  regular  liquidity  returns  to  Group  Treasury.  Work  is  ongoing  to  ensure  Lloyds  TSB  Group’s
compliance with the new liquidity framework being proposed by the Financial Services Authority.

The principal sources of liquidity for Lloyds TSB Group plc are dividends received from its directly owned subsidiary company, Lloyds TSB Bank, and loans
from this and other Lloyds TSB Group companies. The ability of Lloyds TSB Bank to pay dividends, or for Lloyds TSB Bank or other Lloyds TSB Group
companies  to  make  loans  to  Lloyds  TSB  Group  plc,  depends  on  a  number  of  factors,  including  their  own  regulatory  capital  requirements,  distributable
reserves and ﬁnancial performance. For additional information see ‘Shareholder information – Dividends’.

Lloyds TSB Group plc is also able to raise funds by issuing loan capital or equity, although in practice Lloyds TSB Group plc has never issued equity for this
purpose and the majority of Lloyds TSB Group’s loan capital has been issued by Lloyds TSB Bank. As at 31 December 2003, Lloyds TSB Group plc had
£1,356  million  of  subordinated  debt  in  issuance  compared  with  £10,454  million  for  the  consolidated  Lloyds  TSB  Group.  The  cost  and  availability  of
subordinated  debt  ﬁnance  are  inﬂuenced  by  credit  ratings.  A  reduction  in  these  ratings  could  increase  the  cost  and  could  reduce  market  access. 
At 31 December 2003, the credit ratings of Lloyds TSB Bank were as follows:

Moody’s
Standard & Poor’s
Fitch

Senior debt

Aaa
AA
AA+

The credit ratings of Lloyds TSB Group plc were one notch lower. The ratings outlook from Moody’s and Fitch for Lloyds TSB Bank is stable. The Standard
& Poor’s rating outlook is negative. These credit ratings are not a recommendation to buy, hold or sell any security; and each rating should be evaluated
independently of every other rating.

A signiﬁcant part of the liquidity of Lloyds TSB Group’s banking businesses arises from their ability to generate customer deposits. A substantial proportion
of the customer deposit base is made up of current and savings accounts which, although repayable on demand, have traditionally provided a stable source
of funding. During 2003, amounts deposited by customers increased by £162 million from £116,334 million at 31 December 2002 to £116,496 million
at 31 December 2003, although excluding the effect of disposals made during the year there was an underlying growth of £6,798 million. These customer
deposits are supplemented by the issue of subordinated loan capital and wholesale funding sources in the capital markets, as well as from direct customer
contracts.  Wholesale  funding  sources  include  deposits  taken  on  the  inter-bank  market,  certiﬁcates  of  deposit,  sale  and  repurchase  agreements,  a  Euro
Medium Term Note programme, of which £5,184 million had been utilised for senior funding at 31 December 2003, and a US$5,000 million commercial
paper programme, of which US$1,037 million had been utilised at 31 December 2003.

The ability to sell assets quickly is also an important source of liquidity for Lloyds TSB Group’s banking businesses. Lloyds TSB Group holds sizeable balances
of marketable treasury and other eligible bills and debt securities which could be disposed of to provide additional funding should the need arise.

The following table sets out the amounts and maturities of Lloyds TSB Group’s contractual cash obligations at 31 December 2003.

Long-term debt – dated
Euro Medium Term Note programme
US$ commercial paper programme
Securitisation vehicles
Operating leases
Capital commitments
Other purchase obligations

58 LLOYDS TSB GROUP

Within
one year
£m

One to 
three years
£m

Three to
ﬁve years
£m

Over
ﬁve years
£m

505
711
579
3,046
226
77
265

249
177
–
–
393
–
340

668
673
–
–
372
–
200

3,073
3,623
–
–
258
–
220

Total
£m

4,495
5,184
579
3,046
1,249
77
1,025

5,409

1,159

1,913

7,174

15,655

Operating and financial review and prospects

Other purchase obligations includes amounts expected to be payable in respect of material contracts entered into by the Lloyds TSB Group for the provision
of outsourced and other services. The cost of these services will be charged to the proﬁt and loss account as it is incurred. The Lloyds TSB Group also has
a constructive obligation to ensure that its deﬁned post-retirement beneﬁt schemes remain adequately funded. The amount and timing of the Lloyds TSB
Group’s cash contributions to these schemes is uncertain and  will be affected by factors such as future  investment  returns and  demographic changes.
Lloyds TSB Group expects to make cash contributions of approximately £375 million to these schemes in 2004. The table above also excludes details of
future cash ﬂows related to certain insurance liabilities due to uncertainty as to their amounts and timing.

At 31 December 2003, Lloyds TSB Group also had £5,959 million of undated long-term debt outstanding; there were no ﬁnance lease obligations outstanding.

Off-balance sheet arrangements

The following table sets out the amounts and maturities of Lloyds TSB Group’s other commercial commitments at 31 December 2003. These commitments
are not included in Lloyds TSB Group’s consolidated balance sheet.

Acceptances
Guarantees
Other contingent liabilities

Total contingent liabilities

Lending commitments
Other commitments

Total commitments

Within
one year
£m

One to 
three years
£m

Three to
ﬁve years
£m

Over
ﬁve years
£m

295
5,516
2,330

8,141

2
181
135

318

2
130
9

141

–
295
130

425

Total
£m

299
6,122
2,604

9,025

62,088
879

9,587
13

4,840
6

1,906
16

78,421
914

62,967

9,600

4,846

1,922

79,335

Total contingents and commitments

71,108

9,918

4,987

2,347

88,360

Lending commitments are agreements to lend to customers in accordance with contractual provisions; these are either for a speciﬁed period or, as in the
case of credit cards and overdrafts, represent a revolving credit facility which can be drawn down at any time, provided that the agreement has not been
terminated. The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without
being drawn upon.

Lloyds TSB Group’s banking businesses are also exposed to liquidity risk through the provision of securitisation facilities to certain corporate customers.
Lloyds TSB Group currently offers securitisation facilities to its corporate clients through two conduit securitisation vehicles, Cancara and Obelisk. These are
funded  in  the  asset-backed  commercial  paper  market.  The  main  conduit  sponsored  by  Lloyds  TSB  Bank  plc  was  established  in  2002 and  commenced
funding in 2003. The conduit, Cancara Asset Securitisation Limited, is divided into three subgroups of companies:

a) the issuer companies, Cancara Asset Securitisation Limited (‘Cancara Limited’) and Cancara Asset Securitisation LLC (‘Cancara LLC’), which issue the
commercial paper in the US and Euro asset backed commercial paper markets to third party investors and are bankruptcy remote special purpose limited
liability companies. Cancara Limited is wholly owned by an independent charitable trust; Cancara Asset Securitisation LLC is a subsidiary of Cancara Limited;

b) the purchasing companies, Gresham Receivables Nos. 1, 2 (UK) and 3 Limited, which purchase customer receivables and fund these via a secured
loan or discounted note from Cancara Limited, are bankruptcy remote special purpose vehicles, each wholly owned by one or more independent charitable
trusts; and

c) the investment purchasing companies, Dragon Securities Nos. 1, 2, 3, 4, 5, 6 and 7 Limited, which purchase asset-backed securities (backed by third
party assets) from the market and initially also from Lloyds TSB Group. As Lloyds TSB Bank plc acts as investment advisor to the investment purchasing
companies  and  receives  a  performance  related  fee,  the  companies  are consolidated  by  Lloyds  TSB  Group  under  the  provisions  of  Financial  Reporting
Standard 5 as quasi-subsidiaries.

Other than certain third party asset backed securities mentioned above, Lloyds TSB Group does not sell its own assets to the other purchasing companies
or issuer companies nor does it, or any of its subsidiaries or afﬁliates, have an afﬁliation through ownership control or otherwise to these companies. However,
Lloyds TSB Group does provide liquidity facilities to the issuer, purchasing and investment purchasing companies to fund short-term cash deﬁcits that may
arise  through  timing  differences  between  cash  receipts  from  the  receivables  and  cash  payments  to  the  holders  of  the  commercial  paper.  As  at
31 December 2003  Lloyds  TSB  Bank  plc  provided  asset-backed  commercial  paper  liquidity  support  facilities  to  the  purchasing  companies,  investment
purchasing companies and Cancara totalling approximately £3.8 billion. As of the same date total assets held by the purchasing companies, investment
purchasing  companies  and  Cancara  totalled  approximately  £3.7  billion, of which £3.1 billion has been consolidated into the Lloyds TSB Group’s
balance sheet. 

At 31 December 2003 Lloyds TSB Group also acted as sponsor to three additional conduit securitisation purchasing entities, Monument Asset Securitisation
Company Limited (‘Monument’) and Obelisk Funding Limited and Obelisk Funding (No. 2) Limited (‘Obelisk’). These are wholly owned by independent trusts
and administered by third parties. These off-balance sheet entities purchase securities or receivables from customers funded by secured lending from third
parties, which in turn issue asset-backed commercial paper to investors. Lloyds TSB Group does not sell its own receivables to these entities, and the assets
and  obligations  of  Monument  and  Obelisk  are  not  included  in  Lloyds  TSB  Group’s  consolidated  balance  sheet.  However,  Lloyds  TSB  Group  provides 
short-term asset-backed commercial paper liquidity support facilities on commercial terms to the issuers of the commercial paper, for use in the event of a
market disturbance should they be unable to roll over maturing commercial paper or obtain alternative sources of funding. 

In respect of Obelisk as at 31 December 2003 it held assets of approximately £0.6 billion, primarily loans and investments. The assets are generally of
investment grade quality and are typically secured. Lloyds TSB Bank plc provided asset-backed commercial paper liquidity support facilities of approximately
£0.6 billion.  In  the  future  it  is  intended  that  much  of  the  business  funded  by  Obelisk  will  be  transferred  to  the  Cancara  conduit  structure.  At
31 December 2003, Monument had no assets and there are no remaining commitments to Monument as this vehicle is in the process of being closed.
During 2003, fee income earned by Lloyds TSB Group in relation to the Cancara, Monument and Obelisk transactions totalled approximately £7.80 million. 

Within Lloyds TSB Group’s insurance and investments businesses, the principal sources of liquidity are premiums received from policyholders, charges
levied upon policyholders, investment income and the proceeds from the sale and maturity of investments. The investment policies followed by Lloyds

LLOYDS TSB GROUP   59

Operating and financial review and prospects

TSB Group’s life assurance companies take account of anticipated cash ﬂow requirements including by matching the cash inﬂows with projected liabilities
where appropriate. Cash deposits and highly liquid government securities are available to provide liquidity to cover any higher than expected cash outﬂows.

Based upon the levels of resources within the banking and insurance and investments businesses and the ability of Lloyds TSB Group to access the wholesale
money markets or issue debt securities should the need arise, Lloyds TSB Group believes that its overall liquidity is sufﬁcient to meet current obligations to
customers, policyholders and debt holders, support expectations for future changes in asset and liability levels and carry on normal operations.

Supervision and regulation

UK regulations

The cornerstone of the regulatory regime in the UK is the Financial Services and Markets Act 2000 (‘FSMA’) which came into force on 1 December 2001
(a  date  known  as  N2)  and  replaced  much  of  the  previous  legislation  under  which  banks,  insurance  companies  and  investment  businesses  had  been
authorised and supervised. In accordance with the provisions of the FMSA on 30 November 2002, the Financial Services Authority (‘FSA’) completed the
process of assuming responsibility for the regulation and oversight of a wide range of ﬁnancial services activities in the UK. The FSA’s Integrated Prudential
Sourcebook (due to be implemented by the end of 2004) will bring together their main prudential requirements organised by risk (for example, credit risk,
market risk, insurance risk etc) replacing the existing Interim Prudential Sourcebooks, which are organised by types of business. Much of the Integrated
Prudential Sourcebook is based on European Union (‘EU’) directives and other international standards, many of which are currently being revised. 

Any individual who carries out what is known as a ‘controlled function’ in a ﬁnancial services ﬁrm needs to be approved by the FSA. Controlled functions
include those of directors, the ﬁnance ofﬁcer, risk management, compliance, anti-money laundering and internal audit. The FSA has established a Code of
Practice for Approved Persons; shortfalls in their conduct can lead to sanctions against the individual by the FSA.

The regulatory environments in which the different businesses within the Lloyds TSB Group operate are discussed below.

Banking

The  FSA  carries  out  its  supervision  of  the  UK  banking  sector  through  the  collection  of  information  from  a  series  of prudential  returns  covering  sterling  and
non-sterling operations, meetings with the senior management of the banks and reports obtained from skilled persons. The regular reports include operating
statements and returns covering (amongst other things) capital adequacy, liquidity, large single exposures and large exposures to related borrowers, lendings by
industry sector and geographical area, maturity analyses and foreign exchange activities. A risk-based approach for the supervision of all banks was introduced
in  1998;  under  this  approach,  the  starting  point  for  the  FSA’s  supervision  of  a  bank  is  based  on  a  systematic  analysis  of  that  bank’s  risk  proﬁle.  Having
determined the level of inherent risk in the bank a minimum capital adequacy requirement is established, which a bank is required to meet at all times.

Capital adequacy returns are submitted on a periodic basis for all the authorised institutions within the Lloyds TSB Group. There are six UK authorised banks
within the Lloyds TSB Group: Lloyds TSB Bank, Lloyds TSB Scotland, Cheltenham & Gloucester, Lloyds TSB Private Banking, Scottish Widows Bank and
AMC Bank. Returns are also submitted on a consolidated basis for the Lloyds TSB Group as a whole.

Depositors (who are eligible claimants) in the UK are provided with protection for their deposits with authorised institutions. Depositors with an institution
which has been declared insolvent are entitled to receive 100 per cent of the ﬁrst £2,000 and 90 per cent of the next £33,000 of their protected deposits
from the Financial Services Compensation Scheme, subject to a maximum amount of £31,700, including both principal and accrued interest. All authorised
institutions are required to be members of the Financial Services Compensation Scheme and are subject to a levy in proportion to their deposit base, which
includes deposits in sterling, other European Economic Area currencies and euro, to ﬁnance the Compensation Scheme.

The Banking Code (the ‘Code’) is a voluntary code agreed by UK banks and building societies which became effective in 1992, with subsequent revisions
in  1994,  1998,  2001  and  2003,  and  which  has  been  adopted  by  Lloyds  TSB  Group.  The  Code  deﬁnes  the  responsibilities  of  the  banks  and  building
societies to their personal customers in connection with the operation of their UK accounts and sets out minimum standards of service that these customers
can expect from institutions which subscribe to the Code. Compliance with the Code is monitored by the Banking Code Standards Board.

The Business Banking Code is a voluntary code agreed by UK banks which became effective at the end of March 2002, with a subsequent revision in 2003
and which has been adopted by Lloyds TSB Group. The Business Banking Code deﬁnes the responsibilities of the banks to their smaller business customers
in  connection  with  the operation  of  their  accounts  and  sets  out  minimum  standards  of  service  that  such  customers  can  expect  from  institutions  which
subscribe to the Business Banking Code. Compliance with the Business Banking Code is monitored by the Banking Code Standards Board.

Investment business

The FSA is responsible for the authorisation and supervision of those ﬁrms which are engaged in investment business as deﬁned in the FSMA. As part of
the  authorisation  process,  the  FSA  reviews  applicants  to  ensure  that  they  satisfy  the  necessary  criteria  including  honesty,  competence  and  ﬁnancial
soundness, to engage in regulated activity. Lloyds TSB Group’s investment businesses became authorised by the FSA through being ‘grandfathered’ as having
been authorised under previous legislation to carry on investment business.

The FSA’s regulatory approach aims to focus and reinforce the responsibility of the management of each approved person to ensure that it takes reasonable
care to organise and control its affairs responsibly and effectively and that it develops and maintains adequate risk management systems. The FSA Handbook
of Rules and Guidance (‘the Handbook’) sets out 11 Principles for Businesses and the rules to which investment businesses are required to adhere.

Under the FSMA a compulsory single, industry wide, investor’s compensation scheme, the Financial Services Compensation Scheme has been set up.
The Scheme is ﬁnanced by a levy system and the FSMA allows for the establishment of different funds for different kinds of business and for different
maximum amounts of claim. The maximum award for compensation on investments is £48,000 (100 per cent of the ﬁrst £30,000 and 90 per cent of
the next £20,000).

At N2, a new Inter-Professionals Code (IPC) covering investment products succeeded the London Code of Conduct (LCC) for investment and non-investment
products. Trading in the wholesale markets in Non-Investment Products (NIPs) that is sterling, foreign exchange and bullion wholesale deposit markets, and
the spot and forward foreign exchange and bullion markets, is not covered by the IPC. There was however strong market support for a code to cover these
markets, and in November 2002, a draft NIPs Code was published for consultation.

The draft code had been drawn up by a wide cross-section of market practitioners representing principals and brokers in the foreign exchange, money and
bullion markets. The work was carried out by the Foreign Exchange Joint Standing Committee, the Wholesale Sterling Deposits Working Group (a sub-group
of the Money Market Liaison Group) and the London Bullion Market Association, and was based on the LCC, while working in tandem with the FSA’s work
on the IPC. These groups have considered the comments put forward during the consultation period and produced a revised version of the code. The groups
will continue to monitor developments in market practice and review periodically how the code should be amended to reﬂect such changes.

60 LLOYDS TSB GROUP

Operating and financial review and prospects

The London Code of Conduct for Non-Investment Products will apply to both FSA authorised and non-FSA authorised institutions. Given the fact that some
ﬁrms will operate both in the NIPs and investment product markets, the NIPs Code has been drafted with a view to making its provisions consistent where
appropriate with the relevant parallel provisions in the FSA Handbook. The provisions of the NIPs Code are intended only as guidance on what is currently
believed  to  constitute  good  practice  in  the  NIPs  wholesale  markets.  The  code  has  no  statutory  underpinning  except  where  it  refers  to  existing  legal
requirements, although the FSA may take into account a ﬁrm’s compliance or otherwise with this and other codes when making decisions on authorisation.

Insurance

The insurance companies within the Lloyds TSB Group also became authorised by the FSA through being ‘grandfathered’ as having been authorised under
previous legislation. While the authorisation and supervision of insurance companies is subject to the same FSA regulatory approach as other investment
companies, rules exist to:

• Restrict the carrying out of insurance business in the UK to persons authorised by the FSA.

• Require the separation of the long-term business assets of an insurance company from the assets attributable to shareholders.

• Require, and deﬁne the role of, an appointed actuary for each insurance company carrying out long-term business in the UK. The appointed actuary is

responsible for monitoring the ﬁnancial health of the company.

• Require the directors to prepare an annual report on the solvency position of the insurer. The valuation basis for assets is deﬁned and there are limits on
the  extent  to  which  certain  categories  of  assets  are  allowable  in  determining  the  solvency  position.  The  appointed  actuary  must  calculate  the  value  of
long-term  liabilities  and  details  of  his  investigations  are  contained  in  the  directors’  solvency  report.  In  determining  the  value  of  long-term  liabilities  the
appointed actuary must use a method and valuation basis permitted by the Handbook.

• Require the maintenance of a prescribed solvency margin at all times. The amount of the solvency margin depends upon the amount and type of business

an insurance company writes. Failure to maintain the required solvency margin gives the regulator grounds for intervention.

• Prevent an insurer, and its parent, from declaring a dividend when long-term business assets do not exceed long-term liabilities. Furthermore, surplus assets

in the long-term fund can only be transferred out once the appointed actuary has completed an investigation.

• Prevent the use of the long-term business assets for purposes other than supporting long-term business.

With the introduction of the Integrated Prudential Sourcebook in 2004, the rules governing the appointment and roles of actuaries and the minimum capital
requirements relating to long-term insurance business are set to change, particularly in relation to with-proﬁts business. 

The Financial Services Compensation Scheme also applies to general and long-term insurance business written by an insurer authorised by the FSA or by
the UK branch of a European Economic Area ﬁrm carrying on ‘home state regulated activity’. The limit of compensation in respect of long-term insurance
contracts is 90 per cent of the value of the contract with no maximum.

Other relevant legislation and regulation

The  Consumer  Credit  Act  1974  regulates  both  brokerage  and  lending  activities  in  the  provision  of  personal  secured  and  unsecured  lending.  The  Data
Protection Act 1998 regulates, among other things, the retention and use of data relating to individual customers. The Unfair Terms in Consumer Contracts
Regulations 1994 came into force in July 1995. These Regulations together with the Unfair Contract Terms Act 1977 apply to certain contracts for goods
and services entered into with customers. The main effect of the Regulations is that a contractual term covered by the Regulations which is ‘unfair’ will not
be enforceable against a consumer. These Regulations apply, among other things, to mortgages and related products and services.

The Mortgage Code is a voluntary code followed by lenders and mortgage intermediaries dealing with customers in the UK who want a loan secured on
their home. It sets standards of good mortgage practice, which are followed as a minimum standard by those subscribing to it. Compliance with the Mortgage
Code is monitored by the Mortgage Code Compliance Board. The new mortgage regulation regime has been ﬁnalised by the FSA and will take effect from
31 October 2004.

The General Insurance Standards Council (‘GISC’) is an independent, non-statutory organisation that was ofﬁcially launched on 3 July 2000 to regulate the
sales, advice and service standards of its members. GISC members may be insurers, intermediaries or others involved in general insurance such as claims
handlers. Members’ obligations to individuals buying insurance for themselves and their families are explained fully in the GISC Private Customer Code, while
the GISC Commercial Code explains members’ obligations in relation to businesses buying insurance. Members are monitored to make sure they follow the
standards in the Code.

In December 2001 the UK government announced that the FSA would become responsible for regulating the sale and administration of general insurance
(e.g.  motor,  property  and  liability  insurance)  and  pure  protection  contracts  (i.e.  critical  illness,  income  protection,  term  assurance  and  long-term  care
assurance). The government’s legislation, and the FSA’s rules subsequently made under it, will, when ﬁnalised, implement the Insurance Mediation Directive
(‘IMD’) in the UK. The regulation of insurance intermediation will commence from 14 January 2005.

The Financial Ombudsman Service (‘FOS’) was established at N2 pursuant to the FMSA to provide customers with a free, independent service designed to
resolve disputes where the customer is not satisﬁed with the response received from the regulated ﬁrm. The FOS resolves disputes that cover most ﬁnancial
products  and  services  provided  in  (or  from)  the  United  Kingdom,  from  insurance  and  pension  plans  to  bank  accounts  and  investments,  for  eligible
complainants, private individuals and small businesses, charities or trusts. The decisions made by the FOS are binding on ﬁrms. Under section 229 of the
FMSA, if a complaint is determined in favour of the complainant, the determination may include a money award against the ﬁrm of such amount as the
Ombudsman considers fair compensation for ﬁnancial loss and subject to the maximum limit of £100,000, or a direction that the ﬁrm take such steps in
relation to the complainant as the Ombudsman considers just and appropriate or, both of these.

EU directives

EU  directives,  which  are  required  to  be  implemented  in  member  states  through  national  legislation,  have  a  strong  inﬂuence  over  the  framework  for
supervision  and  regulation  of  banking  and  ﬁnancial  services  in  the  UK.  The  banking  directives  aim  to  harmonise  banking  regulation  and  supervision
throughout member states by setting out minimum standards in key areas such as capital adequacy and deposit and investor compensation schemes. The
UK  has  now  largely  implemented  these  minimum  requirements.  The  directives  also  require  member  states  to  give  ‘mutual  recognition’  to  each  other’s
standards of regulation. Under the Second Banking Co-ordination directive the concept of mutual recognition has also been extended to create the ‘passport’
concept; this gives a bank which has been authorised in its ‘home’ state the freedom to establish branches in, and to provide cross-border services into,
other member states without the need for additional local authorisation. 

LLOYDS TSB GROUP   61

Operating and financial review and prospects

Whilst credit institutions such as those in Lloyds TSB Group are primarily regulated in their home state by a local regulator, the EU directives prescribe minimum
criteria  for  the  authorisation  of  credit  institutions  and  the  prudential  supervision  applicable  to  them.  Investment  ﬁrms  are  subject  to  a  similar  regulatory
environment and can obtain a ‘passport’ under the Investment Services Directive or the UCITS Management Directive. Despite the application of the ‘passports’
a member state can impose certain requirements on the conduct of banking and investment activities in its boundaries, including conduct of business rules.

Credit institutions and investment ﬁrms are required to make adequate capital provisions for risks entered into: the directives set out the deemed quality and
acceptable relative proportions of various types of capital. The directives also regulate permissible counterparty exposures, provide for the supervision of
consolidated ﬁnancial groups’ capital adequacy requirements and deﬁne permissible exposures to individual or linked counterparties.

During 2004 the European Commission will be issuing a draft risk based capital directive for banks and investment ﬁrms. This is based on the revised Basel
Capital Accord, which is being developed by the Basel Committee on banking supervision. This is likely to result in comprehensive changes to the capital
adequacy regulations applicable to Lloyds TSB Group. The proposals for the new framework cover three main areas:

• Minimum capital requirements and methodologies for allocation of regulatory capital for credit and other risks.

• A supervisory review process, including the setting of capital ratios by bank supervisors.

• Improvement in the stability of the ﬁnancial system by reliable and timely disclosure of risk information.

It is not expected that the eventual framework will be implemented before 1 January 2007.

The UK ﬁnancial services industry will also be affected by a number of other initiatives currently being developed by the EU; work continues on the Financial
Services Action Plan, which is intended to create a single market for ﬁnancial services by 2005, and there are proposals for a new Consumer Credit Directive.
The Lloyds TSB Group will continue to monitor the progress of these initiatives and assess the likely impact on its business.

Rest of the world

Lloyds TSB Group operates in many countries around the world and its overseas branches and subsidiaries are subject to reporting and reserve requirements
and controls imposed by the relevant central banks and regulatory authorities.

Customer remediation payments

Redress to past purchasers of pension policies

During the early 1990s, the UK government and regulatory authorities became concerned that customers who had been encouraged to set up private pension
plans had been given poor advice and that they would, in fact, have been in a better position if they had remained in, or joined, employer sponsored pension
schemes. The regulator of the UK pension industry (then the Securities and Investments Board, now the FSA) carried out an industry-wide investigation into
the conduct of business involving the transfer of pensions. The conclusion of this investigation was that a large number of customers had been poorly advised
by insurance companies and intermediaries across the industry. As a result, the regulator established an action plan requiring the UK pensions industry to
review all cases of possible misselling and where appropriate pay compensation. 

In  common  with  a  number  of  other  banks  and  insurance  companies,  in  January  1997  Lloyds  TSB  Bank  was  ﬁned  £325,000  by  the  Investment
Management Regulatory Organisation Limited for regulatory breaches and failings in connection with the sale of personal pensions between April 1988 and
July 1993. Lloyds TSB Group does not expect any further ﬁnes or regulatory investigations in connection with the regulator’s action plan for reviewing cases
of possible misselling. However, the principal cost incurred by the Lloyds TSB Group as a result of this matter relates to the compensation paid to past
purchasers of pensions. As the review of pension cases has progressed, provisions have been established in respect of the anticipated cost of these payments.

The provisions have been calculated by making assumptions about the number of cases requiring compensation and the estimated cost of the resulting payment.
As the review has progressed greater experience has enabled management to reﬁne these assumptions. The size of the provision has also been affected by
periodic revisions to the actuarial guidelines issued by the FSA for the calculation of redress payments and lower stock market levels which have resulted in an
increase in the cost of restitution into company pension schemes as personal pension fund values and the trustees’ expectation of future returns reduce. These
factors have resulted in additional charges being made to the Lloyds TSB Group’s proﬁt and loss account of £70 million in 2001, £40 million in 2002 and
£44 million in 2003. Following normal actuarial practice, each year the provision has also been increased to recognise the interest accruing upon the assets
held to match the liability. This increase in the provision amounted to some £2 million in 2003, £17 million in 2002 and £20 million in 2001, although there
was no net effect on Lloyds TSB Group’s proﬁt and loss account. At 31 December 2003 the provisions held amounted to £25 million. See note 30d to the
ﬁnancial statements.

The review is now nearing completion and management does not expect any further material changes in the provisioning requirement. However, the cases
that are still to be settled are generally large and complex and there is therefore a risk that the assumptions made in determining the provision may prove
to be inaccurate.

Mortgage endowment and other savings products

A current industry issue concerns the sale of life assurance products related to the repayment of residential mortgages (‘mortgage endowments’). At sale,
the premium is set at a level such that the projected beneﬁts, including an estimate of growth over the life of the policy and allowing for an estimate of the
expenses to be charged, will equal or exceed the mortgage debt. Falling investment returns have led to increased concern that the value of some of these
policies will be less than the amount required to repay the mortgage. Certain customers have complained that this risk was not properly explained to them
at the time of the sale.

During 2002, a review was carried out in conjunction with the FSA into sales of mortgage endowment and other long-term savings products made by the
Abbey Life sales force between 1988 and its disposal by the Lloyds TSB Group in February 2000. As a result of this review, in December 2002 the FSA
ﬁned Abbey Life £1 million for mortgage endowment misselling and other deﬁciencies in its compliance procedures and controls. A provision of £165 million
was established, in the year ended 31 December 2002, for the cost of compensation due to customers based upon assumptions as to the number of cases
requiring redress and the estimated average cost; this provision was increased by £22 million in 2003 as greater experience has enabled management to
reﬁne the underlying assumptions. In addition, there has been an increase in complaints in respect of products sold by the Abbey Life sales force prior to
1988; a provision of £34 million has been established in 2003 to cover the estimated cost of redress.

62 LLOYDS TSB GROUP

Operating and financial review and prospects

Mortgage endowments were also sold to customers through the branch networks of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester;
these policies were either underwritten by life assurance companies within the Lloyds TSB Group or by third parties. During 2003 there has been a signiﬁcant
increase in the level of complaints received from customers in respect of these sales and as a result a provision of some £65 million has been established
to cover the estimated cost of remediation. The ultimate cost remains highly uncertain as it depends both upon the number of customers whose complaints
are  found  to  be  justiﬁed  and  the  actual  payments  made,  which  will  depend  upon  individual  circumstances.  Consequently,  there  is  a  risk  that  further
provisions in respect of this matter may be required in the future, although management is satisﬁed that current provisioning levels remain adequate.

Concerns have also been expressed over the appropriateness of sales of certain stock market related savings products. In this regard, Lloyds TSB Group has
carried out, in conjunction with the FSA, an investigation into sales made in 2000 and 2001 of the Extra Income & Growth Plan (‘EIGP’). The EIGP is a
term investment providing a ﬁxed return either by way of quarterly income, annual income or a single payment at maturity. The capital repayment at maturity
is linked to the performance of a basket of shares, selected from the FTSE 100. The investigation was completed during 2003 and concluded that the Lloyds
TSB Group did not have sufﬁciently rigorous systems and controls for considering all the issues surrounding the selling of the EIGP and in particular, did not
provide sales staff with sufﬁciently in-depth training on how much of a customer’s available funds should be invested. As a result the product was sold to
some  customers  for  whom  it  was  not  suitable.  The  FSA  ﬁned  Lloyds  TSB  Bank  £1.9  million  and  required  that  compensation  should  be  paid  to  those
customers who invested in the EIGP when it was not appropriate. A charge of £130 million has been made to the proﬁt and loss account in 2003 in respect
of the costs of the investigation and to provide for the estimated cost of redress and the incremental costs expected to be incurred processing the payments
to customers. A further charge of £5 million was made during 2003 in respect of remediation to customers who invested in other long-term savings products.

With-proﬁts options and guarantees

In common with other organisations in the life assurance industry, prior to its demutualisation Scottish Widows wrote policies which contained potentially
valuable options and guarantees, including guaranteed annuity option policies. A guaranteed annuity option policy is a pension policy that provides a cash
beneﬁt at retirement age, which can be converted into an annuity at a speciﬁed minimum rate. Under the terms of the transfer of the Scottish Widows
business, a separate memorandum account was created within the with-proﬁts fund called the Additional Account which is available to meet any additional
costs of providing guaranteed beneﬁts on transferred policies. The Additional Account had a value at 31 December 2003 of £1.4 billion (2002: £1.5 billion);
to the extent that it is insufﬁcient to provide these beneﬁts any shortfall would be met by the Lloyds TSB Group.

Since demutualisation in 2000, Scottish Widows continued to write policies containing similar features, although the volume of products written has since
reduced and is now not signiﬁcant. The Additional Account is not available to meet any additional cost of providing the beneﬁts on these policies which
would, to a large extent, have to be met by the Lloyds TSB Group.

The eventual cost of providing beneﬁts on the policies written both pre and post demutualisation is dependent upon a large number of variables, including
in particular:

• future interest rate and equity market trends;

• demographic factors, such as future persistency and mortality; and

• the proportion of policyholders who seek to exercise their options.

The ultimate cost, and any impact upon the Lloyds TSB Group, will not be known for many years. However, Scottish Widows has been developing an actuarial
model to assist in the management of the with-proﬁts fund and to meet regulatory requirements. The model allows management to estimate the effects of
different economic scenarios upon the ﬁnancial position of the fund and consider the implications of different management actions. Preliminary output from
this model indicates that the possible cost of providing beneﬁts on policies containing features such as options and guarantees varies widely and, depending
on  the  economic  scenario  encountered,  could result  in  the  Lloyds  TSB  Group  incurring  a  liability.  Based on the information available at present, having
considered the range of possible outcomes, and after making allowance for the effect of proposed future management actions, the Lloyds TSB Group currently
considers that no provision is necessary. However, the model is subject to ongoing development and the position will be kept under review.

Capital resources

The total capital resources of Lloyds TSB Group are set out below:

Minority interests (equity and non-equity)
Called-up share capital
Share premium account
Merger reserve
Proﬁt and loss account
Shareholders’ funds (equity)

Undated loan capital
Dated loan capital

Total capital resources

31 December
2003
£m

31 December
2002
£m

31 December.
2001
£m.

727
1,418
1,136
343
6,727
9,624

10,351
5,959
4,495

20,805

731
1,416
1,093
343
5,091
7,943

8,674
5,496
4,672

18,842

546
1,411
959
343
7,613
10,326

10,872
4,102
4,006

18,980

Lloyds TSB Group’s total capital resources increased by £1,963 million during 2003.

Shareholders’ funds increased by £1,681 million, mainly due to retained proﬁts, reﬂecting in part the proﬁt arising on the disposal of The National Bank of
New Zealand, and the favourable effect of exchange rate movements on the carrying value of the Lloyds TSB Group’s overseas branches and subsidiaries.
Loan capital increased by £286 million following the issue of additional undated loan capital to support the expansion of the Lloyds TSB Group’s balance
sheet which more than offset the effect of disposals.

LLOYDS TSB GROUP   63

Operating and financial review and prospects

Capital ratios

The international standard for measuring capital adequacy is the risk asset ratio, which relates regulatory capital to balance sheet assets and off-balance
sheet exposures weighted according to broad categories of risk. 

Lloyds TSB Group’s regulatory capital is divided into tiers deﬁned by the European Community Banking Consolidation Directive as implemented in the UK
by the FSA’s Interim Prudential Sourcebook for Banks. Tier 1 comprises mainly shareholders’ funds, tier 1 capital instruments and minority interests, after
deducting goodwill and other intangible assets. Tier 2 comprises general loan loss provisions, and qualifying subordinated loan capital, with restrictions on
the amount of general provisions and loan capital which may be included. The amount of qualifying tier 2 capital cannot exceed that of tier 1 capital. Total
capital is reduced by deducting investments in subsidiaries and associates which are not consolidated for regulatory purposes and investments in the capital
of other credit/ﬁnancial institutions. In the case of Lloyds TSB Group, this means that the net assets of its life assurance and general insurance businesses
are deducted from Lloyds TSB Group’s regulatory capital.

Banking  operations  are  categorised  as  either  banking  book  or  trading  book  (broadly,  activities  which  are  accounted  for  on  a  mark-to-market  basis).
Risk-weighted assets are determined according to a broad categorisation of the nature of each asset or exposure and counterparty and, for the trading book,
by taking into account market-related risks. 

31 December
2003
£m

31 December
2002
£m

31 December.
2001
£m

Capital:
– Tier 1
– Tier 2

Supervisory deductions

Total regulatory capital

Total risk-weighted assets

Post-tax return on average risk-weighted assets
Risk asset ratios:
– Total capital
– Tier 1

11,223
8,935

20,158
(6,898)

13,260

117,732

2.63%

11.3%
9.5%

9,442
8,846

18,288
(6,573)

11,715

122,411

1.62%

9.6%
7.7%

8,352
7,831

16,183
(6,730)

9,453

107,861

2.26%

8.8%
7.7%

At 31 December 2003, the risk asset ratios were 11.3 per cent for total capital and 9.5 per cent for tier 1 capital. The 9.5 per cent tier 1 capital ratio appears
higher than would perhaps be expected and reﬂects the higher level of supervisory deductions resulting from Lloyds TSB Group’s signiﬁcant investment in
its life assurance operations.

Lloyds  TSB  Group’s capital ratios improved signiﬁcantly during 2003, partly as a  result of  gains on business  disposals. Lloyds TSB Group’s capital
management policy is focused on optimising value for shareholders. There is a clear focus on delivering organic growth and expected capital retentions are
sufﬁcient to support planned levels of growth. However, management also wishes to maintain the ﬂexibility to make value enhancing ‘in market’ acquisitions
and therefore, at this stage, there are no plans to return capital to shareholders other than by way of dividend payments (see ‘Shareholder information –
Dividends’). Management will keep all options for the utilisation of capital under reveiw.

There  are  strict  limits  imposed  by  the  regulatory  authorities  as  to  the  proportion  of  Lloyds  TSB  Group’s  regulatory  capital  base  that  can  be  made  up  of
subordinated debt and preferred securities. Lloyds TSB Group’s capacity to raise new debt capital for regulatory purposes increases as proﬁts are retained;
at 31 December 2003, Lloyds TSB Group had capacity to raise approximately £2,300 million of tier 2 debt capital, compared to approximately £600 million
at 31 December 2002. This increase reﬂects the effects of retained proﬁts and favourable exchange rate movements. The unpredictable nature of movements
in the value of the investments supporting the long-term assurance funds could cause the amount of qualifying tier 2 capital to be restricted because of
falling tier 1 resources. The Lloyds TSB Group seeks to ensure that even in the event of such restrictions the total capital ratio will remain adequate.

During 2003, total capital for regulatory purposes increased by £1,545 million to £13,260 million. Tier 1 capital increased by £1,781 million, mainly as
a result of proﬁt retentions and favourable exchange rate movements, and tier 2 capital increased by £89 million. This was partly offset by an increase in
supervisory  deductions  of  £325  million, reﬂecting an  increase  of  £268  million  in  the  long-term assurance business attributable to  the  shareholder to
£6,481 million, from £6,213 million in December 2002.

Risk-weighted assets decreased to £117,732 million at 31 December 2003 following the disposal of the Lloyds TSB Group’s operations in New Zealand
and Brazil and the post-tax return on average risk-weighted assets was 2.63 per cent.

The free asset ratio is a common measure of ﬁnancial strength in the UK for long-term businesses. It is the ratio of assets less liabilities (including actuarial
reserves but before the required regulatory minimum solvency margin) expressed as a percentage of the liabilities. It is derived from annual insurance returns
which will be completed in March 2004. At 31 December 2003 the free asset ratio for Scottish Widows plc was estimated as 13.5 per cent, compared with
12.2 per cent at 31 December 2002. This free asset ratio included some £195 million allowance for future proﬁts (December 2002: £400 million). After
adjusting for the required regulatory minimum solvency margin, the Scottish Widows plc ratio, expressed as a percentage of total assets, was an estimated
8.3 per cent at 31 December 2003, compared with 7.3 per cent at 31 December 2002. As part of the FSA’s Integrated Prudential Sourcebook developments
realistic reporting will be introduced for the end of 2004. Based on the form of disclosure agreed between the Association of British Insurers and the FSA,
management estimates that the risk capital margin is covered over three times.

64 LLOYDS TSB GROUP

Operating and financial review and prospects

Corporate social responsibility

The Lloyds TSB Group has long recognised the importance of corporate social responsibility (CSR). It is one of the UK’s largest corporate givers; it has award
winning  policies  in  equality  and  diversity,  employee  relations  and  training  and  development;  and,  it has leading  edge  systems  for  the  assessment  of
environmental risks in lending. This track record is reﬂected in sector leading performance in a variety of CSR indices, league tables and investor ratings.

The Lloyds TSB Group recognises that  social,  ethical  and  environmental  (SEE)  issues  bring  both  risks  and  opportunities.  The  Lloyds  TSB  Group’s full
response to such issues is detailed in its separate CSR report, The Community & our Business, (see page 185 for details).

The Lloyds TSB Group has a CSR steering committee chaired by the deputy group chief executive and comprising the senior executives of those businesses
most  directly  affected  by  SEE  issues.  The  committee  meets  quarterly  to  recommend  strategy  and  direction.  The  board  reviews  overall  CSR  performance
annually and individual issues are subject to board discussion throughout the year.

The board is conﬁdent that the systems in place to manage signiﬁcant CSR risks are effective and provide adequate information to identify and assess the
short and long-term risks arising from SEE matters. In 2003, CSR risks and opportunities have been assessed and the board is satisﬁed that CSR risks pose
no material threat to the company.

During 2003 the Lloyds TSB Group has continued to roll out its balanced scorecard as a tool to support the business strategy and values and to provide a
means to balance the needs of customers, staff and shareholders. The balanced scorecard seeks to ensure that staff performance is measured on customer
service,  building  customer  relationships,  people  management  and  assessment  of  risk  as  well  as  sales  and  ﬁnancial  measures.  Where  appropriate,
management remuneration and incentives are linked directly to speciﬁc areas of CSR performance, for example service quality.

Robust internal audit systems are in place to review adherence to policies and procedures and environmental performance is subject to external independent
veriﬁcation. Overall, the board is satisﬁed that the company complies with its CSR related policies and procedures.

Investment portfolio, maturities, deposits, short-term borrowings 

Investment securities and other securities

The following table sets out the book value and valuation of Lloyds TSB Group’s investment securities and other securities at 31 December for each of the
three years indicated.

2003
Book value
£m

2003
Valuation
£m

2002
Book value
£m

2002
Valuation
£m

2001
Book value.
£m.

2001
Valuation.
£m.

Investment securities 1
Bank and building society certiﬁcates of deposit
Corporate debt securities
Mortgage backed securities
Other asset backed securities
Other debt securities
Securities of the US treasury and US government agencies
Other government securities
Other public sector securities
Equity shares

Other securities
UK government securities
Securities of the US treasury and US government agencies
Other government securities
Other public sector securities
Bank and building society certiﬁcates of deposit
Corporate debt securities
Mortgage backed securities
Other asset backed securities
Other debt securities
Equity shares

2,515
1,895
2,211
3,942
1,283
1,624
271
–
35

2,515
1,890
2,212
3,951
1,284
1,626
276
–
131

3,147
1,495
893
2,817
1,369
1,740
400
1
38

3,148
1,496
892
2,820
1,367
1,736
405
1
67

4,670
613
521
1,193
1,211
1,148
1,633
–
38

4,677
616
527
1,198
1,209
1,147
1,829
–
66

13,776

13,885

11,900

11,932

11,027

11,269

–
38
7,215
106
–
6,785
664
120
–
423

–
38
7,215
106
–
6,785
664
120
–
423

–
40
5,995
112
340
7,842
1,838
1,191
94
168

–
40
5,995
112
340
7,842
1,838
1,191
94
168

31
–
4,072
151
234
7,102
1,054
592
–
187

31
–
4,072
151
234
7,102
1,054
592
–
187

15,351

15,351

17,620

17,620

13,423

13,423

1 Investment securities are those intended for use on a continuing basis in the activities of Lloyds TSB Group and not for dealing purposes. Investment securities

held by Lloyds TSB Group’s insurance businesses are not included.

LLOYDS TSB GROUP   65

Operating and financial review and prospects

Maturities and weighted average yields of debt securities

The weighted average yield for each range of maturities is calculated by dividing the annualised interest income prevailing at 31 December 2003 by the book
value of securities held at that date.

Maturing within one year

Maturing after one 
but within ﬁve years

Maturing after ﬁve 
but within ten years

Maturing after ten years

Amount
£m

Yield
%

Amount
£m

Yield
%

Amount
£m

Yield
%

Amount
£m

Investment securities
Bank and building society certiﬁcates of deposit
Corporate debt securities
Mortgage backed securities
Other asset backed securities
Other debt securities
Securities of the US treasury and US government agencies
Other government securities

Total book value

Other securities
Securities of the US treasury and US government agencies
Other government securities
Other public sector securities
Corporate debt securities
Mortgage backed securities
Other asset backed securities

Total book value

2,464
24
36
67
214
–
206

3,011

–
910
17
1,097
10
–

2,034

3.7
3.5
1.3
2.2
2.0
–
2.0

–
2.2
2.1
2.1
2.2
–

51
1,422
1,301
2,874
626
414
62

6,750

–
1,342
52
5,273
237
62

6,966

2.7
5.2
3.5
3.1
2.8
1.6
12.0

–
3.0
2.9
2.8
3.2
3.0

–
398
874
1,001
434
1,112
3

3,822

38
4,963
37
415
380
58

5,891

–
2.2
4.1
3.9
3.2
1.8
10.0

4.1
4.0
3.7
3.9
3.8
4.5

–
51
–
–
9
98
–

158

–
–
–
–
37
–

37

Yield
%

–
2.4
–
–
0.5
1.6
–

–
–
–
–
4.5
–

Maturity analysis and interest rate sensitivity of loans and advances to customers and banks as at 31 December 2003

The following table analyses the maturity proﬁle and interest rate sensitivity of loans by type on a contractual repayment basis as at 31 December 2003. 
All amounts are before deduction of provisions and interest in suspense. Demand loans are included in the ‘maturing in one year or less’ category.

Maturing in
one year or less
£m

Maturing after
one but within
ﬁve years
£m

Maturing after
ﬁve years
£m

11,940

2,006
12,078
5,102
437
1,691
9,296

42,550
3,926

46,476

28,202
18,274

1,430

9,690
7,910
3,041
1,464
2,904
4,725

31,164
1,716

32,880

16,603
16,277

301

59,054
151
1,509
4,569
106
5,381

71,071
2,094

73,165

26,803
46,362

Total
£m

13,671

70,750
20,139
9,652
6,470
4,701
19,402

144,785
7,736

152,521

71,608
80,913

Domestic
Loans and advances to banks
Loans and advances to customers:
– Mortgages
– Other personal lending
– Financial, business and other services
– Lease ﬁnancing
– Hire purchase
– Others

Total domestic loans
Total foreign loans

Total loans

Of which:
– Fixed interest rate
– Variable interest rate

66 LLOYDS TSB GROUP

Operating and financial review and prospects

Deposits

The following table shows the details of Lloyds TSB Group’s average customer deposits in each of the past three years.

Deposits in domestic ofﬁces
Non-interest bearing demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits

Total domestic ofﬁce deposits

Deposits in foreign ofﬁces
Non-interest bearing demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits

Total foreign ofﬁce deposits

Total average deposits

Certiﬁcates of deposit and other time deposits

2003
Average
balance
£m

2003
Average
rate
%

2002
Average
balance
£m

2002
Average
rate
%

2001
Average.
balance.
£m.

2001
Average.
rate.
%.

2,745
26,036
47,041
22,917

–
0.35
2.82
3.76

5,985
19,150
43,585
19,274

–
0.49
3.14
4.04

6,182
18,034
38,743
15,856

98,739

2.31

87,994

2.55

78,815

845
1,608
2,183
4,846

–
2.99
4.35
6.34

789
1,410
2,049
7,806

–
1.56
5.08
11.11

595
991
1,842
8,044

9,482

4.75

12,054

8.24

11,472

108,221

2.52

100,048

3.23

90,287

–
0.73
4.49
5.39

3.46

–
2.93
5.16
9.95

8.05

4.04

The following table gives details of Lloyds TSB Group’s certiﬁcates of deposit issued and other time deposits as at 31 December 2003 individually in excess
of US $100,000 (or equivalent in another currency) by time remaining to maturity.

Over
3 months
but within
6 months
£m

Over
6 months
but within
12 months
£m

3 months
or less
£m

Over
12 months
£m

Total
£m

Domestic
Certiﬁcates of deposit
Time deposits

Foreign
Certiﬁcates of deposit and other time deposits

Short-term borrowings 

11,665
27,408

626
1,024

854
837

13
2,983

13,158
32,252

39,073

1,650

1,691

2,996

45,410

7,420

642

161

569

8,792

46,493

2,292

1,852

3,565

54,202

Short-term borrowings are included within the balance sheet captions ‘Deposits by banks’, ‘Customer accounts’ and ‘Debt securities in issue’ and are not
identiﬁed separately on the balance sheet. The short-term borrowings of Lloyds TSB Group consist of overdrafts from banks, securities sold under agreements
to repurchase, certiﬁcates of deposit issued, commercial paper and promissory notes issued and other marketable paper. Securities sold under agreements
to repurchase and certiﬁcates of deposit issued are the only signiﬁcant short-term borrowings of Lloyds TSB Group. 

The following table gives details of the signiﬁcant short-term borrowings of Lloyds TSB Group for each of the past three years.

Liabilities in respect of securities sold under repurchase agreements
Balance at the period end
Average balance for the period
Maximum balance during the period
Average interest rate during the period
Interest rate at the period end

Certiﬁcates of deposit issued
Balance at the period end
Average balance for the period
Maximum balance during the period
Average interest rate during the period
Interest rate at the period end

2003
£m

4,640
4,848
7,395
4.5%
4.0%

16,415
20,663
22,500
3.1%
3.2%

2002
£m

6,157
6,294
9,697
4.7%
4.6%

21,246
22,040
26,199
3.2%
3.2%

2001
£m.

5,516
3,898
5,516
6.7%
6.1%

17,060
14,643
18,160
5.0%
3.7%

LLOYDS TSB GROUP   67

Five year financial summary

The ﬁnancial information set out in the table below has been derived from the annual reports and accounts of Lloyds TSB Group plc for each of the past
ﬁve years adjusted for subsequent changes in accounting policy and presentation. The ﬁnancial statements for each of the years 1999 to 2001 have been
audited  by  PricewaterhouseCoopers,  independent  accountants;  the  ﬁnancial  statements  for  2002  and  2003  were  audited  by  their  successor  ﬁrm
PricewaterhouseCoopers LLP, independent accountants.

The ﬁnancial statements have been prepared in accordance with UK GAAP, which differs in certain signiﬁcant respects from US GAAP. A discussion of such
differences and a reconciliation of certain UK GAAP amounts to US GAAP is included in note 50 to the ﬁnancial statements.

Proﬁt and loss account data for the year ended 31 December (£m) 1
Net interest income
Other ﬁnance income
Other income
Trading surplus
Provisions for bad and doubtful debts
Proﬁt on ordinary activities before tax
Proﬁt on ordinary activities after tax
Proﬁt for the year attributable to shareholders
Dividends

Balance sheet data at 31 December (£m) 1
Called-up share capital
Shareholders’ funds (equity)
Customer accounts
Undated subordinated loan capital
Dated subordinated loan capital
Loans and advances to customers
Assets2
Total assets

Share information1
Basic earnings per ordinary share
Diluted earnings per ordinary share
Net asset value per ordinary share
Dividends per ordinary share3
Equivalent cents per share3,4
Market price (year-end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions)7

Financial ratios (%) 1,5
Dividend payout ratio
Post-tax return on average shareholders’ equity
Post-tax return on average assets
Post-tax return on average risk-weighted assets
Average shareholders’ equity to average assets
Efﬁciency ratio6

Capital ratios (%) 1
Total capital
Tier 1 capital

2003

2002

2001

2000

1999

5,255
34
4,619
4,735
(950)
4,348
3,323
3,254
1,911

5,171
165
3,551
3,974
(1,029)
2,618
1,852
1,790
1,908

4,922
307
3,659
4,119
(747)
3,167
2,290
2,233
1,872

4,587
424
3,760
4,503
(541)
3,791
2,707
2,658
1,683

4,783
268
3,267
4,382
(615)
3,477
2,394
2,388
1,451

1,418
9,624
116,496
5,959
4,495
135,251
201,934
252,012

1,416
7,943
116,334
5,496
4,672
134,474
207,343
252,561

1,411
10,326
109,116
4,102
4,006
122,935
189,317
235,501

1,396
11,877
101,989
3,391
4,119
114,432
169,495
220,383

1,389
11,755
93,714
3,294
3,199
102,233
153,104
179,646

58.3p
58.1p
170p
34.2p
59.7c
448p
974
5,594

58.7
38.5
1.57
2.63
4.0
52.2

11.3
9.5

32.1p
32.0p
140p
34.2p
54.1c
446p
973
5,583

106.6
16.8
0.93
1.62
5.4
55.3

9.6
7.7

40.4p
40.0p
183p
33.7p
49.3c
746p
981
5,564

83.8
18.1
1.28
2.26
6.9
53.7

8.8
7.7

48.4p
47.9p
213p
30.6p
44.2c
708p
1,026
5,507

63.3
21.2
1.68
3.08
7.8
48.7

8.6
7.9

43.9p
43.1p
212p
26.6p
42.3c
774p
1,024
5,475

60.8
23.4
1.60
2.88
6.8
47.3

14.9
9.9

1 Figures for 2002 and earlier years have been restated to reﬂect the implementation of UITF 37, ‘Purchases and sales of own shares’. UITF 38, ‘Accounting for
ESOP trusts’, FRS 15, ‘Tangible Fixed Assets’, FRS 18, ‘Accounting Policies’, FRS 17, ‘Retirement Beneﬁts’, FRS 19 ‘Deferred Tax’, UITF 33 ‘Obligations in
Capital Instruments’, detailed guidance from the Association of British Insurers for best practice in the preparation of results using the achieved proﬁts method of
accounting and other minor adjustments.

2 Assets exclude long-term assurance assets attributable to policyholders.

3 Annual dividends are comprised of both interim and ﬁnal dividend payments. Final dividends (which are always paid in the following year) are included in the

year to which they relate rather than in the year in which they are paid.

4 Translated into US dollars at the Noon Buying Rate on the date each payment is made except for the 2003 ﬁnal dividend which has been translated at the Noon

Buying Rate on 31 December 2003. 

5 Averages are calculated on a monthly basis from the consolidated ﬁnancial data of Lloyds TSB Group.

6 The efﬁciency ratio is calculated as total operating expenses as a percentage of total income.

7 This ﬁgure excludes 79 million limited voting ordinary shares.

68 LLOYDS TSB GROUP

Five year financial summary

Amounts in accordance with US GAAP

2003

2002

2001

2000

1999

Income statement data for the year ended 31 December (£m)1
Total revenues, net of interest expense
Policyholder beneﬁts and claims expense
Provision for bad and doubtful debts
Income before tax
Net income
Dividends

Balance sheet data at 31 December (£m)
Shareholders’ equity
Deposits
Loans, net of provisions
Total assets

Share information (pence per ordinary share)
Basic earnings
Diluted earnings
Net asset value
Dividends

Financial ratios (%)2
Dividend payout ratio
Post-tax return on average shareholders’ equity
Post-tax return on average assets
Average shareholders’ equity to average assets

14,139
(3,036)
(950)
4,220
3,231
1,908

10,498
(1,565)
(1,029)
2,378
1,753
1,903

9,335
(2,228)
(747)
2,221
1,635
1,738

10,380
(1,735)
(541)
2,759
1,989
1,522

9,493
(936)
(615)
3,348
1,990
1,285

11,892
140,451
134,043
251,158

10,164
141,777
134,202
254,352

13,505
133,419
122,485
243,187

13,682
117,473
110,788
225,734

13,145
110,545
99,120
180,797

57.9
57.7
210
34.2

59.1
29.3
1.29
4.4

31.5
31.3
180
34.2

108.6
14.8
0.73
4.8

29.5
29.2
240
31.5

106.4
12.0
0.72
5.8

36.2
35.9
245
27.8

76.5
14.8
1.00
6.6

36.5
35.9
237
23.6

64.6
15.5
1.13
7.2

1 For the purposes of this ﬁve year summary, income statement items in respect of discontinued operations have been aggregated with those of continuing operations.

2 Lloyds TSB Group does not have sufﬁcient information to calculate US GAAP average balances on a monthly basis. Where applicable, these ﬁnancial ratios have

been based upon simple averages of the opening and closing balances.

LLOYDS TSB GROUP   69

The board

Non-executive directors

Maarten A van den Bergh(cid:2)
Chairman
Joined the Group in 2000 as deputy
chairman and was appointed
chairman in 2001. Joined the Royal
Dutch/Shell Group of companies in
1968 and after a number of senior
and general management
appointments in that group, became
group managing director in 1992.
Appointed president of Royal Dutch
Petroleum Company and vice
chairman of the committee of
managing directors of the Royal
Dutch/Shell Group in 1998 and
continued in these roles until 2000.
A non-executive director of Royal
Dutch Petroleum Company, BT Group
and British Airways. Aged 61. 

David P Pritchard
Deputy Chairman
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, as
group executive director, Wholesale
and International Banking. Retired
from executive duties in 2003, when
he was appointed deputy chairman.
Held senior and general management
appointments with Citicorp from 1978
to 1986 and Royal Bank of Canada
from 1986 to 1995. A non-executive
director of LCH. Clearnet Group.
Aged 59. 

Wolfgang C G Berndt ✠ †
Joined the board in 2003. Joined
Procter and Gamble in 1967 and
held a number of senior and general
management appointments in Europe,
South America and North America,
before retiring in 2001. A non-
executive director of Cadbury
Schweppes and GfK AG. Chairman of
the Institute for the Future. Aged 61.

Ewan Brown CBE FRSE ✠ **
Chairman of Lloyds TSB Scotland
A director since 1999. A non-
executive director of Lloyds TSB
Scotland since 1997. Joined Noble
Grossart in 1969 and was an
executive director of that company
until December 2003. Chairman of
Transport Initiatives Edinburgh. A non-
executive director of John Wood
Group, Noble Grossart and Stagecoach
Holdings. Aged 61.

Gavin J N Gemmell CBE ✠ *
Chairman of Scottish Widows
Joined the board in 2002. A non-
executive director of Scottish Widows,
having been appointed to the board
of that company before it became a
member of the Lloyds TSB Group.
Retired as senior partner of Baillie
Gifford in 2001, after 37 years with
that ﬁrm. A non-executive director of
Archangel Informal Investment.
Chairman of the court of Heriot-Watt
University. Aged 62.

Christopher S Gibson-Smith ✠ †
A director since 1999. Chairman of
National Air Trafﬁc Services and the
London Stock Exchange. Joined BP
in 1970, serving as managing director
from 1997 to 2001, having held
senior and general management
appointments in the UK, USA,
Canada and Europe. A non-executive
director of The British Land Company.
Aged 58. 

DeAnne S Julius CBE ✠ †§
Joined the board in 2001. Held a
number of senior appointments in the
UK and USA with the World Bank,
Royal Dutch/Shell Group and British
Airways, before membership of the
Bank of England Monetary Policy
Committee from 1997 to 2001.
Chaired HM Treasury’s banking
services consumer codes review
group in 2000/1. Chairman of the
Royal Institute of International Affairs.
A non-executive director of the Bank
of England, BP, Serco Group and
Roche Holdings SA. Aged 54.

Angela A Knight ✠ *
Joined the board in 2003. Deputy
chairman of Scottish Widows, having
been appointed to the board of that
company before it became a member
of the Lloyds TSB Group. A member
of parliament from 1992 to 1997 and
Economic Secretary to the Treasury
from 1995 to 1997. Chief Executive
of the Association of Private Client
Investment Managers and Stockbrokers.
A non-executive director of LogicaCMG,
South East Water and the Port of
London Authority. Aged 53.

Christopher Gibson-Smith

Angela Knight

The Earl of Selborne

David Pritchard

Gavin Gemmell 

Maarten van den Bergh

DeAnne Julius

Wolfgang Berndt

70 LLOYDS TSB GROUP

The board

Sir Tom McKillop(cid:4) ‡
A director since 1999. Joined ICI
in 1969 and held a number of
senior and general management
appointments 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 60.

The Earl of Selborne KBE FRS ✠ *§
(leaving on 21 May 2004)
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 63.

* 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
(cid:2) Chairman of the nomination committee

Independent director

(cid:4) Senior independent director

Executive directors

J Eric Daniels 
Group Chief Executive
Joined the board in 2001 as group
executive director, UK Retail Banking
before his appointment as group chief
executive in June 2003. Served with
Citibank from 1975 and held a
number of senior and general
management appointments in the
USA, South America and Europe
before becoming chief operating
ofﬁcer of Citibank Consumer Bank in
1998. Following the Citibank/Travelers
merger in 1998, he was chairman
and chief executive ofﬁcer of Travelers
Life and Annuity until 2000.
Chairman and chief executive ofﬁcer of
Zona Financiera from 2000 to 2001.
Aged 52.

Michael E Fairey
Deputy Group Chief Executive
Joined TSB Group in 1991 and held
a number of senior and general
management appointments before
being appointed to the board in 1997
and deputy group chief executive in
1998. Since January 2004 has also
acted as group ﬁnance director.
Joined Barclays Bank in 1967 and
held a number of senior and general
management appointments, including
managing director of Barclays Direct
Lending Services from 1990 to 1991.
Aged 55.

Peter G Ayliffe 
Group Executive Director, 
UK Retail Banking
Joined the board in 2003 having
previously been managing director
Personal Banking since 2000. Held
a number of senior and general
management appointments in the
Lloyds TSB Group since 1985,
including three years as branch
network director. A non-executive
director of Investors in People UK, Visa
International Limited and Visa
European Union. Served with National
Westminster Bank from 1974 to
1985. Aged 51. 

Archie G Kane
Group Executive Director, 
Insurance and Investments
Joined TSB Commercial Holdings
in 1986 and held a number of senior
and general management
appointments in Lloyds TSB Group
before being appointed to the board
in 2000, as group executive director,
IT and Operations. Appointed group
executive director, Insurance and
Investments in October 2003. 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 51. 

Steve C Targett 
Group Executive Director,
Wholesale and International Banking
Joined the board in 2003. Served
with National Australia Bank from
1997, where he held a number of
senior and general management
appointments in Australia and the
UK before becoming chief executive
ofﬁcer, Europe, in 2002. Previously
held a number of senior and general
management appointments in Cargill,
a commodity trading group, from
1980 to 1988, State Bank of South
Australia from 1988 to 1991 and
ANZ Bank from 1991 to 1997.
His early career, between 1972 and
1980, was spent with National
Australia Bank. Aged 48. 

Helen A Weir
Group Finance Director designate
Joins the board on 26 April 2004.
Group ﬁnance director of Kingﬁsher
from 2000 to 2004. Previously ﬁnance
director of B&Q from 1997, having
joined that company in 1995, and
held a senior position at McKinsey &
Co from 1990 to 1995. Began her
career at Unilever in 1983. A non-
executive director of The City of
London Investment Trust. Aged 41.

Company Secretary
Alastair J Michie FCIS FCIBS

Ewan Brown

Sir Tom McKillop

Eric Daniels

Peter Ayliffe

Helen Weir

Archie Kane

Steve Targett

Michael Fairey

LLOYDS TSB GROUP   71

✠
Directors’ report

Results and dividends

The consolidated proﬁt and loss account on page 89 shows a proﬁt attributable to shareholders for the year ended 31 December 2003 of £3,254 million.

An interim dividend of 10.7p per ordinary share was paid on 8 October 2003 and a ﬁnal dividend of 23.5p per ordinary share will be paid on 5 May 2004.
These dividends will absorb £1,911 million.

Principal activities

The company is a holding company and its subsidiaries provide a wide range of banking and ﬁnancial services through branches and ofﬁces in the UK
and overseas.

Group structure

During the year the Lloyds TSB Group sold a number of businesses overseas, including all of its New Zealand operations, its French fund management and
private banking business and substantially all of its Brazilian business. Details of these disposals are given in the notes to the accounts.

Business review and future developments

A review of the business and an indication of future developments are given on pages 4 to 67.

Authority to purchase shares

The authority for the company to purchase, in the market, up to 566 million of its shares, representing some 10 per cent of the issued ordinary share capital,
expires at the annual general meeting. It was not used during the year and shareholders will be asked, at the annual general meeting, to give a similar
authority, with minor adjustments to provide the ﬂexibility afforded by the new regulations relating to the holding and sale of shares in treasury. 

Directors

Biographical  details  of  directors  are  shown  on  pages  70 to  71.  Particulars  of  their  emoluments  and  interests  in  shares  in  the  company  are  given  on 
pages 78 to 87.

Mr Atkinson, Mr Butler, Miss Forbes and Mr Moore left the board at the annual general meeting in 2003. Mr Ellwood retired on 31 May 2003 and Mr Ross
and Mr Hampton left the board on 30 September 2003 and 12 January 2004, respectively. The Earl of Selborne will retire at the annual general meeting
in 2004.

Mr Targett joined the board on 10 March 2003 and was elected at the annual general meeting on 16 April 2003.

Dr Berndt and Mrs Knight joined the board on 1 May 2003, Mr Ayliffe’s appointment was effective from 1 June 2003 and Mrs Weir joins the board on
26 April 2004. In accordance with the articles of association, they offer themselves for election at the annual general meeting.

Also in accordance with the articles of association, Mr Brown, Mr Daniels, Mr Pritchard and Mr van den Bergh retire at the annual general meeting and offer
themselves for re-election.

Employees

The Lloyds TSB 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 Lloyds TSB Group supports Opportunity Now and is represented on the board of Race for Opportunity, campaigns to improve opportunities
for  women  and  ethnic  minorities  in  the  work  place.  The  Lloyds  TSB  Group  is  a  gold card 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,
training and career development of disabled staff.

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.

Schemes offering share options or the acquisition of shares are available for most staff, to encourage their ﬁnancial involvement in the Lloyds TSB Group.

Donations

The  proﬁt  and  loss  account  includes  a  charge  for  charitable  donations  totalling  £31,712,000 (2002:  £33,403,000)  including  £31,450,000
(2002: £33,336,667)  under  deeds  of  covenant  to  the  four  Lloyds  TSB  Foundations,  which  will  be  paid  during  2004.  No  donations  were  made  to
political parties.

72 LLOYDS TSB GROUP

Directors’ report

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 Department of Trade and Industry as shown on page 185.

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 2003, 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 20. 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 2003 bears to the aggregate of the amounts invoiced by suppliers
during the year.

Auditors

Resolutions  concerning  the  re-appointment  of  PricewaterhouseCoopers  LLP  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
Company Secretary
5 March 2004

LLOYDS TSB GROUP   73

Corporate governance

Compliance with the combined code

The board considers that good governance is central to achieving the Group’s governing objective of maximising shareholder value over time. That has
been uppermost in directors’ minds when applying the principles contained in the combined code on corporate governance annexed to the UK Listing
Authority’s listing rules. The Group has complied with the provisions of the code, and has done so throughout the year regarding the provisions whose
requirements are of a continuing nature.

The board and its committees

The Group is led 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 stand for election by the shareholders at the ﬁrst annual general meeting following their
appointment and must retire, and may stand for re-election by the shareholders, at least every three years. Executive directors normally retire at age 60, as
required by their service agreements. Independent non-executive directors are appointed for speciﬁed terms which, previously, would not exceed ﬁve years
and could be renewed, but now do not exceed three years and may be renewed. 

The board meets at least nine times a year. It has a programme designed to enable the directors regularly to review corporate strategy and the operations and
results of the businesses and discharge their duties within a framework of prudent and effective controls relating to the assessing and managing of risk. 

The roles of the chairman, the group chief executive and the board and its governance arrangements, including the schedule of matters speciﬁcally reserved
to the board for decision, are reviewed annually. The matters reserved to the board for decision include the approval of the annual report and accounts and
any other ﬁnancial statements; the payment of dividends; the long-term objectives of the Group; the strategies necessary to achieve these objectives; the
Group’s budgets and plans; signiﬁcant capital expenditure items; signiﬁcant investments and disposals; the basis of allocation of capital within the Group;
the organisation structure of the Group; the arrangements for ensuring that the Group manages risks effectively; any signiﬁcant change in accounting policies
or practices; the appointment of the company’s main professional advisors; and the appointment of senior executives within the organisation and the related
forward planning.

The board has delegated to management the power to make decisions on operational matters, including those relating to credit, liquidity and market risk,
within an agreed framework.

All directors have access to the services of the company secretary, and independent professional advice is available to the directors at the Group’s expense,
where they judge it necessary to discharge their duties as directors.

The chairman, the group chief executive and the group ﬁnance director have meetings with representatives of major shareholders and all shareholders are
encouraged to attend and participate in the Group’s annual general meeting.

The board evaluates its performance and that of its committees and individual directors. The process adopted affords directors the opportunity, through
their membership of boards of other companies, in the UK and overseas, to draw on their experience to endeavour to ensure that the Group follows best
practice. It also enables directors to suggest how the Group’s procedures may be improved; to assess strengths and weaknesses; and to address its balance
of skills, knowledge and experience. The committees, themselves, assess their respective roles, performance and terms of reference and report accordingly
to the board.

The  chairman’s  performance  is  evaluated  by  the  non-executive  directors,  led  by  the  senior  independent  director,  taking  account  of  the  views  of
executive directors. 

The remuneration committee reviews the performance of the chairman, the deputy chairman, the group chief executive and the other group executive directors,
when considering their remuneration arrangements. The nomination committee reviews the performance of all the directors. Like all board committees, the
nomination committee and remuneration committee report to the board on their deliberations, including the results of these performance evaluations.

The chairman has a private discussion at least once a year with every director on a wide range of issues affecting the Group, including any matters which
the directors, individually, wish to raise.

There  is  an  induction  programme  for  all  new  directors,  which  is  tailored  to  their  speciﬁc  requirements  and  includes  visits  to  individual  businesses  and
meetings with senior management. Additional training and updates on particular issues are arranged as appropriate.

Audit committee

The audit committee comprises Mr Brown (chairman), Mr Gemmell, Mrs Knight and The Earl of Selborne. The deputy chairman is invited to attend meetings 
of  the  committee.  The  committee’s  terms  of  reference  are  available  from  the  company  secretary  and  are  displayed  on  the  company’s  website
www.lloydstsb.com.

The board has determined that no member of the audit committee satisﬁes the strict deﬁnition of an ‘audit committee ﬁnancial expert’ under the regulations
issued by the Securities and Exchange Commission of the United States of America following the passing of the Sarbanes-Oxley Act of 2002. However, the
directors are conﬁdent in the expertise and experience of each member of the committee and of the committee as a whole. The board believes that the
collective experience of the members of the committee enables them, as a group, to act as an effective audit committee and that the audit committee has
functioned and can continue to function effectively without a member who qualiﬁes as an audit committee ﬁnancial expert.

The  audit  committee  met  seven  times  in  2003,  during  which  it  received  reports  from,  and  held  discussions  with,  management  and  the  auditors.
In  discharging  its  duties,  the  committee  has  reviewed  the  auditors’  remuneration  and  their  independence  and  objectivity  and  recommended  their
re-appointment at the annual general meeting. The committee also reviewed the ﬁnancial statements published in the name of the board and the quality
and  acceptability  of  the  related  accounting  policies,  practices  and  ﬁnancial  reporting  disclosures;  the  scope  of  the  work  of  the  group’s  internal audit
department, reports from that department and the adequacy of its resources; the effectiveness of the systems for risk management and compliance with
ﬁnancial services legislation and regulations; the results of the external audit and its cost effectiveness; reports from the external auditors on audit planning
and their ﬁndings on accounting and internal control systems; and its own role and performance. The committee also had a meeting with the auditors,
without executives present, and a meeting with the head of internal audit alone.

74 LLOYDS TSB GROUP

Corporate governance

Chairman’s committee

The chairman’s committee, comprising the chairman, the deputy chairman, the group chief executive and the deputy group chief executive, generally meets
twice a month, to assist the chairman in preparing for board meetings. 

The committee also has speciﬁc powers delegated to it by the board from time to time and following the exercising of these powers, it reports at the next
convenient board meeting.

Group executive committee

The group executive committee, comprising the group chief executive, the deputy group chief executive, the group executive directors, the chief risk director,
the  group  human  resources  director and  the  director  of  group  IT  and  operations,  meets  to  assist  the  group  chief  executive  in  performing  his  duties.
Speciﬁcally, the committee considers the development and implementation of strategy, operational plans, policies and budgets; the monitoring of operating
and ﬁnancial performance; the assessment and control of risk; the prioritisation and allocation of resources; and the monitoring of competitive forces in each
area of operation. The committee, assisted by its sub-committees, the group business risk and group asset and liability committees, also supports the group
chief  executive  in  endeavouring  to  ensure  the  development,  implementation  and  effectiveness  of  the  Group’s  risk  management  framework,  the  clear
articulation of the Group’s risk policies and that the Group’s aggregate risk exposures and concentrations of risk are reviewed.

The committee also has speciﬁc powers delegated to it by the board from time to time and following the exercising of these powers, it reports at the next
convenient board meeting. To comply with the Group’s articles of association, only committee members who are also directors of the company participate
in the exercising of any powers delegated by the board.

Nomination committee

The nomination committee, comprising Mr van den Bergh (chairman), Dr Julius and The Earl of Selborne, reviews the composition of the board, taking into
account the skills, knowledge and experience of directors and considers and makes recommendations to the board on potential candidates for appointment
as directors. The deputy chairman and group chief executive are invited to attend meetings of the committee. The committee also makes recommendations
to  the  board  concerning  the  re-appointment  of  any  independent  non-executive  director  by  the  board  at  the  conclusion  of  his  or  her  speciﬁed  term;  the
re-election of any director by the shareholders under the retirement provisions of the articles of association; any matters relating to the continuation in ofﬁce
of  a  director;  and  the  appointment  of  any  director  to  executive  or  other  ofﬁce,  other  than  the  positions  of  chairman  and  group  chief  executive,  the
recommendation  for  which  would  be  considered  at  a  meeting  of  the  non-executive  directors  regarding  the  position  of  group  chief  executive,  and  all  the
directors regarding the position of chairman.

The committee’s terms of reference are available from the company secretary and are displayed on the company’s website www.lloydstsb.com.

Remuneration committee

The remuneration committee, which comprises Sir Tom McKillop (chairman), Dr Berndt, Dr Gibson-Smith and Dr Julius, reviews the remuneration policy
for the top management group, to ensure that members of the executive management are provided with appropriate incentives to encourage them to enhance
the performance of the Group and that they are rewarded for their individual contribution to the success of the organisation. It is made aware of, and advises
on, major changes to employee beneﬁt schemes and it also agrees the policy for authorising claims for expenses from the group chief executive and the
chairman. It has delegated powers for setting remuneration for the chairman, the deputy chairman, the group executive directors, the company secretary
and any Group employee whose salary exceeds £300,000 per annum.

All the non-executive directors receive the minutes of remuneration committee meetings and have the opportunity to comment and have their views taken
into account before the committee’s decisions are implemented. 

The committee’s terms of reference are available from the company secretary and are displayed on the company’s website www.lloydstsb.com.

Risk oversight committee

During 2003, the risk oversight committee was established, comprising Mr Pritchard (chairman), Mr van den Bergh, Mr Daniels, Mr Fairey, Mr Brown and
Sir  Tom  McKillop:  all  non-executive  directors  are  invited  to  attend  meetings  if  they  wish.  The  risk  oversight  committee’s  duties  include  overseeing  the
development, implementation and maintenance of the Group’s overall risk governance framework, risk appetite, risk strategy and policies, to ensure they are
in line with emerging regulatory, corporate governance and industry best practice. The committee also oversees the Group’s risk exposures; facilitates the
involvement of non-executive directors in risk issues and aids their understanding of these issues; oversees adherence to group risk policies and standards
and considers any material amendments to them; and reviews the work of the Group Risk Management division and the appointment of senior executives
of that division. The risk oversight committee reports to the board on its deliberations after each meeting.

LLOYDS TSB GROUP   75

Corporate governance

Attendance at meetings

The attendance of directors at board meetings and at meetings of the audit, nomination and remuneration committees during 2003 was as follows:

Board

11

6
7
11
11
11
11
10
11
11
7
10
11
10
8
11

4
4
4
4
11
4
7

Audit
committee

Nomination
committee

Remuneration
committee

7

1

7
1

7

3
4
3
2
1

7
4

6

3

3

2
5

6

3
3

3

5

2

3
2

5
5

4

5

2
2
2

Number of meetings during the year

Current directors who served during 2003
P G Ayliffe1
W C G Berndt2
Ewan Brown
J E Daniels
M E Fairey
G J N Gemmell
C S Gibson-Smith
D S Julius3
A G Kane
A A Knight4
Sir Tom McKillop5
D P Pritchard
Lord Selborne6
S C Targett7
M A van den Bergh

Former directors who served during 2003
M K Atkinson8
A C Butler8
P B Ellwood9
S M Forbes8
P R Hampton
A E Moore8
M D Ross10

1 Appointed to the board from 1 June 2003

2 Appointed to the board and remuneration committee from 1 May 2003

3 Appointed to the nomination committee from 16 April 2003

4 Appointed to the board and audit committee from 1 May 2003

5 Left the audit committee on 16 May 2003

6 Appointed to the audit committee from 16 May 2003 

7 Appointed to the board from 10 March 2003

8 Left the board on 16 April 2003

9 Left the board on 31 May 2003

10 Left the board on 30 September 2003

Statement of 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 Lloyds TSB Group as at the end of the year and of the proﬁt or loss for the year. The directors consider that in preparing the
ﬁnancial statements on pages 89 to 175, the company has used appropriate accounting polices, consistently applied and supported by reasonable and
prudent judgements and estimates, and that all accounting standards which they consider applicable have been followed.

The directors have responsibility for ensuring that the company keeps accounting records which disclose with reasonable accuracy the ﬁnancial position of
the company and which enable them to ensure that the ﬁnancial statements comply with the Companies Act 1985. They have general responsibility for
taking such steps as are reasonably open to them to safeguard the assets of the Lloyds TSB Group and to prevent and detect fraud and other irregularities.

76 LLOYDS TSB GROUP

Corporate governance

Internal control

The board of directors is responsible for the establishment and review of the Lloyds TSB Group’s system of internal control, which is designed to ensure
effective and efﬁcient operations, quality of internal and external reporting, internal control, and compliance with applicable laws and regulations. It should
be noted, however, that such a system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. In establishing and
reviewing the system of internal control the directors have regard to the nature and extent 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 are committed to maintaining a control-conscious culture across all areas of operation. This is communicated to all
employees by way of published policies and procedures 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. In addition, there is an annual control
self assessment exercise under which businesses review speciﬁc controls and provide certiﬁcation that these meet the requirements of the Lloyds TSB Group.
As in previous years, this exercise was completed for the year ended 31 December 2003. 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, 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 Lloyds TSB Group by its risk management function, including Group Compliance, and Group Audit. The audit committee receives reports from
the  company’s  auditors,  PricewaterhouseCoopers LLP,  (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.

Going concern

The directors are satisﬁed that the company and the Lloyds TSB Group have adequate resources to continue to operate for the foreseeable future and are
ﬁnancially sound. For this reason they continue to adopt the going concern basis in preparing the accounts.

Disclosure controls

As of 31 December 2003, the Lloyds TSB Group, under the supervision and with the participation of the Lloyds TSB Group’s management, including the
group chief executive and the deputy group chief executive, performed an evaluation of the effectiveness of the Lloyds TSB Group’s disclosure controls and
procedures. Based on this evaluation, the group chief executive and deputy group chief executive concluded that the Lloyds TSB Group’s disclosure controls
and procedures are effective for gathering, analysing and disclosing the information the Lloyds TSB Group is required to disclose in the reports it ﬁles under
the Securities Exchange Act of 1934, within the time periods speciﬁed in the SEC’s rules and forms. The Lloyds TSB Group’s management necessarily applied
its judgment in assessing the costs and beneﬁts of such controls and procedures, which by their nature can provide only reasonable assurance regarding
management’s control objectives.

There has been no change in the Lloyds TSB Group’s internal control over ﬁnancial reporting that occurred during the period covered by this annual report
that has materially affected, or is reasonably likely to materially affect, the Lloyds TSB Group’s internal control over ﬁnancial reporting.

LLOYDS TSB GROUP   77

Directors’ remuneration report

This is a report made by the board of Lloyds TSB Group plc, on recommendation of the remuneration committee. The role of the remuneration committee
is shown on page 75.

The remuneration committee

The members of the remuneration committee during 2003 were Sir Tom McKillop (chairman), Dr Gibson-Smith, Dr Julius, Dr Berndt from 1 May 2003,
Mr Butler until 16 April 2003 and Miss Forbes until 16 April 2003.  

Towers, Perrin, Forster & Crosby, Inc. (TPFC) were appointed by the committee to advise it on matters relating to executive remuneration. TPFC also provide
the management of the company with competitive market data relating to other employees and administrative services for the company’s ﬂexible beneﬁts
plan for its employees.

In addition, in 2003, Alithos Limited provided information for the testing of the total shareholder return (TSR) (calculated by reference to both dividends and
growth in share price) performance conditions for the company’s executive share option schemes and PricewaterhouseCoopers LLP checked the results of
the testing of the performance conditions and the annual incentive payments for executive directors against targets set.

Mr van den Bergh,  Mr Daniels,  Mr Ellwood,  Mr Fairey,  Mr Mitchinson  (Director  of  Group  Human  Resources)  and  Mr Wilson  (Compensation  &  Beneﬁts
Director) provided guidance to the committee (other than for their own remuneration).  

Directors’ remuneration policy

The Lloyds TSB Group’s remuneration policy is to ensure that individual rewards are aligned with Lloyds TSB Group’s performance and the interests of its
shareholders,  and  that  packages  are  provided  which  attract,  retain  and  motivate  executive  directors  and  senior  management  to  perform  to  the  highest
standards.

The strategy for executive directors’ pay is, generally, for basic salaries to reﬂect the relevant market median; for beneﬁts such as the use of a company car,
medical insurance and pension to reﬂect market practice; and for total direct compensation (including annual and long-term incentives) to reward upper
quartile  performance  with  upper  quartile  remuneration.  This  strategy  is  consistent  with  the  principle  that  performance  should  determine  a  signiﬁcant
proportion of the total remuneration. There are no plans to change this strategy.

For all executive directors, except Mr Fairey, approximately two thirds of their total remuneration is performance related. For Mr Fairey, the performance related
element is approximately one half as a result of his pension arrangements outlined on page 81.

The fees of the non-executive directors are agreed by the board within a total amount determined by the shareholders. They may also receive fees, agreed
by the board, for membership of board committees. The fees are designed to recognise the various responsibilities of a non-executive director’s role and to
attract independent and experienced individuals. The fees are neither performance related nor pensionable. Non-executive directors who serve on the boards
of principal subsidiary companies of the Group may also receive additional fees.

Basic salary

Basic salaries are reviewed annually, usually in December, taking into account individual performance and market information (which is provided by TPFC)
and then adjusted from 1 January of the following year. Details of salaries payable in 2004 are shown on page 80.

Annual incentive and performance share plan

The annual incentive scheme for executive directors is designed to reﬂect speciﬁc goals linked to the performance of the business.

For 2004, the total bonus availability (bonus pool) will be based on Group performance with pre-determined targets relating to proﬁt before tax and economic
proﬁt. An amount equal to 75 per cent of the executive directors’ bonus opportunity would be payable into the bonus pool on the achievement of a stretching
budget for 2004; failure to achieve at least 90 per cent of this budget would result in no bonus payment. If there is a bonus pool, individual executive
directors will be considered for awards from the bonus pool based on individual targets which will include proﬁtability, franchise growth, risk, service and
other  speciﬁc  goals  that  are  relevant  to  improving  overall  business  performance.  The  maximum  opportunity  for  executive  directors  will  be  equal  to
100 per cent of salary, with the exception of Mr Daniels, whose maximum opportunity for 2004 has been set at 125 per cent to increase the proportion of
his pay which is performance linked and to reﬂect the competitive market position for total earning opportunity.    

At the annual general meeting in May 2004, the shareholders will be asked to approve a new performance share plan, to operate as an element of the
annual incentive scheme. Under the plan, executive directors will be required to defer 50 per cent of any bonus payable for 2004 into shares in the company,
known as bonus shares. The bonus shares will be held on behalf of the executive for a period of three years before release.  

Under  the  new  plan  executives  will  also  be  eligible  for  an  award  of  free  shares,  to  be  known  as  performance  shares,  to  match  the  bonus  shares.  The
maximum match will be two performance shares for each bonus share, awarded at the end of the three year retention period. The number of performance
shares actually awarded will depend on the company’s TSR performance measured over a three year period, compared with the TSR of the other companies
in the comparator group listed below. The maximum of two performance shares for each bonus share will be awarded only if the company’s TSR performance
places it ﬁrst in the comparator group; one performance share will be awarded for each bonus share if the company is placed ﬁfth; and one performance
share for every two bonus shares if the company is placed eighth (median). Between ﬁrst and ﬁfth positions and ﬁfth and eighth positions sliding scales will
apply. If the TSR performance is below median no performance shares will be awarded. There will be no retest. 

It is currently intended that the other companies in the comparator group will be:

Alliance & Leicester
Bradford & Bingley
Legal & General
Royal & Sun Alliance

Abbey National
Friends Provident
Northern Rock
Standard Chartered

Aviva 
HBOS
Prudential

Barclays
HSBC Holdings
Royal Bank of Scotland

The companies have been chosen as a representative sample against which to measure the success of the Lloyds TSB Group’s strategy of organic growth
within the UK.

78 LLOYDS TSB GROUP

Directors’ remuneration report

Long-term rewards

Executive share option schemes

In 2004, options will be granted to executive directors and senior executives within the scheme limits. These limits relate to the number of shares under
option and the price payable on exercise. The maximum limit for the grant of options to an executive director in any one year is equal to 1.5 times annual
basic salary multiplied by a performance multiplier of 3.5, although in exceptional circumstances, for example on the recruitment of a new executive director,
that could be increased to 4 times annual basic salary multiplied by 3.5.

Performance conditions are set when the grant of options is made and the options cannot normally be exercised unless the conditions have been met. For
options granted in 2004, the performance conditions require the company’s ranking, based on the TSR over the relevant three year period, to be at least
ninth within the comparator group. 

The full grant of options for executive directors will only become exercisable if the company is ranked ﬁrst within the comparator group. 

The following table illustrates the percentage of the grant which would be exercisable depending on the company’s TSR ranking within the comparator group
set out below.

Ranking position within comparator group

Per cent of option which may be exercised

1
2
3
4
5
6
7
8
9
10 or below

100
86
71
57
43
29
23
17
14
Nil – options not exercisable

The other companies in the comparator group are:

Abbey National
Barclays
HSBC Holdings
Prudential

ABN Amro
Citigroup
ING
Royal Bank of Scotland

Alliance & Leicester
Fortis
Legal & General
Royal & Sun Alliance

Aviva
HBOS
National Australia Bank
Standard Chartered

As mentioned above, in 2004 the shareholders will be asked to approve the introduction of a performance share plan. The board is also recommending
that, if the performance share plan is approved, the executive share option scheme rules should be amended so that with effect from the options granted in
2005, the maximum limit for the grant of options to an executive director in any one year will be equal to three times annual basic salary, but with no
performance multiplier. This is a reduction from the current maximum equal to 1.5 times annual salary multiplied by a performance multiplier of 3.5, which
amounts to 5.25 times annual salary in total. The 3 times salary limit may be exceeded but only in exceptional circumstances, for example on the recruitment
of a new executive, to a maximum equal to 4 times basic salary. 

The performance condition for options granted from 2005 will be based on TSR over the relevant (three year) period measured against the same group of
14 UK ﬁnancial services companies listed on page 78. The options will become exercisable in full if the company is placed fourth or above in the comparator
group, and as to 30 per cent if the company is placed eighth (i.e. median). The options will lapse if the company is placed below eighth. A sliding scale
will apply between fourth and eighth positions. There will be no retest.

Other share plans

The executive directors, the chairman and the deputy chairman are also eligible to participate in the Lloyds TSB Group ‘sharesave’ option scheme and the
Lloyds TSB Group ’shareplan'. These are 'all-employee' share schemes and, therefore, performance conditions do not apply.

Shareholding guidelines

The remuneration committee encourages  each executive director to build up a sizeable shareholding in the company  over  time and the new  incentive
arrangements will support this principle. It is expected that, in due course, each executive director will have a shareholding at least equal in value to his or
her annual salary.

Pensions

Executive  directors  are  either  entitled  to  pensions  based  on  salary  and  length  of  service,  with  a  maximum  pension  of  two  thirds  of  ﬁnal  salary,  or  are
members of the deﬁned contribution scheme and their ﬁnal entitlement will depend on their contributions and the ﬁnal value of their fund. The deﬁned
beneﬁts schemes are closed to new entrants on recruitment.

LLOYDS TSB GROUP   79

Directors’ remuneration report

Service agreements

Lloyds TSB Group policy is for executive directors to have service agreements with notice periods of no more than one year. All current executive directors
are entitled to receive 12 months’ notice from the company, but would be required to give six months’ notice if they wished to leave. As the chairman and
deputy chairman are regarded as employees, they are entitled to receive up to eight weeks’ notice.

Mr Ayliffe
Mr Daniels
Mr Fairey
Mr Kane
Mr Pritchard
Mr Targett
Mr van den Bergh
Mrs Weir

Salary from 1 January 2004
(or later date of appointment)

£400,000
£750,000
£518,000
£450,000
£243,000
£480,000
£442,500
£450,000

Date of service agreement

30 May 2003
19 October 2001
28 August 1991
9 February 2000
7 April 2003
15 August 2003
28 July 2000
4 March 2004

It is now the company’s policy (subject to existing contractual arrangements) that where compensation on early termination is due, it should be paid on a
phased basis and that bonus payments should relate to the period of actual service, rather than the full notice period.

Independent non-executive directors do not have service agreements and, in accordance with the articles of association, their appointment may be terminated
at any time without compensation. 

External appointments

Lloyds TSB Group recognises that executive directors may be invited to become non-executive directors of other companies and that these appointments
may broaden their knowledge and experience, to the beneﬁt of the Lloyds TSB Group. Fees are normally retained by the individual directors as the posts
entail personal responsibility. Directors are generally allowed to accept one non-executive directorship.

During 2003, a former executive director received a fee of £35,000, which he retained, for serving as a non-executive director of another company.

Performance graph

The graph illustrates the performance of Lloyds TSB Group plc measured by TSR against a ‘broad equity market index’ over the past ﬁve years. As Lloyds
TSB Group plc has been a constituent of the FTSE 100 index throughout this ﬁve-year period, that index is considered to be the most appropriate benchmark.

Comparative TSR

31 Dec
1998

31 Dec
1999

31 Dec
2000

31 Dec
2001

31 Dec
2002

31 Dec
2003

140

120

100

80

60

40

20

0

Source: Datastream

Rebased to 100 on 1 January 1999

Lloyds TSB Group plc              FTSE 100 index

80 LLOYDS TSB GROUP

Directors’ remuneration report

Audited information

Directors’ emoluments for 2003

Current directors who served during 2003
Executive directors
J E Daniels
M E Fairey
P G Ayliffe
A G Kane
S C Targett

Non-executive directors
M A van den Bergh
D P Pritchard
W C G Berndt
Ewan Brown
G J N Gemmell
C S Gibson-Smith
D S Julius
A A Knight
Sir Tom McKillop
Lord Selborne

Former directors who served during 2003
M K Atkinson
A C Butler
P B Ellwood
S M Forbes
P R Hampton
A E Moore
M D Ross

Former director who served during 2002

Salaries/
fees
£000

Other 
beneﬁts 
£000

Performance-
related
payments
£000

2003
Total
£000

2002
£000

596
498
219
411
366

423
285
32
70
100
45
45
58
49
42

9
12
292
11
483
64
332

210
434
18
39
64

12
42

23

29

48
8
166

258
208
91
172
157

50

65

122

202

185

1,064
1,140
328
622
587

1,263
643
–
418
–

435
377
32
70
100
45
45
58
49
42

97
12
443
11
733
72
683

415
437
–
60
68
38
38
–
45
33

567
40
733
38
298
227
478

25

4,442

1,093

1,510

7,045

5,864

‘Other beneﬁts’ include the use of a company car, private medical insurance, life insurance cover, ﬂexible beneﬁt payments, cash paid for the balance due
above  the  £3,000  limit  for  free  shares  under  the  Lloyds  TSB  Group’s  all  employee  share  incentive  plan  (see  page  83),  allowances  for  relocation  and
professional advice for Mr Targett, housing, education and ﬁnancial advice allowance for Mr Daniels and an additional payment in respect of the contribution
to the separate fund relating to Mr Fairey’s pension. The separate fund, which was mentioned in previous annual reports, was 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.

The amount in ‘other beneﬁts’ for Mr Ross includes legal and career counselling allowances and payments in 2003 to which he was contractually entitled
when his employment was terminated on 30 September 2003. As part of his termination arrangements he is also entitled to a bonus reﬂecting what he
would have received during his notice period. The remainder of his termination payments will be settled in 2004 and will be reported in the 2004 report
and accounts.

For  Mr  Atkinson,  the  ﬁgure  in  ‘other  beneﬁts’  represents  the  amount  to  which  he  was  contractually  entitled  when  his  employment  was  terminated  on
31 May 2002, reﬂecting what he would have received during his notice period in respect of a ﬂexible beneﬁts cash payment, cash paid instead of shares
under shareplan, medical insurance and the use of a company car for the period 1 January to 31 May 2003. The payment under ‘performance related pay’
is the 2003 bonus for the period to 31 May 2003.

Mr Hampton’s employment was terminated on 12 January 2004 and the payments to which he is entitled will be settled in accordance with Lloyds TSB
Group policy. Full details will be reported in the 2004 report and accounts.

Performance-related payments

These payments relate to cash bonuses based on Group performance and the attainment of pre-determined targets relating to proﬁt before tax and economic
proﬁt. 75 per cent of the award was to be payable on achievement of proﬁt before tax and economic proﬁt relating to the Group’s stretching budget for 2003
and the remuneration committee set a higher target for the maximum award. Each executive director received an award equal to 41.8 per cent of salary. 

LLOYDS TSB GROUP   81

Directors’ remuneration report

Audited information

Directors’ pensions

The executive directors are members of one of the pension schemes provided by the Lloyds TSB Group with beneﬁts either on a deﬁned beneﬁt or deﬁned
contribution  basis.  Those  directors who  joined  the  Lloyds  TSB  Group  after  1  June  1989  and  are  members  of  a  deﬁned  beneﬁt  scheme,  have  pensions
provided on salary in excess of the earnings cap either through membership of a funded unapproved retirement beneﬁts scheme ('FURBS’) or by an unfunded
pension promise.

Retirement pensions accrue at rates of between 1/60 and 1/30 of basic salary.

Directors, with the exception of Mr Pritchard, have a normal retirement age of 60. Mr Pritchard’s retirement date was 16 April 2003. In the event of death
in service, a lump sum of 4 times salary is payable plus a spouse’s pension of 2/3 of the member’s prospective pension. On death in retirement, a spouse’s
pension of 2/3 of the member’s pension is payable. The deﬁned beneﬁt schemes are non-contributory. Members of deﬁned contribution schemes are required
to contribute.

Mr Targett is a member of a deﬁned contribution scheme. He joined the Lloyds TSB Group on 10 March 2003. The employer has made contributions to the
deﬁned contribution scheme in respect of him totalling £54,910.

Mr Pritchard has a deferred cash entitlement of £80,194 from his membership of the deﬁned contribution section of the Group’s FURBS.

Mr Ross’s pension entitlement at 31 December 2003 includes an additional 12 months’ service in respect of his notice period.

Mr Ellwood retired on 31 May 2003. At retirement he commuted a pension of £10,611 in return for a lump sum of £110,890. The value shown in the table
is the pension payable at 31 December 2003 assuming he did not commute any pension.

Accrued
pension at

Accrued
pension at

Transfer
value at
31 December 31 December 31 December 31 December
2002
£000
(d)

2003
£000
(c)

2003
£000
(a)

2002
£000
(b)

Transfer
value at

Change in

Additional
pension
earned to
transfer 31 December
2003
£000
(e)

value
£000
(c)-(d)

P G Ayliffe
J E Daniels
P B Ellwood
M E Fairey
P R Hampton
A G Kane
D P Pritchard
M D Ross

98
51
416
186
17
170
42
293

65
31
394
156
6
144
39
274

1,245
711
7,521
3,052
208
2,233
801
5,299

660
347
7,094
2,075
59
1,514
656
4,396

585
364
427
977
149
719
145
903

31
19
11
26
11
21
2
11

Transfer
value of the
increase
£000
(f)

395
266
203
420
133
278
57
205

In addition, the following unfunded beneﬁts have accrued for Mr van den Bergh instead of a salary increase in 2002:

£

£

£

£

£

£

£

M A van den Bergh

6,521

3,378

85,457

36,160

49,297

3,048

39,944

The disclosures in columns (a) to (d) are as required by the Companies Act 1985 Schedule 7A.

Columns (a) and (b) represent the deferred pension to which the directors would have been entitled had they left the Group on 31 December 2003 and
2002, respectively (ignoring the two-year requirement to qualify for a deferred pension).

Column (c) is the transfer value of the deferred pension in column (a) calculated as at 31 December 2003 based on factors supplied by the actuary of the
relevant  Lloyds  TSB  Group  pension  scheme  in  accordance  with  actuarial  guidance  note  GN11.  The  underlying  bases  used  to  arrive  at  the  factors  were
changed during the year by the Actuary to comply with guidance from the Institute of Actuaries. The resulting transfer values are higher than those arrived
at using the previous bases.

Column (d) is the equivalent transfer value, but calculated as at 31 December 2002 on the assumption that the director left service at that date. 

Column (e) is the increase in pension built up during the year, recognising (i) the accrual rate for the additional service based on the pensionable salary in
force at the year end, and (ii) where appropriate the effect of pay changes in 'real' (inﬂation adjusted) terms on the pension already earned at the start of the year.

Column (f) is the capital value of the pension in column (e).

The disclosures in columns (e) and (f) are as required by the UK Listing Authority listing rules. The requirements of the listing rules differ from those of the
Companies Act. The listing rules require the additional pension earned over the year to be calculated as the difference between the pension accrued at the
end of the ﬁnancial year and the pension accrued at the start of the ﬁnancial year less the increase in the pension earned over the year solely due to inﬂation.
The transfer value in column (f) can differ signiﬁcantly from the change in transfer value as required by the Companies Act because the additional pension
accrued over the year calculated in accordance with the listing rules makes allowance for inﬂation and the change in the transfer value required by the
Companies  Act  will  be  signiﬁcantly  inﬂuenced  by  changes  in  the  assumptions  underlying  the  transfer  value  calculation  at  the  beginning  and  end  of  the
ﬁnancial year.

Members of the Lloyds TSB 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.

82 LLOYDS TSB GROUP

Directors’ remuneration report

Directors’ interests

The interests, all beneﬁcial, of those who were directors at 31 December 2003 in shares in Lloyds TSB Group were:

Shares

Executive directors
J E Daniels*
M E Fairey*
P G Ayliffe*
A G Kane*
S C Targett

Non-executive directors
M A van den Bergh
D P Pritchard*
W C G Berndt
Ewan Brown
G J N Gemmell
C S Gibson-Smith
D S Julius
A A Knight
Sir Tom McKillop
Lord Selborne

Former executive director
P R Hampton*

At 1 January 2003
(or later date of
appointment)

At 31 December
2003

At 5 March†
2004

37,073
76,630
91,282
97,835
4,176

1,029
75,425
90,661
81,248
4,000

5,079
4,446
30,000
3,548
50,000
3,151
2,000
3,540
1,000
3,372

37,007
76,605
91,216
97,769
4,110

5,079
5,178
40,000
3,787
70,000
3,151
2,000
3,540
1,000
3,372

6,021

7,018

* The interests at 31 December 2003 include 732 shares allocated on 28 April 2003 at 409.4p per share under the terms of the Lloyds TSB Group shareplan,
the Lloyds TSB Group’s all employee share incentive plan. All eligible employees were entitled to receive an award, up to a maximum of £3,000 in shares, equal
to 3 per cent of their 2002 salary. A similar award will be made in 2004.

In addition, under shareplan, employees have the opportunity to purchase shares, known as partnership shares, up to a maximum of £125 per month.
Under the terms of the scheme employees who purchased partnership shares received additional shares free, known as matching shares, on a one for one
basis  up  to  a  maximum  value  of  £30  per  month,  rounded  down  to  the  nearest  whole  share.  Any  shares  purchased  or  awarded  under  this  scheme  are
included in the ﬁgures above. 

† The changes in beneﬁcial interests between 31 December 2003 and 5 March 2004 related to ‘partnership’ and ‘matching’ shares acquired under the Lloyds

TSB Group shareplan.

LLOYDS TSB GROUP   83

Directors’ remuneration report

Audited information

Exercise periods

From

To

Notes

Interests in share options

Current directors
who served
during 2003

P G Ayliffe 

J E Daniels

M E Fairey

A G Kane*

D P Pritchard

S C Targett

Other share plans:
J E Daniels
S C Targett

84 LLOYDS TSB GROUP

At 1 January 2003
(or later date of
appointment)

Granted
during
the year

Exercised/
lapsed during
the year

At 31 December
2003

3,327
13,000
12,000
20,000
3,000
23,657
10,560
16,717
44,562
104,895
218,769

398
907,780
330,419

809
797
54,000
48,000
57,000
85,896
10,931
42,884
148,618
345,104

4,157
48,192
23,008
35,347
25,000
40,000
50,000
27,000
64,786
11,841
34,759
118,178
275,349

4,687
50,000
40,000
71,519
10,385
36,374
127,131
286,363

759,036

216,763

177,034

3,327
599,239
305,232

1,330
531
663,157

5,783
529,105

2,658

331,125

398†

809†

4,157†
48,192
23,008
35,347

3,327
13,000
12,000
20,000
3,000
23,657
10,560
16,717
44,562
104,895
218,769
177,034

–
907,780
330,419
3,327
599,239
305,232

–
797
54,000
48,000
57,000
85,896
10,931
42,884
148,618
345,104
1,330
531
663,157

–
–
–
–
25,000
40,000
50,000
27,000
64,786
11,841
34,759
118,178
275,349
5,783
529,105

4,687
50,000
40,000
71,519
10,385
36,374
127,131
286,363

759,036
2,658

216,763
331,125

Exercise
price

284p
321p
510p
880p
887.5p
549.5p
615.5p
655p
733p
715p
394.25p
430p

474p
694p
715p
284p
394.25p
430p

718p
474p
510p
859.5p
817p
549.5p
615.5p
655p
733p
715p
284p
348p
394.25p

442p
207.5p
282.5p
242.5p
321p
510p
880p
887.5p
549.5p
615.5p
655p
733p
715p
284p
394.25p

416p
859.5p
817p
549.5p
615.5p
655p
733p
715p

1/6/2006
28/3/1999
26/3/2000
4/3/2001
4/3/2002
6/3/2003
8/8/2003
6/3/2004
21/8/2004
6/3/2005
21/2/2006
14/8/2006

–
1/11/2004
6/3/2005
1/6/2006
21/2/2006
14/8/2006

–
1/11/2005
26/3/2000
15/5/2001
2/8/2002
6/3/2003
8/8/2003
6/3/2004
21/8/2004
6/3/2005
1/6/2006
1/11/2006
21/2/2006

–
–
–
–
28/3/1999
26/3/2000
4/3/2001
4/3/2002
6/3/2003
8/8/2003
6/3/2004
21/8/2004
6/3/2005
1/6/2008
21/2/2006

1/6/2004
15/5/2001
2/8/2002
6/3/2003
8/8/2003
6/3/2004
21/8/2004
6/3/2005

30/11/2006
27/3/2006
25/3/2007
3/3/2008
3/3/2009
5/3/2010
7/8/2010
5/3/2011
20/8/2011
5/3/2012
20/2/2013
13/8/2013

–
31/10/2011
5/3/2012
30/11/2006
20/2/2013
13/8/2013

–
30/4/2006
25/3/2007
14/5/2008
1/8/2009
5/3/2010
7/8/2010
5/3/2011
20/8/2011
5/3/2012
30/11/2006
30/4/2007
20/2/2013

–
–
–
–
27/3/2006
25/3/2007
3/3/2008
3/3/2009
5/3/2010
7/8/2010
5/3/2011
20/8/2011
5/3/2012
30/11/2008
20/2/2013

30/11/2004
14/5/2008
1/8/2009
5/3/2010
7/8/2010
5/3/2011
20/8/2011
5/3/2012

311.25p
348p

10/3/2006
1/11/2006

9/3/2013
30/4/2007

See page 86

1/1/2005
1/1/2006

30/6/2005
30/6/2006

a, h
c, f
c, f, i
c, f, i
c, g, i
d, g, i
d, g, i
d, g, h, i
e, g, h, i
e, h, i
e, h
e, h

e, g, h, i
e, h, i
a, h
e, h
e, h

a, h, i
c, f, i
c, f, i
c, g, i
d, g, i
d, g, i
d, g, h, i
e, g, h, i
e, h, i
a, h
a, h
e, h

j
j
j
c, f
c, f, i
c, f, i
c, g, i
d, g, i
d, g, i
d, g, h, i
e, g, h, i
e, h, i
a, h
e, h

a, h
c, f, i
c, g, i
d, g, i
d, g, i
d, g, h, i
e, g, h, i
e, h, i

e, h
a, h

h
h

Directors’ remuneration report

Audited information

Interests in share options (continued)

Former directors
who served
during 2003

M K Atkinson

P B Ellwood

P R Hampton

M D Ross

At 1 January 2003

Granted
during
the year

Lapsed during
the year

At 31 December
2003 (or earlier
date of leaving
the board)

27,040
40,560
30,000
50,000
42,000
50,000
59,144
26,136
38,583
35,314
22,945

111,340
100,000
110,000
80,000
85,000
80,364
61,714
130,501

326,351

3,245
265,696
30,152
141,456
315,734

27,040
40,560
30,000‡
50,000
42,000
50,000
59,144
26,136
38,583
35,314
22,945

111,340
100,000
110,000
80,000
85,000
80,364
61,714
130,501

326,351§
3,327§
642,739§

–
265,696
30,152
102,162
166,637
–
130,994

3,327
642,739

3,327
589,473

3,245†

39,294**
149,097**
3,327**
458,479**

Exercise
price

201.55p
250.37p
321p
510p
859.5p
817p
549.5p
615.5p
655p
733p
715p

242.5p
321p
510p
859.5p
817p
549.5p
615.5p
655p

740p
284p
394.25p

520p
549.5p
655p
733p
715p
284p
394.25p

Exercise periods

From

To

Notes

8/9/1997
12/9/1998
28/3/1999
26/3/2000
15/5/2001
2/8/2002
6/3/2003
8/8/2003
6/3/2004
21/8/2004
6/3/2005

3/3/1998
27/3/1999
26/3/2000
15/5/2001
2/8/2002
6/3/2003
8/8/2003
6/3/2004

5/6/2005
1/6/2006
21/2/2006

–
6/3/2003
6/3/2004
21/8/2004
6/3/2005
–
21/2/2006

16/4/2004
16/4/2004
31/5/2003
16/4/2004
16/4/2004
16/4/2004
16/4/2004
16/4/2004
6/9/2004
21/2/2005
6/9/2005

31/5/2004
31/5/2004
31/5/2004
31/5/2004
31/5/2004
31/5/2004
31/5/2004
6/9/2004

4/6/2012
30/11/2006
20/2/2013

–
30/9/2004
30/9/2004
21/2/2005
6/9/2005
–
21/8/2006

b, f, k
b, f, k
c, f, l
c, f, i, k
c, f, i, k
c, g, i, k
d, g, i, k
d, g, i, k
d, g, h, i, k
e, g, h, i, k
e, h, i, k

b, f, k
c, f, k
c, f, i, k
c, f, i, k
c, g, i, k
d, g, i, k
d, g, i, k
d, g, h, i, k

e, h, i
a, h
e, h

d, g, i, k
d, g, h, i. k
e, g, h, i, k
e, h, i, k

e, h, k

a) Sharesave.

b) Executive option granted prior to March 1996.

c) Executive option granted between March 1996 and August 1999.

d) Executive option granted between March 2000 and March 2001.

e) Executive option granted after March 2001.

f) Exercisable.

g) Not exercisable as the performance conditions had not been met.

h) Not exercisable as the option has not been held for the period required by the relevant scheme.

i) Market price of shares is below the share option exercise price.

j) Market price on day of exercise was 447p. In that regard Mr Kane made a gain of £294,672. 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 below.

k) The exercise periods were shortened in accordance with the rules of the relevant share option schemes, when the directors concerned left the board.

l) The exercise period was shortened in accordance with the share option scheme rules when the director ceased to be an employee.

* Mr Kane was entitled to receive additional Lloyds TSB Group shares on exercising share options held on 28 December 1995. These shares were to compensate
him for the special dividend of 68.3p per share which was paid to former TSB Group shareholders in 1996 following the merger with Lloyds Bank, but which
was not paid to optionholders. In that regard he received 6,994, 3,339 and 5,130 additional shares when he exercised the 48,192, 23,008 and 35,347 share
options shown above. Following these exercises, he no longer holds any share options over which these arrangements apply.

† 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.

‡ Mr Atkinson exercised this share option after he left the board. The date of exercise was 29 May 2003 and the market price of the shares on that day

was 454.5p.

** These share options lapsed when Mr Ross left the board.

§ These share options lapsed when Mr Hampton left the board on 12 January 2004.

The market price for a share in the company at 1 January 2003 and 31 December 2003 was 446p and 448p, respectively. The range of prices between
1 January 2003 and 31 December 2003 was 295.75p to 483p. 

None of the other directors at 31 December 2003 had options to acquire shares in Lloyds TSB Group plc or its subsidiaries.

LLOYDS TSB GROUP   85

Directors’ remuneration report

The following table contains information on the performance conditions for executive options granted since 1996. The remuneration committee chose the
relevant performance condition because it was felt to be challenging, aligned to shareholders’ interests and appropriate at the time.

Options granted

Performance conditions

Prior to March 1996

None

March 1996

Growth in earnings per share which is equal to the aggregate percentage change in the retail price index plus two
percentage points for each complete year of the relevant period.

March 1997 – August 1999

As for March 1996 plus a further condition that the company’s ranking based on TSR over the relevant period should
be in the top ﬁfty companies of the FTSE 100.

March 2000 – March 2001

As for March 1997 – August 1999 except that there must have been growth in the earnings per share equal to the
change in the retail price index plus three percentage points for each complete year of the relevant period.

August 2001 – August 2003

That the company’s ranking based on TSR over the relevant period against a comparator group (17 UK and
international ﬁnancial services companies including Lloyds TSB) must be at least ninth, when 14 per cent of the
option will be exercisable. If the company is ranked ﬁrst in the group, then 100 per cent of the option will be
exercisable and if ranked tenth or below the performance condition is not met. 

At the end of 2003 Lloyds TSB Group was ranked:

10th after three years of the performance period for options granted in 2001; 

11th after two years of the performance period for options granted in 2002; and

17th after one year of the performance period for options granted in 2003.

Other share plans

Share retention plan 

Mr Daniels is the only participant in this plan and holds an option, granted to him on 2 November 2001, to acquire 216,763 ordinary shares in Lloyds
TSB Group plc for a total price of £1. The option was granted as part of the remuneration package considered necessary to attract him from the USA and
is  designed  to  encourage  him  to  remain  with  Lloyds  TSB  Group  plc.  The  option  is  not  subject  to  any  performance  condition  but  will  normally  become
exercisable only if he remains an employee, and has not given notice of resignation, on 31 December 2004. Full details of the plan were set out in the 2002
annual report.

Lloyds TSB Group plc share plan 2003

A further share plan has been established in connection with the recruitment of Mr Targett as an executive director. 

The Lloyds TSB Group plc share plan 2003 was adopted in March 2003, speciﬁcally to facilitate the recruitment of Mr Targett, to compensate him for the
value of the options he had with his previous employer, which lapsed when he left them to join the Lloyds TSB Group. Mr Targett is the only participant in
the plan and he became eligible to participate in it when he joined Lloyds TSB Group on 10 March 2003. On 11 March 2003, an option was granted to
him under the plan to acquire 331,125 ordinary shares in Lloyds TSB Group plc (with a value of £1 million at the date of grant) for a total exercise price
of £1. No further options may be granted to him under the plan.

The option is designed to encourage Mr Targett to remain with Lloyds TSB Group plc. Accordingly, the option, which is not subject to any performance
conditions, will normally become exercisable only if Mr Targett remains as an employee, and has not given notice of resignation, on 31 December 2005.
The option will also be exercisable if Mr Targett ceases to be an employee before that date in certain circumstances described in his service agreement, in
which case the option will be exercisable for six months and then lapse. These circumstances include Mr Targett’s being entitled to terminate his service
agreement without notice by reason of his employer’s conduct or being removed as a director or employee otherwise than in accordance with that agreement.
The option may also become exercisable early on a takeover or reconstruction of Lloyds TSB Group plc, if Mr Targett’s service agreement is terminated by
Lloyds TSB Group plc due to sickness or injury, or if he dies (in which case his personal representatives would generally have twelve months from the date
of death to exercise the option).

The option will lapse if Mr Targett ceases to be an employee, or gives notice of resignation, before the normal exercise date, except in the circumstances
described above. 

The number and/or nominal amount of shares may be adjusted by the board on certain variations in the share capital of Lloyds TSB Group plc.

The beneﬁt conferred by this option is not pensionable and the option is not transferable. 

No new shares will be issued to satisfy the option under either of these plans.

86 LLOYDS TSB GROUP

Directors’ remuneration report

Non-beneﬁcial interests

Directors had non-beneﬁcial interests as follows:

Mr Ayliffe, Mr Daniels, Mr Fairey, Mr Hampton, Mr Kane, Mr Pritchard, Mr Targett and Mr van den Bergh, together with some 80,000 other employees,
were  potential  beneﬁciaries  in  the  162,692  and  1,609,602  shares  held  at  the  end  of  the  year  by  the  Lloyds  TSB  qualifying  employee  share  ownership 
trust  and  the  Lloyds  TSB  Group  employee  share  ownership  trust  respectively.  1,721,503  and  1,684,041  shares,  respectively,  were  held  by  these  trusts 
at the beginning of the year. These holdings were 1,364 and 1,471,150, respectively, on 5 March 2004. In addition, the above directors, with the exception
of Mr van den Bergh, together with some 80,000 other employees, were potential participants in the Lloyds TSB Group shareplan and were, therefore,
treated as interested in the 2,163,267 shares held at the end of the year by the trustee of the shareplan. No shares were held at the beginning of the year.
This holding was 1,849,239 on 5 March 2004.

None of those who were directors at the end of the year had any other interest in the capital of Lloyds TSB Group plc or its subsidiaries. 

The register of directors’ interests, which is open to inspection, contains full particulars of directors’ shareholdings and options to acquire shares in Lloyds
TSB Group plc.

On behalf of the board

A J Michie
Company Secretary
5 March 2004 

LLOYDS TSB GROUP   87

Report of the independent auditors

To the members of Lloyds TSB Group plc

We have audited the ﬁnancial statements which comprise the consolidated proﬁt and loss account, the consolidated balance sheet, the company balance sheet,
the consolidated cash ﬂow statement, the statement of total recognised gains and losses and the related notes which have been prepared under the accounting
policies set out on pages 95 to 98. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the
directors’ remuneration report under the headings directors’ emoluments, directors’ pensions and directors’ interests in share options (‘the auditable part’).

Respective responsibilities of directors and auditors

The  directors’  responsibilities  for  preparing  the  annual  report  and  the  ﬁnancial  statements  in  accordance  with  applicable  United  Kingdom  law  and
accounting standards are set out in the statement of directors’ responsibilities on page 76. The directors are also responsible for preparing the directors’
remuneration report.

Our  responsibility  is  to  audit  the  ﬁnancial  statements  and  the  auditable  part  of  the  directors’  remuneration  report  in  accordance  with  relevant  legal  and
regulatory  requirements  and  United  Kingdom  Auditing  Standards  issued  by  the  Auditing  Practices  Board.  This report,  including  the  opinion,  has  been
prepared for and only for the company’s members as a body in accordance with Section 235 of the United Kingdom Companies Act 1985 and for no other
purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or in
to whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion, as to whether the ﬁnancial statements give a true and fair view and whether the ﬁnancial statements and the auditable part
of the directors’ remuneration report have been properly prepared in accordance with the Companies Act 1985. 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 regarding directors’ remuneration and transactions is not disclosed.

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. The other information comprises only the directors’ report, the chairman’s statement, the group
chief executive’s review, the operating and ﬁnancial review and prospects, the remainder of the directors’ remuneration report and the corporate governance
statement.

We review whether the corporate governance statement on pages 74 to 77 reﬂects the company’s compliance with the seven provisions of the Combined
Code issued in June 1998 speciﬁed for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not 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 or
Group’s corporate governance procedures or its risk and control procedures.

Basis of audit opinion

We conducted our audit in accordance with auditing standards 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 and the auditable part of the directors’ remuneration report. 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’s 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  and  the  auditable  part  of  the  directors’  remuneration  report  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

In our opinion:

• the ﬁnancial statements give a true and fair view of the state of affairs of the company and the Group as at 31 December 2003 and of the proﬁt and cash

ﬂows of the Group for the year then ended;

• the ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985; and

• those parts of the directors’ remuneration report required by Part 3 of Schedule 7A to the Companies Act 1985 have been properly prepared in accordance

with the Companies Act 1985.

PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
Southampton, England
5 March 2004

88 LLOYDS TSB GROUP

Consolidated proﬁt and loss account

for the year ended 31 December 2003

Interest receivable:
Interest receivable and similar income arising 
from debt securities
Other interest receivable and similar income
Interest payable

Net interest income
Other ﬁnance income
Other income
Fees and commissions receivable
Fees and commissions payable
Dealing proﬁts (before expenses)
Income from long-term assurance business
General insurance premium income
Other operating income

Total income
Operating expenses
Administrative expenses
Depreciation
Amortisation of goodwill
Depreciation and amortisation
Total operating expenses

Trading surplus 
General insurance claims
Provisions for bad and doubtful debts
Speciﬁc
General

Amounts written off ﬁxed asset investments

Operating proﬁt 
Share of results of joint ventures
Proﬁt on sale 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

Proﬁt (loss) for the year

Earnings per share
Diluted earnings per share

Continuing
operations
2003
£ million

Discontinued
operations
2003
£ million

Note

Total
2003
£ million

Total
2002*†

Total
2001*†

£ million

£ million

389
8,484
4,129

4,744
34

2,987
(688)
525
436
535
682
4,477

9,255

4,229
633
39
672
4,901

4,354
236

883
4
887
44

3,187
(22)
–

3,165

63
1,213
765

511
–

112
(34)
35
17
–
12
142

653

247
13
12
25
272

381
–

63
–
63
–

318
–
865

1,183

452
9,697
4,894

5,255
34

3,099
(722)
560
453
535
694
4,619

9,908

4,476
646
51
697
5,173

4,735
236

946
4
950
44

3,505
(22)
865

4,348
1,025

3,323

22
47

3,254
1,911

1,343

58.3p
58.1p

567
9,982
5,378

5,171
165

3,053
(645)
188
(294)
486
763
3,551

8,887

4,212
642
59
701
4,913

3,974
229

965
64
1,029
87

2,629
(11)
–

2,618
766

1,852

19
43

1,790
1,908

(118)

32.1p
32.0p

530
10,834
6,442

4,922
307

2,922
(602)
233
(30)
428
708
3,659

8,888

4,219
511
39
550
4,769

4,119
174

736
11
747
60

3,138
(10)
39

3,167
877

2,290

17
40

2,233
1,872

361

40.4p
40.0p

45

3
30

4
25
24

16

5

21
6

8
9

40

10
11

42

12
12

The accompanying notes are an integral part of the financial statements.

* restated (see note 1)
† An analysis of the results for the years ended 31 December 2002 and 2001 between continuing and discontinued operations is given in note 7.

LLOYDS TSB GROUP   89

Consolidated balance sheet

at 31 December 2003

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
Debt securities
Equity shares
Interests in joint ventures:
– Share of gross assets
– Share of gross liabilities

Intangible ﬁxed assets
Tangible ﬁxed assets
Other assets
Prepayments and accrued income
Long-term assurance business attributable to the shareholder

Long-term assurance assets attributable to policyholders

Total assets

The accompanying notes are an integral part of the financial statements.

* restated (see note 1)

The directors approved the accounts on 5 March 2004.

M A van den Bergh
Chairman

J E Daniels
Group Chief Executive

M E Fairey
Deputy Group Chief Executive

Note

2003
£ million

2002*
£ million

13
14
15
18
19
21

24
25
28
29
30

30

1,195
1,447
539
15,547
135,251
28,669
458

85
(31)
54
2,513
3,918
3,944
1,918
6,481

1,140
1,757
2,409
17,529
134,474
29,314
206

336
(291)
45
2,634
4,096
5,239
2,287
6,213

201,934
50,078

207,343
45,218

252,012

252,561

90 LLOYDS TSB GROUP

Consolidated balance sheet

at 31 December 2003

Liabilities
Deposits by banks
Customer accounts
Items in course of transmission to banks
Debt securities in issue
Other liabilities
Accruals and deferred income
Post-retirement beneﬁt liability
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

The accompanying notes are an integral part of the financial statements.

* restated (see note 1)

Note

2003
£ million

2002*
£ million

32
33

34
35
36
45

37
38

39
39

40

41
42
42
42

30

46

23,955
116,496
626
25,922
7,007
3,206
2,139

25,443
116,334
775
30,255
8,284
3,659
2,077

1,376
402

5,959
4,495

44
683
727
1,418
1,136
343
6,727
9,624

1,313
361

5,496
4,672

37
694
731
1,416
1,093
343
5,091
7,943

201,934
50,078

207,343
45,218

252,012

252,561

299
6,122
2,604

9,025

1,879
5,927
2,540

10,346

79,335

64,504

LLOYDS TSB GROUP   91

Company balance sheet

at 31 December 2003

Fixed assets
Investments:
– Shares in group undertakings
– Loans to group undertakings

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:
– Amounts owed to group undertakings
– Other creditors
– Dividend payable
– Loan capital

Net current liabilities

Total assets less current liabilities
Creditors
Amounts falling due after more than one year:
– Loan capital

Net assets

Capital and reserves
Called-up share capital
Share premium account
Revaluation reserve
Proﬁt and loss account

Shareholders’ funds (equity)

The accompanying notes are an integral part of the ﬁnancial statements.

* restated (see note 1)

The directors approved the accounts on 5 March 2004.

M A van den Bergh
Chairman

J E Daniels
Group Chief Executive

M E Fairey
Deputy Group Chief Executive

Note

22
22

39

39

41
42
42
42

2003
£ million

2002*
£ million

10,753
1,723
12,476

9,091
1,723
10,814

1,387
88
–
362
1,837

1,913
106
1,314
–
3,333
(1,496)

1,375
89
11
250
1,725

1,801
103
1,311
14
3,229
(1,504)

10,980

9,310

1,356

9,624

1,418
1,136
4,687
2,383

9,624

1,356

7,954

1,416
1,093
3,025
2,420

7,954

92 LLOYDS TSB GROUP

Other statements

Statement of total recognised gains and losses

for the year ended 31 December 2003

Proﬁt attributable to shareholders
Currency translation differences on foreign currency net investments
Actuarial losses recognised in post-retirement beneﬁt schemes (note 45)
Deferred tax thereon (note 45)

Total recognised gains and losses relating to the year
Prior year adjustment in respect of changes in accounting policy in 2003 (note 1)
Prior year adjustments in respect of changes in accounting policy in earlier years

Total gains and losses recognised during the year

Historical cost proﬁts and losses

for the year ended 31 December 2003

2003
£ million

3,254
118
(6)
2
(4)

3,368
(29)
–

3,339

2002*

£ million

1,790
(3)
(3,299)
968
(2,331)

(544)
–
(404)

(948)

2001*
£ million

2,233
(86)
(2,873)
863
(2,010)

137
–
248

385

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 consolidated shareholders’ funds

for the year ended 31 December 2003

Proﬁt attributable to shareholders
Dividends

Proﬁt (loss) for the year
Currency translation differences on foreign currency net investments
Actuarial losses recognised in post-retirement beneﬁt schemes
Issue of shares
Movements in relation to own shares
Goodwill written back on sale of businesses (note 6)

Net increase (decrease) in shareholders’ funds
Shareholders’ funds at beginning of year
Prior year adjustment at 1 January 2001 (note 1)

Shareholders’ funds at end of year

The accompanying notes are an integral part of the financial statements.

* restated (see note 1)

2003
£ million

3,254
(1,911)

1,343
118
(4)
45
(2)
181

1,681
7,943
–

9,624

2002*
£ million

2001*
£ million

1,790
(1,908)

(118)
(3)
(2,331)
139
(70)
–

(2,383)
10,326
–

2,233
(1,872)

361
(86)
(2,010)
379
(195)
–

(1,551)
11,901
(24)

7,943

10,326

LLOYDS TSB GROUP   93

Consolidated cash flow statement

for the year ended 31 December 2003

Net cash inﬂow from operating activities (note 49a)

Dividends received from associated undertakings

Returns on investments and servicing of ﬁnance:
– Dividends paid to equity minority interests (note 49d)
– Payments made to non-equity minority interests (note 49d)
– 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 injections to long-term assurance business
Net cash inﬂow (outﬂow) from capital expenditure and ﬁnancial investment

Acquisitions and disposals:
– Additions to interests in joint ventures
– Acquisition of group undertakings and businesses (note 49e)
– Disposal of group undertakings and businesses (note 49g)
Net cash inﬂow (outﬂow) from acquisitions and disposals

Equity dividends paid

Net cash outﬂow before ﬁnancing

Financing:
– Issue of subordinated liabilities (loan capital)
– Cash proceeds from issue of ordinary share capital and sale of own shares
– held in respect of employee share schemes
– Repayments of subordinated liabilities (loan capital)
– Minority investment in subsidiaries (note 49d)
– Capital element of ﬁnance lease rental payments
Net cash inﬂow from ﬁnancing

2003
£ million

2002
£ million

2001
£ million

772

5

(14)
(81)
(600)
–
(695)

(598)
(186)
(784)

(35,420)
36,281
(778)
287
–
370

(12)
(1,106)
2,382
1,264

5,394

9,927

2

2

(18)
(43)
(463)
–
(524)

(758)
(193)
(951)

(46,830)
45,507
(1,315)
359
(140)
(2,419)

(21)
(117)
–
(138)

(17)
(40)
(514)
(1)
(572)

(682)
(147)
(829)

(47,049)
40,530
(1,157)
285
(100)
(7,491)

(44)
(180)
40
(184)

(1,908)

(1,903)

(1,738)

(976)

(539)

(885)

533

32
(75)
–
(1)
489

2,120

77
(55)
167
(4)
2,305

742

194
(131)
–
(20)
785

(100)

(Decrease) increase in cash (note 49c)

(487)

1,766

The accompanying notes are an integral part of the financial statements.

94 LLOYDS TSB GROUP

Notes to the accounts

1 Accounting policies

Accounting policies are unchanged from 2002 except that:

(i) The Group has implemented the requirements of Urgent Issues Task Force (‘UITF’) Abstract 37 ‘Purchases and sales of own shares’ and UITF Abstract
38 ‘Accounting for ESOP trusts’. As a result, holdings of shares in Lloyds TSB Group plc owned by subsidiaries and the Group’s employee share ownership
trusts, which were previously shown as assets in the balance sheet, are now treated as a deduction from shareholders’ funds. Purchases and sales of Lloyds
TSB Group plc shares are accounted for as movements in shareholders’ funds and no gains or losses are recognised in the proﬁt and loss account. The
charge to the proﬁt and loss account in respect of share options granted to employees, that are expected to be satisﬁed from shares held within the employee
share ownership trusts, is now calculated on the basis of the original intrinsic value of the options, rather than the carrying value of the shares. In the case
of Lloyds TSB Group plc shares held within the with-proﬁts long-term assurance fund an appropriate adjustment has been made to long-term assurance
liabilities to policyholders.

There has been no effect upon proﬁt before tax in 2003 as a result of this change in policy (2002: increase of £9 million; 2001: increase of £3 million); a
prior  year  adjustment  increasing shareholders’  funds  at 1 January  2001 by  £6 million  has  been  made.  The  effect  upon  the  Group’s  balance  sheet  at 
31 December 2003 has been to reduce total assets by £164 million (2002: £160 million), to reduce accruals by £43 million, to increase deferred tax
provisions by £7 million, to reduce shareholders’ funds by £6 million (2002: £3 million) and to reduce long-term assurance liabilities to policyholders by
£122 million (2002: £122 million). The effect upon the Company’s balance sheet at 31 December 2003 has been to reduce total assets by £23 million
(2002: £18 million) and to reduce shareholders’ funds by an equivalent amount. Comparative ﬁgures have been restated.

(ii) It has been the Group’s policy to defer certain expenses incurred in connection with the acquisition of new asset ﬁnance and unit trust business and
charge these costs to the proﬁt and loss account over the expected life of the related transactions. Following a review of the Group’s accounting policies this
treatment is no longer considered to be the most appropriate and these costs will now be charged to the proﬁt and loss account as incurred.

The effect of this change in policy has been to increase proﬁt before tax in 2003 by £10 million (2002: £2 million; 2001: £3 million); a prior year adjustment
reducing shareholders’ funds at 1 January 2001 by £30 million has been made. The effect upon the Group’s balance sheet at 31 December 2003 has
been to reduce total assets by £27 million (2002: £37 million) and reduce shareholders’ funds by £19 million (2002: £26 million).

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 (see o), in compliance with Section 255A, Schedule 9 and other requirements
of the Companies Act 1985 except as described below (see c), in accordance with applicable accounting standards, pronouncements of the Urgent Issues
Task Force and with the Statements of Recommended Practice issued by the British Bankers’ Association and the Finance & Leasing Association. The Group’s
methodology for calculating embedded value follows the guidance published by the Association of British Insurers for the preparation of ﬁgures using the
achieved proﬁts method of accounting except that tangible assets attributable to the shareholder are valued at market value. The guidance would require
those assets backing capital requirements to be discounted to reﬂect the cost of encumbered capital, but such a treatment would be inconsistent with the
treatment of capital supporting the Group’s banking operations. If this treatment had been followed income from long-term assurance business before tax in
2003 would have been slightly reduced and embedded value would have been some 8 per cent lower given the size of the shareholder capital required to
be retained within Scottish Widows under the terms of the demutualisation. 

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 continues to take 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. Entities that do not meet the legal deﬁnition of a subsidiary but which give rise to beneﬁts that are in substance no different to those that
would arise from subsidiaries are also included in the consolidated accounts. In order to reﬂect the different nature of the shareholder’s and policyholders’
interests  in  the  long-term  assurance  business,  the  value  of  long-term  assurance  business  attributable  to  the  shareholder  and  the  assets  and  liabilities
attributable to policyholders are classiﬁed under separate headings in the consolidated balance sheet. Details of transactions entered into by the Group which
are not eliminated on consolidation are given in note 44.

c Goodwill

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, ‘Goodwill and Intangible Assets’, this goodwill
was not reinstated when the Group adopted the standard in 1998.

The useful economic life of the goodwill arising on each acquisition is determined at the time of the acquisition. The directors consider that it is appropriate
to assign an indeﬁnite life to the goodwill which arose on the acquisition of Scottish Widows during 2000 in view of the strength of the Scottish Widows
brand, developed through over 185 years of trading, and the position of the business as one of the leading providers of life, pensions, unit trust and fund
management products. Both of these attributes are deemed to have indeﬁnite durability, which has been determined based on the following factors: the
nature of the business; the typical life spans of the products; the extent to which the acquisition overcomes market entry barriers; and the expected future
impact of competition on the business.

As a result, the Scottish Widows 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’. Impairment of the goodwill is evaluated by comparing the
present  value  of  the  expected  future  cash  ﬂows,  excluding  ﬁnancing  and  tax (the  ‘value-in-use’), to  the  carrying  value  of  the  underlying  net  assets  and
goodwill. If the net assets and goodwill were to exceed the value-in-use, an impairment would be deemed to have occurred and the resulting write-down in
the goodwill would be charged to the proﬁt and loss account immediately.

LLOYDS TSB GROUP   95

Notes to the accounts

1 Accounting policies (continued)

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 2003 would be £93 million lower (2002: £93 million lower; 2001: £94 million lower), with a corresponding reduction in reserves
of £358 million (2002: £265 million); intangible assets on the balance sheet would also be £358 million lower (2002: £265 million lower).

Goodwill arising on all other acquisitions after 1 January 1998 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
either when it is received or when there ceases to be any signiﬁcant doubt about its ultimate receipt (see e).

Fees and commissions receivable from customers to reimburse the Group for costs incurred are taken to income when due. Fees and commissions 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 and commissions charged in lieu of interest are taken to income on a level yield basis over the period of the loan. Other fees and commissions
receivable are accounted for as they fall due.

e Provisions for bad and doubtful debts and non-performing lending

Provisions for bad and doubtful debts

It is the Group’s policy to make provisions for bad and doubtful debts, by way of a charge to the proﬁt and loss account, to reﬂect the losses inherent in the
loan portfolio at the balance sheet date. There are two types of provision, speciﬁc and general, and these are discussed further below.

Speciﬁc provisions

Speciﬁc provisions relate to identiﬁed risk advances and are raised when the Group considers that recovery of the whole of the outstanding balance is in
serious doubt. The amount of the provision is equivalent to the amount necessary to reduce the carrying value of the advance to its expected ultimate net
realisable value.

For  the  Group’s  portfolios  of  smaller  balance  homogeneous  loans,  such  as  the  residential  mortgage,  personal  lending  and  credit  card  portfolios,  speciﬁc
provisions are calculated using a formulae driven approach. These formulae take into account factors such as the length of time that payments from the
customer are overdue, the value of any collateral held and the level of past and expected losses, in order to derive an appropriate provision.

For the Group’s other lending portfolios, speciﬁc provisions are calculated on a case-by-case basis. In establishing an appropriate provision, factors such as
the ﬁnancial condition of the customer, the nature and value of any collateral held and the costs associated with obtaining repayment and realisation of the
collateral are taken into consideration.

General provisions

General provisions are raised to cover latent bad and doubtful debts which are present in any portfolio of advances but have not been speciﬁcally identiﬁed.
The  Group  holds  general  provisions  against  each  of  its  principal  lending  portfolios,  which  are  calculated  after  having  regard  to  a  number  of  factors;  in
particular, the level of watchlist or potential problem debt, the observed propensity for such debt to deteriorate and become impaired and prior period loss
rates. The level of general provision held is reviewed on a regular basis to ensure that it remains appropriate in the context of the perceived risk inherent in
the related portfolio and the prevailing economic climate.

Non-performing lending

An advance becomes classiﬁed as non-performing when interest ceases to be credited to the proﬁt and loss account. There are two types of non-performing
lending which are discussed further below.

Accruing loans on which interest is being placed in suspense

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. Interest is placed on a suspense account and only taken to income if there ceases to be signiﬁcant doubt
about its being paid.

Loans accounted for on a non-accrual basis

In those cases where the operation of the customer’s account has ceased and it has been transferred to a specialist recovery department, the advance is
written down to its estimated realisable value and interest is no longer charged to the customer’s account as its recovery is considered unlikely. Interest is
only taken to income if it is received.

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 and in the long-term assurance business (see o), 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, less amounts written off
for any permanent diminution in their value. Equity shares, apart from those held for dealing purposes and in the long-term assurance business (see o), are
stated at cost less amounts written off for any permanent diminution in their value.

96 LLOYDS TSB GROUP

Notes to the accounts

1 Accounting policies (continued)

Debt securities and equity shares held for dealing purposes are included at market value. In circumstances where securities are transferred from dealing
portfolios to investment portfolios or vice versa, the transfer is effected at an amount based on the market value at the date of transfer. Any resulting proﬁt
or loss is reﬂected in the proﬁt and loss account.

h Shares in group undertakings 

Shares  in  group  undertakings  are  stated  in  the  balance  sheet  of  the  Company  at  its  share  of  net  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.

i Tangible ﬁxed assets 

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 and the related development costs 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 cash investment, taking into account tax and anticipated residual values. Anticipated residual values are reviewed regularly and any impairments
identiﬁed are charged to the proﬁt and loss account.

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 

Assets leased to customers are classiﬁed as ﬁnance leases if the lease agreements transfer substantially all of the risks and rewards of ownership to the
lessee; all other leases are classiﬁed as operating leases.

Income from ﬁnance 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. Income from instalment credit transactions is credited to the proﬁt and loss account using the sum of the digits method.
Rental income from operating leases is credited to the proﬁt and loss account on an accruals basis.

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 

Full provision is made for deferred tax liabilities arising from timing differences between the recognition of gains and losses in the ﬁnancial statements and
their recognition in a tax computation. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that there will be suitable
taxable proﬁts from which the future reversal of the underlying timing differences can be deducted, or where they can be offset against deferred tax liabilities.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on
tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

m Pensions and other post-retirement beneﬁts 

The Group operates a number of deﬁned beneﬁt pension and post-retirement healthcare schemes, and a number of employees are members of deﬁned
contribution pension schemes.

Full actuarial valuations of the Group’s main deﬁned beneﬁt schemes are carried out every three years with interim reviews in the intervening years; these
valuations are updated to 31 December each year by qualiﬁed independent actuaries, or in the case of the Scottish Widows Retirement Beneﬁts Scheme,
by a qualiﬁed actuary employed by Scottish Widows. For the purposes of these annual updates, scheme assets are included at market value and scheme
liabilities are measured on an actuarial basis using the projected unit method; these liabilities are discounted at the current rate of return on an AA corporate
bond of equivalent currency and term. The post-retirement beneﬁt surplus or deﬁcit is included on the Group’s balance sheet, net of the related amount of
deferred tax. Surpluses are included only to the extent that they are recoverable through reduced contributions in the future or through refunds from the
schemes. The current service cost and any past service costs are included in the proﬁt and loss account within operating expenses and the expected return
on the schemes’ assets, net of the impact of the unwinding of the discount on scheme liabilities, is included within other ﬁnance income. Actuarial gains
and losses, including differences between the expected and actual return on scheme assets, are recognised, net of the related deferred tax, in the statement
of total recognised gains and losses.

The costs of the Group’s deﬁned contribution pension schemes are charged to the proﬁt and loss account in the period in which they fall due.

n Foreign currency translation 

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.

LLOYDS TSB GROUP   97

Notes to the accounts

1 Accounting policies (continued)

o Long-term assurance business 

A number of the Group’s subsidiary undertakings are engaged in writing long-term assurance business, including the provision of life assurance, pensions,
annuities and permanent health insurance contracts. In common with other life assurance companies in the UK, these companies are structured into one
or more long-term business funds, depending upon the nature of the products being written, and a shareholder’s fund. All premiums received, investment
returns, claims and expenses, and changes in liabilities to policyholders are accounted for within the related long-term business fund. Any surplus, which
is determined annually by the Appointed Actuary after taking account of these items, may either be distributed between the shareholder and the policyholders
according  to  a  predetermined  formula  or  retained  within  the  long-term  business  fund.  The  shareholder  will  also  levy  investment  management  and
administration charges upon the long-term business fund.

The Group accounts for its interest in long-term assurance business using the embedded value basis of accounting, in common with other UK banks with
insurance subsidiaries. The value of the shareholder’s interest in the long-term assurance business (‘the embedded value’) included in the Group’s balance
sheet is an actuarially determined estimate of the economic value of the Group’s life assurance subsidiaries, excluding any value which may be attributed
to future new business. The embedded value is comprised of the net tangible assets of the life assurance subsidiaries, including any surplus retained within
the long-term business funds, which could be transferred to the shareholder, and the present value of the in-force business. The value of the in-force business
is calculated by projecting the future surpluses and other net cash ﬂows attributable to the shareholder arising from business written by the balance sheet
date,  using  appropriate  economic  and  actuarial  assumptions,  and  discounting  the  result  at  a  rate  which  reﬂects  the  shareholder’s  overall  risk  premium
attributable to this business.

Changes in the embedded value, 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.

The assets held within the long-term business funds are legally owned by the life assurance companies, however the shareholder will only beneﬁt from
ownership of these assets to the extent that surpluses are declared or from other cash ﬂows attributable to the shareholder. Reﬂecting the different nature of
these assets, they are classiﬁed separately on the Group’s balance sheet as ‘Long-term assurance assets attributable to policyholders’, with a corresponding
liability  to  the  policyholders  also  shown.  Investments  held  within  the  long-term  business  funds  are  included  on  the  following  basis:  equity  shares,  debt
securities and unit trusts held for unit linked funds are valued in accordance with policy conditions at market prices; other equity shares and debt 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 the balance sheet date, and mortgages and loans are at cost less amounts written off.

p General insurance business 

The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included, net of refunds, in the
period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred and only credited to the proﬁt and
loss  account  when  earned.  Where  the  Group  acts  as  intermediary,  commission  income  is  included  in  the  proﬁt  and  loss  account  at  the  time  that  the
underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made for the effect of future policy terminations
based upon past experience. 

The underwriting business makes provision for the estimated cost of claims notiﬁed but not settled and claims incurred but not reported at the balance sheet
date. The provision for the cost of claims notiﬁed but not settled is based upon a best estimate of the cost of settling the outstanding claims after taking into
account all known facts. In those cases where there is insufﬁcient information to determine the required provision, statistical techniques are used which take
into  account  the  cost  of  claims  that  have  recently  been  settled  and  make  assumptions  about  the  future  development  of  the  outstanding  cases.  Similar
statistical techniques are used to determine the provision for claims incurred but not reported at the balance sheet date. Claims equalisation provisions are
calculated in accordance with the relevant legislative requirements.

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 swaps together with interest rate swaps, forward rate agreements and options. These derivatives are accounted for in
the same way as 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 reasonable evidence of the intention to hedge at the outset of the transaction
and the derivative substantially matches or eliminates a proportion of the risk associated with 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.

98 LLOYDS TSB GROUP

Notes to the accounts

2 Segmental analysis

The Group’s activities are organised into three businesses: UK Retail Banking and Mortgages, Insurance and Investments and Wholesale and International
Banking.  Services  provided  by  UK  Retail  Banking  and  Mortgages  encompass  the  provision  of  banking  and  other  ﬁnancial  services,  private  banking,
stockbroking and mortgages to personal customers. Insurance and Investments offers life assurance, pensions and savings products, general insurance and
fund management services. Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks
and ﬁnancial institutions, and small and medium-sized UK businesses. It also provides asset ﬁnance to personal and corporate customers; manages the
Group’s activities in ﬁnancial markets through its Treasury function and provides banking and ﬁnancial services overseas.

Life,
pensions,
unit trusts
and asset
insurance management
£m

General

£m

Year ended 31December 2003

Net interest income
Other ﬁnance income
Income from long-term assurance business
Other operating income

Total income
Operating expenses

Trading surplus (deﬁcit)
General insurance claims
Provisions for bad and doubtful debts
Amounts written off ﬁxed asset investments
Share of results of joint ventures
Proﬁt on sale of businesses

UK Retail
Banking
and
Mortgages
£m

3,137
–
–
909

4,046
(2,409)

1,637
–
(594)
–
(22)
–

38
–
–
1,122

1,160
(191)

969
(236)
–
–
–
–

Proﬁt (loss) before tax

1,021

733

Year ended 31December 2002*

Net interest income
Other ﬁnance income
Income from long-term assurance business
Other operating income

Total income
Operating expenses

Trading surplus (deﬁcit)
General insurance claims
Provisions for bad and doubtful debts
Amounts written off ﬁxed asset investments
Share of results of joint ventures

2,890
–
–
837

3,727
(2,212)

1,515
–
(496)
–
(11)

38
–
–
1,065

1,103
(181)

922
(229)
–
–
–

Proﬁt (loss) before tax

1,008

693

Year ended 31December 2001*

Net interest income
Other ﬁnance income
Income from long-term assurance business
Other operating income

Total income
Operating expenses

Trading surplus (deﬁcit)
General insurance claims
Provisions for bad and doubtful debts
Amounts written off ﬁxed asset investments
Share of results of joint ventures
Proﬁt on sale of businesses

2,690
–
–
911

3,601
(2,170)

1,431
–
(357)
–
(10)
–

48
–
–
900

948
(169)

779
(174)
–
–
–
–

Proﬁt (loss) before tax

1,064

605

43
–
436
198

677
(213)

464
–
–
–
–
–

464

36
–
(305)
217

(52)
(299)

(351)
–
–
–
–

(351)

32
–
(42)
288

278
(319)

(41)
–
–
–
–
–

(41)

Insurance
and
Investments
£m

81

436
1,320

1,837
(404)

1,433
(236)
–
–
–
–

Wholesale
and
International
Banking
£m

1,876
–
–
1,514

3,390
(2,028)

1,362
–
(306)
(44)
–
–

Central
group items
£m

Continuing Discontinued†††
operations
£m

operations
£m

(350)
34
–
298

(18)
(60)

(78)
–
13
–
–
–

4,744
34
436
4,041

9,255
(4,901)

4,354
(236)
(887)
(44)
(22)
–

Total
£m

5,255
34
453
4,166

511
–
17
125

653
(272)

9,908
(5,173)

381
–
(63)
–
–
865

4,735
(236)
(950)
(44)
(22)
865

1,197

1,012

(65)

3,165

1,183

4,348

74
–
(305)
1,282

1,051
(480)

571
(229)
–
–
–

1,970
–
–
1,469

3,439
(1,908)

1,531
–
(489)
(57)
–

(251)
165
–
149

63
(36)

27
–
7
(30)
–

4,683
165
(305)
3,737

8,280
(4,636)

3,644
(229)
(978)
(87)
(11)

488
–
11
108

607
(277)

330
–
(51)
–
–

5,171
165
(294)
3,845

8,887
(4,913)

3,974
(229)
(1,029)
(87)
(11)

342

985

4

2,339

279

2,618

80
–
(42)
1,188

1,226
(488)

738
(174)
–
–
–
–

1,905
–
–
1,312

3,217
(1,698)

1,519
–
(328)
(22)
–
–

(207)
307
–
170

270
(151)

119
–
6
(38)
–
–

4,468
307
(42)
3,581

8,314
(4,507)

3,807
(174)
(679)
(60)
(10)
–

454
–
12
108

4,922
307
(30)
3,689

574
(262)

8,888
(4,769)

312
–
(68)
–
–
39

4,119
(174)
(747)
(60)
(10)
39

564

1,169

87

2,884

283

3,167

LLOYDS TSB GROUP   99

Notes to the accounts

2 Segmental analysis (continued)

Geographical area:**

Interest receivable
Other ﬁnance income
Fees and commissions receivable
Dealing proﬁts (before expenses)
Income from long-term assurance business
General insurance premium income
Other operating income

Domestic
2003
£m

International
2003
£m

Continuing Discontinued†††
operations
2003
£m

operations
2003
£m

8,490
34
2,831
276
436
535
677

383
–
156
249
–
–
5

8,873
34
2,987
525
436
535
682

1,276
–
112
35
17
–
12

Total
2003
£m

10,149
34
3,099
560
453
535
694

Total gross income

13,279

793

14,072

1,452

15,524

Proﬁt on ordinary activities before tax

2,810

355

3,165

1,183

4,348

Geographical area:**

Interest receivable
Other ﬁnance income
Fees and commissions receivable
Dealing proﬁts (before expenses)
Income from long-term assurance business
General insurance premium income
Other operating income

Domestic* International
2002
£m

2002
£m

Continuing* Discontinued†††
operations
2002
£m

operations
2002
£m

Total*
2002
£m

8,226
165
2,773
125
(305)
486
552

582
–
169
39
–
–
207

8,808
165
2,942
164
(305)
486
759

1,741
–
111
24
11
–
4

10,549
165
3,053
188
(294)
486
763

Total gross income

12,022

997

13,019

1,891

14,910

Proﬁt on ordinary activities before tax

2,122

217

2,339

279

2,618

Geographical area:**

Interest receivable
Other ﬁnance income
Fees and commissions receivable
Dealing proﬁts (before expenses)
Income from long-term assurance business
General insurance premium income
Other operating income

Domestic* International
2001
£m

2001
£m

Continuing* Discontinued†††
operations
2001
£m

operations
2001
£m

Total*
2001
£m

8,950
307
2,636
138
(42)
428
538

804
–
185
70
–
–
162

9,754
307
2,821
208
(42)
428
700

1,610
–
101
25
12
–
8

11,364
307
2,922
233
(30)
428
708

Total gross income

12,955

1,221

14,176

1,756

15,932

Proﬁt on ordinary activities before tax

2,601

283

2,884

283

3,167

100 LLOYDS TSB GROUP

Notes to the accounts

2 Segmental analysis (continued)

Net assets†

Class of business
UK Retail Banking and Mortgages
Insurance and Investments:
– General insurance
– Life, pensions, unit trusts and asset management 

Wholesale and International Banking
Central group items

Continuing operations
Discontinued operations†††

Geographical area:**
Domestic
International

Continuing operations
Discontinued operations†††

2003
£m

2,555

470
6,531
7,001
4,390
(4,278)

9,668
–

9,668

9,069
599

9,668
–

9,668

2002*
£m

2,242

447
6,461
6,908
4,125
(6,647)

6,628
1,352

7,980

6,038
590

6,628
1,352

7,980

Assets††

2003
£m

2002*
£m

90,272

79,629

1,009
8,835
9,844
101,555
263

201,934
–

201,934

189,162
12,772

201,934
–

201,934

794
8,333
9,127
102,464
1,521

192,741
14,602

207,343

177,627
15,114

192,741
14,602

207,343

* Figures for 2001 and 2002 have been restated to take account of the changes in accounting policy explained in note 1 and to reﬂect the transfer of Business
Banking from UK Retail Banking and Mortgages to Wholesale and International Banking, together with changes in internal transfer pricing arrangements. Under
the Group’s transfer pricing arrangements, inter-segment services are generally recharged at cost. Inter-segment lending and deposits are generally entered into
at market rates, except that non-interest bearing balances are priced at a rate that reﬂects the external yield that could be earned on such funds.

** 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 (SSAP 25);

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.

††† Discontinued operations relate to the Wholesale and International Banking segment.

As the business of the Group is mainly that of banking and insurance, no segmental analysis of turnover is given.

3 Dealing proﬁts (before expenses)

Foreign exchange trading income
Securities and other gains

2003
£m

228
332

560

2002
£m

173
15

188

2001
£m.

158
75

233

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. 

4 Administrative expenses 

Salaries
Social security costs
Other pension costs (note 45)

Staff costs
Other administrative expenses

* restated (see note 1)

2003
£m

2,092
143
353

2,588
1,888

4,476

2002*
£m

2,065
134
318

2,517
1,695

4,212

2001*
£m.

2,062
140
347

2,549
1,670

4,219

LLOYDS TSB GROUP   101

Notes to the accounts

4 Administrative expenses (continued)

2003

2002

2001

The average number of persons on a headcount basis 
employed by the Group during the year was as follows:
UK
Overseas

73,814
10,288

84,102

71,134
11,491

82,625

71,184
11,768

82,952

The  above  staff  numbers  exclude  5,202 (2002:  5,870;  2001:  5,450)  staff  employed  in  the  long-term  assurance  business.  Costs  of  £194 million
(2002: £209 million; 2001: £168 million) in relation to those staff are reﬂected in the valuation of the long-term assurance business.

Details of directors’ emoluments, pensions and interests are given on pages 81 to 87.

Statutory audit
– Audit related regulatory reporting
– Further assurance services
Other audit related fees

Audit and audit related fees
Tax advisory
– Due diligence services
– Management consultancy
– Other
Other non-audit  fees

Total fees

2003
£m

5.5
0.9
3.3
4.2

9.7
1.6
0.7
–
0.2
0.9

12.2

2002
£m

4.8
0.9
1.7
2.6

7.4
0.7
0.8
0.1
0.7
1.6

9.7

2001
£m.

4.0
0.8
5.0
5.8

9.8
0.4
5.7
3.5
0.9
10.1

20.3

The auditors’ remuneration for the holding company was £51,500 (2002: £50,000; 2001: £50,000).

During the year the auditors also earned fees of £0.6 million (2002: £0.8 million; 2001: £0.8 million) in respect of the audit of unit trusts and pension
schemes managed by the Group.

Included in ‘Other audit related fees’ are the costs of the audit of the Group’s Form 20-F ﬁling with the SEC and, in 2001, work in relation to the Group’s
initial registration. Also included in this category is advice in relation to preparations for the implementation of International Financial Reporting Standards;
internal control reviews; and work on a number of projects within the Group’s insurance and investments businesses including the audit of the conversion
of unit trusts to open ended investment companies.

The fees paid to the auditors for tax advisory work relate to the preparation and review of the tax returns of a number of the Group’s overseas operations,
advice on a number of issues relating to the acquisition of Scottish Widows, the implementation of internal tax restructuring advice principally within Scottish
Widows and a review of the Group's VAT procedures.

‘Other non-audit fees’ in 2003 principally relate to work in connection with the disposal of The National Bank of New Zealand and the Group’s operations
in Brazil.

It is the Group’s policy to use the auditors on assignments in cases where their knowledge of the Group means that it is neither efﬁcient nor cost effective
to employ another ﬁrm of accountants. Such assignments typically relate to the provision of advice on tax issues, assistance in transactions involving the
acquisition  and  disposal  of  businesses  and  accounting  advice.  Following  a  change  in  policy  in  2002,  the  auditors  are  no  longer  permitted  to  provide
management consultancy services to the Group.

During 2003, the Group revised its procedures for audit committee pre-approval of fees for audit and non-audit services in order to comply with rules issued
by the SEC which seek to ensure the independence of the auditors. Certain de minimis limits for non-audit fees have been established, for particular detailed
types of service. All non-audit assignments where the fee falls below the relevant limit have been approved in advance by the audit committee. All statutory
audit work, and non-audit assignments where the fee is expected to exceed the relevant limit, are subject to individual pre-approval by the audit committee.
Since these revised procedures were introduced in April 2003, 62% of the fees incurred by the Group for non-audit services were individually approved in
advance by the audit committee. In addition, on a quarterly basis, the audit committee receives a report detailing all pre-approved services and amounts
paid to the auditors for such pre-approved services.

5 Amounts written off ﬁxed asset investments

Debt securities
Equity shares

2003
£m

42
2

44

2002
£m

84
3

87

2001
£m.

58
2

60

102 LLOYDS TSB GROUP

Notes to the accounts

6 Proﬁt before tax on sale of businesses

Loss on sale of French fund management and private banking businesses (tax: nil)
Loss on sale of Brazilian businesses (after charging £161 million of goodwill previously 
written off to reserves) (tax: nil)
Proﬁt on sale of New Zealand operations (after charging £20 million of goodwill previously
written off to reserves) (tax: nil)
Proﬁt on sale of Brazilian fund management and private banking businesses (tax: £11 million)

2003
£m

(15)

(41)

921
–

865

2002
£m

–

–

–
–

–

2001
£m.

–

–

–
39

39

During 2003 the Group completed the following transactions:

• The sale, announced on 16 May 2003 and completed on 30 June 2003, of its French fund management and private banking businesses, including its

subsidiaries Lloyds Bank SA, Chaillot Assurances SA and Capucines Investissements SA.

• The sale, announced on 9 October 2003 and completed on 15 December 2003, of its Brazilian subsidiaries Banco Lloyds TSB S.A. and Losango Promotora

de Vendas Ltda, together with substantially all of the business of the Brazilian branch of Lloyds TSB Bank plc and certain offshore Brazilian assets.

• The  sale,  announced  on  23 October 2003  and  completed  on  1 December 2003,  of  its  subsidiary,  NBNZ  Holdings  Limited,  comprising  the  Group’s

New Zealand banking and insurance operations.

On 1 December 2003, the Group also announced the sale of its operations in Guatemala, Honduras and Panama; these sales are expected to be completed
in 2004.

During the year ended 31 December 2001 the Group sold its Brazilian fund management and private banking business, including its subsidiary, Lloyds TSB
Asset Management S.A. 

LLOYDS TSB GROUP   103

Notes to the accounts

7 Analysis of comparative proﬁt and loss accounts

The  analysis  of  the  proﬁt  and  loss  accounts  for  comparative  periods  between  continuing  and  discontinued  operations  is  set  out  below.  Discontinued
operations comprise the operations in France, New Zealand and Brazil sold in 2003 and 2001; for further details see note 6.

Interest receivable:
– Interest receivable and similar income arising from debt securities
– Other interest receivable and similar income
Interest payable

Net interest income
Other ﬁnance income
Other income:
Fees and commissions receivable
Fees and commissions payable
Dealing proﬁts (before expenses)
Income from long-term assurance business
General insurance premium income
Other operating income

Total income
Operating expenses:
Administrative expenses
Depreciation
Amortisation of goodwill
Depreciation and amortisation
Total operating expenses

Trading surplus
General insurance claims
Provisions for bad and doubtful debts:
Speciﬁc
General

Amounts written off ﬁxed asset investments

Operating proﬁt 
Share of results of joint ventures

Proﬁt on ordinary activities before tax

Continuing
operations
2002
£m

523
8,285
4,125

4,683
165

2,942
(614)
164
(305)
486
759
3,432

8,280

3,973
630
33
663
4,636

3,644
229

914
64
978
87

2,350
(11)

2,339

Discontinued
operations
2002
£m

44
1,697
1,253

488
–

111
(31)
24
11
–
4
119

607

239
12
26
38
277

330
–

51
–
51
–

279
–

279

Total
2002
£m

567
9,982
5,378

5,171
165

3,053
(645)
188
(294)
486
763
3,551

8,887

4,212
642
59
701
4,913

3,974
229

965
64
1,029
87

2,629
(11)

2,618

104 LLOYDS TSB GROUP

Notes to the accounts

7 Analysis of comparative proﬁt and loss accounts (continued)

Interest receivable:
– Interest receivable and similar income arising from debt securities
– Other interest receivable and similar income
Interest payable

Net interest income
Other ﬁnance income
Other income:
Fees and commissions receivable
Fees and commissions payable
Dealing proﬁts (before expenses)
Income from long-term assurance business
General insurance premium income
Other operating income

Total income
Operating expenses:
Administrative expenses
Depreciation
Amortisation of goodwill
Depreciation and amortisation
Total operating expenses

Trading surplus
General insurance claims
Provisions for bad and doubtful debts:
Speciﬁc
General

Amounts written off ﬁxed asset investments

Operating proﬁt 
Share of results of joint ventures
Proﬁt on sale of business

Proﬁt on ordinary activities before tax

8 Proﬁt on ordinary activities before tax

Proﬁt on ordinary activities before tax is stated after taking account of:
Income from:
Aggregate amounts receivable, including capital repayments, in respect of assets leased to
customers and banks under:
– Finance leases and hire purchase contracts
– Operating leases 
Proﬁts less losses on disposal of investment securities
Charges:
Rental of premises
Hire of equipment
Interest on subordinated liabilities (loan capital)

Continuing
operations
2001
£m

503
9,251
5,286

4,468
307

2,821
(576)
208
(42)
428
700
3,539

8,314

3,981
498
28
526
4,507

3,807
174

668
11
679
60

2,894
(10)
–

2,884

2003
£m

3,495
446
47

220
18
622

Discontinued
operations
2001
£m.

27
1,583
1,156

454
–

101
(26)
25
12
–
8
120

574

238
13
11
24
262

312
–

68
–
68
–

244
–
39

283

2002
£m

3,290
440
160

220
18
537

Total
2001
£m.

530
10,834
6,442

4,922
307

2,922
(602)
233
(30)
428
708
3,659

8,888

4,219
511
39
550
4,769

4,119
174

736
11
747
60

3,138
(10)
39

3,167

2001
£m.

3,250
329
160

203
18
515

LLOYDS TSB GROUP   105

Notes to the accounts

9 Tax on proﬁt on ordinary activities

a Analysis of charge for the year

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
Associated undertakings and joint ventures

* restated (see note 1)

2003
£m

1,079
(72)
1,007
(223)

784

144
(15)
129

913
119
(7)

1,025

2002*
£m

786
12
798
(129)

669

216
(15)
201

870
(106)
2

766

2001*
£m.

769
(14)
755
(87)

668

179
(17)
162

830
46
1

877

The charge for tax on the proﬁt for the year is based on a UK corporation tax rate of 30 per cent (2002: 30 per cent; 2001: 30 per cent).

In addition to the tax charge in the proﬁt and loss account detailed above, £2 million (2002: £968 million; 2001: £863 million) of deferred tax has been
credited to the statement of total recognised gains and losses in respect of actuarial losses recognised in post-retirement beneﬁt schemes (note 45).

b Factors affecting the tax charge for the year

A reconciliation of the charge that would result from applying the standard UK corporation tax rate to proﬁt before tax to the current tax charge and total tax
charge for the year is given below:

2003
£m

4,348

1,304

9
(9)
(10)
(276)
(12)
–
(105)
(14)
16
10

913

105
14
(7)

1,025

23.6%

2002*
£m

2,618

785

9
24
(28)
(23)
(12)
(20)
7
99
43
(14)

870

(7)
(99)
2

766

29.3%

2001*
£m

3,167

950

8
12
8
(39)
(12)
(60)
(48)
2
21
(12)

830

48
(2)
1

877

27.7%

Proﬁt on ordinary activities before tax

Tax charge thereon at UK corporation tax rate of 30%
Factors affecting charge:
– Goodwill amortisation
– Overseas tax rate differences
– Non-allowable and non-taxable items
– Gains exempted or covered by capital losses 
– Tax deductible coupons on non-equity minority interests
– Payments to employee trust
– Capital allowances in excess of depreciation
– Other timing differences
– Life companies rate differences
– Other items

Current tax charge
Deferred tax:
– Capital allowances in excess of depreciation
– Other timing differences
Associated undertakings and joint ventures

Tax on proﬁt on ordinary activities

Effective rate

* restated (see note 1)

106 LLOYDS TSB GROUP

Notes to the accounts

9 Tax on proﬁt on ordinary activities (continued)

c Factors that may affect the future tax charge

The  current  tax  charge  includes  a  charge of  £157 million  (2002:  credit  of  £44  million;  2001:  charge  of  £11  million)  in  respect  of  notional  tax  on  the
shareholder’s interest in the movement in value of the long-term assurance business. Since this derives from the use of a combination of tax rates it can
give rise to a higher or lower charge compared to an expected 30 per cent rate. 

The Finance Act 2003 introduced legislation which will potentially affect the tax treatment of certain transfers from Scottish Widows plc’s long-term business
fund to its shareholder’s fund; it is possible that these transfers will be subject to a higher tax charge than was previously anticipated. The potential deferred
liability not recognised on the balance sheet is approximately £110 million.

Factors that may affect the future deferred tax charge are dealt with in note 37. 

10 Proﬁt for the ﬁnancial year attributable to shareholders

The proﬁt attributable to shareholders includes a proﬁt of £1,880 million (2002: £1,912 million; 2001: £1,893 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.

Certain disclosures necessary to meet US GAAP and SEC disclosure requirements in relation to the parent company are given in note 51 to these ﬁnancial statements.

11 Ordinary dividends

Interim: paid
Final: proposed

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

2003
pence
per share

2002
pence
per share

2001
pence
per share

2003

£m

597
1,314

2002

£m

597
1,311

2001

£m

566
1,306

10.2
23.5

33.7

1,911

1,908

1,872

2002*

2001*

£1,790m
5,570m
27m
5,597m
32.1p
32.0p

£2,233m
5,533m
50m
5,583m
40.4p
40.0p

10.7
23.5

34.2

10.7
23.5

34.2

2003

£3,254m
5,581m
18m
5,599m
58.3p
58.1p

* restated (see note 1)

† 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 8 million (2002: 5 million; 2001: 15 million) ordinary shares

representing the Group’s holdings of own shares (note 43).

LLOYDS TSB GROUP   107

Notes to the accounts

13 Treasury bills and other eligible bills

2003
Balance sheet
£m

2003
Valuation
£m

2002
Balance sheet
£m

Investment securities:
Treasury bills and similar securities
Other eligible bills

Other securities:
Treasury bills and similar securities

Geographical analysis by issuer:
United Kingdom
Latin America
Other

Included above:
Unamortised discounts net of premiums on investment securities

Movements in investment securities comprise:

At 1 January 2003
Exchange and other adjustments
Additions
Bills sold or matured
Amortisation of premiums and discounts

At 31 December 2003

308
222

530

9

539

336
70
133

539

2

305
218

523

Cost
£m

1,875
3
23,453
(24,803)
–

528

257
1,622

1,879

530

2,409

1,726
567
116

2,409

5

Premiums
and discounts
£m

4
–
–
(61)
59

2

2002
Valuation
£m

258
1,620

1,878

Total
£m

1,879
3
23,453
(24,864)
59

530

Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. It is expected that tax of
£2 million (2002: £1 million) would be recoverable if the investment securities were sold at their year end valuation.

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.

2003
£m

2,292
13,273

15,565
(18)

15,547

3,768

7,637
2,329
1,496
335
(18)

15,547

2002
£m

2,212
15,318

17,530
(1)

17,529

4,313

8,512
2,624
1,700
381
(1)

17,529

14 Loans and advances to banks

Lending to banks
Deposits placed with banks

Total loans and advances to banks
Provisions for bad and doubtful debts

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

108 LLOYDS TSB GROUP

Notes to the accounts

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

2003
£m

125,785
4,701
6,470

136,956
(1,677)
(28)

135,251

23,284
9,458
31,384
72,830
(1,677)
(28)

135,251

13,365

2002
£m

124,655
4,342
7,300

136,297
(1,766)
(57)

134,474

23,989
10,357
30,637
71,314
(1,766)
(57)

134,474

11,852

The  cost  of  assets  acquired  during  the  year for  letting  to  customers  under  ﬁnance  leases  and  hire  purchase  contracts amounted  to  £4,478  million
(2002: £3,752 million).

Equipment leased to customers, which is stated after deducting £4,907 million (2002: £5,603 million) of unearned charges, is repayable as follows:

3 months or less
1 year or less but over 3 months
5 years or less but over 1 year
Over 5 years

2003
£m

91
345
1,465
4,569

6,470

2002
£m

127
407
1,669
5,097

7,300

LLOYDS TSB GROUP   109

Notes to the accounts

16 Provisions for bad and doubtful debts and non-performing lending

At 1 January
Exchange and other adjustments
Adjustments on acquisitions and disposals
Transfer from general to speciﬁc provisions
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

2003
Speciﬁc
£m

1,334
(1)
(49)
50
(1,145)
178

1,552
(606)
946

2003
General
£m

433
–
(5)
(50)
–
–

9
(5)
4

2002
Speciﬁc
£m

1,099
(55)
–
–
(878)
203

1,544
(579)
965

2002
General
£m

369
(3)
3
–
–
–

64
–
64

2001
Speciﬁc
£m

1,069
(15)
–
–
(885)
194

1,310
(574)
736

2001
General.
£m

357
1
–
–
–
–

64
(53)
11

At 31 December 

1,313

382

1,334

433

1,099

369

In respect of:
Loans and advances to banks
Loans and advances to customers

Non-performing lending comprises:
Accruing loans on which interest is being placed in suspense
Loans accounted for on a non-accrual basis

Provisions
Interest held in suspense

1,695

18
1,677

1,695

1,767

1
1,766

1,767

2003
£m

633
585

1,218
(916)
(28)

274

1,468

2
1,466

1,468

2002
£m

752
662

1,414
(992)
(57)

365

110 LLOYDS TSB GROUP

Notes to the accounts

17 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
USA
Europe
Rest of the world
Total international

Provisions for bad and doubtful debts*
Interest held in suspense*

2003
£m

2,025
3,211
1,497
4,741
4,577
9,652

70,750
20,139
6,470
4,701
3,351

131,114

557
–
2,681
1,981
623
5,842

136,956
(1,677)
(28)

135,251

2002
£m

2,076
3,373
1,482
4,696
4,008
8,352

62,467
16,579
7,285
4,342
3,397

118,057

1,591
10,447
3,412
2,142
648
18,240

136,297
(1,766)
(57)

134,474

* 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. 

LLOYDS TSB GROUP   111

2003
Balance sheet
£m

1,895
–
2,515
1,895
2,211
3,942
1,283

2003
Valuation
£m

1,902
–
2,515
1,890
2,212
3,951
1,284

2002
Balance sheet
£m

2,140
1
3,147
1,495
893
2,817
1,369

2002
Valuation
£m

2,141
1
3,148
1,496
892
2,820
1,367

13,741

13,754

11,862

11,865

7,253
106
–
6,785
664
120
–

28,669

5,045
23,624

28,669

5,232
15,949
5,130
98
1,994
266

28,669

7,253
106
–
6,785
664
120
–

28,682

8,173
5,581

13,754

14,374
554

14,928

6,035
112
340
7,842
1,838
1,191
94

29,314

6,412
22,902

29,314

5,569
13,254
6,077
1,231
2,763
420

29,314

337

6,102
5,760

11,862

16,034
1,418

17,452

6,035
112
340
7,842
1,838
1,191
94

29,317

6,101
5,764

11,865

16,034
1,418

17,452

Notes to the accounts

18 Debt securities

Investment securities
Government securities
Other public sector securities
Bank and building society certiﬁcates of deposit
Corporate debt securities
Mortgage backed securities
Other asset backed securities
Other debt securities

Other securities
Government securities
Other public sector securities
Bank and building society certiﬁcates of deposit
Corporate debt securities
Mortgage backed securities
Other asset backed securities
Other debt securities

Due within 1 year
Due 1 year and over

Geographical analysis by issuer
United Kingdom
Other European
North America and Caribbean
Latin America
Asia Paciﬁc
Other

Unamortised discounts net of premiums on investment securities

341

Investment securities
Listed
Unlisted

Other securities
Listed
Unlisted

8,162
5,579

13,741

14,374
554

14,928

112 LLOYDS TSB GROUP

Notes to the accounts

18 Debt securities (continued)

Movements in investment securities comprise:

At 1 January 2003
Exchange and other adjustments
Additions 
Transfers from other securities
Securities sold or matured
Adjustments on disposal of businesses
Charge for the year
Amortisation of premiums and discounts

At 31 December 2003

Cost
£m

11,885
(500)
11,962
1,873
(11,389)
(100)
–
–

13,731

Premiums
and discounts
£m

Provisions
£m

66
–
–
–
(5)
–
–
48

109

89
(3)
–
–
(29)
–
42
–

99

Total
£m

11,862
(497)
11,962
1,873
(11,365)
(100)
(42)
48

13,741

Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. It is expected that tax of
£3 million (2002: £4 million) would be payable if the investment securities were sold at their year end valuation.

Transfers from other  securities relate to  debt  securities that have been transferred into the  Group’s new conduit securitisation vehicle, Cancara Asset
Securitisation Limited. These securities were previously held within the Group’s trading portfolios but have been reclassiﬁed as investment securities since
the intention is now to hold them for the longer term.

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. 

19 Equity shares

Investment securities:
Listed
Unlisted

Other securities:
Listed

Movements in investment securities comprise:

At 1 January 2003
Exchange and other adjustments
Additions
Disposals
Adjustments on disposal of businesses
Charge for the year

At 31 December 2003

2003
Balance sheet
£m

2003
Valuation
£m

2002
Balance sheet
£m

2002
Valuation
£m

5
30

35

423

458

5
126

131

Cost
£m

51
1
5
(7)
(9)
–

41

5
33

38

168

206

Provisions
£m

13
1
–
(2)
(8)
2

6

5
62

67

Total
£m

38
–
5
(5)
(1)
(2)

35

Investment securities are those intended for use on a continuing basis in the activities of the Group and not for dealing purposes. If the investment securities
were sold at their year end valuation no tax is expected to be payable as any such gains would be covered by available capital losses.

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.

LLOYDS TSB GROUP   113

Notes to the accounts

20 Assets transferred under sale and repurchase transactions

Included in the Group’s balance sheet are assets subject to sale and repurchase agreements as follows:

Treasury bills and other eligible bills
Debt securities

2003
£m

136
4,503

4,639

2002
£m

588
5,651

6,239

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.

21 Interests in joint ventures

At 1 January 2003
Exchange and other adjustments
Additions
Share of losses

At 31 December 2003

£m

45
17
12
(20)

54

The Group’s principal investments are in two joint ventures:

iPSL
Goldﬁsh Holdings Limited

Group interest

19.5% of issued ordinary share capital
25.0% of issued ordinary share capital

Nature of business

Cheque processing
Financial services

During 2003 the Group contributed a further £12 million of capital to Goldﬁsh Holdings Limited.

In  the  year  ended  31 December 2003  £25 million  (2002:  £31 million;  2001:  £27 million)  of  fees  payable  to  iPSL  have  been  included  in  the  Group’s
administrative expenses and £3 million (2002: £6 million; 2001: £6 million) of charges to iPSL have been included in the Group’s income. The Group has
also prepaid £13 million (2002: £6 million) of fees in respect of 2004 and this amount is included in prepayments and accrued income. 

In the year ended 31 December 2003 £7 million (2002: £25 million; 2001: £1 million) of interest receivable from Goldﬁsh Bank Limited (a wholly owned
subsidiary  of  Goldﬁsh  Holdings  Limited)  and  £6 million  (2002:  £12 million;  2001:  £22 million)  of  charges  to  Goldﬁsh  Bank  Limited  in  respect  of
administrative costs have been included in the Group’s income. At 31 December 2002 Goldﬁsh Bank Limited owed £430 million to the Group, which was
included in loans and advances to banks; in addition, as at 31 December 2002, the Group had made facilities available for Goldﬁsh Bank Limited to borrow
a further £420 million; this facility was cancelled during 2003 and Goldﬁsh Bank no longer owes any signiﬁcant amounts to the Group.

On 30 September 2003 the Group completed the purchase of the credit card and personal loan businesses of Goldﬁsh Bank Limited (see note 48).

Included in the gross assets disclosed on the balance sheet is an investment of £3 million (2002: £8 million) in associated undertakings.

22 Interests in group undertakings

At 1 January 2003
Revaluation

At 31 December 2003

Shares in banks
Shares in other group undertakings

Total – all unlisted

Shares
£m

9,091
1,662

10,753

2003
£m

10,752
1

10,753

Loans
£m

1,723
–

1,723

2002
£m

9,093
(2)

9,091

On an historical basis, shares in group undertakings would have been included at cost of £6,066 million (2002: £6,066 million). No deferred tax provision
has been made against the liability which could arise if group undertakings were disposed of at their balance sheet carrying value because of surplus capital
losses and the exemptions for disposal of substantial shareholding investments.

114 LLOYDS TSB GROUP

Notes to the accounts

22 Interests in group undertakings (continued)

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:

Lloyds TSB Bank plc
Cheltenham & Gloucester plc
Lloyds TSB Commercial Finance Limited
Lloyds TSB Leasing Limited
Lloyds TSB Private Banking Limited
The Agricultural Mortgage Corporation PLC
Lloyds TSB Bank (Jersey) Limited
Lloyds TSB Scotland plc
Lloyds TSB General Insurance Limited
Scottish Widows Investment Partnership Group Limited
Abbey Life Assurance Company Limited
Lloyds TSB Insurance Services Limited
Lloyds TSB Life Assurance Company Limited
Lloyds TSB Asset Finance Division Limited 
Black Horse Limited
Scottish Widows plc
Scottish Widows Annuities Limited

† Indirect interest

Country of
registration/
incorporation

England
England
England
England
England
England
Jersey
Scotland
England
England
England
England
England
England
England
Scotland
Scotland

Percentage of
equity share
capital and
voting rights held

100%
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†

Nature of business

Banking and ﬁnancial services
Mortgage lending and retail investments
Credit factoring
Financial leasing
Private banking
Long-term agricultural ﬁnance
Banking and ﬁnancial services
Banking and ﬁnancial services
General insurance
Investment management
Life assurance
Insurance broking
Life assurance and other ﬁnancial services
Consumer credit, leasing and related services
Consumer credit, leasing and related services
Life assurance
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, Dubai, Ecuador, Gibraltar, Guatemala, Hong Kong,
Honduras, Japan, Luxembourg, Malaysia, Monaco, Netherlands, Panama, Paraguay, Singapore, Spain, Switzerland, Uruguay and the USA.

LLOYDS TSB GROUP   115

Notes to the accounts

23 Quasi-subsidiaries

The Group has interests in a number of entities which, although they do not meet the legal deﬁnition of a subsidiary, give rise to beneﬁts that are in substance
no different from those that would arise if those entities were subsidiaries. As a consequence, these entities are consolidated in the same way as if they were
subsidiaries.

The primary ﬁnancial statements of these entities can be summarised as follows:

Equipment leasing vehicles

Structured ﬁnance vehicles

2003
£m

2002
£m

2001
£m

2003
£m

2002
£m

2001
£m.

Proﬁt and loss account
Interest receivable
Interest payable
Other operating income

Total income
Operating expenses

(Loss) proﬁt on ordinary activities before taxation
Tax on (loss) proﬁt on ordinary activities

Retained proﬁt

Balance sheet
Assets:
Loans and advances to customers
Debt securities
Tangible ﬁxed assets
Other assets and prepayments

Total assets

Liabilities:
Deposits by banks
Debt securities in issue
Other liabilities and accruals
Shareholders’ funds

Total liabilities

–
(59)
93

34
(36)

(2)
6

4

–
(55)
80

25
(24)

1
5

6

–
(41)
58

17
(8)

9
(6)

3

–
–
1,408
23

–
–
1,307
25

1,431

1,332

1,309
–
108
14

1,245
–
77
10

1,431

1,332

–
–
–

–
–

–
–

–

82
(52)
(2)

28
–

28
(2)

26

345
3,718
–
34

4,097

672
3,123
18
284

4,097

12
(4)
–

8
–

8
–

8

329
–
–
4

333

–
73
2
258

333

Cash ﬂow statement
Net cash inﬂow (outﬂow) from operating activities

132

422

391

1,173

(250)

–

Cost
£m

2,771
32
96
(273)
–

2,626

Amortisation
£m

Net book value
£m

137
9
–
(84)
51

113

2,634
23
96
(189)
(51)

2,513

24 Intangible ﬁxed assets

Goodwill
At 1 January 2003
Exchange and other adjustments
Acquisitions (note 48)
Disposal of businesses
Charge for the year

At 31 December 2003

116 LLOYDS TSB GROUP

Notes to the accounts

25 Tangible ﬁxed assets

Cost:
At 1 January 2003 
Exchange and other adjustments
Adjustments on acquisition and disposal
Additions
Disposals

At 31December 2003

Depreciation:
At 1 January 2003
Exchange and other adjustments
Adjustments on disposal
Charge for the year
Disposals

At 31December 2003

Balance sheet amount at 31 December 2003

Balance sheet amount at 31 December 2002

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

Premises
£m

Equipment
£m

Operating 
lease assets
£m

2,315
13
(120)
308
(330)

2,186

1,395
10
(74)
270
(305)

1,296

890

3,918

920

4,096

1,196
4
(52)
82
(38)

1,192

377
–
(14)
65
(12)

416

776

819

2003
£m

369
133
274

776

705

2,572
(61)
(1)
502
(494)

2,518

215
(2)
–
311
(258)

266

2,252

2,357

2002
£m

414
132
273

819

749

The Group’s residual value exposure in respect of operating lease assets, all of which are expected to be disposed of at the end of the lease terms, was as
follows:

Residual value 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

2003
£m

181
330
505
445

1,461

2002
£m

272
173
542
617

1,604

LLOYDS TSB GROUP   117

Notes to the accounts

26 Lease commitments

At 31 December 2003, the Group was committed to various non-cancellable operating leases, which require aggregate future rental payments as follows:

Payable within one year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years

Annual commitments under non-cancellable operating leases were:

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

2003
Premises
£m

7
29
190

226

Obligations under ﬁnance leases were:

Amounts payable in 1 year or less

27 Capital commitments

2002 
Premises
£m

10
29
188

227

2003
Equipment
£m

–
–
–

–

2003
Equipment
£m

–

Premises
£m

226
198
195
188
184
258

1,249

2002
Equipment
£m

2
1
–

3

2002
Equipment
£m

1

Capital  expenditure  contracted  but  not  provided  for  at  31 December 2003  amounted  to  £77 million  (2002:  £117 million)  of  which  £71 million
(2002: £107 million) relates to assets to be leased to customers under operating leases.

28 Other assets

Balances arising from derivatives used for trading purposes (note 47a)
Balances arising from derivatives used for hedging purposes
Settlement balances
Other assets

* restated (see note 1)

29 Prepayments and accrued income

Interest receivable
Deferred expenditure incurred under cash gift and discount mortgage schemes
Other debtors and prepayments

* restated (see note 1)

2003
£m

2,489
475
54
926

3,944

2003
£m

869
128
921

1,918

2002*
£m

3,428
778
76
957

5,239

2002*
£m

931
201
1,155

2,287

118 LLOYDS TSB GROUP

Notes to the accounts

30 Long-term assurance business 

a Methodology

For  the  purposes  of  the  Group’s  consolidated  accounts,  the  value  of  the  shareholder’s  interest  in  the  long-term  assurance  business  is  calculated  on  an
embedded value basis. The embedded value is comprised of the net tangible assets of the life assurance subsidiaries, including any surplus retained in the
long-term business funds, which could be transferred to shareholders, and the present value of the in-force business. The value of the in-force business is
calculated by projecting future surpluses and other net cash ﬂows attributable to the shareholder arising from business written by the balance sheet date
and discounting the result at a rate which reﬂects the shareholder’s overall risk premium attributable to this business.

Surpluses arise following annual actuarial valuations of the long-term business funds, which are carried out in accordance with the statutory requirements
designed to ensure and demonstrate the solvency of the funds. Future surpluses will depend upon experience in a number of areas such as investment
returns, lapse rates, mortality and administrative expenses. Surpluses can be projected by making realistic assumptions about future experience, having
regard to both actual experience and forecast long-term economic trends. Other net cash ﬂows principally comprise annual management charges and other
fees levied upon the policyholders by the life assurance subsidiaries.

Changes  in  the  embedded  value,  which  are  determined  on  a  post-tax  basis,  are  included  in  the  proﬁt  and  loss  account  and  described  as  income  from
long-term assurance business. For the purpose of presentation the change in this value is grossed up at the underlying rate of corporation tax.

b Analysis of embedded value

The embedded value included in the consolidated balance sheet comprises:

Net tangible assets of life companies including surplus
Value of other shareholder’s interests in the long-term assurance business

Movements in the embedded value balance have been as follows:

At 1 January – as previously reported
Prior year adjustment (note 1)

At 1 January – restated
Exchange and other adjustments
Proﬁt (loss) after tax
Capital injections
Adjustments on disposal
Dividends

At 31 December

* restated (see note 1)

2003
£m

3,602
2,879

6,481

2003
£m

6,213
–

6,213
12
296
–
(38)
(2)

6,481

2002*
£m

3,309
2,904

6,213

2002*
£m

6,366
(22)

6,344
(14)
(250)
140
–
(7)

6,213

c Analysis of income from long-term assurance business

Income from long-term assurance business included in the proﬁt and loss account can be divided into those items comprising the operating proﬁt of the
business and other items. Included within operating proﬁt are the following items:

New business income. This represents the value recognised at the end of the year from new business written during the year after taking into account the
cost of establishing technical provisions and reserves.

Distribution  costs. This  represents  the  actual  costs  of  acquiring  new  business  during  the  year  and  includes  commissions  paid  to  independent  ﬁnancial
advisors and other direct sales costs.

Contribution from existing business. This comprises the following elements:

• The expected return arising from the unwinding of the discount applied to the expected cash ﬂows at the beginning of the year;

• Experience variances caused by the differences between the actual experience during the year and the expected experience; 

• The effects of changes in assumptions, other than economic assumptions, and other items; and

• Customer remediation provisions (see d).

Development costs. This represents investments in strategic developments primarily relating to Sandler products, depolarisation and e-commerce.

Investment  earnings. This  represents  the  expected  investment  return  on  both  the  net  tangible  assets  and  the  value  of  the  shareholder’s  interest  in  the
long-term business account, based upon the economic assumptions made at the beginning of the year.

Operating proﬁt is adjusted by the following items to arrive at income from long-term assurance business:

Investment variance: this represents (a) the difference between the actual investment return in the year on investments backing shareholder funds and the
expected return based upon the economic assumptions made at the beginning of the year; (b) the effect of these ﬂuctuations on the value of in-force business;
and (c) other effects of changes in extraneous economic circumstances beyond the control of management.

Changes in economic assumptions: this represents the effect of changes in the economic assumptions referred to in f.

LLOYDS TSB GROUP   119

Notes to the accounts

30 Long-term assurance business (continued)

Income from long-term assurance business is set out below:  

New business income
Life and pensions distribution costs
New business contribution
Existing business:
– Expected return
– Experience variances
– Assumption changes and other items
– Customer remediation provisions (see d)

Development costs
Investment earnings

Operating proﬁt
Investment variance
Changes in economic assumptions (see f)

Income from long-term assurance business before tax
Attributed tax

Income from long-term assurance business after tax

* restated (see note 1)

d Customer remediation provisions

Redress to past purchasers of pension policies

2003
£m

477
(327)
150

264
(16)
(75)
(100)
73
(13)
153

363
112
(22)

453
(157)

296

2002*
£m

413
(277)
136

312
(1)
78
(205)
184
–
214

534
(883)
55

(294)
44

(250)

2001*
£m

374
(247)
127

348
37
95
(70)
410
–
247

784
(814)
–

(30)
(11)

(41)

Following an industry wide investigation in the 1990’s it was concluded that a large number of customers who had purchased personal pension products 
had been poorly advised by insurance companies and intermediaries; an action plan was established requiring the UK pensions industry to review all cases
of  possible  misselling  and,  where  appropriate,  pay  compensation.  As  the  review  of  pension  cases  in  the  Group  has  progressed,  provisions  have  been
established for the estimated cost of compensation.

Movements in the provision over the last three years have been as follows:

At 1 January
Accrual of interest on the provision
Charge for the year
Compensation paid
Guarantees*

At 31 December

2003
£m

37
2
44
(58)
–

25

2002
£m

203
17
40
(223)
–

37

2001
£m

352
20
70
(238)
(1)

203

* In some cases, rather than pay cash compensation directly into the customer’s personal pension plan, the Group has guaranteed to ‘top-up’ the customer’s

pension income, on retirement, to the level that they would have received under the relevant occupational scheme.

A  review  of  the  adequacy  of  the  provision  has been carried out at each year end and greater experience has lead to the reﬁnement of the underlying
assumptions about the number of cases requiring compensation and the estimated cost per case. The size of the provision has also been affected by periodic
revisions to the actuarial guidelines issued by the FSA for the calculation of redress payments and lower stock market values which have resulted in an
increase in the cost of restitution into company pension schemes as personal pension fund values and the trustees’ expectations of future returns reduce.
These factors have lead to additional provisions being made of £70 million in 2001, £40 million in 2002 and £44 million in 2003.

The review is now nearing completion and management do not expect any further material changes in the provisioning requirement. However, the cases
that are still to be settled are generally large and complex and there is therefore a risk that the assumptions made in determining the provision may prove
to be inaccurate.

120 LLOYDS TSB GROUP

Notes to the accounts

30 Long-term assurance business (continued)

Mortgage endowments and other savings products

During 2002, a review was carried out in conjunction with the FSA into sales of mortgage endowment and other long-term savings products made by the
Abbey Life sales force between 1988 and its disposal by the Lloyds TSB Group in February 2000. As a result of this review, in December 2002 the FSA
ﬁned Abbey Life £1 million for mortgage endowment misselling and other deﬁciencies in its compliance procedures and controls. A provision of £165 million
was established, in the year ended 31 December 2002, for the cost of compensation due to customers based upon assumptions as to the number of cases
requiring redress and the estimated average cost; this provision was increased by £22 million in 2003 as greater experience has enabled management to
reﬁne the underlying assumptions. In addition, there has been an increase in complaints in respect of products sold by the Abbey Life sales force prior to
1988; a provision of £34 million has been established in 2003 to cover the estimated cost of redress.

Movements in the provision over the last three years have been as follows:

At 1 January
Accrual of interest on the provision
Charge for the year
Compensation paid

At 31 December

2003
£m

165
5
56
(77)

149

2002
£m

–
–
165
–

165

2001
£m

–
–
–
–

–

Details of the provisions held in respect of the estimated cost of making redress payments to customers in respect of past product sales by the Group’s
banking operations are given in note 38.

e With-proﬁts options and guarantees

In common with other organisations in the life assurance industry, prior to its demutualisation Scottish Widows wrote policies which contained potentially
valuable options and guarantees, including guaranteed annuity option policies. Under the terms of the transfer of the Scottish Widows business, a separate
memorandum account was created within the with-proﬁts fund called the Additional Account which is available, inter alia, to meet any additional costs of
providing guaranteed beneﬁts on transferred policies; the Additional Account had a value at 31December 2003 of £1.4 billion (2002: £1.5 billion). To the
extent that the Additional Account is insufﬁcient to provide these beneﬁts any shortfall would be met by the Lloyds TSB Group.

Since demutualisation in 2000, Scottish Widows continued to write policies containing similar features, although the volume of products written has since
reduced and is now not signiﬁcant. The Additional Account is not available to meet any additional cost of providing the beneﬁts on these policies which
would, to a large extent, have to be met by the Lloyds TSB Group.

The eventual cost of providing beneﬁts on the policies written both pre and post demutualisation is dependent upon a large number of variables, including
in particular:

• future interest rate and equity market trends;

• demographic factors, such as future persistency and mortality; and

• the proportion of policyholders who seek to exercise their options.

The  ultimate  cost,  and  any  impact  upon  the  Lloyds  TSB  Group,  will  not  be  known  for  many  years.  However, Scottish  Widows  has been developing  an
actuarial model to assist in the management of the with-proﬁts fund and to meet regulatory requirements. The model allows management to estimate the
effects of different economic scenarios upon the ﬁnancial position of the fund and consider the implications of different management actions. Preliminary
output from this model indicates that the possible cost of providing beneﬁts on policies containing features such as options and guarantees varies widely
and, depending on the economic scenario encountered, could result in the Lloyds TSB Group incurring a liability. Based on the information available at
present, having considered the range of possible outcomes, and after making allowance for the effect of proposed future management actions, the Lloyds
TSB  Group  currently considers that no  provision  is necessary. However, the model  is subject to ongoing development and the position will be kept
under review.

f Assumptions

In accordance with the Association of British Insurers’ detailed guidance for the preparation of ﬁgures using the achieved proﬁts method of accounting, the
Group has reviewed the economic assumptions used in the embedded value calculations. The guidance requires that the assumptions should be reviewed
at each reporting date. 

The principal economic assumptions have been revised at 31 December 2003 as follows:

Risk-adjusted discount rate (net of tax)
Return on equities (gross of tax)
Return on ﬁxed interest securities (gross of tax)
Expenses inﬂation

2003
%

7.60
7.45
4.85
3.80

2002
%

7.35
7.10
4.50
3.30

The revised assumptions have resulted in a net charge to the proﬁt and loss account of £22 million.

LLOYDS TSB GROUP   121

Notes to the accounts

30 Long-term assurance business (continued)

Other assumptions used to derive the embedded value are as follows:

• Assumed rates of mortality and morbidity are taken from published tables adjusted for demographic differences. Assumptions in respect of lapse rates reﬂect

the recent actual experience of the companies concerned.

• Current tax legislation and rates have been assumed to continue unaltered, except where future changes have been announced. The UK corporation tax
rate  used  for  grossing  up  was  30 per  cent  (2002:  30 per  cent;  2001:  30 per cent).  The  normalised  investment  earnings  have  been  grossed  up  at  a
composite longer term tax rate of 17 per cent (2002: 17 per cent; 2001: 17 per cent).

• The value of the in-force business does not allow for future premiums under recurring single premium business or non-contractual increments, which are

included in new business when the premium is received. Department of Social Security rebates have been treated as recurring single premiums.

• Future bonus rates on with-proﬁts business are set at levels which would fully utilise the assets supporting the with-proﬁts business. The proportion of
proﬁts derived from with-proﬁts business allocated to the shareholder has been assumed to continue at the current rate of one-ninth of the cost of the
eligible bonus, in accordance with the terms of the transfer of the Scottish Widows business.

g Sensitivities

The table below shows the effect on both the embedded value at 31 December 2003 and the new business contribution for the year then ended of theoretical
changes in the main economic assumptions.

Embedded
value
£m

New business
income
£m

As published
Effect of a 1% increase in the discount rate
Effect of a 1% reduction in the discount rate
Effect of a 1% reduction in the return on equities

h Balance sheet

The long-term assurance assets attributable to policyholders comprise:

Investments
Premises and equipment
Other assets 

Net tangible assets of life companies including surplus 

Investments shown above comprise:
Fixed interest securities
Stocks, shares and unit trusts
Investment properties
Other properties
Mortgages and loans
Deposits

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 
Other liabilities

* restated (see note 1)

6,481
(190)
199
(80)

2003
£m

52,082
40
1,680

53,802
(3,602)

50,200

15,947
27,590
3,540
121
65
4,819

52,082

23,730
238
25,023
346
863

50,200

477
(33)
31
(18)

2002*
£m

47,136
45
1,468

48,649
(3,309)

45,340

14,779
24,128
3,623
121
53
4,432

47,136

23,217
225
20,996
12
890

45,340

For the purposes of consolidating the long-term assurance policyholder assets and liabilities into the Group’s balance sheet a deduction has been made of
£122 million (2002: £122 million) for own shares held within the with-proﬁt funds.

122 LLOYDS TSB GROUP

Notes to the accounts

30 Long-term assurance business (continued)

i Disclosures on a modiﬁed statutory solvency basis 

The individual statutory accounts of the Group’s life assurance subsidiaries are prepared under the modiﬁed statutory solvency basis, in the same way as
the statutory accounts of listed insurance groups in the UK. The principal difference between the modiﬁed statutory solvency basis and the embedded value
basis  used  for  the  preparation  of  the  Group’s  accounts  is  that accounts  prepared  under  the  modiﬁed  statutory  solvency  basis  do  not  reﬂect  the  value  of
in-force business.

Under the modiﬁed statutory solvency basis, the results of the Group’s long-term life and pensions businesses were as follows:

Premiums
Investment income
Unrealised gains on investments
Other income

Claims
Change in technical provisions
Expenses
Realised losses on investments
Unrealised losses on investments 
Other charges
Tax attributable to long-term business
Transfer (to) from the fund for future appropriations

Balance on the technical account – long-term business
Tax attributable to balance on the technical account – long-term business
Income in shareholder fund
Expenses in shareholder fund

Proﬁt (loss) on ordinary activities before tax
Tax on proﬁt (loss) on ordinary activities

Proﬁt (loss) for the ﬁnancial year

* restated (see note 1)

2003
£m

5,139
2,073
4,833
6

12,051
(4,433)
(4,540)
(689)
(1,679)
(22)
(4)
(41)
(414)

229
112
34
–

375
(125)

250

2002*
£m

5,524
1,942
–
33

7,499
(5,031)
3,877
(720)
(1,790)
(4,353)
(3)
200
(84)

(405)
(190)
35
(1)

(561)
177

(384)

Income from long-term assurance business after tax reconciles to the loss calculated on a modiﬁed statutory solvency basis as follows:

Income from long-term assurance business attributable to the shareholder after tax
(Increase) decrease in value-in-force taken to proﬁt

Other differences:
Movement in deferred acquisition costs
Tax adjustment
Other

Proﬁt (loss) for the ﬁnancial year:
Modiﬁed statutory solvency basis

* restated (see note 1)

2003
£m

296
(2)

294

66
(60)
(50)

250

2002*
£m

(250)
(166)

(416)

45
55
(68)

(384)

2001*
£m

4,854
1,832
–
93

6,779
(4,957)
2,759
(625)
(1,031)
(4,432)
(8)
280
1,249

14
(103)
38
–

(51)
94

43

2001*
£m.

(41)
111

70

(79)
150
(98)

43

LLOYDS TSB GROUP   123

Notes to the accounts

30 Long-term assurance business (continued)

A summarised balance sheet on a modiﬁed statutory solvency basis was as follows:

Assets
Investments
Assets held to cover linked liabilities
Other assets

Total assets

Liabilities
Shareholder’s funds
Fund for future appropriations
Long-term business provision†
Technical provision for linked liabilities† 
Other creditors

Total liabilities

* restated (see note 1)

† Net of reinsurers’ share of technical provisions

2003
£m

27,468
25,023
2,018

54,509

4,234
346
23,730
25,023
1,176

54,509

2002*
£m

26,540
20,996
1,718

49,254

3,914
12
23,217
20,996
1,115

49,254

The value of long-term business attributable to the shareholder on an embedded value basis reconciles to the net assets of the Group’s life and pensions
subsidiaries calculated on a modiﬁed statutory solvency basis as follows:

Long-term assurance business attributable to the shareholder – embedded value basis
Value of in-force business

Other differences:
Deferred acquisition costs
Tax adjustment 
Other adjustments

Net tangible assets of life operations:
Modiﬁed statutory solvency basis

* restated (see note 1)

31 Assets and liabilities denominated in foreign currencies

Assets:
Denominated in sterling
Denominated in other currencies

Liabilities:
Denominated in sterling
Denominated in other currencies

* restated (see note 1)

2003
£m

6,481
(2,879)

3,602

496
145
(9)

4,234

2003
£m

153,775
48,159

201,934

153,769
48,165

201,934

Assets and liabilities exclude long-term assurance assets attributable to policyholders and liabilities to policyholders.

2002*
£m

6,213
(2,904)

3,309

430
205
(30)

3,914

2002*
£m

142,586
64,757

207,343

142,566
64,777

207,343

124 LLOYDS TSB GROUP

Notes to the accounts

32 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

2003
£m

7,455

15,002
1,197
69
232

23,955

The breakdown of deposits by banks between the domestic and international ofﬁces of the Group is set out below:

Domestic:
Non-interest bearing
Interest bearing

International:
Non-interest bearing
Interest bearing

33 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

2003
£m

144
18,715
18,859

61
5,035
5,096

23,955

2003
£m

90,539

17,316
1,846
5,431
1,364

116,496

The breakdown of customer accounts between the domestic and international ofﬁces of the Group is set out below:

Domestic:
Non-interest bearing
Interest bearing

International:
Non-interest bearing
Interest bearing

2003
£m

3,328
109,384
112,712

358
3,426
3,784

116,496

2002
£m

8,500

14,692
1,634
487
130

25,443

2002
£m

166
19,411
19,577

82
5,784
5,866

25,443

2002
£m

87,918

19,047
3,099
4,140
2,130

116,334

2002
£m

2,381
103,870
106,251

759
9,324
10,083

116,334

LLOYDS TSB GROUP   125

Notes to the accounts

34 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

2003
£m

711
81
1,099
3,623

5,514

17,942
2,015
283
168
20,408

25,922

2002
£m

437
443
746
1,659

3,285

19,525
7,174
30
241
26,970

30,255

Debt  securities  in  issue  include  certiﬁcates  of  deposit  of  £16,415 million  (2002:  £21,246 million)  and  commercial  paper  of  £3,625 million
(2002: £3,109 million). An amount of £5,184 million (2002: £2,364 million) relating to debt securities issued under the Group’s Euro Medium Term Note
programme is included in these ﬁgures.

35 Other liabilities

Balances arising from derivatives used for trading purposes (note 47a)
Balances arising from derivatives used for hedging purposes
Current tax
Dividends
Settlement balances
Other liabilities

* restated (see note 1)

36 Accruals and deferred income

Interest payable
Other creditors and accruals

2003
£m

3,499
503
503
1,314
40
1,148

7,007

2003
£m

1,216
1,990

3,206

2002*
£m

4,462
611
528
1,311
49
1,323

8,284

2002
£m

1,385
2,274

3,659

126 LLOYDS TSB GROUP

Notes to the accounts

37 Deferred tax

Short-term timing differences
Accelerated depreciation allowances

* restated (see note 1)

At 1 January 2003 – as previously reported
Prior year adjustment (note 1)

At 1 January 2003 – restated
Exchange and other adjustments 
Adjustments on acquisitions and disposals
Tax provided

At 31 December 2003

2002*
£m

(357)
1,670

1,313

2003
£m

(229)
1,605

1,376

£m

1,317
(4)

1,313
64
(120)
119

1,376

Deferred  tax  is  recognised  in  respect  of  the  retained  earnings  of  overseas  subsidiaries  and  associates  only  to  the  extent  that,  at  the  balance  sheet  date,
dividends have been accrued as receivable or a binding agreement to distribute past earnings in the future has been entered into. Deferred tax balances have
not been discounted.

The deferred tax balance at 31 December 2003 does not include any amounts in respect of the Group’s post-retirement beneﬁt liability which is shown on
the balance sheet after deduction of a deferred tax asset of £916 million (2002: £854 million) (note 45).

38 Other provisions for liabilities and charges

At 1 January 2003 
Exchange and other adjustments 
Adjustments on disposal
Provisions applied
Charge for the year

At 31 December 2003

Customer remediation provisions

Customer
remediation
provisions
£m

16
–
–
(119)
200

97

Insurance
provisions
£m

225
(11)
–
(231)
236

219

Vacant
leasehold property
and other
£m

120
–
(3)
(46)
15

86

Total
£m

361
(11)
(3)
(396)
451

402

The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases where the
original sales processes are found to have been deﬁcient. During the year the Group has provided a further £200 million in this respect, of which £65 million
relates to past sales of mortgage endowment policies and £135 million to long-term savings products.

Mortgage  endowments  were  sold  to  customers  through  the  branch  network  of  Lloyds  TSB  Bank,  Lloyds  TSB  Scotland  and  Cheltenham  &  Gloucester,  and
underwritten by life assurance companies within Lloyds TSB Group and also by third parties. The principal assumptions underlying the provision relate to the
number of cases requiring redress and the estimated average cost per case. It is expected that the majority of the expenditure will be incurred over the next two
years.  Whilst  the  current  provision  has  been  calculated  based  on  recent  actual  experience,  uncertainty  remains  as  to  the  ultimate  cost  and  timing  of  the
payments, which will be inﬂuenced by external factors beyond the control of management, such as regulatory actions and the performance of ﬁnancial markets.

The provision in respect of long-term savings predominantly relates to redress payments in respect of the Extra Income and Growth Plan (‘EIGP’) product.
During the year the Group has completed an investigation, in conjunction with the FSA, into sales of this product made in 2000 and 2001 and as a result
has  agreed  to  pay  compensation  to  those  customers  who  invested  in  the  EIGP  when  it  was  not  appropriate.  The  provision  reﬂects  the  costs  of  this
investigation, the estimated cost of redress payments to customers who qualify for compensation calculated using the criteria agreed with the FSA, and the
incremental costs expected to be incurred processing the payments to customers. The compensation exercise is in progress and is expected to be completed
during 2004.

LLOYDS TSB GROUP   127

Notes to the accounts

38 Other provisions for liabilities and charges (continued)

Insurance provisions

The Group’s general insurance subsidiary maintains 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.

The Group also carries provisions in respect of its obligations relating to UIC Insurance Company Limited (‘UIC’), which is partly owned by the Group. The
Group has indemniﬁed a third party against losses in the event that UIC does not honour its obligations under a re-insurance contract, which is subject to
asbestosis and pollution claims in the US. The ultimate exposure to claims in respect of the insurance business of UIC is uncertain. Accordingly, the provision
has been based upon an actuarial estimate of prospective claims, taking account of re-insurance arrangements protecting UIC and UIC’s available assets.
Given the long-term nature of many of the claims to which UIC is exposed, it is expected to be many years before the Group’s ultimate liability can be
assessed with certainty. 

Vacant leasehold property and other

Vacant leasehold property 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 ﬁve years; where a property is disposed of earlier than anticipated, any remaining balance
in the provision relating to that property is released.

128 LLOYDS TSB GROUP

Notes to the accounts

39 Subordinated liabilities

Undated loan capital 
Dated loan capital 

Notes

Group
2003
£m

5,959
4,495

Group
2002
£m

5,496
4,672

Total subordinated liabilities

10,454

10,168

Company
2003
£m

497
859

1,356

Company
2002
£m

497
873

1,370

Undated loan capital*
Primary Capital Undated Floating Rate Notes:
Series 1 (US$750 million)
Series 2 (US$500 million)
Series 3 (US$600 million)
113/4% Perpetual Subordinated Bonds
6.625% Perpetual Capital Securities (c750 million)
6.90% Perpetual Capital Securities
callable 2007 (US$1,000 million)
55/8% Undated Subordinated Step-up Notes callable
2009 (c1,250 million)
Undated Step-up Floating Rate Notes
callable 2009 (c150 million)
65/8% Undated Subordinated Step-up Notes callable 2010
6.35% Step-up Perpetual Capital Securities
callable 2013 (c500 million)
5.57% Undated Subordinated Step-up
Coupon Notes callable 2015 (¥20,000 million)
5.125% Undated Subordinated Step-up Notes callable 2016
61/2% Undated Subordinated Step-up Notes callable 2019
8% Undated Subordinated Step-up Notes callable 2023
61/2% Undated Subordinated Step-up Notes callable 2029
6% Undated Subordinated Step-up
Guaranteed Bonds callable 2032

Dated loan capital
Eurocurrency Zero Coupon Bonds 2003 (¥3,045 million)
Subordinated Fixed Rate Bonds 2003 (NZ$151 million)
Subordinated Floating Rate Notes 2004
73/8% Subordinated Bonds 2004
Subordinated Floating Rate Notes 2004
81/2% Subordinated Bonds 2006
73/4% Subordinated Bonds 2007
51/4% Subordinated Notes 2008 (DM 750 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)
Subordinated Fixed Rate Bonds 2010 (NZ$100 million)
61/4% Subordinated Notes 2010 (c400 million)
Subordinated Floating Rate Notes 2010 (US$400 million)
12% Guaranteed Subordinated Bonds 2011
91/8% Subordinated Bonds 2011
43/4% Subordinated Notes 2011 (c850 million)
Subordinated Fixed Rate Bonds 2011 (NZ $100 million)
Subordinated Fixed Rate Bonds 2012 (NZ $125 million)
Subordinated Fixed Rate Bonds 2012 (NZ $125 million)
57/8% Subordinated Guaranteed Bonds 2014 (c750 million)
57/8% Subordinated Notes 2014 
67/8% Subordinated Notes 2015
Subordinated Floating Rate Notes 2020 (c100 million)
95/8% Subordinated Bonds 2023

a

b

c

g

a
f

d, g

h
j
f
f
f

f

a

a, i

e

a

a
e

a

419
279
335
100
523

550

874

105
407

349

104
496
267
199
455

497

466
311
373
100
482

610

807

97
406

322

104
–
267
199
455

497

5,959

5,496

–
–
5
400
100
249
299
269
100
100

279
–
281
223
100
149
578
–
–
–
461
148
345
70
339

14
48
10
400
100
249
299
249
100
99

310
33
259
248
100
149
532
33
41
41
461
148
344
65
340

4,495

4,672

–
–
–
–
–

–

–

–
–

–

–
–
–
–
–

497

497

–
–
–
–
–
249
–
–
–
–

–
–
–
–
–
149
–
–
–
–
461
–
–
–
–

859

–
–
–
–
–

–

–

–
–

–

–
–
–
–
–

497

497

14
–
–
–
–
249
–
–
–
–

–
–
–
–
–
149
–
–
–
–
461
–
–
–
–

873

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.

LLOYDS TSB GROUP   129

Notes to the accounts

39 Subordinated liabilities (continued)

a) These notes bear interest at rates ﬁxed periodically in advance based on London Interbank rates. 

b) In certain circumstances the interest payments on these securities can be deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB Group plc
can declare or pay a dividend until any deferred payments have been made. In the event of a winding up of Lloyds TSB Bank plc, these securities will acquire the
characteristics of preference shares. The securities can be redeemed at par at the option of Lloyds TSB Bank plc on or after 25 October 2006.

c) In certain circumstances the interest payments on these securities can be deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB Group plc
can declare or pay a dividend until payments are resumed. Any deferred payments will be made good on redemption of the securities. In the event of a winding
up of Lloyds TSB Bank plc, these securities will acquire the characteristics of preference shares. The securities can be redeemed at par at the option of Lloyds
TSB Bank plc on or after 22 November 2007.

d) In certain circumstances the interest payments on these securities can be deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB Group plc
can declare or pay a dividend until any deferred payments have been made. In the event of a winding up of Lloyds TSB Bank plc, these securities will acquire the
characteristics of preference shares. The securities can be redeemed at par at the option of Lloyds TSB Bank plc on or after 25 February 2013.

e) Issued by a group undertaking under the Company’s subordinated guarantee.

f) At the callable date the coupon on these Notes will be reset by reference to the applicable ﬁve year benchmark gilt rate.

g) In the event that these Notes are not redeemed at the callable date, the coupon will be reset to a ﬂoating rate.

h) In the event that these 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.

i) Exchangeable at the election of the Group for further subordinated ﬂoating rate notes.

j) Issued during 2003 primarily to ﬁnance the general business of the Group.

Dated subordinated liabilities are repayable as follows:

1 year or less
2 years or less but over 1 year
5 years or less but over 2 years
Over 5 years

40 Non-equity minority interests

Non-equity minority interests comprise:

Group
2003
£m

505
–
917
3,073

4,495

Euro Step-up Non-Voting Non-Cumulative Preferred Securities callable 2012 (c430 million)*
Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015**

Capital instruments
European Financial Institution Investments Partnership†
LM ABS Investment Partnership‡

Company
2003
£m

–
–
249
610

859

Group
2002
£m

67
505
548
3,552

4,672

2003
£m

301
248

549
100
34

683

Company
2002
£m

14
–
249
610

873

2002
£m

278
248

526
123
45

694

* 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,  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,  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 securities 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.

† These securities constitute interests in European Financial Institution Investments Partnership, an English law general partnership in which the principal partner
is Langbourn Holdings Limited, a wholly owned subsidiary of the Group. The minority interests are entitled to 90 per cent of the partnership’s proﬁts. In the
event of a winding-up, at least 90 per cent of the capital of the partnership would be returned to Langbourn Holdings Limited.

‡ These securities constitute interests in LM ABS Investment Partnership, an English law general partnership in which the principal partner is Lime Street
(Funding) Limited, a wholly owned subsidiary of the Group. The minority interests are entitled to 95 per cent of the partnership’s proﬁts. In the event of a
winding-up, at least 85 per cent of the capital of the partnership would be returned to Lime Street (Funding) Limited.

130 LLOYDS TSB GROUP

Notes to the accounts

41 Called-up share capital

Authorised:

Sterling
6,911 million Ordinary shares of 25p each
79 million Limited voting ordinary shares of 25p each
175 million Preference shares of 25p each

US dollars
160 million Preference shares of US25 cents each

Euro
160 million Preference shares of c25 cents each

Japanese yen
50 million Preference shares of ¥25 each

Issued and fully paid:
Ordinary shares of 25p each
At 1 January 
Issued to the QUEST (note 43) (6 million shares; 2002: 18 million shares;
2001: 47 million shares)
Issued under employee share schemes (5 million shares; 2002: 1 million shares;
2001: 10 million shares)

At 31 December 

Limited voting ordinary shares of 25p each
At 1 January and 31 December

Number of shares in issue (millions):
Ordinary shares of 25p each

Limited voting ordinary shares of 25p each

2003

2002

2001

£m
1,728
20
44

1,792

US$m
40

ccm
40

¥m
1,250

2003
£m

£m
1,728
20
44

1,792

US$m
40

cm
40

¥m
1,250

2002
£m

£m
1,728
20
44

1,792

US$m
40

cm
40

¥m
1,250

2001
£m

1,396

1,391

1,376

1

1

1,398

20

1,418

5,594

79

5

–

1,396

20

1,416

5,583

79

12

3

1,391

20

1,411

5,564

79

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.

Lloyds TSB Group plc has entered into deeds of covenant with the Lloyds TSB Foundations, under the terms of which the Company makes annual donations
to the foundations equal, in total, to 1 per cent of the Group’s pre-tax proﬁts (after certain adjustments) averaged over three years. The deeds of covenant
can be cancelled by the Company at nine years’ notice.

At 31 December 2003, options to acquire 158 million Lloyds TSB Group ordinary shares of 25p each were outstanding under the executive share option
schemes, the share retention plan, the Lloyds TSB Group plc share plan 2003, and the staff sharesave share option schemes exercisable up to 2013. These
include the options, described on page 86, to acquire 216,763 shares and 331,125 shares under the share retention plan and the Lloyds TSB Group plc
share plan 2003 respectively: otherwise the options are exercisable at prices ranging from 202p to 888p per share. 

LLOYDS TSB GROUP   131

Notes to the accounts

42 Reserves

Share premium account (the Group and the Company):
At 1 January 
Premium arising on issue of shares

At 31 December 

Merger reserve (the Group):
At 1 January and 31 December 

Proﬁt and loss account (the Group):
At 1 January – as previously reported 
Prior year adjustment (note 1)

At 1 January – restated
Exchange and other adjustments
Actuarial losses recognised in post-retirement beneﬁt schemes (note 45)
Movements in relation to own shares (note 43)
Goodwill written back on sale of businesses
Proﬁt (loss) for the year

At 31 December 

Revaluation reserve (the Company):
At 1 January
Increase in net tangible assets of subsidiary undertakings

At 31 December

Proﬁt and loss account (the Company):
At 1 January – as previously reported
Prior year adjustment (note 1)

At 1 January – restated
Movements in relation to own shares (note 43)
Loss for the year

At 31 December 

2002
£m

959
134

1,093

343

7,613
–

7,613
(3)
(2,331)
(70)
–
(118)

5,091

2001
£m

595
364

959

343

9,567
(24)

9,543
(86)
(2,010)
(195)
–
361

7,613

2003
£m

1,093
43

1,136

343

5,091
–

5,091
118
(4)
(2)
181
1,343

6,727

3,025
1,662

4,687

2,438
(18)

2,420
(6)
(31)

2,383

The proﬁt and loss account reserves of the Group at 31December 2003 include £1,258 million (2002: £1,310 million; 2001: £1,222 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 Group’s proﬁt and loss account reserves at 31 December 2002 are stated after including a deﬁcit of £2,139 million relating to the
Group’s  post-retirement  deﬁned  beneﬁt  schemes  (2002:  deﬁcit  of  £2,077  million;  2001:  surplus  of  £281  million)  and  after  deducting  £39 million
(2002: £43 million; 2001: £50 million) in respect of own shares held (see note 43).

The  cumulative  amount  of  premiums  on  acquisitions  written  off  against  Group  reserves  during  previous  years  amounts  to  £2,090  million  (2002:
£2,271 million; 2001: £2,271 million) of which £1,662 million (2002: £1,823 million; 2001: £1,817 million) was within the last 10 years. 

The  accumulated  foreign  exchange  translation  adjustment  as  at  31 December 2003  reduced  Group  reserves  by  £144  million  (2002:  £262  million;
2001: £259 million).

132 LLOYDS TSB GROUP

Notes to the accounts

43 Own shares

The amounts deducted from proﬁt and loss account reserves in respect of own shares, which are held at cost, are comprised as follows:

Own shares held in relation to employee shares schemes*

Own shares – the Company 
Lloyds TSB Group interest in shares held by the long-term assurance funds†

Own shares – the Group

2003
£m

22

22
17

39

2002
£m

26

26
17

43

2001
£m

33

33
17

50

* Lloyds TSB Group plc sponsors the Lloyds TSB Group Employee Share Ownership Trust, a discretionary trust for the beneﬁt of employees and former employees
of the Lloyds TSB Group. The Company has lent £21 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 trust,
the trustees have waived all but a nominal dividend on the shares they hold. At 31 December 2003, 2 million shares were held by the trustees with a cost of
£12 million and a market value of £7 million (2002: 2 million shares with a cost of £13 million and a market value of £7 million; 2001: 2 million shares with a
cost of £15 million and a market value of £15 million).

The Group has also established the Lloyds TSB Qualifying Employee Share Ownership Trust (‘the QUEST’) for the purpose of providing shares on the exercise
of  options  under  certain  of  the  Group’s  Save  As  You  Earn  (SAYE)  share  option  schemes.  During  2003,  Lloyds  TSB  Group  plc  made no contributions
(2002:  £66  million;  2001:  £200  million)  to  the  QUEST,  and  the  trustees  subscribed  for  6  million  (2002:  18  million;  2001:  47  million)  shares  in  the
Company for a consideration of £26 million (2002: £136 million; 2001: £316 million). At 31 December 2003, 0.2 million shares were held by the QUEST
with a cost of £1 million (2002: 1.7 million shares with a cost of £13 million; 2001: 2.4 million shares with a cost of £18 million). Under the terms of
the QUEST’s trust deed, the trustees have waived all but a nominal dividend on the shares they hold. 

In 2001 the Group established the Lloyds TSB Group Shareplan (‘Shareplan’) for the purpose of providing an enhanced remuneration package for employees.
The shares are used to provide free shares awarded to employees for no consideration, as a percentage of salaries by reference to the proﬁts of the Group;
together with partnership shares which are acquired by employees via monthly contributions; and matching shares, which are additional shares awarded
for no consideration to employees acquiring partnership shares. Shareplan became active during 2003. At 31 December 2003, 2 million shares were held
(but not allocated to individual employees) by the Shareplan trustees at their cost to the Group of £9 million. The trustees have waived all but a nominal
dividend on the shares they hold.

In addition, a further 0.4 million ordinary shares were held by Lloyds TSB Group Holdings (Jersey) Limited at 31 December 2003 (2002: 0.4 million;
2001: 0.5 million). 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.  These  shares  have  a  market  value  of  £2  million
(2002: £2 million; 2001: £4 million).

† The long-term assurance funds of Scottish Widows hold 31 million shares (2002: 31 million; 2001: 31 million) in Lloyds TSB Group plc which were bought
prior to the acquisition of Scottish Widows by the Lloyds TSB Group. Due to the structure of these funds, the Lloyds TSB Group is effectively exposed to the
risk and rewards of ownership of one tenth of these shares; the remaining nine tenths are held to meet liabilities to policyholders.

Movements in the amount deducted from reserves in respect of own shares have been as follows:

The Group
At 1 January
Purchases of, and subscriptions for, shares 
Use of shares on exercise of employee options and for other employee share plans

At 31 December

The Company
At 1 January
Purchases of, and subscriptions for, shares 
Use of shares on exercise of employee options and for other employee share plans

At 31 December

2003
£m

43
74
(78)

39

26
74
(78)

22

2002
£m

50
185
(192)

43

33
185
(192)

26

2001
£m

47
374
(371)

50

30
374
(371)

33

The  charge to  the Group’s proﬁt and loss account reserves represents the loss on transactions in own shares of  £10 million (2002: £65 million;
2001: £183 million) less the net reduction in the cost of own shares of £4 million (2002: a reduction of £7 million; 2001: an increase of £3 million) and
an increase in the accrual in respect of free shares to be awarded in respect of Shareplan of £4 million (2002: decrease of £12 million; 2001: decrease of
£9 million).

The charge to the Company’s proﬁt and loss account reserves represents the loss on transactions in own shares of £10 million less the net reduction in the
cost of own shares of £4 million.

LLOYDS TSB GROUP   133

Notes to the accounts

44 Related party transactions

a Transactions, arrangements and agreements involving directors and others

At 31 December 2003, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons
and with ofﬁcers included:

2003
Number of
persons

2003
Total
£000

2002
Number of 
persons

2002
Total
£000

Loans and credit card transactions:
Directors and connected persons
Ofﬁcers

6
30

3,199
5,355

4
31

3,334
3,930

During the year one ofﬁcer purchased a car from the Group for a consideration of £27,000 (2002: three ofﬁcers, total consideration £37,000).

b Group undertakings

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.

c Joint ventures 

Details of the Group’s joint ventures are provided in note 21. Information relating to transactions entered into between Group undertakings and the joint
ventures and details of outstanding balances at 31 December 2003 are also shown in note 21.

d Long-term assurance business

The Group enters into certain transactions with its long-term assurance businesses, which cannot be eliminated in the consolidated accounts because of the
basis  of  accounting  used  for  the  Group’s  long-term  assurance  businesses.  After  taking  into  account  legally  enforceable  netting  agreements,  at
31 December 2003 Group entities owed £1,995 million (2002: £1,372 million) and were owed £136 million (2002: £145 million); these amounts are
included in customer accounts and loans and advances to customers respectively. Furthermore Scottish Widows plc has provided £30 million of subordinated
loan capital to Scottish Widows Bank plc, which is included in other liabilities. In addition, fees of £107 million (2002: £76 million; 2001: £62 million)
were received, and fees of £71 million (2002: £35 million; 2001: £28 million) were paid, in respect of asset management and other services.

Certain administrative properties used by Scottish Widows are owned by the long-term assurance funds. During 2003 Scottish Widows paid rent to the
long-term assurance funds amounting to £5 million (2002: £5 million; 2001: £4 million). In addition, at 31 December 2003, the long-term assurance funds
owned 31 million ordinary shares in the Company (2002: 31 million shares).

e Pension funds

Group entities provide a number of banking and other services to the Group’s pension funds, which are conducted on similar terms to third party transactions.
At 31 December 2003, the Group’s pension funds had call deposits with Lloyds TSB Bank plc amounting to £16 million (2002: £89 million).

45 Pensions and other post-retirement beneﬁts 

The pension costs included in administrative expenses are comprised as follows:

Deﬁned contribution schemes
Deﬁned beneﬁt schemes

2003
£m

33
320

353

2002
£m

25
293

318

2001
£m

18
329

347

The majority of the Group’s employees are members of the deﬁned beneﬁt sections of Lloyds TSB Group Pension Schemes No’s 1 and 2. During the years
ended 31 December 2001 and 2002, the Group made no contributions to these schemes. During 2003, no contributions have been made to the Lloyds
TSB Group Pension Scheme No. 2; however the Group has recommenced contributions to the Lloyds TSB Group Pension Scheme No. 1 at a rate of
31.7 per cent of pensionable salary, with effect from 1 July 2003. Since the deﬁned beneﬁt sections of these schemes are now closed to new members and
the age proﬁle of the active members is increasing, under the projected unit method, the current service cost will increase as the members of the schemes
approach retirement.

The latest full valuations of the schemes were carried out as at 30 June 2002; these have been updated to 31 December 2003 by qualiﬁed independent
actuaries. The last full valuations of other group schemes were carried out on a number of different dates; these have been updated to 31 December 2003
by qualiﬁed independent actuaries or, in the case of the Scottish Widows Retirement Beneﬁts Scheme, by a qualiﬁed actuary employed by Scottish Widows.

The principal assumptions used in the scheme valuations were as follows:

Rate of inﬂation
Rate of salary increases
Rate of increase for pensions in payment and deferred pensions
Discount rate

31 December
2003
%

31 December 
2002
%

31 December.
2001
%

2.50
4.04
2.50
5.40

2.30
3.83
2.30
5.60

2.50
4.04
2.50
6.00

134 LLOYDS TSB GROUP

Notes to the accounts

45 Pensions and other post-retirement beneﬁts (continued)

In addition, the Group operates a number of schemes which provide post-retirement healthcare 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 healthcare for all eligible former employees (and their dependents) 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.

Included within other ﬁnance income is an interest cost of £5 million (2002: £4 million; 2001: £3 million) in respect of these deﬁned beneﬁt post-retirement
healthcare schemes. 

For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 31 December 2000; this valuation has
been  updated  to  31 December 2003 by  qualiﬁed  independent  actuaries.  The  principal  assumptions  used  were  as  set  out  above,  except  that  the  rate  of
increase in healthcare premiums has been assumed at 5.58 per cent.

The assets of the Group’s deﬁned beneﬁt schemes and the expected rates of return are summarised as follows:

Fair value at
31 December
2003
£m

Expected
long-term rate
of return at
31 December
2003
%

Fair value at
31 December
2002
£m

Expected
long-term rate
of return at
31 December 
2002
%

Fair value at
31 December 
2001
£m

Expected
long-term rate
of return at
31 December
2001
%

Market values of scheme assets:
Equities
UK fixed interest gilts
UK index linked gilts
Sterling non-government bonds
Property
Cash

Total fair value of scheme assets

Other ﬁnance income comprises:

Expected return on scheme assets
Interest cost of scheme liabilities

7,454
551
545
1,033
713
307

10,603

7,175
557
–
491
791
69

9,083

8.1
4.8
4.4
5.4
7.1
3.5

2003
£m

696
(662)

34

The pension and other post-retirement beneﬁt cost in respect of deﬁned beneﬁt schemes comprises:

Current service cost
Past service costs

Deﬁned beneﬁt costs

The amounts recognised in the statement of total recognised gains and losses comprise:

Actual return less expected return on scheme assets
Experience gains and losses arising on scheme liabilities
Effect of changes in demographic and ﬁnancial assumptions

Actuarial losses recognised
Deferred tax thereon

Amount recognised in the statement of total recognised gains and losses

2003
£m

269
51

320

2003
£m

802
94
(902)

(6)
2

(4)

7,779
1,835
126
–
798
588

11,126

8.4
4.5
–
5.6
6.9
3.8

2002
£m

817
(652)

165

2002
£m

244
49

293

2002
£m

(2,582)
(240)
(477)

(3,299)
968

(2,331)

8.0
5.1
5.0
–
7.1
4.1

2001
£m.

844
(537)

307

2001
£m.

212
117

329

2001
£m.

(2,015)
(71)
(787)

(2,873)
863

(2,010) 

LLOYDS TSB GROUP   135

Notes to the accounts

45 Pensions and other post-retirement beneﬁts (continued)

The experience gains and losses recognised can also be interpreted as follows:

Actual return less expected return on scheme assets:
Amount
Percentage of scheme assets at balance sheet date
Experience gains and losses arising on scheme liabilities:
Amount
Percentage of scheme liabilities at balance sheet date
Total amount recognised in the statement of total recognised gains and losses:
Amount
Percentage of scheme liabilities at balance sheet date

The amounts reported on the Group’s balance sheet are comprised as follows:

Market value of assets
Present value of scheme liabilities

Deﬁcit in the schemes
Related deferred tax asset 

Net post-retirement beneﬁt liability

2003
£m

802
7.6%

94
0.7%

(6)
0.0%

2003
£m

10,603
(13,658)

(3,055)
916

(2,139)

The movements in the (deﬁcit) surplus in the schemes over the last two years have been as follows:

2002
£m

(2,582)
28.4%

(240)
2.0%

(3,299)
27.5%

(Deﬁcit) surplus at beginning of year
Exchange and other adjustments
Other ﬁnance income
Current service costs
Contributions
Past service costs 
Actuarial loss
Adjustment on disposal of business

Deﬁcit at end of year

2003
£m

(2,931)
(4)
34
(269)
138
(51)
(6)
34

(3,055)

2001
£m.

(2,015)
18.1%

(71)
0.7%

(2,873)
26.9%

2002
£m

9,083
(12,014)

(2,931)
854

(2,077)

2002
£m

433
26
165
(244)
37
(49)
(3,299)
–

(2,931)

46 Contingent liabilities and commitments

Acceptances and endorsements arise where the Lloyds TSB Group agrees to guarantee payment on a negotiable instrument drawn up by a customer.

Guarantees include those given on behalf of a customer to stand behind the current obligations of the customer and to carry out those obligations should
the customer fail to do so.

Other items serving as direct credit substitutes include standby letters of credit, or other irrevocable obligations, serving as ﬁnancial guarantees where the
Lloyds TSB Group has an irrevocable obligation to pay a third party beneﬁciary if the customer fails to repay an outstanding commitment; they also include
acceptances drawn under letters of credit or similar facilities where the acceptor does not have speciﬁc title to an identiﬁable underlying shipment of goods.

Performance bonds and other transaction related contingencies (which include bid or tender bonds, advance payment guarantees, VAT Customs & Excise
bonds and standby letters of credit relating to a particular contract or non-ﬁnancial transaction) are undertakings where the requirement to make payment
under the guarantee depends on the outcome of a future event.

Where guarantees are issued on behalf of customers, Lloyds TSB Group usually holds collateral against the exposure or has a right of recourse to the customer.

Lloyds TSB Group’s maximum exposure to loss is represented by the contractual nominal amount detailed in the table below. Consideration has not been taken
of any possible recoveries from customers for payments made in respect of such guarantees under recourse provisions or from collateral held or pledged. 

136 LLOYDS TSB GROUP

Notes to the accounts

46 Contingent liabilities and commitments (continued)

Contingent liabilities
Acceptances and endorsements
Guarantees
Other:
– Other items serving as direct credit substitutes
– Performance bonds and other transaction-related contingencies
– Other contingent liabilities

Commitments
Documentary credits and other short-term trade-related transactions
Forward asset purchases and 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

2003
£m

299
6,122

1,069
1,534
1
2,604

9,025

368
546
–

62,440
15,981

79,335

2002
£m

1,879
5,927

1,103
1,436
1
2,540

10,346

289
394
32

49,417
14,372

64,504

47 Derivatives and other ﬁnancial instruments

Information about the Group’s use of ﬁnancial instruments and management of the associated risks is given on pages 53 to 55.

a 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. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to ﬁx
the rate of interest on a future loan or deposit, for a speciﬁed period and commencing on a speciﬁed future date.

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. A currency option gives the buyer, on payment
of a premium, the right, but not the obligation, to sell speciﬁed amounts of currency at agreed rates of exchange on or before a speciﬁed future date.

Equity derivatives are also used by the Group as part of its equity based retail product activity to eliminate the Group’s exposure to ﬂuctuations in various
international  stock  exchange  indices.  Index-linked  equity  options  are  purchased  which  give  the  Group  the  right,  but  not  the  obligation,  to  buy  or  sell  a
speciﬁed amount of equities, or basket of equities in the form of published indices on or before a speciﬁed future date.

Derivatives contracts expose the Group to both market risk and credit risk. Only a few highly specialist trading centres within the Group are permitted to
enter into derivative contracts and the level of exposure to interest rate and exchange rate movements and other market variables is strictly controlled and
monitored within approved limits. 

LLOYDS TSB GROUP   137

Notes to the accounts

47 Derivatives and other ﬁnancial instruments (continued)

Unlike on-balance sheet instruments the principal amount of the contract does not 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. 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.

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:

Notional
principal
amount
£m

76,368
10,329
1,678
1,542

89,917

236,956
54,213
10,475
5,265
38,626

345,535

5,407

Notional
principal
amount
£m

94,250
8,556
4,468
4,303

111,577

258,523
41,768
8,248
4,899
18,963

332,401

5,662

Fair value
assets
£m

Fair value
liabilities
£m

1,669
328
55
–

2,052

3,346
29
145
–
–

3,520

693

(3,776)

2,489

Fair value
assets
£m

2,064
232
87
–

2,383

5,473
35
105
–
–

5,613

608

(5,176)

3,428

2,127
511
14
39

2,691

4,006
29
–
162
–

4,197

387

(3,776)

3,499

Fair value
liabilities
£m

2,735
304
8
103

3,150

5,808
37
–
152
–

5,997

491

(5,176)

4,462

31 December 2003

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 and other contracts

Effect of netting

Balances arising from off-balance sheet ﬁnancial instruments

31 December 2002

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

138 LLOYDS TSB GROUP

Notes to the accounts

47 Derivatives and other ﬁnancial instruments (continued)

Non-trading

Through  intra  company  and  intra  group  transactions,  Group  companies  establish  non-trading  derivatives  positions  with  the  Group’s  independent  trading
operations, which then enter into similar positions with third parties. The notional principal amounts and fair values of non-trading instruments entered into
with third parties were as follows:

31 December 2003

Exchange rate contracts:
Spot, forwards and futures
Currency swaps

Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options written

Effect of netting

31 December 2002

Exchange rate contracts:
Spot, forwards and futures
Currency swaps

Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options written

Effect of netting

Notional
principal
amount
£m

171
459

630

30,816
7,188
40

38,044

Notional
principal
amount
£m

146
59

205

17,261
1,279
41

18,581

Fair value
assets
£m

Fair value
liabilities
£m

13
28

41

256
1
–

257

(165)

133

5
10

15

260
1
–

261

(165)

111

Fair value
assets
£m

Fair value
liabilities
£m

16
4

20

129
2
–

131

(36)

115

4
1

5

223
2
1

226

(36)

195

The aggregate carrying value of non-trading derivatives with a positive fair value was an asset of £132 million (2002: an asset of £54 million) and with a
negative fair value was a liability of £71 million (2002: a liability of £9 million).

LLOYDS TSB GROUP   139

Notes to the accounts

47 Derivatives and other ﬁnancial instruments (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 2003
Exchange rate contracts:
Notional principal amount
Replacement cost
Interest rate contracts:
Notional principal amount
Replacement cost
Equity and other contracts:
Notional principal amount
Replacement cost
Total:
Notional principal amount
Replacement cost

31 December 2002
Exchange rate contracts:
Notional principal amount
Replacement cost
Interest rate contracts:
Notional principal amount
Replacement cost
Equity contracts:
Notional principal amount
Replacement cost
Total:
Notional principal amount
Replacement cost

Under
1 year
£m

79,677
1,753

175,306
578

2,886
523

257,869
2,854

102,559
2,209

150,883
850

1,130
3

254,572
3,062

1 to 5
years
£m

7,005
141

161,584
1,660

1,965
115

170,554
1,916

6,888
108

149,381
2,682

3,714
531

159,983
3,321

Over 5
years
£m

3,865
199

46,689
1,539

556
55

51,110
1,793

2,335
86

50,718
2,212

818
74

53,871
2,372

Total
£m

90,547
2,093

383,579
3,777

5,407
693

479,533
6,563

111,782
2,403

350,982
5,744

5,662
608

468,426
8,755

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.

Net replacement cost represents the total positive fair value of all derivative contracts at the balance sheet date, after allowing for the offset of all negative
fair values where the Group has a legal right of set-off with the counterparty concerned.

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; the
Group’s exposure is further reduced by qualifying collateral held.

2003
£m

1,272
1,350

2,622
(416)

2,206

2002
£m

1,939
1,604

3,543
(521)

3,022

OECD banks
Other

Net replacement cost
Qualifying collateral held

Potential credit risk exposure

140 LLOYDS TSB GROUP

Notes to the accounts

47 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. The table does not take into account the effect of interest rate options used
by the Group to hedge its exposure; details of options are given in note 47a.

31 December 2003

Assets:
Treasury bills and other eligible bills
Loans and advances to banks
Loans and advances to customers
Debt securities and equity shares
Other assets

3 months
or less
£m

408
10,686
88,298
8,718
101

6 months
or less
but over
3 months
£m

1 year
or less
but over
6 months
£m

5 years
or less
but over
1 year
£m

48
1,311
4,680
606
–

65
463
5,549
279
16

6
746
30,777
1,856
8

Over
5 years
£m

3
86
6,171
2,372
–

Non-
interest
bearing
£m

Trading
book
£m

Total
£m

–
366
(1,648)
(55)
16,058

9
1,889
1,424
15,351
5,287 

539
15,547
135,251
29,127
21,470

Total assets

108,211

6,645

6,372

33,393

8,632

14,721

23,960

201,934

Liabilities:
Deposits by banks
Customer accounts
Debt securities in issue
Other liabilities
Subordinated liabilities – loan capital
Minority interests and shareholders’ funds
Internal funding of trading business

22,254
104,236
18,375
300
2,088
–
(11,528)

635
705
1,507
–
1,086
–
(810)

262
876
1,040
–
–
–
(412)

286
5,227
1,210
–
910
–
(3,217)

99
1,173
3,790
–
6,370
–
(820)

205
3,686
–
8,108
–
10,333
–

214
593
–
6,348
–
18
16,787

23,955
116,496
25,922
14,756
10,454
10,351
–

Total liabilities

135,725

3,123

1,766

4,416

10,612

22,332

23,960

201,934

Off-balance sheet items

6,930

(1,365)

(4,049)

(2,596)

1,080

–

Interest rate repricing gap

(20,584)

2,157

557

26,381

(900)

(7,611)

Cumulative interest rate repricing gap

(20,584)

(18,427)

(17,870)

8,511

7,611

–

–

–

–

–

–

–

31 December 2002*

Assets:
Treasury bills and other eligible bills
Loans and advances to banks
Loans and advances to customers
Debt securities and equity shares
Other assets

3 months
or less
£m

1,759
12,363
88,349
6,093
130

6 months
or less
but over
3 months
£m

1 year
or less
but over
6 months
£m

5 years
or less
but over
1 year
£m

23
1,362
4,997
1,049
25

94
761
8,233
312
25

1
775
26,787
1,972
243

Over
5 years
£m

2
200
7,210
2,516
48

Non-
interest
bearing
£m

Trading
book
£m

Total
£m

–
666
(1,732)
(42)
16,461

530
1,402
630
17,620
6,479

2,409
17,529
134,474
29,520
23,411

Total assets

108,694

7,456

9,425

29,778

9,976

15,353

26,661

207,343

Liabilities:
Deposits by banks
Customer accounts
Debt securities in issue
Other liabilities
Subordinated liabilities – loan capital
Minority interests and shareholders’ funds
Internal funding of trading business

21,572
103,996
19,169
353
2,692
–
(7,973)

817
1,318
5,526
–
1,140
–
(198)

240
1,193
2,002
6
12
–
(1,545)

377
3,829
1,212
–
1,183
–
(5,148)

112
2,008
1,224
–
5,141
–
(880)

248
3,140
–
9,090
–
8,826
–

2,077
850
1,122
7,020
–
(152)
15,744

25,443
116,334
30,255
16,469
10,168
8,674
–

Total liabilities

139,809

8,603

1,908

1,453

7,605

21,304

26,661

207,343

Off-balance sheet items

10,942

5,939

(10,082)

(8,830)

2,031

–

Interest rate repricing gap

(20,173)

4,792

(2,565)

19,495

4,402

(5,951)

Cumulative interest rate repricing gap

(20,173)

(15,381)

(17,946)

1,549

5,951

–

–

–

–

–

–

–

* restated (see note 1)

LLOYDS TSB GROUP   141

Notes to the accounts

47 Derivatives and other ﬁnancial instruments (continued)

c Fair value analysis 

Financial instruments include both ﬁnancial assets and ﬁnancial liabilities and also derivatives. The fair value of a ﬁnancial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Wherever possible, fair values have been estimated using market prices for instruments held by the Group. Where market prices are not available, fair values
have been estimated using quoted values for instruments with characteristics either identical or similar to those of the instruments held by the Group. In
certain  cases,  where  no  ready  markets  currently  exist,  various  techniques  have  been  developed  to  estimate  what  the  approximate  fair  value  of  such
instruments might be. These estimation techniques are necessarily subjective in nature and involve several assumptions. 

The fair values presented in the following table are at a speciﬁc date and may be signiﬁcantly different from the amounts which will be actually be paid or
received on the maturity or settlement date. In many cases, the estimated fair values could not be realised immediately and accordingly do not represent the
value of these ﬁnancial instruments to the Group as a going concern.

Because a variety of estimation techniques are employed and signiﬁcant estimates made, comparisons of fair values between ﬁnancial institutions may not
be meaningful. Readers of these accounts are thus advised to use caution when using this data to evaluate the Group’s ﬁnancial position. 

Fair value information is not provided for items that do not meet the deﬁnitions of a ﬁnancial instrument. These items include intangible assets, such as
the  value  of  the  Group’s  branch  network,  the  long-term  relationships  with  depositors  and  credit  card  relationships,  premises  and  equipment  and
shareholders’  equity.  These  items  are  material  and  accordingly  the  Group  believes  that  the  fair  value  information  presented  does  not  represent  the
underlying value of the Group. 

The valuation technique for each major category of ﬁnancial instrument is discussed below:

Treasury bills and other eligible bills

Fair value is estimated using market prices, where available.

Loans and advances to banks and customers

The Group provides loans and advances to commercial, corporate and personal customers at both ﬁxed and variable rates. The carrying value of the variable
rate loans and those relating to lease ﬁnancing is assumed to be their fair value. For ﬁxed rate lending, several different techniques are used to estimate fair value,
as considered appropriate. For commercial and personal customers, fair value is principally estimated by discounting anticipated cash ﬂows (including interest
at contractual rates) at market rates for similar loans offered by the Group and other ﬁnancial institutions. The fair value for corporate loans was estimated by
discounting anticipated cash ﬂows at a rate which reﬂects the effects of interest rate changes, adjusted for changes in credit risk. Certain loans secured on
residential properties are made at a ﬁxed rate for a limited period, typically two to ﬁve years, after which the loans revert to the relevant variable rate. The fair
value of such loans has been estimated by reference to the market rates for similar loans of maturity equal to the remaining ﬁxed interest rate period.

Debt securities and equity shares held for investment purposes

Listed investment securities are valued at quoted mid-market prices. Unlisted securities and equity shares are valued based on discounted cash ﬂows, market
prices of similar securities and other appropriate valuation techniques.

Deposits by banks and customer accounts

The fair value of deposits repayable on demand is considered to be equal to their carrying value. The fair value for all other deposits and customer accounts
was estimated using discounted cash ﬂows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities and for subordinated
liabilities is estimated using quoted market prices.

Financial commitments and contingent liabilities

The Group considers that, given the lack of an established market, the diversity of fee structures and the difﬁculty of separating the value of the instruments
from the value of the overall transaction, it is not meaningful to provide an estimate of the fair value of ﬁnancial commitments and contingent liabilities.
These are therefore excluded from the following table.

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.

31 December 2003

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
Book value
£m

Trading book
Fair value
£m

Non-trading book
Book value
£m

Non-trading book
Fair value
£m

9
3,313
15,351

807
–
–

9
3,313
15,351

807
–
–

530
147,485
13,776

139,644
25,922
10,454

523
148,870
13,885

139,695
26,254
11,684

142 LLOYDS TSB GROUP

Notes to the accounts

47 Derivatives and other ﬁnancial instruments (continued)

31 December 2002

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
Book value
£m

Trading book
Fair value
£m

Non-trading book
Book value
£m

Non-trading book
Fair value
£m

530
2,032
17,620

2,927
1,122
–

530
2,032
17,620

2,927
1,122
–

1,879
149,971
11,900

138,850
29,133
10,168

1,878
151,526
11,932

138,428
29,005
11,156

The disclosures in this note cover all on-balance sheet ﬁnancial instruments; fair values of all derivative instruments are disclosed in note 47a.

Fair values are determined by reference to quoted market prices or, where no market price is available, using internal models which discount expected future
cash ﬂows at prevailing interest rates.

Fair values have not been calculated for sundry debtors and creditors in the trading book.

d Currency exposures

Structural currency exposures

The Group’s main overseas operations are in the Americas and Europe (and, in 2002, in New Zealand). Details of the Group’s structural foreign currency
exposures are as follows:

Functional currency of Group operations

New Zealand dollar
Euro
US dollar
Swiss franc
Other non-sterling

Non-structural currency exposures

2003
£m

–
287
255
104
200

846

2002
£m

921
304
363
100
323

2,011

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 pages 53 to 55.

e Unrecognised gains and losses on hedging instruments

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 2003, the unrecognised gains on ﬁnancial instruments used for hedging were £303 million (2002: £418 million) and unrecognised losses
were £219 million (2002: £516 million).

The net losses arising in 2002 and earlier years and recognised in 2003 amounted to £150 million. Net gains of £30 million arose in 2003 but were not
recognised in the year.

Of the net gains of £84 million at 31 December 2003, £63 million of net gains are expected to be recognised in the year ending 31 December 2004 and
£21 million of net gains 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 53.

LLOYDS TSB GROUP   143

Notes to the accounts

48 Acquisitions

On 1 August 2003, the Group announced the acquisition of the credit card and personal loan businesses of Goldﬁsh Bank Limited, together with the Goldﬁsh
brand and loyalty programme. The acquisition became effective on 30 September 2003 with the transfer of the portfolios to the Group’s subsidiary, Lloyds
TSB  Bank  plc,  for  a consideration  of  £1,096 million,  settled  in  cash.  The  premium  arising  of  £96 million  from the effective payment to the majority
shareholder has been capitalised and will be written off to the proﬁt and loss account over its estimated useful life of 10 years. No signiﬁcant fair value
adjustments were made. The results of these businesses have been consolidated in full from the date of acquisition; the effect on the results of the Group
is not material.

During the year ended 31 December 2002, the Group’s asset ﬁnance operations completed the acquisitions of First National Vehicle Holdings and Abbey
National Vehicle Finance, both previously wholly owned subsidiaries of Abbey National plc operating in the UK contract hire and ﬂeet management market,
and the business of the Dutton-Forshaw Group, a motor dealer; a number of fair value adjustments were made in respect of these acquisitions. In addition
the Group’s retail operations acquired the business of Accucard, a credit card technology development and marketing company. Premiums on acquisition
totalling £103 million were capitalised and are being written off to the proﬁt and loss account over their estimated useful lives. Initial cash payments totalling
£103 million were made in 2002; during 2003 a refund of £5 million has been received in respect of First National Vehicle Holdings and Abbey National
Vehicle Finance, following agreement of the completion accounts, and a further payment of £1 million has been made in respect of the Accucard business
(with the ﬁnal payment of £1 million being due in 2004).

During the year ended 31 December 2001, the Group completed the acquisition of CashFriday Limited, a provider of funding and payroll services to the UK
temporary  recruitment  sector.  The  consideration  was  £10  million,  of  which  £1  million  was  settled  in  cash  in  the  year  ended  31  December  2001  and 
£9 million was satisﬁed by the issue of short-term loan notes. The premium on acquisition of £8 million was capitalised and is being written off to the proﬁt
and loss account over its estimated useful life.

144 LLOYDS TSB GROUP

Notes to the accounts

49 Consolidated cash ﬂow statement

The cash ﬂow statement reﬂects cash ﬂows attributable to the banking, life and general insurance businesses. Cash ﬂows from long-term assurance business
attributable  to  shareholders  include  the  surplus  emerging  from  the  life  and  pension  businesses;  ‘Income  from  long-term  assurance  business’  reﬂects  the
movement in the value of long-term assurance business attributable to shareholders (see note 30) as adjusted for capital injections and acquisitions, which
are reﬂected within the ‘Capital expenditure and ﬁnancial investment’ and ‘Acquisitions and disposals’ sections of the cash ﬂow statement. Cash ﬂows relating
to the long-term assurance business attributable to policyholders are not reﬂected within this statement.

a Reconciliation of operating proﬁt to net cash inﬂow from operating activities

Operating proﬁt
Decrease (increase) in prepayments and accrued income
(Decrease) increase in accruals and deferred income
Provisions for bad and doubtful debts
Net advances written off
Insurance claims
Insurance claims paid
Customer remediation provision
Customer remediation paid
Amounts written off ﬁxed asset investments
Income from long-term assurance business
Transfer 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 decrease (increase) in investments other than investment securities
Net decrease (increase) in other assets
Net (decrease) increase in deposits by banks
Net increase in customer accounts
Net increase in debt securities in issue
Net (decrease) increase in other liabilities
Net decrease (increase) in items in course of collection/transmission
Other non-cash movements

Net cash inﬂow from operating activities

* restated (see note 1)

b Analysis of cash as shown in the balance sheet

Cash and balances with central banks
Loans and advances to banks repayable on demand

2003
£m

3,505
147
(226)
950
(967)
236
(231)
200
(119)
44
(453)
–
622
–
697
(30)

4,375
(11,710)
248
816
(1,000)
7,658
685
(645)
169
176

772

2003
£m

1,195
3,768

4,963

2002*
£m

2,629
(21)
113
1,029
(675)
233
(210)
–
–
87
294
–
537
–
701
(189)

4,528
(11,970)
(2,494)
(685)
1,018
6,900
5,904
1,511
147
535

5,394

2002
£m

1,140
4,313

5,453

2001*
£m

3,138
(285)
(439)
747
(691)
174
(178)
–
–
60
30
155
515
1
550
(376)

3,401
(9,340)
(5,664)
(334)
7,689
7,525
6,557
109
(17)
1

9,927

2001
£m

1,240
2,443

3,683

The  Group  is  required  to  maintain  balances  with  the  Bank  of  England  which,  at  31 December 2003,  amounted  to  £177 million  (2002:  £165  million;
2001: £156 million).

c Analysis of changes in cash during the year

At 1 January
Net cash (outﬂow) inﬂow before adjustments for the effect of foreign exchange movements
Effect of foreign exchange movements

At 31 December

2003
£m

5,453
(487)
(3)

4,963

2002
£m

3,683
1,766
4

5,453

2001
£m

3,821
(100)
(38)

3,683

LLOYDS TSB GROUP   145

Notes to the accounts

49 Consolidated cash ﬂow statement (continued)

d Analysis of changes in ﬁnancing during the year

Share capital (including premium and merger reserve)

At 1 January
Issue of share capital

At 31 December

2003
£m

2,852
45

2,897

2002
£m

2,713
139

2,852

2001
£m

2,334
379

2,713

Included in the amounts shown above in respect of
2001: £185 million).

the issue of share capital are non-cash movements of £13 million (2002: £62 million;

Equity minority interests

At 1 January
Exchange and other adjustments
Minority share of proﬁt after tax
Dividends paid to minority shareholders

At 31 December

Non-equity minority interests

At 1 January
Exchange and other adjustments
Cash inﬂow from ﬁnancing
Minority share of proﬁt after tax
Payments to minority shareholders

At 31 December

Subordinated liabilities and ﬁnance leases

At 1 January
Exchange and other adjustments
Cash inﬂow from ﬁnancing
Capital repayments
Adjustments on acquisition
Adjustments on disposal

At 31 December

e Acquisition of group undertakings and businesses

Cash consideration paid (see f)
Payments to former members of Scottish Widows Fund and Life Assurance Society 
acquired during 2000
Cash consideration refunded in respect of acquisition in 2002
Deferred consideration in respect of acquisition in 2002

Net cash outﬂow 

2003
£m

37
(1)
22
(14)

44

2003
£m

694
23
–
47
(81)

683

2003
£m

10,169
34
458
(1)
–
(206)

10,454

2003
£m

1,096

14
(5)
1

1,106

2002
£m

37
(1)
19
(18)

37

2002
£m

509
18
167
43
(43)

694

2002
£m

8,111
(5)
2,065
(4)
2
–

10,169

2002
£m

103

14
–
–

117

2001
£m

37
–
17
(17)

37

2001
£m

515
(6)
–
40
(40)

509

2001
£m

7,533
(13)
611
(20)
–
–

8,111

2001
£m

1

179
–
–

180

146 LLOYDS TSB GROUP

Notes to the accounts

49 Consolidated cash ﬂow statement (continued)

f Acquisition of group undertakings

Net assets acquired:
Loans and advances
Other assets
Tangible ﬁxed assets
Deposits by banks, customer accounts and other liabilities

Goodwill arising on consolidation

Satisﬁed by:
Amounts receivable
Issue of loan notes
Deferred consideration
Cash 

g Disposal of group undertakings and businesses

Cash
Loans and advances to banks
Loans and advances to customers
Debt securities
Intangible assets
Deposits by banks
Customer accounts
Debt securities in issue
Subordinated liabilities
Other net assets 
Goodwill written back on sale of businesses

Proﬁt on sale

Cash consideration received
Cash disposed of 

Net cash inﬂow from disposals

2003
£m

993
18
2
(13)

1,000
96

1,096

–
–
–
1,096

1,096

2003
£m

52
1,035
13,770
852
189
(519)
(8,372)
(5,108)
(206)
(305)
181

1,569
865

2,434
(52)

2,382

2002
£m

66
137
384
(590)

(3)
103

100

(5)
–
2
103

100

2002
£m

–
–
–
–
–
–
–
–
–
–
–

–
–

–
–

–

2001
£m

–
15
–
(13)

2
8

10

–
9
–
1

10

2001
£m

–
–
–
–
–
–
–
–
–
1
–

1
39

40
–

40

LLOYDS TSB GROUP   147

Notes to the accounts

50 Differences between UK GAAP and US GAAP

The accounts presented in this report have been prepared in accordance with accounting principles generally accepted in the United Kingdom (UK GAAP).
These differ in signiﬁcant respects to the accounting principles generally accepted in the United States (US GAAP). The following is a summary of signiﬁcant
differences applicable to the Group.

UK GAAP

Business combinations

US GAAP

UK GAAP permits merger accounting for business combinations where all
of the following criteria are met: (1) no party is either portrayed as
acquirer or acquired; (2) all parties participate in establishing the
management structure; (3) one party does not dominate by virtue of its
relative size; (4) consideration received by the equity shareholders of each
party, in relation to their equity shareholding, comprises primarily equity
shares in the combined entity; and (5) no equity shareholder retains any
material interest in only part of the combined entity. Business
combinations that do not satisfy all these criteria must be accounted for
using acquisition accounting.

Goodwill/customer related intangibles

Following the implementation of Financial Reporting Standard (FRS) 10
‘Goodwill and intangible assets’ in 1998 goodwill arising on acquisitions
of or by group and associated undertakings is capitalised and amortised
over its estimated life. There is a presumption that the estimated life is
limited to 20 years or less, although this may be rebutted and a longer or
indeﬁnite useful life considered. Goodwill is written off when judged to be
irrecoverable. For acquisitions prior to 1 January 1998 goodwill was charged
directly against reserves as permitted by Statement of Standard Accounting
Practice 22. This goodwill was not reinstated following the implementation
of FRS 10, but in the event of a subsequent disposal it will be written
back and included in the calculation of the proﬁt or loss on disposal.

UK GAAP does not require a value to be placed upon the customer
relationships in acquisitions.

Pension costs

For deﬁned beneﬁt schemes, pension costs in the proﬁt and loss account
reﬂect the cost of accruing beneﬁts for active employees, beneﬁt
improvements and the cost of severances borne by the schemes; the
expected return on scheme assets, net of a charge in respect of the
unwinding of the discount applied to scheme liabilities, is included in 
the proﬁt and loss account as other ﬁnance income. Actuarial gains and
losses, including differences between the expected and actual return on
scheme assets, are recognised as they arise, net of deferred tax, in the
statement of total recognised gains and losses. Scheme assets are
assessed at fair value and scheme liabilities are measured on an actuarial
basis using the projected unit method and are discounted at the current
rate of return on a high quality corporate bond of equivalent currency and
term. The overall surplus or deﬁcit is included on the balance sheet, net of
the related deferred tax.

Costs in relation to deﬁned contribution schemes are charged to the proﬁt
and loss account in the period in which they fall due.

148 LLOYDS TSB GROUP

Following the implementation of Statement of Financial Accounting
Standards (SFAS) No. 141 ‘Business Combinations’, which supersedes
Accounting Principles Board (APB) Opinion No. 16 ‘Business Combinations’,
the purchase method must be used for all business combinations initiated
after 30 June 2001. For business combinations initiated before
1 July 2001, APB Opinion No. 16 required that a business combination be
accounted for as a pooling-of-interests if two previously independent entities
combined as a result of one entity issuing common stock in exchange for
substantially all the common stock of the second entity. However, whilst the
offer may include provisions to distribute cash for fractional shares or shares
held by dissenting shareholders, it may not include a pro-rata distribution of
cash or other consideration. In addition, no changes in the equity interests
of the common stock may be made prior to the pooling in contemplation of
the transaction and neither may the ratio of the interest of the individual
common stockholder to those of other common stockholders in a
combining company change as a result of the exchange of stock.

Following the implementation in full of SFAS No. 142 ‘Goodwill and Other
Intangible Assets’ on 1 January 2002, goodwill arising on all acquisitions
by group and associated undertakings is capitalised but no longer
amortised and is subject to regular review for impairment. Prior to the
adoption of SFAS No. 142, the Group accounted for goodwill under the
provisions of APB No. 17 ‘Intangible Assets’ which required that all
goodwill be capitalised and amortised over its estimated useful life, which
should not exceed 40 years; the Group amortised goodwill over periods of
up to 20 years. Goodwill amortised prior to the adoption of SFAS No. 142
is not permitted to be reinstated.

For acquisitions occurring on or after 1 July 2001, SFAS No. 141 requires
that, when assessing the value of the assets of an acquired entity, certain
identiﬁable intangible assets must be recognised. Such identiﬁable
intangible assets include the asset representing the value of customer
relationships, which is capitalised separately and amortised through the
income statement over the estimated average life of the customer
relationships. Prior to 1 July 2001, the Group applied the provisions
contained within SFAS No. 72 ‘Accounting for Certain Transactions of
Bank and Thrift Institutions’ in assessing the value of assets of an
acquired ﬁnancial institution.

SFAS No. 87 ‘Employers’ Accounting for Pensions’ prescribes a similar
method but allows that a certain portion of actuarial gains and losses be
deferred and allocated in equal amounts over the average remaining
service lives of the current employees. In addition, if the fair value of plan
assets falls below the accumulated beneﬁt obligation (which is the current
value of accrued beneﬁts without allowance for future salary increases) an
additional minimum liability must be recognised. An equal amount should
be recognised as an intangible asset up to the amount of any unrecognised
prior service cost. Any amount not recognised as an intangible asset is
reported in other comprehensive income, net of deferred tax.

US GAAP also requires a transition adjustment for pension schemes in
place before the introduction of SFAS No. 87. The difference between the
funded status of the schemes and the total amount of accrued or prepaid
pension cost, at the date of transition, is amortised over the average
remaining service lives of employees at that date.

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

UK GAAP

Leasing

US GAAP

Finance lease income is recognised in proportion to the funds invested in
the lease using a method that results in a constant rate of return on the
net cash investment, which takes into account tax payments and receipts.

Operating lease assets are depreciated such that rentals less depreciation
are recognised at a constant periodic rate of return on the net cash
invested in that asset.

Proﬁts or losses arising on sale and leasebacks are taken to proﬁt as
they arise.

Property

Depreciation is charged on the cost of freehold and long leasehold properties
over their estimated useful economic lives. Following the adoption of
FRS 15, the Group 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 the
land, is being depreciated over 50 years. Previously it was considered that
the residual values were such that depreciation was not signiﬁcant.

Share compensation schemes

No cost is recognised for the Group’s Save-As-You-Earn schemes as these
are exempt under UITF17. For other share schemes, the difference between
the market price and exercise price at the date of grant is charged to the
proﬁt and loss account on a systematic basis over the period that the
employees are expected to beneﬁt.

Computer software developed or obtained for internal use

All computer software costs are expensed as incurred except for operating
software and application software relating to separable new systems,
which are capitalised and depreciated over their estimated useful lives.
All enhancements are expensed as incurred.

Derivatives

Derivatives used in the Group’s trading activities are carried at fair value
and all changes in fair value are reported within dealing proﬁts in the
proﬁt and loss account. Derivatives used in the Group’s non-trading
activities are accounted for on an accruals basis, in line with the treatment
of the underlying items which they are hedging. 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. Derivatives
embedded within ﬁnancial instruments are not required to be
separately analysed.

The application of SFAS No. 13 ‘Accounting for Leases’ gives rise to a
level rate of return on the investment in the lease, but without taking
into account tax payments and receipts. This results in income being
recognised in different periods than under UK GAAP.

Operating lease assets are depreciated such that the depreciation charge
is at least equal to that which would arise on a straight line basis.

Under SFAS No. 28 ‘Accounting for Sales with Leasebacks’ proﬁts or
losses arising on a sale and leaseback are deferred and amortised. For
leasebacks resulting in a ﬁnance lease, the amounts are amortised in
proportion to the amortisation of the leased asset; for leasebacks resulting
in an operating lease, the amounts are amortised in proportion to the
gross rental charged to expense over the lease term.

Freehold and long leasehold properties are included in the balance sheet
at historical cost and depreciated over their estimated useful economic lives
from the date of acquisition.

The Group accounts for share compensation schemes based on their
estimated fair values at the date of the grant in accordance with SFAS
No. 123 ‘Accounting for Stock Based Compensation’.

The American Institute of Certiﬁed Public Accountants (AICPA) Statement
of Position 98-1 ‘Accounting for the costs of computer software developed
or obtained for internal use’ requires certain costs incurred from
1 January 1999 in respect of software developed for internal use to be
capitalised and subsequently amortised. This includes enhancements to
existing systems which add additional functionality.

SFAS No. 133 ‘Accounting for Derivative Instruments and for Hedging
Activities’ requires that all derivatives be recognised on-balance sheet at
fair value. Changes in the fair value of derivatives that are not hedges 
are reported in the income statement. For derivatives which are hedges,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or ﬁrm commitments through earnings or
recognised in other comprehensive income until the hedged item is
recognised in earnings. The ineffective portion of a hedge’s change in
fair value is immediately recognised in earnings. A derivative will only be
classiﬁed as a hedge providing an entity meets stringent qualifying criteria
in respect of documentation and hedge effectiveness.

SFAS No. 133 further requires a derivative that is embedded within a
ﬁnancial instrument to be separated from the host contract and fair valued
if it is not deemed to be clearly and closely related to the host. If the
derivative cannot be reliably separated, SFAS No. 133 requires the entire
instrument to be fair valued.

LLOYDS TSB GROUP   149

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

UK GAAP

Foreign currency translation

US GAAP

The assets, liabilities and results of the Group’s overseas operations are
translated into sterling at the rate of exchange prevailing at the balance
sheet date, as permitted under UK GAAP.

Under SFAS No. 52 ‘Foreign Currency Translation’, foreign currency assets
and liabilities are translated at the year-end rate; however, results are
translated at the average rate for the year.

Investment securities

Debt securities and equity shares intended for use on a continuing basis
by the Group are treated as investment securities and included in the
balance sheet at cost as adjusted for the amortisation of any premiums
and discounts arising upon acquisition, less provision for any permanent
diminution in value.

SFAS No. 115 ‘Accounting for Certain Investments in Debt and Equity
Securities’ requires that debt securities which are ‘available-for-sale’ (where
there is the absence of either the intent or the ability to hold them to
maturity) and equity shares with a readily determinable market value
should be recorded at fair value with unrealised gains and losses reﬂected
in shareholders’ equity. All debt securities held as available-for-sale are
subject to assessment for other than temporary impairment in accordance
with SFAS No. 115 and, for asset backed securities, in accordance with
the Emerging Issues Task Force (EITF) Abstract No. 99-20 ‘Recognition of
Interest Income and Impairment on Purchased and Retained Beneﬁcial
Interests in Securitised Financial Assets’.

Dividends payable

Dividends declared after the period end are recorded in the period to
which they relate.

Dividends are recorded in the period in which they are declared.

Own shares

Own shares held are deducted from equity. Own shares that are held by
the Group’s long-term assurance funds are recognised to the extent of
the shareholder’s interest, which is 10 per cent.

All own shares held are reclassiﬁed as Treasury stock and deducted from
shareholders’ equity in accordance with the AICPA Accounting Research
Bulletin (ARB) No. 51 ‘Consolidated Financial Statements’.

Deferred tax

Deferred tax is provided for all timing differences between the recognition
of gains and losses in the ﬁnancial statements and their recognition in a
tax computation. Deferred tax assets are recognised to the extent that it is
regarded as more likely than not that there will be suitable taxable proﬁts
from which the future reversal of the underlying timing differences can be
deducted. Deferred tax is provided based on the rates that have been
enacted or have been substantially enacted.

Under SFAS No. 109 ‘Accounting for Income Taxes’, deferred tax assets
and liabilities are recorded for all temporary differences. A valuation
allowance is recorded against a deferred tax asset where it is more likely
than not that some portion of the deferred tax asset will not be realised.
Deferred tax is provided on enacted tax rates. SFAS No. 109 requires
provisions to be raised on the portion of unremitted foreign earnings that
are not considered to be permanently reinvested in the foreign subsidiary.

Provision for credit losses

A speciﬁc provision is made to cover the estimated loss as soon as the
recovery of an outstanding loan is considered doubtful. General provisions
are raised to cover losses incurred but not yet identiﬁed as of the balance
sheet date.

SFAS No. 114 ‘Accounting by Creditors for Impairment of a Loan’ requires
the overall credit risk provision to be determined based upon the present
value of expected future cash ﬂows, discounted at the loan’s effective interest
rate or, as a practical expedient, on the loan’s observable market value, or
the fair value of the collateral if the loan is collateral dependent. Smaller
balance homogeneous consumer loans that are collectively valued for
impairment are outside the scope of SFAS No. 114, as are debt securities
and leases. General provisions are made against such loans when losses
have been incurred but not yet identiﬁed as of the balance sheet date.

Consolidation of special purpose vehicles

Entities that fall within the deﬁnition of quasi-subsidiaries as set out in
FRS5 have been consolidated. A quasi-subsidiary is deﬁned as an entity
which, although it does not fulﬁl the deﬁnition of a subsidiary, is directly 
or indirectly controlled by Lloyds TSB Group.

FIN 46-R requires the consolidation of variable interest entities (VIEs) for
which Lloyds TSB Group is deemed to be the primary beneﬁciary. A more
detailed discussion of VIEs can be found on pages 170 to 171.

Trust-preferred securities

Under UK GAAP, trust-preferred securities are treated as equity rather
than debt.

Following the adoption of SFAS No. 150 ‘Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity’ from
1 January 2003, certain trust-preferred securities are classiﬁed as
liabilities rather than equity.

150 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

UK GAAP

Insurance activities

US GAAP

The shareholder’s interest in the long-term assurance fund is valued at the
net present value of the proﬁts inherent in such policies. 

The net present value of the proﬁts inherent in the policies of the 
long-term assurance fund is not recognised. An adjustment is made for the
amortisation of acquisition costs and fees.

Additional information on the differences between the UK and US
accounting for insurance activities is provided within the Insurance section
of this note on pages 172 to 174.

Current and future accounting developments

United States

FASB Interpretation Number (FIN) 46 (revised December 2003) – Consolidation of Variable Interest Entities

FIN 46 was issued in January 2003, was revised in December 2003 and has been interpreted in various FASB staff positions. It is effective immediately 
for all variable interests in variable interest entities (VIE) created after 31 January 2003. For VIEs created before that date, the requirements are effective for
Lloyds TSB Group from 1 January 2004. FIN 46 requires certain transitional disclosures to be made immediately if it is reasonably possible that an entity
will consolidate or disclose information about VIEs when FIN 46 becomes effective. FIN 46 deﬁnes a VIE as an entity where either the total equity investment
at risk is not sufﬁcient to permit the entity to ﬁnance its activities, without additional subordinated ﬁnancial support; or the equity investors lack any one of
the following: (1) the ability to make decisions about an entity’s activities; (2) the obligation to absorb losses of the entity; or (3) the right to receive residual
returns of the entity. VIEs are required to be consolidated by the primary beneﬁciary, which is the party that absorbs the majority of the entity’s expected
losses, expected gains, or both. The required transitional disclosures have been made within this annual report; the impact on Lloyds TSB Group’s US GAAP
ﬁnancial statements is discussed further on page 170.

SFAS 149 – Amendment of Statement 133 on Derivative Instruments and Hedging Activities

SFAS No. 149 was issued in April 2003. This Statement amends and clariﬁes ﬁnancial accounting and reporting for derivative instruments, including certain
derivative  instruments  embedded  in  other  contracts  (collectively  referred  to  as  derivatives)  and  for  hedging  activities  under  FASB  Statement  No.  133,
Accounting  for  Derivative  Instruments  and  Hedging  Activities.  This  Statement  is  effective  prospectively  for  contracts  entered  into  or  modiﬁed  after 
30 June 2003 and prospectively for hedging relationships designated after 30 June 2003. Adoption of this statement has not had a material impact on
Lloyds TSB Group’s US GAAP ﬁnancial statements. 

SFAS 150 – Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

SFAS No. 150 was issued in May 2003. The statement amends the accounting for certain ﬁnancial instruments that, under previous guidance, issuers could
account for as equity and requires that these instruments be classiﬁed as liabilities in statements of ﬁnancial position. This statement is effective prospectively
for ﬁnancial instruments entered into or modiﬁed after 31 May 2003 and otherwise is effective at the beginning of the ﬁrst interim period beginning after 
15 June 2003. This statement shall be implemented by reporting the cumulative effect of a change in an accounting principle for ﬁnancial instruments
created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. Following adoption of this statement,
certain ﬁnancial instruments have been reclassiﬁed from minority interests to liabilities.

AICPA Statement of Position (SOP) 03-1 – Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and
for Separate Accounts

SOP 03-1 was issued in July 2003 and provides guidance on accounting and reporting by insurance enterprises for certain non-traditional long-duration
contracts and for separate accounts. The SOP is effective for ﬁnancial statements for ﬁscal years beginning after 15 December 2003, with earlier adoption
encouraged. Lloyds TSB Group intends to adopt this SOP prospectively from 1 January 2004 and the SOP may not be applied retrospectively to prior years’
ﬁnancial  statements.  Lloyds  TSB  Group  is  currently  analysing  the  impact  of  this  SOP but expects that it will  require various determinations, such as
qualiﬁcation for separate account treatment, treatment of investments in separate account arrangements not meeting the criteria in this SOP and adjustments
to contract holder liabilities, including consideration of certain guarantees.

SFAS 132 – Employers’ Disclosures about Pensions and Other Retirement Beneﬁts (revised 2003)

In December 2003 the FASB issued a revision to SFAS No. 132 which requires enhanced disclosures about the Lloyds TSB Group’s deﬁned beneﬁt pension
plans. The revised  standard  became effective immediately for  UK-based  plans and  will become effective for  the  Lloyds TSB Group’s US GAAP ﬁnancial
statements for 2004 for overseas based plans. Adoption of this statement has not had, and is not expected to have, a material impact on Lloyds TSB Group’s
US GAAP ﬁnancial statements.

AICPA Statement of Position 03-3 – Accounting for Certain Loans or Debt Securities Acquired in a Transfer

SOP 03-3 was issued in December 2003, and provides guidance on the accounting for differences between contractual and expected cash ﬂows from a
purchaser’s initial investment  in loans  or  debt securities acquired  in  a  transfer if those  differences are attributable to credit quality. SOP 03-3 becomes
effective for loans and debt securities acquired in years beginning after 15 December 2004. Adoption of this SOP is not expected to have a material impact
on Lloyds TSB Group’s US GAAP financial statements.

EITF 03-1 – The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments

In November 2003 the EITF reached a consensus on certain additional disclosure requirements in connection with holding losses on investment securities.
The disclosures now required are set out on page 167 of the ﬁnancial statements.

LLOYDS TSB GROUP   151

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

The following tables summarise the adjustments to net income and shareholders’ equity which would arise from the application of US GAAP:

2001*
£m

2,233

(328)

(209)
–
(219)
132
(131)
3
(46)
16
(160)
(4)
(618)

52
296
348

(598)

1,635

Note

p

a
b
a
c

d

f

i
i

Note

p

a
a
c

f
g

h

i
i

2003
£m

3,254

(160)

51
(12)
(150)
143
(37)
–
(113)
(17)
172
(4)
33

21
83
104

(23)

3,231

2003
£m

9,624

(66)

1,218
535
971
(420)
(45)
41
76
109
1,314
(195)
3,604

(39)
(1,231)
(1,270)

2,268

11,892

2002*
£m

1,790

(393)

72
–
(193)
113
(109)
4
(44)
6
305
12
166

25
165
190

(37)

1,753

2002*
£m

7,943

(59)

1,347
589
840
(383)
(50)
69
(98)
32
1,311
(166)
3,491

(60)
(1,151)
(1,211)

2,221

10,164

Reconciliation of net income

Proﬁt for the year attributable to shareholders under UK GAAP

Insurance activities, before tax 
Banking and Group activities:
– Goodwill amortisation
– Reduction in proﬁt on sale of businesses
– Amortisation of customer related intangibles
– Pension costs
– Leasing
– Property depreciation
– Share compensation schemes
– Internal software costs
– Derivatives
– Foreign currency translation differences
Total banking and Group activities, before tax
Taxation:
– Deferred taxation
– Deferred taxation on GAAP differences
Total taxation

Total adjustments, after tax 

Net income under US GAAP

Reconciliation of shareholders’ equity

Shareholders’ funds under UK GAAP

Insurance activities, before tax 
Banking and Group activities:
– Goodwill
– Customer related intangibles
– Pension costs
– Leasing
– Property depreciation
– Internal software
– Derivatives
– Net unrealised gain on available-for-sale securities
– Dividend payable
– Own shares
Total banking and Group activities, before tax
Taxation:
– Deferred taxation
– Deferred taxation on GAAP differences
Total taxation

Total adjustments, after tax

Shareholders’ equity under US GAAP

* restated (see note 1)

152 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Reconciliation of movements in shareholders’ equity under US GAAP

Net income in period
Dividends

New share capital subscribed
Movement in own shares
Share compensation schemes
Minimum pension liability
Change in the fair value of available-for-sale securities – insurance activities
Change in the fair value of available-for-sale securities – banking activities
Exchange and other differences

Shareholders’ equity at beginning of period

Shareholders’ equity at end of period

Accumulated other comprehensive income

Exchange translation differences
Additional minimum pension liability
Available-for-sale securities:
– Net unrealised gains – insurance activities
– Related amortisation of deferred acquisition costs
– Net unrealised gains – banking activities
– Taxation

2003
£m

3,231
(1,908)

1,323
45
(31)
113
53
8
54
163

1,728
10,164

11,892

2003
£m

(158)
(3,224)

182
(125)
109
(49)
117

2002*
£m

1,753
(1,903)

(150)
139
35
44
(3,277)
15
(147)
–

(3,341)
13,505

10,164

2002
£m

(321)
(3,277)

245
(197)
32
(25)
55

Accumulated other comprehensive income under US GAAP

(3,265)

(3,543)

* restated (see note 1)

2001*
£m

1,635
(1,738)

(103)
379
(189)
46
–
(46)
(165)
(98)

(176)
13,681

13,505

2001
£m

(321)
–

49
(23)
242
(81)
187

(134)

LLOYDS TSB GROUP   153

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Condensed US GAAP Proﬁt and loss account

The following table provides a condensed proﬁt and loss account for the Group, incorporating the US GAAP adjustments arising.

Loan interest, including fees
Other interest and dividends
Insurance premiums
Commissions and fees
Realised gains from sales of investments
Foreign exchange trading income
Securities and other trading gains (losses)
Other income

Total revenues
Interest expense

Total revenues, net of interest expense

Policyholder beneﬁts and claims expense
Movement in undistributed earnings to policyholders
Provisions for bad and doubtful debts
Amounts written off ﬁxed asset investments
Total beneﬁts, claims and provisions
Non-insurance compensation and beneﬁts
Insurance underwriting, operating and acquisition expenses
Other operating expenses
Depreciation
Amortisation of intangible ﬁxed assets:
– Goodwill
– Customer related intangibles
– Value of long-term assurance business acquired

Income before tax from continuing operations
Provision for income taxes (continuing operations)**
Minority interests, net of income taxes
Discontinued operations:
– Income from discontinued operations
– Proﬁt on sale of businesses
– Provision for income taxes

Cumulative effect of accounting changes (net)

Net income under US GAAP
Exchange translation and other differences
Minimum pension liability
Available-for-sale securities:
– Net unrealised (losses) gains – insurance activities
– Related amortisation of deferred acquisition costs
– Net unrealised gains (losses) – banking activities
– Taxation

Comprehensive income under US GAAP

Earnings per share (pence)
Diluted earnings per share (pence)

* restated (see note 1)

2003
£m

8,341
1,771
2,042
2,328
89
193
1,021
1,755

17,540
4,106

13,434

3,036
(100)
887
44
3,867
2,306
578
2,619
713

–
150
188
338
6,554

3,013
832
26

354
853
(89)
1,118
(42)

3,231
163
53

(63)
72
77
(24)
62

3,509

57.9p
57.7p

2002*
£m

7,937
2,035
2,015
2,171
163
149
(2,370)
1,881

13,981
4,123

9,858

1,565
(1,518)
978
87
1,112
2,418
766
1,828
749

–
193
725
918
6,679

2,067
495
62

311
–
(81)
230
13

1,753
–
(3,277)

196
(174)
(210)
56
(132)

(1,656)

31.5p
31.3p

2001*
£m

8,707
2,077
1,671
2,147
183
133
(2,307)
1,407

14,018
5,271

8,747

2,228
(2,427)
679
60
540
2,014
511
2,362
611

236
219
305
760
6,258

1,949
448
57

233
39
(81)
191
–

1,635
(98)
–

(49)
(16)
(238)
92
(211)

1,326

29.5p
29.2p

** Signiﬁcant items affecting the Group’s effective tax rate under US GAAP include the fact that tax is levied on UK life assurance and pension businesses under
specialised rules not based on the proﬁt and loss account. In addition, under US GAAP a tax provision is required for unrealised gains that are attributable to the
policyholders. The amount provided will vary depending upon the ﬂuctuations of the stock market and this movement can result in signiﬁcant changes in the
effective rate of tax.

154 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Condensed US GAAP Balance sheet

The following table provides a condensed balance sheet for the Group, incorporating the US GAAP adjustments arising. 

Assets
Cash and due from banks
Deposits at interest with banks
Securities purchased under resale agreements
Treasury bills and other eligible bills
Trading account assets
Investments
Loans, net of provisions
Tangible ﬁxed assets
Intangible ﬁxed assets:
– Goodwill
– Customer related intangibles
– Value of long-term assurance business acquired
– Pension liability related intangible
Deferred acquisition costs
Separate account assets
Other assets

Total assets

Liabilities
Deposits
Trading account liabilities
Debt securities in issue
Policyholder liabilities
Undistributed policyholder allocations
Commitments and contingencies
Deferred tax
Long-term debt
Separate account liabilities
Other liabilities
Minority interests

Total liabilities

Shareholders’ equity:
– Common stock
– Additional paid-in capital
– Retained earnings
– Treasury stock
– Accumulated other comprehensive income
Total shareholders’ equity

Total liabilities and shareholders’ equity

* restated (see note 1)

2003
£m

9,364
10,219
2,642
530
36,627
19,045
134,043
3,842

3,731
535
2,094
231
1,048
22,494
4,713

251,158

140,451
3,500
25,922
25,080
1,772
216
1,444
11,003
22,494
7,330
54

239,266

1,418
5,003
8,929
(193)
(3,265)
11,892

251,158

2002*
£m

8,547
11,678
1,696
1,879
41,412
16,635
134,202
4,085

3,981
589
2,282
221
846
18,945
7,354

254,352

141,777
5,583
29,133
23,763
1,890
192
1,422
10,168
18,945
10,584
731

244,188

1,416
4,848
7,634
(191)
(3,543)
10,164

254,352

LLOYDS TSB GROUP   155

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Condensed Consolidated statement of cash ﬂows in accordance with SFAS No. 95

Cash ﬂows from operating activities
Net income before minority interests and effect of accounting changes
Adjustments required to reconcile net income to net cash provided by operating activities:
Amortisation of intangible ﬁxed assets
Depreciation of tangible ﬁxed assets
Provision for bad and doubtful debts, net of write-offs
Change in trading account assets
Change in trading account liabilities
Change in deferred acquisition costs
Change in other assets
Change in policyholder liabilities
Change in undistributed policyholder allocations
Change in other liabilities
Net gain on sale of investment securities
Proﬁt on disposal of businesses
Proﬁt on disposal of tangible ﬁxed assets
Other, net

Total adjustments

Net cash provided by (used in) operating activities

Cash ﬂows from investing activities
Change in deposits at interest with banks
Change in securities purchased under resale agreements
Change in loans and advances to customers
Purchases of investment securities
Proceeds from sale and maturity of investment securities
Purchases of tangible ﬁxed assets
Proceeds from sale of tangible ﬁxed assets
Additions to interests in joint ventures
Acquisition of subsidiary undertakings and businesses
Disposal of subsidiary undertakings and businesses

Net cash used in investing activities

Cash ﬂows from ﬁnancing activities
Dividends paid – equity
Dividends paid to minorities – equity
Dividends paid to minorities – non-equity
Cash proceeds from issue of ordinary share capital and sale of treasury stock
Issue of long-term debt
Redemption of long-term debt
Minority investment in subsidiaries
Change in deposits
Change in short-term borrowings
Policyholders’ deposits
Policyholders’ withdrawals

Net cash provided by ﬁnancing activities

Change in cash and cash equivalents
Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Cash paid during the year for income taxes
Cash paid during the year for interest
Non-cash investing and ﬁnancing activities:
Loan notes issued in respect of acquisitions

* restated (see note 1)

156 LLOYDS TSB GROUP

2003
£m

3,299

338
726
(17)
4,309
(2,083)
(202)
1,760
1,365
(118)
(2,779)
(89)
(853)
(43)
884

3,198

6,497

1,587
(946)
(12,342)
(40,763)
39,312
(799)
330
(12)
(1,106)
2,382

(12,357)

(1,908)
(14)
(38)
32
533
(75)
–
6,388
1,807
1,039
(1,087)

6,677

817
8,547

9,364

784
5,066

–

2002*
£m

1,802

918
761
354
(3,176)
2,107
(51)
(91)
(97)
(1,588)
(266)
(163)
–
(47)
152

(1,187)

615

102
(313)
(11,743)
(47,885)
46,880
(1,352)
359
(21)
(117)
–

(14,090)

(1,903)
(18)
(43)
77
2,120
(55)
167
7,925
5,969
1,602
(1,207)

14,634

1,159
7,388

8,547

951
5,321

–

2001*
£m

1,692

772
625
56
(2,004)
174
(97)
(2,776)
583
(2,427)
100
(183)
(39)
(67)
(759)

(6,042)

(4,350)

(986)
3,554
(12,211)
(48,842)
42,282
(1,140)
293
(44)
(180)
40

(17,234)

(1,738)
(17)
(40)
194
742
(131)
–
16,458
6,326
1,987
(1,287)

22,494

910
6,478

7,388

829
6,755

9

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Balance sheet presentation

Certain classiﬁcation differences exist in ﬁnancial reporting under UK GAAP and US GAAP. For the Group, such differences primarily arise in the balance
sheet and the following comparison lists the line items in which such differences occur.

UK GAAP

US GAAP

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
Debt securities
Equity shares
Other assets
Prepayments and accrued income
Items in course of transmission to banks
Debt securities in issue
Other liabilities
Accruals and deferred income
Other provisions for liabilities and charges
Subordinated liabilities
Merger reserve
Long-term assurance business

Consolidated statement of cash ﬂows

Cash and due from banks
Cash and due from banks
Classiﬁed as ‘Trading account assets’ where appropriate
Loans to banks due on demand classiﬁed as ‘Cash and due from banks’;
Reverse repos classiﬁed as ‘Securities purchased under resale agreements’
Reverse repos classiﬁed as ‘Securities purchased under resale agreements’
Classiﬁed as ‘Trading account assets’ and ‘Investments’ where appropriate
Classiﬁed as ‘Trading account assets’ and ‘Investments’ where appropriate
Classiﬁed as ‘Trading account assets’ where appropriate
Other assets
Cash and due from banks
Classiﬁed as ‘Trading account liabilities’ where appropriate
Classiﬁed as ‘Trading account liabilities’ where appropriate
Other liabilities
Commitments and contingencies
Long-term debt
Classiﬁed as ‘Additional paid-in capital’
Classiﬁcations are discussed on pages 172 to 174

The  Group’s  UK  GAAP  cash  ﬂow  statement  on  page  94 is  prepared  under  the  provisions  of  FRS  1 (Revised).  This  is  similar  in  many  respects  to  SFAS
No. 95 ‘Statement of Cash Flows’, as amended by SFAS No. 104 ‘Statement of Cash Flows – Net Reporting of Certain Cash Receipts and Cash Payments
and Classiﬁcation of Cash Flows from Hedging Transactions’. Two principal differences arise between the standards with regard to the deﬁnition of cash and
the classiﬁcation of items within the cash ﬂow statement.

FRS 1 (Revised) deﬁnes cash as cash in hand and repayable on demand. Under SFAS No. 95, cash and cash equivalents are deﬁned as short-term, highly
liquid investments that are both readily convertible to known amounts of cash; and so near their maturity that they present insigniﬁcant risk of changes in
value because of changes in interest rates.

For the purposes of SFAS No. 95, the Group’s cash and cash equivalents of £9,364 million (2002: £8,547 million; 2001: £7,388 million) comprise
items reported under the following UK balance sheet categories: cash and balances at central banks; items in the course of collection from banks; loans
and advances to banks repayable on demand and items in the course of transmission to banks. Under UK GAAP the results, assets and liabilities of the
long-term  assurance  business  are  presented  on  a  one-line  basis  and  accordingly  movements  in  cash  ﬂows  are  aggregated  into  one  line  within  the
reconciliation of operating proﬁt. Under US GAAP, the insurance activities have been disaggregated and accordingly the cash ﬂows have been allocated to
the  appropriate  line  items  within  the  cash  ﬂow  statement.  Cash  attributable  to  the  long-term  assurance  business  is  included  within  cash  and  cash
equivalents above.

Differences between UK and US GAAP with regard to classiﬁcation of items within the cash ﬂow statement are summarised below:

Cash ﬂow

Classiﬁcation under FRS 1 (Revised)

Classiﬁcation under SFAS No. 95

Net change in loans and advances, including lease ﬁnancing
Net change in deposits and debt securities in issue
Dividends paid to equity and non-equity minority interests
Tax paid
Capital expenditure and ﬁnancial investment
Purchases/proceeds from disposal of subsidiary and 
associated undertakings
Dividends paid – equity

Operating activities
Operating activities
Returns on investments and servicing of ﬁnance
Taxation
Capital expenditure and ﬁnancial investment

Acquisitions and disposals
Equity dividends paid

Investing activities
Financing activities
Financing activities
Operating activities
Investing activities

Investing activities
Financing activities

Under FRS 1 (Revised), transactions designated as hedges are reported under the same heading as the related assets or liabilities. The restrictions in respect
of cash and balances at central banks are disclosed on page 145.

LLOYDS TSB GROUP   157

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Notes to the UK/US GAAP reconciliation

a Goodwill and customer related intangible assets

Under UK GAAP on 1 January 1998, the Group adopted FRS 10, ‘Goodwill and Intangible Assets’. In respect of acquisitions since 1 January 1998, goodwill
is included in the consolidated balance sheet under intangible ﬁxed assets and amortised over its estimated useful economic life on a straight-line basis.
Prior to 1 January 1998, the Group charged goodwill directly against reserves. 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  FRS  11  ‘Impairment  of  Fixed  Assets  and  Goodwill’.  Should  any
impairment be identiﬁed, it would be charged to the proﬁt and loss account immediately. 

Under US GAAP, from 1 January 2002 the Group adopted the remaining provisions of SFAS No. 142 and accordingly all goodwill arising in respect of
acquisitions is capitalised but no longer amortised and is subject to regular review for impairment; in periods prior to 1 January 2002, goodwill arising
in respect of acquisitions was amortised over periods of up to 20 years. Goodwill amortised prior to the full adoption of SFAS No. 142 is not permitted
to be reinstated.

The Group has performed the required impairment tests under UK and US GAAP and no impairments were recorded against goodwill during 2002 or 2003.

The treatment of the Group’s major acquisitions is detailed below:

Abbey Life

In 1988, Lloyds Bank Plc transferred a minority interest in ﬁve businesses to Abbey Life Group plc, a life insurance company, in return for a majority interest
in  the  enlarged  Abbey  Life  Group.  Under  UK  GAAP,  this  transaction  was  accounted  for  as  a  merger.  Under  US  GAAP,  the  same  transaction  would  be
accounted for as an acquisition. Accordingly the net assets of Abbey Life Group plc (later renamed Lloyds Abbey Life plc) have been fair valued in accordance
with US GAAP and a purchase price determined based on the fair value of the minority interest transferred. In 1996, Lloyds TSB Group plc acquired the
remaining minority interest in Lloyds Abbey Life plc. Under UK and US GAAP the transaction is treated as an acquisition. However, certain differences arise
under US GAAP regarding the determination of fair value of life insurance companies and accordingly an adjustment has been made for the items affected. 

Cheltenham & Gloucester

Under UK and US GAAP, the purchase of the business of Cheltenham & Gloucester Building Society by Lloyds Bank Plc in August 1995 is treated as an
acquisition. Certain differences arise under US GAAP regarding the fair value of the net assets. In addition, the net assets acquired include £521 million
relating to customer related intangibles, which has been amortised over 7 years. 

TSB Group plc

The business combination of Lloyds Bank Plc and TSB Group plc in December 1995 was accounted for as a merger as permitted under UK GAAP at that
time, although legally TSB Group plc was deemed to have acquired Lloyds Bank Plc. Under US GAAP, the same transaction would have been accounted
for as an acquisition of TSB Group plc by Lloyds Bank Plc. Accordingly, for US GAAP, the net assets of TSB Group plc have been fair valued as at the date
of  the  business  combination  and  a  purchase  price  determined  based  on  the  value  of  TSB  Group  plc  shares  at  that  time.  The  net  assets  include
£1,596 million relating to customer related intangibles, which is being amortised over 11 years. 

Scottish Widows

In March 2000, the Group acquired the business of Scottish Widows’ Fund and Life Assurance Society, a life insurance and pensions provider. Under UK
and US GAAP, the purchase is treated as an acquisition. However certain differences arise under US GAAP regarding the determination of fair value of the
life insurance business, and certain other differences between UK and US GAAP such as the treatment of pensions and own shares, for which adjustments
have been made. 

158 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

The movement in US GAAP goodwill is summarised as follows:

Cost
Balance at 1 January
Exchange and other adjustments
Change in accounting principle
Acquisitions
Disposals

Balance at 31December

Amortisation
Balance at 1 January
Exchange and other adjustments
Change in accounting principle
Charge for the year
Disposals

Balance at 31 December

Net book value

The movement in goodwill by segment is as follows:

UK Retail Banking and Mortgages
Insurance and Investments
Wholesale and International Banking

UK
GAAP
£m

2003
US GAAP
adjustment
£m

2,771
32
–
96
(273)

2,325
11
–
(96)
(84)

US
GAAP
£m

5,096
43
–
–
(357)

UK
GAAP
£m

2002
US GAAP
adjustment
£m

2,640
28
–
103
–

2,348
(36)
23
(10)
–

US
GAAP
£m

4,988
(8)
23
93
–

2,626

2,156

4,782

2,771

2,325

5,096

(137)
(9)
–
(51)
84

(978)
(3)
–
51
(8)

(1,115)
(12)
–
–
76

(74)
(4)
–
(59)
–

(1,036)
9
(10)
59
–

(1,110)
5
(10)
–
–

(113)

(938)

(1,051)

(137)

(978)

(1,115)

2,513

1,218

3,731

2,634

1,347

3,981

Balance at
1 January
£m

Exchange
movements
£m

Balance at
Disposals 31 December
£m

£m

660
2,194
1,127

3,981

–
–
31

31

–
–
(281)

660
2,194
877

(281)

3,731

In 2002, the unamortised deferred credit of £13 million in respect of negative goodwill was, under the transitional provisions of SFAS No. 141, written off
and recognised in the income statement as the effect of a change in accounting principle.

Net income and earnings per share amounts for the years ended 31 December 2003, 2002 and 2001, adjusted to exclude the amortisation expenses related
to goodwill assets which are no longer amortised, are as follows:

Net income (£m)

Basic earnings per share (pence)

Diluted earnings per share (pence)

2003

2002

2001

2003

Amounts as reported
Add back goodwill amortisation

3,231
–

1,753
–

1,635
248

Adjusted amounts

3,231

1,753

1,883

57.9
–

57.9

2002

31.5
–

31.5

2001

2003

29.5
4.5

34.0

57.7
–

57.7

2002

31.3
–

31.3

2001

29.2
4.5

33.7

Under US GAAP, the intangible asset representing the value of customer relationships associated with an acquisition is capitalised separately and amortised
in the consolidated income statement over the estimated average life of the customer relationships. At 31 December 2003, the weighted average remaining
life of those relationships is estimated as 4 years.

2003
£m

2002
£m

Customer related intangible assets
Balance at 1 January
Additions
Amortisation

Balance at 31 December

Over the next 5 years, estimated amortisation is expected to be:
2004: £157 million
2005: £157 million
2006: £156 million
2007: £11 million
2008: £10 million

589
96
(150)

535

772
10
(193)

589

LLOYDS TSB GROUP   159

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

b Proﬁt on sale of businesses

As discussed in note 6, Lloyds TSB Group disposed of its interest in the National Bank of New Zealand, its operations in France and certain of its interests
in Brazil during 2003.

Under UK GAAP, upon disposal of a business or undertaking, goodwill written off directly against reserves prior to the implementation of FRS 10 ‘Goodwill
and Intangible Assets’, is included in the Group’s share of the net assets of the business or undertaking in the calculation of the proﬁt or loss on disposal.

Under US GAAP, all goodwill is capitalised and, up to 31 December 2002, amortised over its estimated useful life. From 1 January 2003, goodwill is no
longer amortised but instead subject to impairment testing. Upon disposal of a business or undertaking, the goodwill is included in the calculation of the
proﬁt or loss on disposal. Compared to the treatment under UK GAAP, the effect of this is to increase the proﬁts, or reduce the losses, arising on the sale of
those businesses before the implementation of FRS 10.

The difference between the proﬁt on disposal under UK GAAP and that recorded under US GAAP is analysed as follows:

Differences in the net book value of goodwill
Other UK/US GAAP accounting differences
Exchange adjustments

Reduction in proﬁt on disposal

Summarised ﬁnancial information, prepared in accordance with US GAAP, is as follows:

Total revenues, net of interest expense

Income from discontinued operations
Proﬁt on sale of businesses
Provision for income tax

2003
£m

705

354
853
(89)

1,118

2002
£m

640

311
–
(81)

230

The following is a summary of the US GAAP assets and liabilities of the discontinued operations as at the date of disposal.

Cash
Investments
Trading assets
Loans
Goodwill
Other assets

Total assets

Deposits
Debt securities in issue
Long-term debt
Other liabilities
Shareholders’ equity

Total liabilities

£m

(89)
(6)
107

12

2001
£m

588

233
39
(81)

191

2003
£m

52
110
744
14,805
281
1,077

17,069

8,891
5,108
206
1,390
1,474

17,069

c Pension and other post-retirement costs 

The measurement of the US GAAP pension cost is undertaken in accordance with the requirements of SFAS No. 87 and SFAS No. 109. The disclosures
reﬂect the amendments arising from SFAS No. 132 ‘Employers’ Disclosures about Pensions and Other Postretirement Beneﬁts’ (revised 2003).

For  the  reconciliations  below,  the  Group  has  applied  SFAS  No.  87  to  the  Lloyds  TSB  Group  Pension  Schemes  No’s  1  and  2  with  effect  from
31 December 1997 as it was not feasible to apply it as of January 1989, the date speciﬁed in the standard. The Scottish Widows pension scheme has been
included from 3 March 2000, the date of acquisition.

160 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Other post-retirement costs include a liability of £87 million (2002: £83 million) in respect of post-retirement healthcare.

Pension expense

The components of the deﬁned beneﬁt pension expense which arise under US GAAP are estimated as:

Service cost
Interest cost
Expected return on plan assets
Net amortisation and deferral

Net pension charge (credit)
Net charge recognised under UK GAAP

US GAAP adjustment

Obligations and funded status

Change in plan assets
Plan assets at fair value as at 1 January
Exchange and other movements
Actual return on plan assets
Employer contributions
Beneﬁts paid

Plan assets at fair value at 31 December

Change in projected beneﬁt obligation
Projected beneﬁt obligation as at 1 January
Exchange and other movements
Service cost
Interest cost
Amendments
Net actuarial loss 
Beneﬁts paid

Projected beneﬁt obligation at 31 December

Funded status
Unrecognised net actuarial loss
Unrecognised prior service cost
Unrecognised transition asset

Accrued/prepaid

Accrued beneﬁt cost
Intangible asset recognised
Accumulated other comprehensive income

Net amount recognised

Accrued beneﬁt cost, net of intangible asset recognised under US GAAP
Accrued liability recognised under UK GAAP

US GAAP adjustment 

Accumulated beneﬁt obligations

2003
£m

267
670
(797)
3

143
286

(143)

2003
£m

9,095
(65)
1,838
138
(398)

10,608

12,183
(99)
267
670
37
1,114
(398)

13,774

(3,166)
5,454
233
–

2,521

(2,315)
231
4,605

2,521

(2,084)
3,055

971

2002
£m

256
655
(817)
(79)

15
128

(113)

2001
£m

212
545
(778)
(89)

(110)
22

(132)

2002
£m

11,335
–
(1,905)
37
(372)

9,095

11,020
–
256
655
59
565
(372)

12,183

(3,088)
5,529
221
(107)

2,555

(2,312)
221
4,646

2,555

(2,091)
2,931

840

The accumulated beneﬁt obligations for all deﬁned beneﬁt pension schemes were £12,924 million at 31 December 2003 (2002: £11,407 million).

Information for pension plans with an accumulated beneﬁt obligation in excess of plan assets is presented in aggregate below:

Projected beneﬁt obligation
Accumulated beneﬁt obligation
Fair value of plan assets

2003
£m

13,168
12,468
10,227

2002
£m

11,881
11,170
8,933

LLOYDS TSB GROUP   161

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

The  additional minimum  pension  liability  arising  on  these  plans  of  £4,836  million  (2002: £4,867  million) has  been  recognised  in  accumulated other
comprehensive income, net of the related intangible asset of £231 million (2002: £221 million) and deferred taxes of £1,381 million (2002: £1,369 million).

Assumptions

The ﬁnancial assumptions used to calculate the projected beneﬁt obligation at 31 December 2003 and 2002 are as follows:

Discount rate
Expected rate of salary increases
Rate of pension increases

2003
%

5.40
4.04
2.50

The ﬁnancial assumptions used to determine net cost for the year ended 31 December 2003, 2002 and 2001 are as follows:

Discount rate
Expected return on assets
Expected rate of salary increases
Rate of pension increases

2003
%

5.60
6.60
3.83
2.30

2002
%

6.00
6.60
4.04
2.50

2002
%

5.60
3.83
2.30

2001
%

6.00
6.60
3.53
2.50

The overall expected return on assets assumption has been determined with the aim of reﬂecting the average rate of growth expected on the funds invested.
In deriving this return the aim is to use a stable, realistic long-term rate of return. In any year, it is considered whether the rate of return is reasonable having
regard to the weighted average of the expected returns from each of the main asset classes adjusted to allow for any difference between the levels of the fair
value and market related value of assets.

The expected return for each asset class reﬂects a combination of historical performance analysis, the forward looking views of the ﬁnancial markets (as suggested
by the yields available) and the views of investment organisations. Consideration is also given to the rate of return expected to be available for reinvestment.

Assets

The assets of the pension schemes are invested primarily in equities and ﬁxed interest securities. In accordance with SFAS No. 87, the excess of the plan
assets over the projected beneﬁt obligation at the transition date (1 January 1998) is recognised as a reduction to pension expense on a prospective basis
over approximately 15 years, which was the average remaining service period of employees expected to receive beneﬁts under the plans.

The pension schemes’ asset allocation at 2003 and 2002 and the target allocation for 2004 is as follows:

Equities
Debt securities
Property
Other

Fair value of
plan assets at
31 December 2003
%

Fair value of
plan assets at
31 December 2002
%

70.3
20.1
6.7
2.9

100.0

79.0
11.5
8.7
0.8

100.0

Target
allocation
2004
%

70.0
20.0
8.0
2.0

100.0

The principal investment objective is to hold suitable assets of appropriate liquidity which will generate income and capital growth to meet, together with
new contributions from members and the employer, the cost of current and future beneﬁts which the scheme provides.

Following an asset-liability modelling study conducted in 2002, the trustees of Lloyds TSB Group Pension Schemes No’s. 1 and 2 considered the target asset
allocation in the table above to be appropriate for the purposes of meeting this long-term objective. In determining this allocation, the trustees had regard to
the beneﬁts of diversification, the historical rates of return earned, their expected future returns and the expected short-term volatility of each asset class.

The trustees have taken advice from the Scheme Actuary and investment consultant to ensure that this target allocation is suitable for the schemes given
their liability proﬁles. A number of investment managers have been employed to manage the schemes’ assets and each has been given a speciﬁc benchmark
and performance objective.

The approach taken by the trustees of Lloyds TSB Group Pension Schemes No’s. 1 and 2 is similar to that taken by the trustees of the other Lloyds TSB 
Group pension schemes.

Employers’ contributions

Employers’ contributions were £138 million during 2003 (2002: £37 million). Employers’ contributions are expected to be approximately £375 million
during 2004.

162 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

d Share compensation schemes

In accordance with SFAS No. 123 the Group accounts for share compensation schemes based on their estimated fair value at the date of grant. The following
disclosures only reﬂect options granted from 1 January 1995 onwards. In the initial phase-in period, the amounts will not be representative of the effect on
reported net income for future years. The SFAS No. 123 charge for the fair value of share options issued since 1 January 1996 is:

Balance at 1 January

Charge for options granted in year
Charge for options granted in prior years

Total charge for the year

Balance at 31 December

2003
£m

(208)

(17)
(96)

(113)

(321)

2002
£m

(164)

(9)
(35)

(44)

(208)

2001
£m

(118)

(9)
(37)

(46)

(164)

During the period from 1 January 1995 to 31 December 2003 the Group operated the following stock compensation plans:

Executive scheme

The Executive share option schemes are long-term incentive schemes and are available to certain senior executives of the Group, with grants usually made
annually. Options are granted 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. From 18 April 2001, the aggregate value of the award based upon the market price at the date of grant must not exceed four
times the executive’s annual remuneration and, normally, the limit for the grant of options to an executive in any one year would be equal to 1.5 times
annual salary with  a  maximum  performance  multiplier  of  3.5.  Prior  to  18 April 2001,  the  normal  limit  was  equal  to  one  year’s  remuneration  and  no
performance multiplier was applied.

Options are normally exercisable between three and ten years from the date of grant. However, the exercise of the options is subject to the satisfaction of
the following performance conditions:

For options granted after March 2001

The performance condition is linked to the performance of Lloyds TSB Group plc’s total shareholder return (calculated by reference to both dividends and
growth in share price) against a comparator group of 17 companies including Lloyds TSB Group plc. 

The performance condition is measured over a three year period commencing at the end of the ﬁnancial year preceding the grant of the option and continuing
until the end of the third subsequent year. If the performance condition is not then met, it will be measured at the end of the fourth ﬁnancial year. If the
condition has not then been met, the options will lapse. 

To meet the performance conditions, the Group’s ranking against the comparator group must be at least ninth. The full grant of options will only become
exercisable if the Group is ranked ﬁrst. A performance multiplier will be applied below this level to calculate the number of shares in respect of which options
granted to executive directors will become exercisable, and will be calculated on a sliding scale. If Lloyds TSB Group plc is ranked below median the options
will not become exercisable. 

Options granted to senior executives other than executive directors are not so highly leveraged and as a result, different performance multipliers are applied
to their options. For the majority of executives, options are granted with the performance condition but no performance multiplier.

For options granted up to March 2001

Options granted

Performance conditions

Prior to March 1996
March 1996 – August 1999

March 2000 – March 2001

None
That Lloyds TSB Group plc’s ranking based on shareholder return (calculated by reference to both dividends and growth
in share price) over the relevant period should be in the top ﬁfty companies of the FTSE 100 and that there must have
been growth in earnings per share which is equal to the aggregate percentage change in the Retail Price Index plus two
percentage points for each complete year of the relevant period.
As  for  March  1996  –  August  1999  except  that  there  must  have  been  growth  in  the  earnings  per  share  equal  to  the
change in the Retail Price Index plus three percentage points for each complete year of the relevant period.

In respect of options granted between March 1996 and March 2001, the relevant period for the performance conditions begins at the end of the ﬁnancial
year of the date of grant and will continue until the end of the third ﬁnancial year following commencement or, if not met, the end of such later year in which
the conditions are met. Once the conditions have been satisﬁed the options will remain exercisable without further conditions. If they are not satisﬁed by the
tenth anniversary of the grant the option will lapse.

The effect of the performance conditions on the value of the executive share options has been determined by assuming that the earnings per share condition
will be satisﬁed at all times and by using a stochastic projection model to determine the effect of the market-based condition. The compensation cost accrued
in the US GAAP ﬁnancial statements has therefore been based on a best estimate of the number of options that are likely to vest. To the extent that actual
forfeitures are different from the estimate, the calculation of the compensation cost will be revised as appropriate.

LLOYDS TSB GROUP   163

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

As at 31 December 2003, no options granted under the Executive share scheme have lapsed as a result of a failure to satisfy the performance conditions.

Executive scheme

Outstanding at 1 January
Granted
Exercised
Forfeited

2003

Number of
options

2003
Weighted
average
exercise price
(pence)

2002

Number of
options

2002
Weighted
average
exercise price
(pence)

2001

Number of
options

20,990,641
13,405,502
(57,092)
(1,338,146)

670.58
393.63
254.00
636.51

15,153,496
6,940,024
(369,721)
(733,158)

651.07
711.53
420.49
781.17

11,216,636
6,067,500
(1,196,024)
(934,616)

2001
Weighted
average
exercise price
(pence)

615.23
687.22
387.11
793.48

Outstanding at 31December

33,000,905

560.18

20,990,641

670.58

15,153,496

651.07

The  weighted  average  fair  value  of  options  granted  in  the  year  was  £0.62 (2002:  £1.41;  2001:  £1.50).  Of  the  options  outstanding  at
31 December  2003  6,930,536 were  exercisable  (2002:  4,409,916;  2001:  3,789,890)  and  had  a  weighted  average  exercise  price  of  £6.24
(2002: £6.84; 2001: £6.04).

Share retention plan

In  2001,  the  Group  adopted  the  Lloyds  TSB  Group  plc  Share  Retention  Plan.  Options  granted  under  this  scheme  are  not  subject  to  any  performance
conditions.  The  option  granted  in  2001  was  made  speciﬁcally  to  facilitate  the  recruitment  of  Mr  Daniels, has  a  total  exercise  price  of  £1, and will be
exercisable in the six month period beginning 31 December 2004.

Share retention plan

Outstanding at 1 January and 31 December

The weighted average remaining vesting period as at 31 December 2003 was 1 year.

Lloyds TSB Group plc Share Plan 2003

2003
Number of
shares

216,763

In March 2003, the Group adopted the Lloyds TSB Group plc Share Plan 2003. Options granted under this scheme are not subject to any performance
conditions.  The  option  granted  in  2003  was  made  speciﬁcally  to  facilitate  the  recruitment  of  Mr  Targett, has  a  total  exercise  price  of  £1, and will  be
exercisable in the six month period beginning 31 December 2005.

Lloyds TSB Group plc Share Plan 2003

Outstanding at 1 January 
Granted in the year 

Outstanding at 31 December 

2003
Number of
shares

–
331,125

331,125

The weighted average remaining vesting period as at 31 December 2003 was 2 years.

Save-As-You-Earn scheme

Eligible employees may enter into contracts through the Save-As-You-Earn (SAYE) scheme to save up to £250 per month and, at the expiry of a ﬁxed term of
three or ﬁve years, have the option to use these savings within six months of the expiry of the ﬁxed term to acquire shares in the Group at a discount, which
is currently 20 per cent of the market price at the date the options were granted. Grants in periods up to 31 December 2001 also had options exercising
after seven years.

SAYE scheme

Outstanding at 1 January
Granted
Exercised
Forfeited/cancelled

2003

Number of
options

2003
Weighted
average
exercise price
(pence)

2002

Number of
options

2002
Weighted
average
exercise price
(pence)

2001

Number of
options

104,548,147
100,863,926
(4,267,120)
(76,461,524)

489.55
289.23
355.14
483.43

106,806,493
35,113,451
(18,847,753)
(18,524,044)

479.30
508.28
409.39
547.53

136,169,743
23,850,747
(44,897,336)
(8,316,661)

2001
Weighted
average
exercise price
(pence)

404.03
548.29
283.69
500.73

Outstanding at 31 December

124,683,429

335.85

104,548,147

489.55

106,806,493

479.30

The weighted average fair value of options granted in the year was £0.85 (2002: £1.75; 2001: £2.24). Of the options outstanding at 31 December 2003
3,422,122 were  exercisable  (2002:  3,923,030;  2001: 1,411,511)  and  had  a  weighted  average  exercise  price  of  £5.60 (2002:  £5.87;  2001  £3.81).
In 2003 cancellations of approximately 56 million shares (2002: approximately 14 million; 2001: approximately 6 million) are included in the above amounts.

164 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

The  ranges  of  exercise  prices,  weighted  average  fair  values  and  weighted  average  contractual  life  for  the  options  granted  under  the  Executive  and  SAYE
schemes outstanding at 31 December 2001, 2002 and 2003 are shown in the table below:

2003
Executive

2003
SAYE

2002
Executive

2002
SAYE

2001
Executive.

2001
SAYE.

Exercise price (pence)
Fair value (pence)
Weighted average remaining life (years)

242.50-887.50
62-209
7.8

253.00-768.00
85-295
3.5

242.50-887.50
63-209
7.7

160.40-768.00
67-295
2.8

242.50-887.50
63-209
7.9

160.40-768.00
67-295
2.8

The  ranges  of  exercise  prices,  weighted  average  exercise  prices,  weighted  average  remaining  contractual  life  and  number  of  options  outstanding  at
31 December 2003 for the Executive and SAYE schemes are as follows:

Exercise price range

£2 to £3
£3 to £4
£4 to £5
£5 to £6
£6 to £7
£7 to £8
£8 to £9

The fair value calculations are based on the following assumptions:

Risk-free interest rate
Expected life
Expected volatility
Expected dividend yield

Executive scheme

Weighted
average
remaining
life
(years)

Number of
options

332,406
1.18
8.93 12,206,579
9.62 1,529,464
5.64 3,949,876
7.29 4,085,411
8.06 8,656,469
4.73 2,240,700

Weighted
average
exercise
price
(pence)

244.61
386.81
430.00
541.84
661.44
720.07
870.27

Weighted
average
exercise
price
(pence)

284.01
348.00
450.60
546.15
632.00
722.16
–

SAYE scheme

Weighted
average
remaining
life
(years)

Number of
options

3.93 89,985,987
4.15 8,038,508
2.27 14,007,067
2.07 10,016,981
0.35 1,824,533
810,353
1.12
–
–

Executive

3.80%
5 years
38%
6.40%

SAYE

3.86%
3 or 5 years
38%
6.40%

Details of options outstanding in respect of stock compensation plans operated prior to 1 January 1995 are as follows:

2003

Lloyds TSB Group plc Executive Share Option Scheme (1989)
Lloyds TSB Group plc Executive Share Option Scheme 
Lloyds Bank Plc Senior Executives’ UK Share Option Scheme 1987

2002

Lloyds TSB Group Staff Share Save Scheme 
Lloyds TSB Group plc Executive Share Option Scheme (1989)
Lloyds TSB Group plc Executive Share Option Scheme 
Lloyds Bank Plc Senior Executives’ UK Share Option Scheme 1987
Lloyds TSB Group Rollover Scheme (formerly Lloyds Abbey Life)

Weighted
average
option
Number of
price at
options at 31 December

Number of
shares as
to which
options were
exercisable at
(pence) 31 December

31 December

Number
of options
lapsed
during year

Number
of options
exercised
during year

–
87,889
52,728

–
282.50
200.70

–
87,889
52,728

140,617

140,617

–
–
–

–

48,680
23,008
35,152

106,840

Weighted
average
option
Number of
price at
options at 31 December

Number of
shares as
to which
options were
exercisable at
(pence) 31 December

Number
of options
lapsed
during year

Number
of options
exercised
during year

31 December

–
48,680
110,897
87,880
–

247,457

–
207.0
282.5
200.7
–

–
48,680
110,897
87,880
–

28,086
–
–
–
–

37,869
40,566
26,671
35,152
18,678

247,457

28,086

158,936

Weighted
average
exercise
price
(pence)

162.50
–
201.60

Weighted
average
exercise
price
(pence)

161.0
141.7
282.5
200.6
146.6

LLOYDS TSB GROUP   165

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

e Earnings per share

Basic  earnings  per  share  under  US  GAAP  differ  from  UK  GAAP  (see  note  12)  only  to  the  extent  that  income  calculated  under  US  GAAP  differs  from
UK GAAP.

Diluted  earnings  per  share  measures  the  effect  that  existing  share  options  would  have  on  the  basic  earnings  per  share  if  they  were  to  be  exercised,  by
increasing the number of ordinary shares, although any options that are anti-dilutive are excluded from this calculation. An option is considered anti-dilutive
when the value of the exercise price exceeds the market price. Under US GAAP certain incentive plan shares, for which the trustees have waived all dividend
and voting rights, have also been included in the calculation of diluted earnings per share.

Basic
Net income (US GAAP)
Weighted average number of ordinary shares in issue
Earnings per share

Diluted
Net income (US GAAP)
Weighted average number of ordinary shares in issue
Earnings per share

2003

2002

2001

£3,231m
5,581m
57.9p

£3,231m
5,600m
57.7p

£1,753m
5,570m
31.5p

£1,753m
5,600m
31.3p

£1,635m
5,533m
29.5p

£1,635m
5,595m
29.2p

The  weighted  average  number  of  anti-dilutive  shares  excluded  from  the  calculation  of  diluted  earnings  per  share  was 71 million  at  31 December 2003
(2002: 17 million; 2001: 9 million).

f Derivatives

Under UK GAAP, 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  arise if  these  instruments  were  carried  at  market  value  are
therefore not recognised. 

For the purposes of US GAAP, the Group believes that derivatives that are hedges under UK GAAP do not qualify for hedge accounting under the provisions
of SFAS No. 133; prior to the adoption of SFAS No. 133, such exposures did not qualify for hedge accounting under US GAAP either and therefore there
was no transition adjustment in respect of SFAS No. 133. Accordingly these exposures have been marked to market, with the resulting gains and losses
taken directly to income. In addition, an adjustment to measure embedded derivatives that are not deemed to be clearly and closely related to the underlying
host contract at their fair value has been included within unrecognised gains and losses during the year. The movement in the US GAAP adjustment arising
is summarised below:

Balance at 1 January
Exchange and other adjustments
Net losses recognised in the year
Unrecognised gains (losses) arising during the year

Adjustments on disposal of businesses

Balance at 31December

2003
£m

(98)
(10)
150
22

172
12

76

2002
£m

(417)
14
396
(91)

305
–

(98)

2001
£m.

(251)
(6)
230
(390)

(160)
–

(417)

These activities are discussed more fully on pages 53 to 55 and in note 47 on page 137.

The application of EITF 02-3 ‘Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities’, which does not allow the recognition of an unrealised gain or loss at the inception of a derivative contract unless the models
used to value these contracts use market observable inputs, has not had an impact on Lloyds TSB Group’s US GAAP ﬁnancial statements. The fair value of
these contracts is calculated using quoted prices in an active market or prices where the fair value is determined using a valuation technique that incorporates
observable market data.

166 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

g Investment securities

Under UK GAAP investment securities are held at amortised cost except within the long-term insurance businesses where the securities are held at market
value, with unrealised gains and losses taken to the income statement in the period to which they relate.

Under SFAS No. 115 all debt securities and equity shares are classiﬁed and disclosed as either held-to-maturity, available-for-sale or trading. Those classiﬁed
as held-to-maturity are measured at amortised cost. Available-for-sale securities are measured at fair value with unrealised gains and losses excluded from
the  income  statement  and  reported  net  of  tax  and  minority  interests  as  a  separate  component  of  other  comprehensive  income.  Trading  securities  are
measured at fair value with unrealised gains and losses included in the income statement. Debt securities and equity shares categorised as available-for-
sale under US GAAP give rise to an adjustment to accumulated other comprehensive income as detailed on page 153.

The disclosures for investment securities in the tables below include those held within the banking business as reported in notes 18 and 19 and those held
within the insurance business. Securities held by the general insurance business are included within notes 18 and 19 under UK GAAP; for the purposes of
US  GAAP  they  are  classiﬁed  within  insurance  activities.  At  31 December 2003,  the  book  and  market  values  of  these  securities  were  £396 million
(2002: £297 million). The Group had no held-to-maturity securities at 31 December 2003 or 31 December 2002.

Proceeds from sales and maturities of available-for-sale investment 
debt securities and equity shares
Gross realised gains
Gross realised losses

Net amount sold

2003
£m

14,448
(136)
47

14,359

2002
£m

15,502
(197)
34

15,339

Realised  gains  and  losses  are  computed  using  the  weighted  average  cost  method.  Gross gains of £13 million (2002: £nil) were recorded  on  securities
transferred from available-for-sale to trading.

2003

Available-for-sale investment securities:
UK government
Securities of the US treasury and US government agencies
European governments
Other government securities
Other public sector securities
Bank and building society certiﬁcates of deposit
Corporate debt securities
Mortgage backed securities
Other asset backed securities
Other debt securities

Debt securities
Equity shares

Of which:
Banking
Insurance

Amortised
cost
£m

734
1,624
15
807
75
2,515
5,483
2,211
3,942
1,313

18,719
35

18,754

13,380
5,374

18,754

Gross
unrealised
gains
£m

Gross
unrealised
losses
£m

46
13
1
22
1
–
152
2
12
3

252
97

349

133
216

349

(3)
(11)
–
(3)
(2)
–
(33)
(1)
(3)
(1)

(57)
(1)

(58)

(24)
(34)

(58)

Carrying
value
£m

777
1,626
16
826
74
2,515
5,602
2,212
3,951
1,315

18,914
131

19,045

13,489
5,556

19,045

At 31 December 2003, the aggregate amount of unrealised losses outstanding for less than 12 months was £40 million, and related to investment securities
with a fair value of £651 million; the aggregate amount of unrealised losses outstanding for more than 12 months was £18 million, and related to investment
securities with a fair value of £206 million. These are generally corporate and government securities and the changes in fair value are primarily caused by
movements in interest rates rather than movements in credit ratings. Accordingly, Lloyds TSB Group considers that these unrealised losses are temporary in
nature and accordingly no charge has been made for other-than-temporary impairment. The amortised cost includes provisions of £105 million that have
been raised under UK GAAP; these provisions are considered as permanent under US GAAP and no further provisions are deemed necessary.

LLOYDS TSB GROUP   167

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

2002

Available-for-sale investment securities:
UK government
Securities of the US treasury and US government agencies
European governments
Other government securities
Other public sector securities
Bank and building society certiﬁcates of deposit
Corporate debt securities
Mortgage backed securities
Other asset backed securities
Other debt securities

Debt securities
Equity shares

Of which:
Banking
Insurance

Amortised
cost
£m

622
1,740
106
1,159
70
3,147
4,288
893
2,817
1,478

16,320
38

16,358

11,603
4,755

16,358

Maturity of investment debt securities:
2003
Available-for-sale
Amortised cost
Fair value

2002
Available-for-sale
Amortised cost
Fair value

h Own shares

Gross
unrealised
gains
£m

Gross
unrealised
losses
£m

Carrying
value
£m

676
1,736
106
1,213
73
3,148
4,420
892
2,820
1,484

16,568
67

16,635

11,635
5,000

16,635

–
(7)
–
(874)
–
–
(25)
(1)
(9)
(3)

(919)
(5)

(924)

(899)
(25)

(924)

54
3
–
928
3
1
157
–
12
9

1,167
34

1,201

931
270

1,201

Due
between
1 and 5
years
£m

Due
within
1 year
£m

Due
between
5 and 10
years
£m

Due over
10 years
£m

No ﬁxed
maturity
£m

Total
£m

3,011
3,010

7,121
7,100

4,361
4,433

4,078
4,216

148
155

18,719
18,914

3,833
3,847

4,941
4,941

3,837
3,873

3,471
3,657

238
250

16,320
16,568

Additional own  shares  held  of  £154 million  at  31 December 2003  (2002:  £166 million)  have  been  netted  off  against  Additional  Paid-in  Capital  within
Shareholders’ equity in accordance with ARB No. 51. This relates to the amount of Lloyds TSB Group plc shares held within the long-term assurance funds
that have not been deducted from equity under UK GAAP.

168 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

i Deferred taxation

In accordance with the provisions of SFAS No. 109, the US GAAP deferred tax liability is:

Deferred tax liabilities
Assets used in the business
Assets leased to customers
Transfers from long-term business fund (see note 9)
Value of business acquired
Deferred acquisition costs
Pension proﬁt recognition
Other

Total liabilities

Deferred tax assets
Goodwill
Loan loss allowance
Tax losses:
– Pensions business
– Other
Speciﬁc loan loss allowance
Pension schemes
Unrealised losses on trading securities
Other

Total assets 

Valuation allowance

Valuation allowance

2003
£m

10
1,593
110
496
267
50
263

2,789

(315)
(122)

(1,353)
(394)
(22)
(508)
(15)
(317)

(3,046)

1,701

1,444

2002
£m

(21)
1,696
–
543
209
167
277

2,871

(335)
(104)

(1,362)
(265)
(67)
(602)
(20)
(421)

(3,176)

1,727

1,422

Scottish Widows has a signiﬁcant with-proﬁts pensions business. This business is subject to UK corporation tax on the basis of a notional return determined
by the UK taxation authorities. To the extent that the actual return from the business is less than the notional return, tax losses accumulate which may be
carried  forward  and  offset  against  excess  returns  in  future  years.  The  value  of  these  losses  at  31 December 2003  was  £1,140 million
(2002: £1,170 million). Excess returns do not occur regularly and are only likely to be triggered in the future if interest rates increase signiﬁcantly or there
is signiﬁcant volatility in the markets or the actuarial valuation basis alters signiﬁcantly. Given the current low interest rate environment and in view of the
fact that the actuarial valuation basis is currently considered unlikely to alter signiﬁcantly, in the opinion of management it is more likely than not that these
losses will not be realised and therefore a full valuation allowance has been established against this balance. 

A further valuation allowance of £246 million (2002: £222 million) has been established against other tax losses which are not expected to be utilised in
the foreseeable future. Under UK tax legislation, certain capital losses may only be offset against taxable gains of a particular type and consequently the
associated deferred tax assets are less certain of realisation. Assessments have been made as to the likelihood of gains arising that can be offset against
these losses and, to the extent that it is more likely than not that these losses will not be realised, appropriate valuation allowances have been established.
In  relation  to  other  tax  losses,  the  pattern  of  utilisation  of  losses  over  previous  years  has  been  reviewed  together  with  gains  that  may  be  realised  in  the
foreseeable future and an appropriate valuation allowance established to the extent that it is more likely than not that these losses will not be realised.

A deferred tax asset of £315 million (2002: £335 million) has been recognised as a result of the different accounting and tax treatments for goodwill arising
upon acquisition of companies and businesses. There is currently no expectation that these businesses will be disposed of and therefore in the opinion of
management it is more likely than not that these losses will not be realised. Accordingly, a full valuation allowance has been established against this balance.

Tax losses

The Group has the following tax losses available to be carried forward and offset against the future taxable proﬁts of certain subsidiaries. The majority of the
losses may be carried forward indeﬁnitely.

Trading losses
Capital losses
Pensions business

2003
£m

1,741
1,082
3,800

6,623

2002
£m

1,340
786
3,900

6,026

LLOYDS TSB GROUP   169

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

US GAAP reconciliation

The following tables reconcile the UK GAAP tax charge and deferred tax liability to the US GAAP tax charge and deferred tax liability as disclosed on pages
154 and 155.

UK GAAP Proﬁt and loss tax charge
Deferred tax – US GAAP
Deferred tax – US GAAP reconciling items
Disposed businesses

US GAAP Proﬁt and loss tax charge for continuing operations

UK GAAP Deferred tax liability
Deferred tax – UK pension asset
Deferred tax – US GAAP
Deferred tax - US GAAP reconciling items
Other items*

US GAAP Deferred tax liability

2003
£m

1,025
(21)
(83)
(89)

832

2003
£m

1,376
(916)
39
1,231
(286)

1,444

2002
£m

766
(25)
(165)
(81)

495

2001
£m.

877
(52)
(296)
(81)

448

2002
£m

1,313
(854)
60
1,151
(248)

1,422

* Under UK GAAP applicable to banking groups, the Group accounts for its life assurance operations using the embedded value basis of accounting and the
shareholder’s and policyholders’ interests are accounted for as one-line items. Under US GAAP the constituent parts of the shareholder’s and policyholders’
interests are separately disclosed and as a result of this reclassiﬁcation the total deferred tax liability has been decreased. There is no impact on the underlying
shareholder’s equity.

j Loan impairment

At 31 December 2003, the Group estimated that there was no difference between the carrying value of its loan portfolio on the basis of SFAS No. 114 and
its value in the UK GAAP ﬁnancial statements. Impaired loans are those reported as non-performing on page 110, less those loans which are outside the
scope of SFAS No. 114, and amounted to £678 million (2002: £629 million). The impairment reserve in respect of these loans estimated in accordance
with the provisions of SFAS No. 114 was £462 million (2002: £412 million). During the year ended 31 December 2003, impaired loans, including those
excluded  from  SFAS  No.  114,  averaged  £1,424 million  (2002:  £1,247  million)  and  interest  income  recognised  on  these  loans  was  £25 million
(2002: £31 million). 

k Signiﬁcant Group concentrations of credit risk

SFAS No. 107 ‘Disclosure about Fair Value of Financial Instruments’ states that concentrations of credit risk exist if a number of counterparties are engaged
in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes
in economic or other conditions. The Group’s exposure to credit risk is concentrated in the United Kingdom where the majority of the Group’s activities are
conducted and is detailed further in note 17.

l Repos and reverse repos

The Group enters into reverse repo transactions which are accounted for as collateralised loans. It is the Group’s policy to seek collateral which is at least
equal  to  the  amount  loaned.  At  31 December 2003,  the  fair  value  of  collateral  accepted  under  reverse  repo  transactions  that  the  Group  is  permitted  by
contract or custom to sell or repledge was £2,077 million (2002: £1,295 million). Of this, £255 million (2002: £139 million) was sold or repledged as
at 31 December 2003. The remainder has been held for continuing use within the business. The Group also enters into repos which are accounted for as
secured borrowings. As at 31 December 2003, the carrying value of assets that have been pledged as collateral under repo transactions where the secured
party is permitted by contract or custom to sell or repledge was £1,714 million (2002: £1,552 million).

m Variable interest entities

In  January  2003,  the  FASB  released  FIN  46  ‘Consolidation  of  Variable  Interest  Entities’  and  subsequently  issued  a  revised  version,  FIN  46-R,  in
December 2003. FIN 46-R changes the method of determining whether certain entities should be included in the Group’s consolidated ﬁnancial statements.
An entity is called a variable interest entity (VIE) and is subject to the requirements of FIN 46-R if it has:

• equity that is insufﬁcient to permit the entity to ﬁnance its activities without additional subordinated support; or

• equity investors that cannot make signiﬁcant decisions about the entity’s operations, or that do not absorb the expected losses or receive the majority of

the expected gains.

A VIE is consolidated by its primary beneﬁciary, which is the party involved with the VIE that has a majority of the expected losses or a majority of the
expected returns or both.

The provisions of FIN 46-R have been applied immediately by Lloyds TSB Group to VIEs created on or after 1 February 2003; for VIEs created before that
date, FIN 46-R becomes effective in 2004. The implementation of FIN 46-R has resulted in the consolidation of VIEs increasing total assets by £86 million.

The nature of the activities of VIEs in which Lloyds TSB Group has a signiﬁcant variable interest include:

Financing vehicles

These entities have predominantly pre-determined activities, the nature of which are primarily lending and investments and are undertaken in  order to
improve the efﬁciency of  Lloyds TSB Group’s normal lending and deposit taking activities. In determining whether to enter into these structures, careful
consideration has been given to ensure the structures meet Lloyds TSB Group’s risk management and control requirements.

170 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

Leasing partnerships

These relate to limited partnerships which have been created with a third party investor to acquire signiﬁcant capital items which are then leased out to third
parties, typically on an operating lease.

Securitisation conduit vehicles

These vehicles are investment-purchasing companies which purchase asset-backed securities (which are backed by third party assets) from the market and
initially from Lloyds TSB Group. These vehicles form part of Lloyds TSB Group’s overall securitisation conduit and are consolidated under UK GAAP as these
are considered to be directly controlled by Lloyds TSB Group.

Venture capital enterprises

These relate to  start-up  entities  which  typically  have  minimal  equity  investment,  with  the  bulk  of  the  ﬁnancing  provided  by  the  Group  in  the  form  of
subordinated lending. Without this lending, the entities would not have sufﬁcient capital to ﬁnance their activities.

The following table represents the carrying amounts of classiﬁcation of consolidated assets that are collateral for those VIE operations that are (1) already
consolidated under UK and US GAAP which would continue to be consolidated under US GAAP and (2) those VIEs created after 1 February 2003 which
fall to be consolidated under FIN 46-R:

31 December 2003

Cash
Tangible ﬁxed assets
Investments
Loans
Other assets

Total assets of consolidated VIEs

The total assets of consolidated VIEs is attributable to the following types of vehicles:

31 December 2003

Financing vehicles
Leasing partnerships
Securitisation conduit vehicles
Venture capital enterprises

Currently
consolidated VIEs
£m

VIEs created after
1 February 2003
£m

1
1,408
7,349
385
48

9,191

–
–
–
–
86

86

Currently
consolidated VIEs
£m

VIEs created after
1 February 2003
£m

4,707
1,431
3,053
–

9,191

–
–
–
86

86

Total
£m

1
1,408
7,349
385
134

9,277

Total
£m

4,707
1,431
3,053
86

9,277

The total assets and maximum exposure to loss at 31 December 2003 for those VIEs created before 1 February 2003 where Lloyds TSB Group believes it
is the primary beneﬁciary and which have not been consolidated under UK or US GAAP are analysed in the table below. Lloyds TSB Group anticipates it
would have to  consolidate these entities in its US GAAP ﬁnancial statements from 1 January 2004. For the purposes of these disclosures, maximum
exposure to loss is considered to be the total assets, equivalent to Lloyds TSB Group’s interest. Lloyds TSB Group does not believe that losses arising from
its involvement in these entities will be material.

Securitisation conduit vehicles
Venture capital enterprises

Total assets
£m

1,308
630

1,938

Maximum
exposure to loss
£m

1,308
630

1,938

The following table shows the total assets and maximum exposure to loss, as at 31 December 2003, for those entities where Lloyds TSB Group has a
signiﬁcant variable interest in a VIE but is not determined to be the primary beneﬁciary:

Venture capital enterprises

Total assets
£m

2,356

Maximum
exposure to loss
£m

2,356

The FASB continues to provide additional guidance on implementing FIN 46-R through FASB Staff Positions.  As this guidance is issued, the Group will
continue  to  review  the  status  of  VIEs  it  is  involved  with  and  as  a  result  of  any  changes  in  guidance  additional  VIEs  may  ultimately  be  required  to  be
consolidated.

n Guarantees

Lloyds TSB Group utilises a number of different types of lending-related ﬁnancial instruments, such as commitments and guarantees, to meet the ﬁnancing
needs  of  its  customers.  These  are  discussed  more  fully  in  note 46. Most  of  these  guarantees  and  commitments  expire  without  being  drawn.  Under  the
provisions of FIN 45, which establishes accounting and disclosure requirements for guarantors, a liability is required to be recognised for the fair value of
guarantees issued from 1 January 2003. The fair value of the obligation is, in the substantial majority of cases, the amount of premium received under the
contract. The adoption of FIN 45 did not have a material impact on Lloyds TSB Group’s US GAAP ﬁnancial statements.

LLOYDS TSB GROUP   171

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

o Trust-preferred securities

Following the application of SFAS No. 150, the trust-preferred securities that were previously classiﬁed as minority interests have been reclassiﬁed as debt
in Lloyds TSB Group’s US GAAP ﬁnancial statements. At 31 December 2003, these amounted to £549 million and further details of these securities can
be found in note 40. The amount that previously would have been classiﬁed as minority interests in the US GAAP income statement has been reclassiﬁed
as an effect of changes in accounting principle and amounted to £42 million, net of tax. In future years this will be included within interest expense.

p Insurance activities 

The following tables summarise the adjustments to the proﬁt and loss account and balance sheet which would arise from the application of US GAAP to the
Group’s insurance businesses.

Proﬁt and loss account

Note

2003
Life
£m

2003
General
£m

2003
Total
£m

2002*
Life
£m

2002
General
£m

2002*
Total
£m

2001*
Life
£m

2001
General
£m

2001*
Total.
£m.

Income from long-term 
assurance business
Other interest and dividends
Insurance premiums
Other income
Policyholder beneﬁts and 
claims expense
Movement in undistributed 
policyholder allocations
Insurance underwriting, 
operating and acquisition expenses
Depreciation
Amortisation of value of long-term 
assurance business acquired
Revenue and expense recognition
Equalisation provision

Total adjustments before tax 

i
i
i
i

i

i
i

ii

(453)
1,331
1,551
1,020

(2,814)

118

(676)
(15)

(188)
(13)
–

(139)

Balance sheet

Long-term assurance business attributable to the shareholder
Long-term assurance assets attributable to policyholders
Cash and due from banks
Trading account assets
Tangible ﬁxed assets
Deferred acquisition costs
Value of long-term assurance business acquired
Separate account assets
Other assets
Indebtedness of related parties
Long-term assurance liabilities to policyholders
Debt securities in issue
Policyholder liabilities
Undistributed policyholder allocations
Equalisation provision
Other liabilities
Separate account liabilities
Indebtedness to related parties

Total adjustments before tax

* restated (see note 1)

–
–
–
–

–

–

2
–

–
(33)
10

(21)

(453)
1,331
1,551
1,020

294
1,187
1,525
(2,101)

(2,814)

(1,394)

118

1,588

(674)
(15)

(188)
(46)
10

(760)
(16)

(725)
–
–

(160)

(402)

–
–
–
–

–

–

2
–

–
(3)
10

9

294
1,187
1,525
(2,101)

30
1,019
1,232
(2,006)

(1,394)

(2,033)

1,588

2,427

(758)
(16)

(725)
(3)
10

(697)
(23)

(305)
–
–

(393)

(356)

–
–
–
–

–

–

(4)
–

–
24
8

28

2003
Life
£m

2003
General
£m

2003
Total
£m

2002*
Life
£m

2002
General
£m

Note

ii
iii

iv

v
ii
viii

iii

vi
vii

viii

(6,481)
(50,078)
3,587
24,212
148
902
2,094
22,494
763
2,200
50,078
(256)
(24,946)
(1,772)
–
(235)
(22,494)
(322)

(106)

–
–
–
–
–
(11)
–
–
–
–
–
–
–
–
51
–
–
–

40

(6,481)
(50,078)
3,587
24,212
148
891
2,094
22,494
763
2,200
50,078
(256)
(24,946)
(1,772)
51
(235)
(22,494)
(322)

(6,213)
(45,218)
2,117
24,664
157
709
2,282
18,945
1,014
1,588
45,218
(154)
(23,632)
(1,890)
–
(429)
(18,945)
(333)

(66)

(120)

–
–
–
–
–
(13)
–
–
33
–
–
–
–
–
41
–
–
–

61

30
1,019
1,232
(2,006)

(2,033)

2,427

(701)
(23)

(305)
24
8

(328)

2002*
Total
£m

(6,213)
(45,218)
2,117
24,664
157
696
2,282
18,945
1,047
1,588
45,218
(154)
(23,632)
(1,890)
41
(429)
(18,945)
(333)

(59)

172 LLOYDS TSB GROUP

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

i) Revenue recognition

Under  UK  GAAP  applicable  to  banking  groups,  the  Group  accounts  for  its  life  assurance  operations  using  the  embedded  value  basis  of  accounting.  An
embedded value is an actuarially determined estimate of the economic value of a life assurance company, excluding any value which may be attributed to
future new business. The embedded value is the sum of the net assets of the life assurance company and the present value of the in-force business. The
value  of  the  in-force  business  is  calculated  by  projecting  future  net  cash  ﬂows  using  appropriate  economic  and  actuarial  assumptions  and  the  result
discounted at a rate which reﬂects the shareholders’ overall risk premium. The change in the embedded value during any reporting period adjusted for any
dividends declared or capital injected, and grossed up at the underlying rate of corporation tax, is reﬂected in the Group’s proﬁt and loss account as income
from long-term assurance business.

US  GAAP  requires  that  results  of  the  life  assurance  business  should  be  reported  on  a  gross  basis  and  reﬂected  in  appropriate  captions  in  the  income
statement. Premiums from conventional with-proﬁts policies and other protection-type life insurance policies are recognised as revenue when due from the
policyholder.  Premiums  from  unitised  with-proﬁts  life  insurance  policies  and  investment  contracts,  which  have  minimal  mortality  risk,  are  reported  as
increases in policyholder account balances when received. Revenues derived from these policies consist of mortality charges, policy administration charges,
investment management fees and surrender charges that are deducted from policyholders’ accounts and are disclosed within other income.

Under US GAAP, premiums and policy charges received that relate to future periods are deferred until the period to which they relate. For limited payment
annuities,  the  excess  of  the  gross  premium  over  the  US  GAAP  net  beneﬁt  premium  is  deferred  and  amortised  in  relation  to  the  expected  future  beneﬁt
payments. For investment contracts, policy charges that beneﬁt future periods are deferred and amortised in relation to expected gross proﬁts.

ii) Value of long-term assurance business acquired 

Under US GAAP the value of the long-term assurance business acquired (‘VOBA’) is calculated at acquisition by discounting future earnings to a present
value. In subsequent years the VOBA is amortised over the premium recognition period for with-proﬁts life insurance and other protection-type insurance
policies using assumptions consistent with those used in computing policyholder beneﬁt provisions. VOBA for investment-type policies and unitised insurance
policies is amortised in relation to expected gross proﬁts. Expected gross proﬁts are evaluated regularly against actual experience and revisions made to allow
for the effect of any changes.

2003
£m

2,282
255
(443)

2,094

2002
£m

3,007
(108)
(617)

2,282

Balance at 1 January
Interest accrued on unamortised balance
Amortisation 

Balance at 31 December

Over the next 5 years the amount of VOBA expected to be amortised prior to interest accruals is: 
2004: £153 million
2005: £165 million
2006: £160 million
2007: £152 million
2008: £141 million

iii) Balance sheet

Under  UK  GAAP  applicable  to  banking  groups,  in  order  to  reﬂect  the  different  nature  of  the  shareholder’s  and  policyholders’  interests  in  the  long-term
assurance business these are shown separately as one-line items in the Group’s balance sheet. The value of the long-term assurance business attributable
to the shareholder comprises the net assets of the life assurance companies and the value of the in-force business. The assets attributable to policyholders
mainly comprise the investments held in the long-term assurance funds either on behalf of policyholders, or which have not yet been allocated to either the
policyholders or the shareholder. Liabilities to policyholders mainly comprise policyholder beneﬁt provisions.

Under  US  GAAP  the  constituent  parts  of  the  shareholder’s  and  policyholders’  interests  in  the  long-term  assurance  business  are  separately  disclosed.
Signiﬁcant differences also arise regarding the valuation of the constituent assets and liabilities, which are discussed further in the notes which follow.

iv) Investments

Under UK GAAP applicable to banking groups, debt securities and equity shares held within the long-term assurance funds are included in the Group’s
balance sheet at market value; investment properties are included at existing use value.

Under US GAAP, debt securities are classiﬁed as trading, available-for-sale or held-to-maturity; equity shares may only be classiﬁed as trading or available-
for-sale. Securities classiﬁed as trading are carried at current market value. Securities classiﬁed as available-for-sale are carried at current market value, and
unrealised gains and losses arising are held as a separate component of shareholders’ equity. Securities classiﬁed as held-to-maturity are carried at amortised
cost. In addition, US GAAP requires that all freehold and long leasehold properties should be carried at depreciated historic cost.

For those securities classiﬁed as available-for-sale, the disclosures required under SFAS No. 115 are presented in aggregate with the banking business on
pages 167 and 168.

v) Deferred acquisition costs

Under  UK  GAAP  applicable  to  banking  groups,  the  cost  of  acquiring  new  and  renewal  life  assurance  business  is  recognised  in  the  embedded  value
calculation as incurred.

Under US GAAP the costs incurred by the Group in the acquisition of new and renewal life insurance business are capitalised. These consist of the acquisition
costs,  principally  commissions,  marketing  and  advertising  and  the  administration  costs  associated  with  the  processing  and  policy  issuance,  typically
underwriting, together these are capitalised as an asset and amortised in relation to the proﬁt margin of the policies acquired. 

Deferred acquisition costs for conventional with-proﬁts life insurance and other protection type insurance policies are amortised in relation to premium income
using assumptions consistent with those used in computing policyholder beneﬁts provisions. Investment, universal life, and separate account contracts are
amortised in proportion to the estimated gross proﬁts arising from the contracts.

LLOYDS TSB GROUP   173

Notes to the accounts

50 Differences between UK GAAP and US GAAP (continued)

vi) Policyholder liabilities

Under UK GAAP applicable to banking groups, future policyholder beneﬁt provisions included in the Group’s balance sheet are calculated using net premium
methods for conventional with-proﬁts life insurance and other protection-type policies and are based on fund value for unitised with-proﬁts insurance policies
and  investment-type  policies.  Net  premiums  are  calculated  using  assumptions  for  interest,  mortality,  morbidity  and  expenses.  These  assumptions  are
determined as prudent best estimates at the date of valuation.

Under US GAAP, for unitised with-proﬁts insurance and other investment-type policies, the liability is represented by the policyholder’s account balance before
any applicable surrender charges. Policyholder beneﬁt liabilities for conventional with-proﬁts life insurance and other protection-type insurance policies are
developed using the net level premiums method. Assumptions for interest, mortality, morbidity, withdrawals and expenses were prepared using best estimates
at date of policy issue (or date of company acquisition by the Group, if later) plus a provision for adverse deviation based on Group experience. Interest
assumptions range from 4 per cent to 7 per cent.

vii) With-proﬁts business

With-proﬁts policies entitle the policyholder to participate in the surplus within the with-proﬁts life fund of the insurance company which issued the policy.
Regular bonuses are determined annually by the issuing company’s Appointed Actuary and its board of directors. The bonuses that may be declared are
highly correlated to the overall performance of the underlying assets and liabilities of the fund in which the contracts participate and are the subject of normal
variability and volatility. Terminal bonuses are paid on maturity of the contract and are designed to provide policyholders with a share of the total performance
of the issuing company during the period of the contract.

The contract for conventional with-proﬁts business written into the with-proﬁts fund provides that approximately 90 per cent of the surplus arising from the
net assets of the fund is allocated to policyholders in the form of annual bonuses. For unitised with-proﬁts business written into the with-proﬁts fund all of
the surplus is allocated to policyholders as bonus.

Under  UK  GAAP  all  amounts  in  the  with-proﬁts  fund  not  yet  allocated  to  policyholders  or  shareholders  are  recorded  in  the  liabilities  attributable  to
policyholders on the Group’s balance sheet.

Under US GAAP a liability is established for undistributed policyholder allocations. The excess of assets over liabilities in the with-proﬁts fund is allocated to
the policyholders and shareholders in accordance with the proportions prescribed by the contracts. The remaining liability comprises the obligation of the
insurance company to the policyholders.

viii) Separate account assets and liabilities

Under UK GAAP, segregated accounts are established for policyholder business for which policyholder beneﬁts are wholly or partly determined by reference
to speciﬁc investments or to an investment-related index. This is referred to as linked business. Linked business can either be unit-linked, property-linked
or index-linked. In the case of the unit-linked and property-linked business the policyholders bear the investment risk. The Group bears the investment risk
relating to the index-linked business. 

Under US GAAP only those assets where the policyholder bears the investment risk are reported as separate account assets and liabilities.

2003
£m

24
1,911

1,935
(43)

1,892
(12)

1,880
(1,911)

(31)

2002
£m

15
1,908

1,923
(39)

1,884
28

1,912
(1,908)

4

2001
£m

6
1,872

1,878
(60)

1,818
75

1,893
(1,872)

21

51 Parent company disclosures

a Company proﬁt and loss account

Net interest income
Dividends received from group undertakings

Total income
Operating expenses

Proﬁt on ordinary activities before tax
Taxation (charge) credit 

Proﬁt on ordinary activities after tax
Dividends

(Loss) proﬁt for the year

174 LLOYDS TSB GROUP

Notes to the accounts

51 Parent company disclosures (continued)

b Company cash ﬂow statement

Net cash inﬂow (outﬂow) from operating activities
Returns on investments and servicing of ﬁnance:
– Dividends received from group undertakings
– Interest paid on subordinated liabilities (loan capital)

Net cash inﬂow from returns on investments and servicing of ﬁnance
Taxation:
– UK corporation tax received
Capital expenditure and ﬁnancial investment:
– Capital lending to subsidiaries
– Repayments of capital lending by subsidiaries
Net cash outﬂow from capital expenditure and ﬁnancial investment 
Equity dividends paid

Net cash inﬂow (outﬂow) before ﬁnancing
Financing:
– Cash proceeds from issue of ordinary share capital and sale of own shares

held in respect of employee share schemes
– Issue of subordinated liabilities (loan capital)
– Repayments of subordinated liabilities (loan capital)
Net cash inﬂow from ﬁnancing

Increase in cash

c Reconciliation to US GAAP

Shareholders’ funds (UK GAAP)
Dividends receivable
Dividends payable
Revaluation of shares in group undertakings

Shareholders’ equity (US GAAP)

d Reconciliation of the movements in shareholders’ equity under US GAAP

Proﬁt after tax (UK GAAP)
Dividends receivable
Share compensation schemes

Net income (US GAAP)
Dividends paid

Issue of shares
Movements in relation to own shares
Share compensation schemes
Revaluation of shares in group undertakings

Shareholders’ equity at 1 January

Shareholders’ equity at 31 December

* restated (see note 1)

2003
£m

71

1,908
(96)

1,812

119

–
–
–
(1,908)

94

32
–
(14)
18

112

2003
£m

9,624
(1,314)
1,314
2,268

11,892

2003
£m

1,880
(3)
(113)

1,764
(1,908)

(144)
45
(6)
113
1,694

1,702
10,190

11,892

2002
£m

20

1,903
(34)

1,869

79

(964)
–
(964)
(1,903)

(899)

77
958
–
1,035

136

2002
£m

1,912
(5)
(44)

1,863
(1,903)

(40)
77
5
44
(3,317)

(3,231)
13,421

10,190

2001
£m

(68)

1,736
(41)

1,695

62

(100)
100
–
(1,738)

(49)

197
–
(100)
97

48

2002*
£m

7,954
(1,311)
1,311
2,236

10,190

2001
£m

1,893
(136)
(46)

1,711
(1,738)

(27)
194
1
46
(383)

(169)
13,590

13,421

LLOYDS TSB GROUP   175

Shareholder information

Dividends

Lloyds TSB Group plc has paid an interim and ﬁnal dividend each year since the merger of TSB Group plc and Lloyds Bank Plc in 1995. Dividends are paid
in May and October and the record date for the purpose of determining the shareholders who will be entitled to a dividend is established a number of weeks
before the dividend payment date. TSB Group plc, which was re-named Lloyds TSB Group plc after the merger, has paid an interim and ﬁnal dividend every
year since its ﬂotation on the London Stock Exchange in September 1986, with the exception of 1986 when no ﬁnal dividend was paid. Lloyds TSB Bank
has paid a dividend every year since its incorporation as Lloyds Banking Company Limited in 1865. 

Lloyds TSB Group plc's ability to pay dividends is restricted under UK company law. Dividends may only be paid if distributable proﬁts are available for that
purpose. In the case of a public limited company, a dividend may only be paid if the amount of net assets is not less than the aggregate of the called-up
share  capital  and  undistributable  reserves  and  if  the  payment  of  the  dividend  will  not  reduce  the  amount  of  the  net  assets  to  less  than  that  aggregate.
In addition, a company cannot pay a dividend if any of its UK insurance subsidiaries is insolvent on a regulatory valuation basis or in the case of regulated
entities, if the payment of a dividend results in regulatory capital requirements not being met. Similar restrictions exist over the ability of Lloyds TSB Group
plc's subsidiary companies to pay dividends to their immediate parent companies. Furthermore, in the case of Lloyds TSB Group plc, dividends may only
be paid if sufﬁcient distributable proﬁts are available for distributions due in the ﬁnancial year on certain preferred securities. The board has the discretion
to  decide  whether  to  pay  a  dividend  and  the  amount  of  any  dividend.  In  making  this  decision,  the  board  is  mindful  of  the  level  of  dividend  cover  and,
consequently, proﬁt growth may not necessarily result in increases in the dividend. The board recognises the importance attached by shareholders to the
Lloyds TSB Group’s dividend. In the case of American Depositary Shares (‘ADSs’), dividends are paid through The Bank of New York which acts as paying
and transfer agent.

The  table  below  sets  out  the  interim  and  ﬁnal  dividends  which  were  declared  in  respect  of  the  ordinary  shares  for  ﬁscal  years  1999  through  2003.
The sterling amounts have been converted into US dollars at the Noon Buying Rate in effect on each payment date, except for the 2003 ﬁnal dividend which
has been translated at the Noon Buying Rate on 31 December 2003.

1999
2000
2001
2002
2003

Interim dividend
per share
£

Interim dividend
per share
$

Final dividend
per share
£

Final dividend
per share
$

0.081
0.093
0.102
0.107
0.107

0.134
0.136
0.149
0.167
0.178

0.185
0.213
0.235
0.235
0.235

0.289
0.306
0.344
0.374
0.419

There are no UK governmental laws, decrees or regulations that affect the remittance of dividends or other shareholder payments to non-residents of the UK
who hold shares of Lloyds TSB Group plc.

Trading market for shares

The ordinary shares of Lloyds TSB Group plc are listed and traded on the London Stock Exchange under the symbol ‘LLOY.L’. The prices for shares as quoted
in the ofﬁcial list of the London Stock Exchange are in pounds sterling. The following table shows the reported high and low closing prices for the ordinary
shares  on  the  London  Stock  Exchange.  This  information  has  been  extracted  from  publicly  available  documents  from  various  sources,  including  ofﬁcially
prepared materials from the London Stock Exchange, and has not been prepared or independently veriﬁed by the Lloyds TSB Group.

Price per share (in pence)
High

Price per share (in pence)
Low

Annual prices:
2003
2002
2001
2000
1999
1998
Quarterly prices:
2003
Fourth quarter
Third quarter
Second quarter
First quarter
2002
Fourth quarter
Third quarter 
Second quarter
First quarter
Monthly prices:
February 2004
January 2004
December 2003
November 2003
October 2003
September 2003

176 LLOYDS TSB GROUP

483.00
817.00
772.00
774.50
1,060.00
1,070.50

448.00
483.00
476.75
459.00

591.00
665.00
817.00
775.00

476.25
473.75
448.00
414.25
444.25
442.00

295.75
427.50
590.00
517.00
725.00
575.50

396.00
413.75
326.00
295.75

427.50
456.50
624.00
680.00

447.75
449.75
404.25
396.00
407.75
413.75

Shareholder information

On 4 March 2004, the closing price of shares on the London Stock Exchange was 456 pence, equivalent to $8.32 per share translated at the Noon Buying
Rate of $1.825 per £1.00 on 4 March 2004.

Lloyds TSB Group plc's American Depositary Receipts (‘ADRs’) have been traded on the over-the-counter market in the US under the symbol ‘LLDTY’ since
March 2000. Since 27 November 2001 Lloyds TSB Group plc ADSs have been listed on The New York Stock Exchange under the symbol ‘LYG’. The prices
for Lloyds TSB Group plc's ADRs, as quoted below, are in US dollars. Each ADS represents four ordinary shares. The following table shows the reported high
and low closing prices for the ADRs in the over-the-counter market in the US.

Price per share (in US dollars)
High

Price per share (in US dollars)
Low

Annual prices:
2001 (to 26 November 2001) 
2000
Quarterly prices:
2001
Fourth quarter (to 26 November 2001) 
Third quarter 
Second quarter
First quarter

46.00
45.27

43.88
44.00
43.94
46.00

34.75
33.50

38.25
35.50
38.94
34.75

The following table shows the reported high and low closing prices for ADSs on the New York Stock Exchange.

Price per ADS (in US dollars)
High

Price per ADS (in US dollars)
Low

Annual prices:
2003
2002
2001 (from 27 November 2001) 
Quarterly prices:
2003
Fourth quarter
Third quarter
Second quarter
First quarter
2002
Fourth quarter
Third quarter
Second quarter
First quarter
Monthly prices:
February 2004
January 2004
December 2003
November 2003
October 2003
September 2003

32.55
48.55
44.99

32.55
31.16
32.35
29.79

37.75
41.84
48.55
45.30

36.36
35.50
32.55
28.84
29.96
28.88

19.65
27.85
41.30

27.07
26.43
20.98
19.65

27.85
28.97
38.30
39.16

33.58
33.04
28.57
27.07
28.22
26.47

On 4 March 2004, the closing price of ADSs on the New York Stock Exchange was $33.78.

Lloyds TSB Group plc does not know of any shareholder owning beneﬁcially, directly or indirectly, 5 per cent or more of the shares of Lloyds TSB Group plc,
or of any shareholder having more than 5 per cent of the voting rights.

Documents on display

The documents concerning us which are referred to herein may be inspected at the SEC. You may read and copy any document ﬁled or furnished by us at
the SEC's public reference rooms in Washington D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on
the reference rooms. The SEC also maintains a website at www.sec.gov which contains, in electronic form, each of the reports and other information that
we have ﬁled electronically with the SEC.

LLOYDS TSB GROUP   177

Taxation

UK taxation 

The following discussion is intended only as a general guide to current UK tax legislation, what is understood to be current UK Inland Revenue practice and
the terms of the current UK/US income tax treaty (the ‘New Treaty’) and the former UK/US income tax treaty (the ‘Old Treaty’), all of which are subject to
change at any time, possibly with retroactive effect. 

The New Treaty for the avoidance of double taxation with respect to taxes on income entered into force following the exchange of instruments of ratiﬁcation
by the UK Parliament and the US Senate on 31 March 2003. 

The UK Inland Revenue is the UK government department responsible for assessing and collecting UK tax revenues. The discussion is intended as a general
guide and only applies to persons who are the beneﬁcial owners of their ordinary shares or ADSs. References below to a US holder are to that term as
deﬁned,  and  subject  to  the  exclusions  described  in  the  introduction,  below  under  ‘US  federal  income  tax  considerations’.  It  may  not  apply  to  certain
shareholders or ADS holders, such as dealers in securities. 

Tax can be complicated and individual circumstances may need to be considered in more detail. Any person who is in any doubt as to his tax position should
consult his own professional adviser.

Taxation of chargeable gains

UK residents

A disposal (or deemed disposal) of ordinary shares or ADSs by a shareholder or holder of ADSs resident or (in the case of an individual) ordinarily resident
for tax purposes in the UK may, depending on the shareholder's or ADS holder's particular circumstances, and subject to any available exemption or relief,
give rise to a chargeable gain or an allowable loss for the purposes of UK taxation on chargeable gains.

Individuals, other than US holders, temporarily non-resident in the UK

A shareholder or ADS holder who is an individual and who has, on or after 17 March 1998, ceased to be resident and ordinarily resident for tax purposes
in the UK for a period of less than ﬁve years of assessment and who disposes of ordinary shares or ADSs during that period may be liable, on return to the
UK, to UK taxation on chargeable gains arising during the period of absence, subject to any available exemption, relief and/or foreign tax credit.

US holders

Subject to the provisions set out in the next paragraph in relation to temporary non-residents, US holders will not normally be liable for UK tax on chargeable
gains unless they carry on a trade, profession or vocation in the UK through a branch or agency and the ordinary shares or ADSs are or have been used or
held by or for the purposes of the branch or agency, in which case such US holder might, depending on individual circumstances, be liable to UK tax on
chargeable gains on any disposition of ordinary shares or ADSs. A US holder who is only temporarily not resident in the UK may, under anti-avoidance
legislation, still be liable for UK tax on chargeable gains realised, subject to any available exemption, relief and/or foreign tax credit.

A US holder who is an individual and who has, on or after 17 March 1998, ceased to be resident or ordinarily resident for tax purposes in the UK for a
period of less than ﬁve years of assessment and who disposes of ordinary shares or ADSs during that period may be liable, on return to the UK, to UK
taxation on chargeable gains arising during the period of absence, subject to any available exemption, relief and/or foreign tax credit.

Other non-UK resident persons

Subject to the provisions set out above under ‘Individuals, other than US holders, temporarily non-resident in the UK’, shareholders or ADS holders who are
neither resident nor ordinarily resident in the UK will not normally be liable for UK tax on chargeable gains unless they carry on a trade, profession or vocation
in the UK through a branch or agency and the ordinary shares or ADSs are or have been used or held by or for the purposes of the branch or agency, in
which case such shareholder or ADS holder might, depending on individual circumstances, be liable to UK tax on chargeable gains on any disposition of
ordinary shares or ADSs. An individual holder of ordinary shares or ADSs who is only temporarily not resident in the UK may, under anti-avoidance legislation,
still be liable for UK tax on chargeable gains realised, subject to any available exemption, relief and/or foreign tax credit.

Taxation of dividends

UK residents

Lloyds TSB Group will not be required to withhold tax at source when paying a dividend on the ordinary shares or ADSs.

An individual shareholder or ADS holder who is resident in the UK for tax purposes will be entitled to a tax credit in respect of any dividend received
from the Lloyds TSB Group and will be taxable on the gross dividend, which is the aggregate of the dividend received and related tax credit. The value
of the tax credit will be equal to one-ninth of the dividend received (and, therefore, 10 per cent of the gross dividend). The gross dividend will be treated
as an individual's marginal taxable income. The tax credit will, however, be treated as discharging the individual's liability to income tax in respect of
the gross dividend, unless and except to the extent that the gross dividend falls above the threshold for the higher rate of income tax. A UK resident
individual shareholder or ADS holder who is liable to income tax at the higher rate (currently 40 per cent) will be subject to tax at the rate applicable to
dividends  for  such  shareholders  or  ADS  holders  (currently  32.5  per  cent)  on  the  gross  dividend.  The  tax  credit  will  be  set  against  but  will  not  fully
discharge such shareholders’ or ADS holders’ tax liability on the gross dividend and they will have to pay additional tax equal to 22.5 per cent of the
gross dividend, being 25 per cent of the dividend received, to the extent that such sum, when treated as marginal income, falls above the threshold for
the higher rate of income tax.

There will be no payment of the tax credit or any part of it to an individual whose liability to income tax on the dividend and the related tax credit is less
than the tax credit, except where the individual holds the relevant shares through a personal equity plan or individual savings account and the dividend is
received into such plan or account on or before 5 April 2004.

UK resident shareholders or ADS holders who are not liable to UK tax on dividends, including pension funds and charities, will not be entitled to claim the
tax credits in respect of dividends although charities will be entitled to a payment by the UK Inland Revenue of a speciﬁed proportion of any dividend paid
by us to the charities on or before 5 April 2004, that proportion declining on a year by year basis.

178 LLOYDS TSB GROUP

Taxation

Subject to certain exceptions, such as for dealers in securities and for some insurance companies with overseas business, UK resident corporate shareholders
or ADS holders will generally not be subject to corporation tax in respect of dividends received from Lloyds TSB Group, but will not be entitled to the payment
of any tax credit with respect to the dividends.

US holders

Lloyds TSB Group will not be required to withhold tax at source when paying a dividend on the ordinary shares or ADSs to a US holder.

A US holder is entitled under the terms of the Old Treaty, in principle, to receive a payment from the UK Inland Revenue in respect of a dividend from the
Lloyds TSB Group in an amount equal to the tax credit (the ‘Tax Credit Amount’) to which a UK resident individual is generally entitled in respect of the
dividend. This is an amount equal to one-ninth of the dividend received. However, that entitlement is subject to a deduction withheld under the Old Treaty.
The amount of such deduction will equal the Tax Credit Amount, i.e. one-ninth of the dividend. Therefore, a US holder will not be able to claim any payment
from the UK Inland Revenue in respect of a dividend from Lloyds TSB Group.

The New Treaty does not provide for any such entitlement and a US holder will not be able to claim any payment from the UK Inland Revenue in respect
of a dividend from Lloyds TSB Group.

The UK does not currently apply a withholding tax on dividends under its domestic laws. Were such withholding imposed as permitted under the New Treaty,
the UK generally will be entitled in certain circumstances to impose a withholding tax at a rate of 15% on dividends paid to US holders. A US holder who
is subject to such withholding should be entitled to a credit for such withholding tax, subject to applicable limitations, against the US holder's US federal
income tax liability.

Other non-UK resident persons

Lloyds TSB Group will not be required to withhold tax at source when paying a dividend on the ordinary shares or ADSs to a holder, other than a US holder,
who is not resident for tax purposes in the UK.

Holders of ordinary shares or ADSs, other than US holders, who are not resident for tax purposes in the UK and who receive a dividend from the Lloyds
TSB Group will not have any further UK tax to pay in respect of the dividend, but will not normally be able to claim any additional payment in respect of
the dividend from the UK Inland Revenue under any applicable Double Tax Treaty.

Stamp duty and stamp duty reserve tax

UK residents, US holders and other non-UK resident persons

Any conveyance or transfer on sale of ordinary shares (whether effected using the CREST settlement system or not) will be subject to UK stamp duty or
stamp  duty  reserve  tax  (‘SDRT’).  The  transfer  on  sale  of  ordinary  shares  will  be  liable  to  ad  valorem  UK  stamp  duty  or  SDRT,  generally  at  the  rate  of
0.5 per cent of the consideration paid (rounded up to the next multiple of £5 in the case of stamp duty). Stamp duty is usually the liability of the purchaser
or transferee of the ordinary shares. An unconditional agreement to transfer such ordinary shares will be liable to SDRT, generally at the rate of 0.5 per cent
of the consideration paid, but such liability will be cancelled, or, if already paid, refunded, if the agreement is completed by a duly stamped transfer within
six years of the agreement having become unconditional. SDRT is normally the liability of the purchaser or transferee of the ordinary shares.

Where Lloyds TSB Group issue ordinary shares or a holder of ordinary shares transfers such shares to the custodian or nominee for the depositary to facilitate
the issue of ADSs to him representing the ordinary shares or to a person providing clearance services (or their nominee or agent), a liability to UK stamp
duty or SDRT at the rate of 1.5 per cent (rounded up to the next multiple of £5 in the case of the stamp duty) of either the issue price or, in the case of
transfer, the listed price of the ordinary shares, calculated in sterling, will arise. Where a holder of ordinary shares transfers such shares to the custodian or
nominee for the depositary or clearance service this charge will generally be payable by the person receiving the ADSs or transferring the ordinary shares
into the clearance service.

A  liability  to  stamp  duty  at  the  ﬁxed  rate  of  £5  will  arise  as  a  result  of  the  cancellation  of  any  ADSs  with  the  ordinary  shares  that  they  represent  being
transferred to the ADS holder.

No liability to UK stamp duty or SDRT will arise on a transfer of ADSs provided that any document that effects such transfer is not executed in the UK and
that it remains at all subsequent times outside the UK. An agreement to transfer ADSs will not give rise to a liability to SDRT.

US federal income tax considerations

The following summary describes certain US federal income tax consequences of the acquisition, ownership and disposition of ADSs or ordinary shares, but
it  does  not  purport  to  be  a  comprehensive  description  of  all  of  the  tax  considerations  that  may  be  relevant  to  a  decision  to  acquire  such  securities.
The summary applies only to holders that hold ADSs or ordinary shares as capital assets and does not address special classes of holders, such as:

• certain ﬁnancial institutions;

• insurance companies;

• dealers in securities or foreign currencies;

• holders holding ADSs or ordinary shares as part of a hedge, straddle or other conversion transaction;

• holders whose ‘functional currency’ is not the US dollar;

• holders liable for alternative minimum tax;

• partnerships or other entities classiﬁed as partnerships for US federal income tax purposes; or

• a holder that owns 10 per cent or more of the voting shares of Lloyds TSB Group plc.

In addition, the summary is based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated
by the Deposit Agreement or any other related document will be performed in accordance with its terms. The US Treasury has expressed concerns that
parties  to  whom  ADSs  are  pre-released  may  be  taking  actions  that  are  inconsistent  with  the  claiming  of  foreign  tax  credits  for  US  holders  of  ADSs.
Accordingly, the analysis of the creditability of UK taxes described below could be affected by future actions that may be taken by the US Treasury.

LLOYDS TSB GROUP   179

Taxation

The summary is based upon tax laws of the US including the Internal Revenue Code of 1986, as amended to the date hereof (the ‘Code’), administrative
pronouncements,  judicial  decisions  and  ﬁnal,  temporary  and  proposed  Treasury  Regulations,  as  well  as  upon  the  Old  Treaty  and  the  New  Treaty,  as
appropriate, changes to any of which may affect the tax consequences described herein possibly with retroactive effect. Prospective purchasers of the ADSs
or ordinary shares should consult their own tax advisors as to the US, UK or other tax consequences of the purchase, ownership and disposition of such
securities in their particular circumstances, including the effect of any state or local tax laws.

As used herein, a ‘US holder’ is a beneﬁcial owner of ADSs or shares, that is, for US federal income tax purposes:

• a citizen or resident of the US;

• a corporation or a partnership created or organised in or under the laws of the US or of any political subdivision thereof; 

• an estate the income of which is subject to US federal income taxation regardless of its source; or

• a trust subject to the control of one or more US persons and the primary supervision of a US court.

For US federal income tax purposes, US holders of ADSs will be treated as the owners of the underlying ordinary shares.

Taxation of distributions

To the extent paid out of current or accumulated earnings and proﬁts of Lloyds TSB Group plc (as determined in accordance with US federal income tax
principles), distributions made with respect to ADSs or ordinary shares (other than certain distributions of capital stock of Lloyds TSB Group plc or rights to
subscribe for shares of capital stock of Lloyds TSB Group plc) will be includible in the income of a US holder as ordinary dividend income from non-US
sources. Such dividends will not be eligible for the ‘dividends received deduction’ generally allowed to corporations under the Code. 

Subject to applicable limitations that may vary depending upon a holder’s individual circumstances, dividends paid to non-corporate US holders in taxable
years beginning before 1 January 2009 should be taxable at a maximum tax rate of 15 per cent. Non-corporate US holders should consult their own tax
advisors to determine whether they are subject to any special rules that limit their ability to be taxed at this favourable rate.

The amount of the distribution will equal the US dollar value of the pounds sterling received, calculated by reference to the exchange rate in effect on the
date such distribution is received (which, for holders of ADSs, will be the date such distribution is received by the Depositary), whether or not the Depositary
or US holder in fact converts any pounds sterling received into US dollars at that time. If the pounds sterling received as a dividend are not converted into
US dollars on the date of receipt, then the US holder's tax basis in the pounds sterling received will equal such dollar amount and the US holder may realise
an exchange gain or loss on the subsequent conversion into US dollars. Any gains or losses resulting from the conversion of pounds sterling into US dollars
will be treated as ordinary income or loss, as the case may be, of the US holder and will be US source.

A US holder may, under the Old Treaty, elect to claim a foreign tax credit in respect of the Tax Credit Amount. A US holder who so elects must include the
Tax Credit Amount in income. Under the New Treaty no such election is available on or after 1 May 2003 (or 1 May 2004 in the case of a holder who
effectively elects to extend the applicability of the Old Treaty).

The limitation of foreign taxes eligible for credit is calculated separately with respect to speciﬁc classes of income. For this purpose, any dividends paid by
Lloyds TSB Group plc on ADSs or ordinary shares will generally constitute ‘passive income’ or, in the case of US ﬁnancial service providers, may be ‘ﬁnancial
services income’.

The rules relating to foreign tax credits are complex and it is recommended that US holders consult their tax advisors to determine whether and to what
extent a foreign tax credit might be available in connection with dividends on the ADSs or ordinary shares.

Taxation of capital gains

Gain or loss realised by a US holder on (i) the sale or exchange of ADSs or ordinary shares or (ii) the Depositary's sale or exchange of ordinary shares received
as distributions on the ADSs will be subject to US federal income tax as a capital gain or loss in an amount equal to the difference between the US holder's
tax basis in the ADSs or ordinary shares and the amount realised on the disposition. Gains or losses, if any, will be US source. 

Deposits and withdrawals of ordinary shares in exchange for ADSs will not result in taxable gain or loss for US federal income tax purposes.

Information reporting and backup withholding

Dividends paid on ADSs or ordinary shares to a US holder may be subject to information reporting requirements of the Code. Such dividends may also be
subject to backup withholding unless the US holder:

• is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or

• provides a taxpayer identiﬁcation number on a properly completed Form W-9 or a substitute form and certiﬁes that no loss of exemption from backup

withholding has occurred and that such holder is a US person.

Any amount withheld under these rules will be creditable against the US holder's federal income tax liability. A US holder who does not provide a correct
taxpayer identiﬁcation number may be subject to certain penalties.

180 LLOYDS TSB GROUP

Other information

Group structure

The following is a list of the principal subsidiaries of Lloyds TSB Group plc at 31 December 2003. The audited consolidated accounts of Lloyds TSB Group
plc for the year ended 31 December 2003 include the audited accounts of each of these companies.

Nature of business

Registered ofﬁce

Name of subsidiary undertaking

Country of
registration/
incorporation

Percentage of equity
share capital and
voting rights held

Lloyds TSB Bank plc

England

100%

Cheltenham & Gloucester plc

England

100%*

Banking and ﬁnancial
services

Mortgage lending and 
retail investments

Lloyds TSB Commercial 
Finance Limited

England

100%*

Credit factoring

Lloyds TSB Leasing Limited

England

100%*

Financial leasing

Lloyds TSB Private Banking 
Limited

The Agricultural Mortgage 
Corporation PLC

Lloyds TSB Bank (Jersey) 
Limited

England

100%*

Private banking

England

100%*

Long-term agricultural ﬁnance

Jersey

100%*

Banking and ﬁnancial services

Lloyds TSB Scotland plc

Scotland

100%*

Banking and ﬁnancial services

Lloyds TSB General Insurance 
Limited

Scottish Widows Investment 
Partnership Group Limited

Abbey Life Assurance Company 
Limited

Lloyds TSB Insurance Services 
Limited

Lloyds TSB Life Assurance 
Company Limited

Lloyds TSB Asset Finance 
Division Limited

England

100%*

General insurance

England

100%*

Investment management

England

100%*

Life assurance

England

100%*

Insurance broking

England

100%*

England

100%*

Life assurance and other
ﬁnancial services

Consumer credit, leasing and
related services

Consumer credit, leasing and
related services

Black Horse Limited

England

100%*

Scottish Widows plc

Scotland

100%*

Life assurance

Scottish Widows Annuities Limited

Scotland

100%*

Life assurance

* Indirect interest

Related party transactions

25 Gresham Street
London EC2V 7HN

Barnett Way
Gloucester GL4 3RL

Beaumont House
Beaumont Road, Banbury
Oxfordshire OX16 7RN

25 Gresham Street
London EC2V 7HN

25 Gresham Street
London EC2V 7HN

AMC House
Chantry Street, Andover
Hampshire SP10 1DD

25 New Street
St. Helier
Jersey JE4 8RG

Henry Duncan House
120 George Street
Edinburgh EH2 4LH

25 Gresham Street
London EC2V 7HN

10 Fleet Place
London EC4M 7RH 

80 Holdenhurst Road
Bournemouth BH8 8ZQ

25 Gresham Street
London EC2V 7HN

25 Gresham Street
London EC2V 7HN

25 Gresham Street
London EC2V 7HN

25 Gresham Street
London EC2V 7HN

69 Morrison Street
Edinburgh EH3 8YF

69 Morrison Street
Edinburgh EH3 8YF

At 31 December 2003, those who were directors of Lloyds TSB Group plc on that day beneﬁcially owned the following ordinary shares, not including options:

Title of class

Identity of person or group

Amount owned

Per cent of class

Ordinary shares, nominal value 25 pence each

Directors (16 persons)

450,832

0.01

In addition, those directors held, as at 31 December 2003, options to acquire 8,342,025 shares, all of which were granted pursuant to the executive share
option schemes, sharesave share option schemes, share retention plan and share plan. 

Lloyds TSB Group plc is not owned or controlled directly or indirectly by another corporation or by any government and Lloyds TSB Group plc is unaware
of any arrangements which might result in a change in control.

LLOYDS TSB GROUP   181

Other information

Lloyds TSB Group, as at 31 December 2003, had related party transactions with 6 directors and 30 ofﬁcers. See Note 44a to the ﬁnancial statements.
The  transactions  in  question  were  made  in  the  ordinary  course  of  business,  were  made  on  substantially  the  same  terms,  including  interest  rates  and
collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or
present other unfavourable features.

Exchange rates

In this annual report, unless otherwise indicated, all amounts are expressed in pounds sterling. For the months shown the US dollar high and low Noon
Buying Rates per pound sterling were:

2004
February

2004
January

2003
December

2003
November

2003
October

2003
September

US dollars per pound sterling:
High
Low

1.90
1.82

1.85
1.79

1.78
1.72

1.72
1.67

1.70
1.66

1.66
1.57

For the years shown the averages of the US dollar Noon Buying Rates per pound sterling on the last day of each month were:

US dollars per pound sterling:
Average

2003

2002

2001

2000

1999

1.64

1.51

1.44

1.52

1.61

On 4 March 2004, the latest practicable date, the US dollar Noon Buying Rate was $1.825 = £1.00. Lloyds TSB Group makes no representation that
amounts in pounds sterling have been, could have been or could be converted into US dollars at that rate or at any of the above rates. 

Exchange controls

There are no UK laws, decrees or regulations that restrict Lloyds TSB Group plc's export or import of capital, including the availability of cash and cash
equivalents for use by Lloyds TSB Group, or that affect the remittance of dividends or other shareholder payments to non-UK holders of Lloyds TSB Group
plc shares, except as otherwise set out in ‘Taxation’.

Properties

As at 31 December 2003, Lloyds TSB Group occupied 3,468 properties in the UK. Of these, 730 were held as freeholds, 84 as long-term leaseholds and
2,654  as  short-term  leaseholds.  The  majority  of  these  properties  are  retail  branches,  widely  distributed  throughout  England,  Scotland  and  Wales.  Other
buildings include the Lloyds TSB Group's head ofﬁce in the City of London, and customer service and support properties located to suit business needs, but
clustered largely in London, Birmingham, Bristol (in England), Edinburgh (in Scotland) and Cardiff and Newport (in Wales).

In addition, Lloyds TSB Group owns, leases or uses under licence properties for business operations elsewhere in the world, principally in Argentina, Spain
and Switzerland.

Legal actions

Lloyds TSB Group is periodically subject to threatened or ﬁled legal actions in the ordinary course of business. Lloyds TSB Group does not expect the ﬁnal
outcome of any legal proceedings currently known to it to have a material adverse effect on its consolidated results of operations or ﬁnancial condition.

Enforceability of civil liabilities

Lloyds TSB Group plc is a public limited company incorporated under the laws of Scotland. Most of Lloyds TSB Group plc's directors and executive ofﬁcers
and certain of the experts named herein are residents of the United Kingdom. A substantial portion of the assets of Lloyds TSB Group plc, and a substantial
portion of the assets of such persons, are located outside the United States. As a result, it may not be possible for investors to effect service of process within
the United States upon such persons or to enforce against them judgements of US courts, including judgements predicated upon the civil liability provisions
of the federal securities laws of the United States. Furthermore, Lloyds TSB Group plc has been advised by its English solicitors that there is doubt as to the
enforceability in the United Kingdom, in original actions or in actions for enforcement of judgements of US courts, of civil liabilities, including those predicated
solely upon the federal securities laws of the United States.

Registered ofﬁce and principal executive ofﬁces

Lloyds TSB Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on 21 October 1985
with  the  registered  number  95000.  Lloyds  TSB  Group  plc's  registered  ofﬁce  is  Henry  Duncan  House,  120  George  Street,  Edinburgh  EH2  4LH,  and  its
principal executive ofﬁces in the UK are located at 25 Gresham Street, London, EC2V 7HN, telephone number + 44 (0) 20 7626 1500.

Memorandum and articles of association

A summary of the material provisions of Lloyds TSB Group plc's memorandum and articles of association was incorporated into Lloyds TSB Group plc's
registration statement ﬁled with the SEC on 25 September 2001 and is therefore incorporated into this annual report by reference to that statement.

182 LLOYDS TSB GROUP

Glossary

Term used 

Accounts

Associates

ATM

Attributable proﬁt

Broking

Building society

US equivalent or brief description

Financial statements.

Long-term equity investments accounted for by the equity method.

Automatic Teller Machine.

Net income.

Brokerage.

A building society is a mutual institution set up to lend money to its
members for house purchases. See also ‘Demutualisation’.

Called-up share capital

Ordinary shares, issued and fully paid.

Contract hire

Cashpoint

Creditors

Dealing

Debtors

Demutualisation

Economic proﬁt

Embedded value 

Endowment mortgage

Fees and commissions payable

Fees and commissions receivable

Finance lease

Freehold

Guaranteed annuity option

Hire purchase

Interchange

Interest payable

Interest receivable

ISA 

Leasehold

Lien

Life assurance

Loan capital

Members

Memorandum and articles of association

National Insurance

Leasing.

Automatic Teller Machine.

Payables.

Trading.

Receivables.

Process by which a mutual institution is converted into a public limited
company.

See deﬁnition under ‘Operating and ﬁnancial review and prospects –
Economic proﬁt’.

See deﬁnition under ‘Operating and ﬁnancial review and prospects –
Critical accounting policies’.

An interest-only mortgage to be repaid by the proceeds of an endowment
insurance policy which is assigned to the lender providing the mortgage.
The sum insured, which is payable on maturity or upon the death of the
policyholder, is used to repay the mortgage. 

Fees and commissions expense.

Fees and commissions income.

Capital lease.

Ownership with absolute rights in perpetuity.

See ‘Operating and ﬁnancial review and prospects – With-proﬁts options
and guarantees’.

See ‘Description of business – Business and activities – Wholesale and
International Banking – Asset ﬁnance’.

System allowing customers of different Automatic Teller Machine (ATM)
operators to use any ATM that is part of the system. 

Interest expense.

Interest income.

Individual Savings Account.

Land or property which is rented from the owner for a speciﬁed term 
under a lease. At the expiry of the term the land or property reverts back
to the owner.

Under UK law, a right to retain possession pending payment.

Life insurance.

Long-term debt.

Shareholders.

Articles and bylaws.

A form of taxation payable in the UK by employees, employers and the
self-employed, used to fund beneﬁts at the national level including state
pensions, medical beneﬁts through the National Health Service (NHS),
unemployment and maternity. It is part of the UK's national social security
system and ultimately controlled by the Department of Social Security.

Nominal value

One-off

Ordinary shares

Par value.

Non-recurring.

Common stock.

LLOYDS TSB GROUP   183

US equivalent or brief description

A line of credit, contractually repayable on demand unless a ﬁxed-term has
been agreed, established through a customer's current account.

Real estate.

Income statement.

Retained earnings.

Reserves.

Premiums which are payable throughout the duration of a policy or for
some shorter ﬁxed period.

The insuring again by an insurer of the whole or part of a risk that it has
already insured with another insurer called a reinsurer. 

Capital stock.

Stockholders' equity.

Additional paid-in capital.

Shares outstanding.

A premium in relation to an insurance policy payable once at the
commencement of the policy.

Property and equipment.

Restricted surplus.

Mutual fund.

Value at Risk, see deﬁnition under ‘Operating and financial review 
and prospects – Risk management – Market risk – Measurement –
Trading value at risk (VaR)’.

Variance/covariance methodology, see deﬁnition under ‘Operating and
ﬁnancial review and prospects – Risk management – Market risk –
Measurement – Trading value at risk (VaR)’.

The sum of regular premiums plus one-tenth of single premiums paid by
customers on life insurance, pensions and unit trusts.

See ‘Description of business – Business and activities – Insurance and
Investments – Life assurance, pensions and investments’.

Glossary

Term used 

Overdraft

Premises

Proﬁt and loss account

Proﬁt and loss account reserve

Provisions

Regular premium

Reinsurance

Share capital

Shareholders' funds

Share premium account

Shares in issue

Single premium

Tangible ﬁxed assets

Undistributable reserves

Unit trust

VaR

VcV

Weighted sales

With-proﬁts sub-fund

184 LLOYDS TSB GROUP

Reference information for shareholders

Analysis of shareholders

Financial calendar 2004

at 31 December 2003

Size of shareholding

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

Shareholders

Number of ordinary shares

Number

69,278
438,388
292,390
136,881
19,895
14,237
819
1,176
507

973,571

%

7.12
45.03
30.03
14.06
2.05
1.46
0.08
0.12
0.05

Millions

2.3
147.7
188.6
266.7
135.7
255.5
55.7
396.5
4,144.9

%

0.04
2.64
3.37
4.77
2.42
4.57
1.00
7.09
74.10

100.00

5,593.6*

100.00

* Includes 741 million shares (13.3%) registered in the names of some 867,000 individuals. 216 million shares (3.86%) are held by over 65,000

staff and Group pensioners, or on their behalf by the trustee of the staff proﬁt sharing schemes or by the trustee of the staff incentive plan.

Substantial shareholdings
At the date of this report
notiﬁcations had been received 
that Legal & General Investment
Management Limited and Barclays
PLC had interests of 3% and 3.03%,
respectively, of the nominal value of
the issued share capital. No other
notiﬁcation has 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, or visit
www.londonstockexchange.com
for details.

Share dealing facilities
The company provides a range of
share dealing facilities for the
purchase and sale of Lloyds TSB
shares.

A postal dealing service is available
through Lloyds TSB Registrars. The
current rate for both purchases and
sales is 0.75%, no minimum.
For full details please contact
Lloyds TSB Registrars.
Telephone 0870 2424244.

A telephone dealing service is
available through Lloyds TSB
Stockbrokers. 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.

An internet sales service is available
through Lloyds TSB Registrars. The
current rate for sales is 0.5%,
minimum £17.50. Log on to
www.shareview.co.uk/dealing
for full details.

American Depositary Receipts (ADRs)
Lloyds TSB shares are traded in the
USA through an NYSE-listed
sponsored ADR facility, with The
Bank of New York as the depositary.
The ADRs are traded on the New
York Stock Exchange under the
symbol LYG. The CUSIP number is
539439109 and the ratio of ADRs
to ordinary shares is 1:4. For details
please contact The Bank of New
York, Investor Relations, PO Box
11258, Church Street Station,
New York, NY 10286-1258.
Telephone (1) 888 BNY ADRS
(US toll free), international callers
(1) 610 382 7836. Visit
www.adrbny.com or email
shareowners@bankofny.com
for details.

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 ISAs, Freepost,
PO Box 249, Haywards Heath, 
West Sussex RH16 3ZU.
Telephone 0845 7418418.

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 ‘Corporate
Responsibility’, Lloyds TSB Group
plc, 25 Gresham Street, London
EC2V 7HN. This information is also
available on the Group’s website.

The Better Payment Practice Code
A copy of the code and information
about it may be obtained from the
DTI Publications Orderline 0870
1502500, quoting ref URN 04/606.
Alternatively, log on to
www.payontime.co.uk for details.

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.

8 March
Results for 2003 announced

17 March
Ex-dividend date for 2003 ﬁnal
dividend

19 March
Record date for ﬁnal dividend

7 April
Final date for joining or leaving the
dividend reinvestment plan for the
ﬁnal dividend

5 May
Final dividend paid

21 May
Annual general meeting in Glasgow

30 July
Results for half-year to 30 June
2004 announced

11 August
Ex-dividend date for 2004 interim
dividend

13 August
Record date for interim dividend

8 September
Final date for joining or leaving the
dividend reinvestment plan for the
interim dividend

6 October
Interim dividend paid

Head ofﬁce
25 Gresham Street
London EC2V 7HN
Telephone +44 (0)20 7626 1500

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, which is a member of the London Stock
Exchange and is authorised and regulated by the
Financial Service Authority.

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LLOYDS TSB GROUP   185