Lloyds Banking Group PLC Annual Report 2004

FY2004 Annual Report · Lloyds Banking Group PLC
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Annual Report and Accounts

2004

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

2004 highlights

Chairman’s statement

Group chief executive’s review

The community and our business

The businesses of Lloyds TSB

Operating and financial review and prospects

Five year financial summary

The board

Directors’ report

Corporate governance

Directors’ remuneration report

Report of the independent auditors

Primary financial statements

Notes to the accounts

Information for shareholders

3

5

7

9

10

12

39

40

42

43

47

58

59

65

113

LLOYDS TSB GROUP   1

Delivering earnings growth

across all major business areas

2004 highlights

Profit before tax

Results

By division

Profit before tax decreased by £855 million, or 20 per cent, to
£3,493 million, reflecting the impact of businesses disposed of
in 2003 which contributed £1,183 million last year.

Profit attributable to shareholders decreased by £833 million,
or 26 per cent, to £2,421 million.

Earnings per share decreased by 26 per cent to 43.3p.

Post-tax return on average shareholders’ equity 24.3 per cent.

Total capital ratio 10.0 per cent, tier 1 capital ratio
8.9 per cent.

Dividend maintained. Final dividend of 23.5p per share,
making a total of 34.2p for the year (2003: 34.2p).

Results – continuing operations excluding investment variance,
changes in economic assumptions and profit/loss on sale of
businesses.

Profit before tax increased by £301 million, or 10 per cent, to
£3,363 million.

Earnings per share increased by 12 per cent to 41.8p.

Economic profit increased by 9 per cent to £1,442 million.

Post-tax return on average shareholders’ equity 23.5 per cent.

Post-tax return on average risk-weighted assets increased from
1.87 per cent to 1.95 per cent.

2004
£ million

2003*
£ million

UK Retail Banking

Insurance and Investments

Wholesale and International Banking

Central group items

1,651

773

1,272

(333)

Profit before tax from continuing operations** 3,363

Changes in economic assumptions†

Investment variance†

Loss on sale of businesses in 2004†

Discontinued operations in 2003†

Profit before tax

Earnings per share

(2)

147

(15)

–

3,493

43.3p

1,471

565

1,038

(12)

3,062

(22)

125

–

1,183

4,348

58.3p

* Restated to reflect changes in the Group’s segmental analysis following the introduction, in
2004, of the management of the Group’s distribution channels as profit centres and other
changes in internal pricing arrangements.

** Excluding changes in economic assumptions, investment variance and (loss) profit on sale 

of businesses.

† Changes in economic assumptions and investment variance relate to Insurance and

Investments, loss on sale of businesses in 2004 and discontinued operations in 2003 relate
to Wholesale and International Banking.

Presentation of information

Dividends

In order to provide a clearer representation of the underlying
performance of the Group, the results of the Group’s life and
pensions, and general insurance businesses include investment
earnings calculated using longer-term investment rates of return.
The difference between the normalised investment 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 profit/loss on the sale of a
number of overseas businesses in 2003 and 2004 and the
trading results of businesses sold in 2003 have been separately
analysed and a reconciliation to the Group’s profit before tax is
shown on this page.

Dividends per share (pence)

30.6      

33.7      

34.2        34.2        34.2

0
0
0
2

1
0
0
2

2
0
0
2

3
0
0
2

4
0
0
2

LLOYDS TSB GROUP   3

Profitably growing our retail

and corporate franchises

Chairman’s statement

Lloyds TSB has a clearly articulated organic growth strategy that 
is focused on improving and deepening relationships with our
personal and business customers. During 2004 this strategy has
started to gain traction, with good progress being made in each of
our business units. The successful delivery of profitable franchise
growth has been central to the Group’s return to positive earnings
momentum during 2004.

The building blocks of attracting, retaining and developing
customer relationships in all areas of our business are the
foundations of profitable franchise development and sustainable
earnings growth. With this in mind Lloyds TSB has spent much
of the last few years putting our customers at the heart of our
strategy, ensuring that customer needs drive our business
transformation. During 2004 we have continued to improve our
product range, we have significantly enhanced our customer
service levels, and we have made clear progress in improving
the Group’s processing efficiency. As a result, customer
satisfaction levels are higher than at any time during recent
years and we are recruiting a higher number of quality
customer relationships.

This focus on our customers, however, has not come at the
expense of other stakeholders. We are constantly striving to
make Lloyds TSB a great place to work and a great investment
opportunity for shareholders. Throughout 2004 I have continued
to be impressed by the drive, commitment and enthusiasm of
our staff and, particularly, their desire to keep improving all
aspects of our business. For shareholders, Lloyds TSB delivered
a total shareholder return (share price appreciation plus
dividends) of 15 per cent during 2004, a significantly better
performance than both the FTSE Bank Index and the FTSE 100
Index. So, 2004 has been a year of good progress for
customers, staff and shareholders all of whom are linked by a
common desire – the successful delivery of Lloyds TSB’s
business and financial strategies.

Financial results

During a year when a great deal of management focus has been
on positioning the Group to deliver sustainable earnings growth,
I am delighted with the 10 per cent growth in profit before tax
from the Group’s continuing operations, excluding investment
variance, changes in economic assumptions and disposal
gains/losses. Each division delivered revenue growth in excess of
cost growth, credit quality has remained strong and profitability
has improved.

Economic outlook

Looking at the UK economy, it is likely that economic growth will
continue, with many commentators believing growth in 2005 
will remain above 2.5 per cent. Whilst there are downside risks 
to these expectations, from a possible slowdown in the housing
market, there is upside potential as well, such as from higher
business investment spending. We expect unemployment and
inflation to remain low, and interest rates to peak during 2005.
This is a relatively benign economic outlook and operating
environment for Lloyds TSB.

Increasing levels of regulation, from both the UK and overseas,
have already become a significant burden on all UK financial
companies. With the adoption of international financial reporting
standards in 2005, this burden is unlikely to ease and the
financial services industry in the UK is likely to continue to
face significant challenges in the arena of accounting and
regulatory change. Whilst Lloyds TSB is well prepared for
these challenges, the ongoing cost of compliance will
remain considerable.

Maarten van den Bergh

Our enhanced risk governance framework is now well embedded 
throughout the Group and risk is a key part of all executive
decision making. Reporting and risk aggregation has been
enhanced and through our better understanding of risk in the
business, we are well placed to take advantage of opportunities 
to continue to grow our business profitably and safely.

Capital and dividend

During 2004 Lloyds TSB has continued to maintain satisfactory
capital ratios, largely as a result of high cash flows generated
throughout the business. The Group’s post-tax return on equity at
24.3 per cent remains one of the highest amongst the major banks
of the world and the board is satisfied with the Group’s capital
position. In addition, Scottish Widows continues to be one of the
most strongly capitalised life assurance companies in the UK.

In line with the rest of the UK banking industry, the Group has
now adopted international financial reporting standards and will in
future report earnings on the basis of these new standards.
Current indications are that this change will not have a material
impact on either the earnings of the Group or its regulatory capital
position, although some ongoing earnings volatility may arise. The
board has decided to maintain the final dividend at 23.5p per
share, making a total for the year of 34.2p (2003: 34.2p). This
represents a dividend yield of 7.2 per cent, calculated using 
the 31 December 2004 share price of 473p.

Board changes

Since the annual general meeting last year, we have welcomed
two new directors to the board. Truett Tate was appointed as
Group Executive Director, Wholesale and International Banking 
in August 2004 and Sir Julian Horn-Smith joined us, as a
non-executive director, in January 2005. Two executive directors,
Steve Targett and Peter Ayliffe, left the board in April 2004 and
January 2005 respectively, and Sir Tom McKillop retired at the
end of his term as a non-executive director in December 2004.
David Pritchard and Chris Gibson-Smith will also be retiring at the
annual general meeting. All the departing directors leave with our
sincere thanks for their contribution to the Group.

Staff

The successful implementation of the Group’s strategy is the
responsibility of all 70,000 staff employed by the Group. It is their
approach to making Lloyds TSB a high performing organisation
that has enabled the Group to make such good progress in 2004
and will ensure further progress over the next few years. We have
a real opportunity to meet an increasing number of our customers’
needs and it is our staff who will make that happen. They are the
day-to-day face of the Bank, the heart of all we do and the key to
future success. I thank them for their efforts in 2004 and their
continuing commitment. Lloyds TSB Group remains one of the
UK’s largest corporate givers, principally through the excellent
work of the independent Lloyds TSB Foundations who made
grants to charities of over £27 million in 2004.

Looking forward

Our focus on delivering profitable franchise growth, against a
backdrop of significant regulatory and competitive pressure, has
led to a good track record of earnings growth. Despite an expected
slowdown in consumer lending growth in the UK, I am confident
that the delivery of revenue growth in excess of cost growth,
combined with strong risk management throughout the
organisation, will enable the Group to achieve a continuing high
return on equity and sustainable economic profit growth.

Maarten van den Bergh
Chairman
3 March 2005

LLOYDS TSB GROUP   5

Continuing to improve

service quality and

processing efficiency

Group chief executive’s review

2004 was a good year for Lloyds TSB and, in many respects, marks
the closing of one chapter and the opening of another. During the
past two years, we worked on a three point plan:

• to enhance the quality, and decrease the volatility, of our earnings

• to maintain our good returns, and 

• to achieve growth.

I am pleased to report that we have made good progress on each
of these priorities and, in doing so, we have also addressed many
of the concerns of our shareholders, which centred on the
adequacy of our capital, the sustainability of the dividend and the
achievement of growth whilst continuing to deliver strong returns. 

Our results in 2004 reflect a higher quality of earnings. The five
Latin American businesses that we sold had impacted adversely
on our performance, incurring losses amounting to more than
£200 million over the five years to 2003, equivalent to a negative
return on equity of some 28 per cent. In addition, the earnings
lost from the strategic sale of our businesses in New Zealand and
Brazil were replaced within a year, as the Group’s organic growth 
strategy continued to deliver. 

The work that we have done to allocate our capital more efficiently,
as well as the management of our quality and costs, has allowed
us to maintain high returns whilst we focused the organisation on
delivering growth. Pleasingly, we are starting to demonstrate better
growth across all of our divisions and key businesses.

In the Retail Bank, income growth exceeded cost growth, we
maintained or grew market share in most of the major product
categories and we improved the depth of customer relationships.
We used the year to put in place a more competitive product set
and a new operating model, whereby we now manage the branch
network on what we term a ‘local markets’ basis. In essence, we
have returned the branch to being part of the local community
and given branch managers greater authority to manage profitability
and run their areas as businesses. We recognise that the needs of
customers vary by community and, by organising in this way, we
believe that we will be both more responsive and effective which
will, in turn, result in faster growth. In our test markets, we
achieved higher growth in quality customer recruitment and a
greater improvement in customer satisfaction than in the rest of
the branch network, and this is now starting to deliver an
improved sales performance. The new model was extended to the
entire branch network in the second half of 2004.

In Wholesale Banking, each of the major businesses made good
progress in acquiring and deepening customer relationships and
all delivered year-on-year profit improvements in excess of
20 per cent. The new management team strengthened our
competitive position with enhanced product offerings and more
proactive calling efforts. This renewed customer focus and better
alignment of relationship and product managers resulted in a
25 per cent uplift in earnings in the Corporate Markets franchise.
Business Banking and Asset Finance also performed strongly,
supported by good income growth and strong cost control.

In Insurance and Investments, our new business contribution in
Scottish Widows increased by 21 per cent as we successfully
focused on more profitable, and more capital efficient, business
lines. The sales of life and pensions products in the branches
were encouraging, although we lagged in unit trust sales. During
2004, supported by the launch of a simplified suite of
bancassurance products in the second half of the year, we
increased our market share of non-IFA life and pensions sales
from 7.8 per cent to 8.9 per cent. Overall, life and pensions
product sales increased by 9 per cent. In Lloyds TSB Insurance,
increased investment resulted in strong growth in sales through
direct channels and we maintained our market leading position
in home insurance distribution. 

Eric Daniels

In addition to the considerable progress in the divisions, we also
used the year to enhance the effectiveness of the Corporate
Centre, with the appointment of new directors in the Risk, Audit,
Human Resources and Finance functions. This has enabled us to
strengthen the operating disciplines across the Group, which
provide the framework for us to grow in a sustained fashion. 

We are only just beginning to unlock the growth potential of the
Lloyds TSB franchise. During 2004, customer satisfaction ratings
reached record levels, employee engagement scores rose to their
highest level ever, credit quality remained strong and our financial
disciplines guided the Group to exceed expectations in terms of
financial performance. This gives us a solid underpinning for the
future. We still have much to do in terms of improving our
execution but I believe we can continue to deliver income growth
in a controlled and sustainable way, due to the progress made by
the divisions and improvements in our operating processes
achieved during 2004.

As we look to the future, we are opening a new chapter focused
primarily on growth. We will continue to focus our efforts on our
core markets and build our skills to sustain superior
performance. Our new priorities are designed to leverage our
strengths in those markets and they are:

• to materially deepen customer relationships, meeting more of
our customers’ needs and winning a greater share of their
business. In the last year and a half, we have put in place
many of the pieces to build stronger relationships; across all of
our divisions we have enhanced service performance and we
have introduced improved product ranges. We have also
introduced local markets in the Retail Bank and built up strong
regional centres in the Wholesale Bank. Our task is now to
integrate these pieces so that our customers enjoy better value
and view us as the place to bring more of their business. 

• to improve our efficiency, growing our top line whilst improving
the productivity of our cost base, using the discipline of ‘positive
jaws’. As our income grows, we will continue to increase our
investment to improve our customer satisfaction ratings and our
efficiency, through further development of our quality
performance, automation, straight-through processing and the
more effective leveraging of our group wide cost base.

• to continue to enhance the Group’s capabilities and

processes to support faster growth. In Finance, we will further
develop our capital management disciplines and our
understanding of the key drivers of economic profit growth at
a more granular level. In Risk, we will continue to build our
skill base to enable us to grow with less volatility in our
earnings and to take advantage of the strategic benefits of
Basel II. In Human Resources, we are developing our people
to perform to their full potential and to create the high
performance organisation necessary to achieve our goals.

Looking back on the year, we achieved our three point plan and
are now making marked progress on the elements of the
Group’s balanced scorecard. Our capital position is in good
shape, with the impact of recent accounting changes
incorporated into our plans, and we achieved growth and higher
quality earnings. Our staff are engaged and the achievement of
these favourable results is due to their commitment and
dedication to serving our customers.

I look forward to seeing continued growth and progress against
our revised set of priorities in 2005 and beyond.

J Eric Daniels
Group Chief Executive
3 March 2005

LLOYDS TSB GROUP   7

We have a clear opportunity

to help our customers

achieve their goals

The community and our business

Our business

Community involvement

There is a business case for corporate responsibility. We know
very clearly that companies which adopt and embrace corporate
responsibility, and link it to their core business, are more likely
to create wealth and shareholder value than those that do not.

It is not just about having the right products at the right price,
and a relentless pursuit of superior service and accessibility for
customers. Having strong values, clear leadership and a
responsible corporate culture are also critical if the business is 
to prosper over time. We want our business to be the first and
natural choice for customers and investors.

With some 2,200 branches, Lloyds TSB Group has one of the
largest branch networks in the UK as well as being a leading
internet and telephone banking provider. Our agreement with
the Post Office allows our personal customers to use around
16,000 post offices for their banking needs.

Lloyds TSB has also been at the forefront of developing
alternative forms of financial provision and support for those
communities where mainstream financial services have
traditionally been considered inappropriate or inaccessible. 
We have been involved in a wide range of projects, on both a
commercial and semi-commercial basis, providing capital for
loan funds which in turn support individual debt-consolidation,
housing improvement, business start-ups and social enterprise.

People and the workplace

People are our greatest asset and we are committed to
becoming a world-class organisation in the way we manage
and develop them.

We know that corporate responsibility is a factor in the
perception that our staff have of Lloyds TSB as an employer and
plays a key part in their engagement and satisfaction in working
for the Group. We can demonstrate a direct relationship between
employee satisfaction, customer satisfaction and, ultimately,
shareholder satisfaction.

In the UK, where we employ over 68,000 people, our
employment policies are continually monitored and
benchmarked against other companies to ensure that, as one 
of the UK’s largest employers, we remain at the leading edge of
employment practice. Our workforce policies and programmes
are focused on ensuring that all our employees believe that
Lloyds TSB is a great place to work and an employer of choice. 

Our commitment to Investors in People (IIP) is about promoting
a culture of career-long learning and a need to equip our staff
with the skills and knowledge that will help them to perform in
the workplace. In 2004, 87 per cent of our employees worked
for business units that are IIP accredited.

Almost £42 million was invested in employee training and
development across the Group in 2004. The University for
Lloyds TSB provided over 67,000 face-to-face training days and
in excess of 29,000 delegate places on residential training
courses. We seek to use awards and qualifications as a means
of benchmarking staff achievement against external standards.

We are committed to improving the diversity of our workforce 
in terms of the representation of women, ethnic minority
employees and disabled employees at all levels in our
organisation. We encourage all employees to develop a balance
between their personal and professional lives through our Work
Options policy. This provides staff with the opportunity to adopt
any one of a number of flexible working practices such as job
sharing, variable and compressed hours and term-time
working. As a result 34 per cent of our workforce currently
work flexibly.

Lloyds TSB is a significant presence in every community. The
customers we serve and the staff that serve them are drawn 
from those same communities. We have one of the largest
community investment programmes in the UK, supporting our
customers and staff, and making a significant contribution to
improving the social fabric of the local environment in which our
business operates.

Community investment is not just about giving money to good
causes. It is also about the substantial time given by our staff in
supporting the work of community organisations, whether
raising money, providing business expertise or simply providing
another willing pair of hands.

The Group Community Awards scheme celebrates staff
achievement and rewards them for their work in the local
community. In 2004, nearly 150 nominations were received
and each of the 10 winners was presented with a £1,000
cheque for their nominated organisations.

Of course, cash giving is also important. Every year we support
our staff’s commitment to local communities through the
matched giving scheme. In 2004 the Lloyds TSB Foundations
set aside £1.25 million to match money raised for, and the time
given to, charity by Lloyds TSB staff. More than 4,000 staff took
part in the scheme, raising a total for charities of more than
£3.4 million. One of our biggest group wide activities is our
Charity of the Year fundraising. In 2004, staff raised over
£1 million for NSPCC and Children 1ST. 

The majority of Lloyds TSB’s charitable giving is channelled
through the four independent Lloyds TSB Foundations, which
cover England and Wales, Scotland, Northern Ireland and the
Channel Islands. Their mission is to improve the lives of people
in local communities, especially those who are disadvantaged
or disabled.

The Lloyds TSB Foundations together receive one per cent of the
Group’s pre-tax profits, averaged over three years, in lieu of their
shareholder dividend. Since 1997, they have received
£228 million to distribute to grassroots causes. In 2005, they will
receive a further £31.2 million to distribute to community groups.

More information on these issues is available in the Group’s
2004 corporate responsibility report and there are details of how
to obtain a copy of this document on page 113.

LLOYDS TSB GROUP 9

The businesses of Lloyds TSB

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

UK Retail Banking

UK Retail Banking provides banking, ﬁnancial services, mortgages and private banking to some 15 million personal customers through our
multi channel distribution capabilities.

Branches. Lloyds TSB Group provides wide-reaching geographic branch coverage in England, Scotland and Wales, with some 2,200 branches
of Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester as at the end of 2004. 

Internet banking. Internet banking provides online banking facilities for personal customers. Some 3 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, in terms of customer numbers, one of the largest
telephony  services  in  Europe.  At  the  end  of  2004,  some  4.8 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 62 million calls
during 2004.

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
2004, personal  customers  of  Lloyds  TSB  Bank and  Lloyds  TSB Scotland were  able  to  withdraw  cash  and  check  balances  through  some
4,200 ATMs at branches and external locations around the country. In addition, our personal customers have access to a further 50,000 cash
machines via LINK in the UK and to cash machines worldwide through the VISA and MasterCard networks.

Current  accounts. 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 provide
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.

Credit cards. 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 12.7 per cent
share of outstanding card balances at 31 December 2004.

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 2004 of £80.1 billion, representing a market share of 9.1 per cent.

UK  Wealth  Management. Private  Banking  provides  a  range  of  tailor-made  wealth  management  services  and  products  to  individuals  from
30 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. 

Insurance and Investments

Insurance and Investments offers life assurance, pensions and investment products, general insurance and fund management services.

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 advisers and directly
via the telephone and the internet. The Scottish Widows brand is the main brand for new sales of Lloyds TSB Group’s life, pensions, unit trust
and other long-term savings products.

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 one of the leading distributors 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 2004 funds under management amounted to some £82 billion. 

10 LLOYDS TSB GROUP

The businesses of Lloyds TSB

Wholesale and International Banking

Wholesale  and  International  Banking  provides  banking  and  related  services  for  major  UK  and  multinational  corporates and  ﬁnancial
institutions,  and  small  and  medium-sized  UK  businesses.  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 

2004 has seen a further increase in our corporate activity with the tighter integration of the businesses within the Wholesale Bank.

Corporate Markets combining the respective strengths of Corporate Banking, Structured Finance and Financial Markets, plays an integral
role in leveraging and expanding our customer franchise and building deep, long-lasting relationships. Corporate Banking manages the core
franchise,  providing  a  relationship-based  ﬁnancial  and  advisory  service  to  the  corporate  marketplace  through  dedicated  regional  teams
throughout the UK and key strategic locations abroad, including New York. Customers have access to our capital and expertise in a broad
range of ﬁnancial solutions. Our relationship managers act as a conduit to partners in the Wholesale Bank and other parts of the Group.
Structured Finance comprises the private equity and leveraged debt businesses and other transactional lending businesses of the Wholesale
Bank. Structured  Finance executes transactions  within  the existing corporate franchise as  well  as building an avenue for new to bank
relationships. Financial Markets 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. 

Asset Finance. Lloyds TSB Group’s asset ﬁnance businesses provide individuals and companies with ﬁnance through leasing, hire purchase
and  contract  hire  packages.  Through  its  invoice  discounting  and  factoring  subsidiary, Lloyds  TSB  Commercial  Finance,  Lloyds  TSB  Group
provides  working  capital  ﬁnance  for  customers.  Specialist  personal  lending,  store  credit  and  the  Dutton-Forshaw  motor  dealership  group
complete this group of businesses.

Business Banking. Relationships with some 574,000 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 nearly a quarter of new businesses opening an account with Lloyds TSB. The main activity of
the Agricultural Mortgage Corporation is to provide long-term ﬁnance to the agricultural sector.

International Banking 

The Group has continued to reshape its international network in 2004 as the sales of our businesses in Argentina, Colombia, Guatemala,
Panama and Honduras were completed during the year.

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  personal  and  corporate
banking operations in Belgium, The Netherlands and Spain.

Offshore  banking. 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. Lloyds  TSB  Group  continues  to  have  ofﬁces  in  Ecuador,  Paraguay  and  Uruguay  which  provide  mainly  corporate  banking
services. In addition, Lloyds TSB Group has private banking and investment operations in the US. 

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

LLOYDS TSB GROUP   11

Operating and financial review and prospects 

Summary of Group results

In 2004 the Group’s statutory proﬁt before tax was £3,493 million, a decrease of £855 million compared to £4,348 million in 2003. This
decrease  was  attributable  to  the  impact in  2003  of  the  proﬁt  on  the  sale  and  trading  results  of  a  number  of  overseas  businesses, which
contributed  £1,183  million.  For  the  same  reason,  proﬁt  attributable  to  shareholders  decreased  by  £833  million,  or  26  per  cent,  to
£2,421 million and earnings per share decreased by 26 per cent to 43.3p.

To enable meaningful comparisons with 2003, it is appropriate to exclude the impact of these 2003 disposals, together with the investment
variance and changes in economic assumptions in the Group’s life assurance businesses. On this basis, as a result of earnings growth in each
business unit, proﬁt before tax increased by £301 million, or 10 per cent, to £3,363 million. Earnings per share increased by 12 per cent to
41.8p and economic proﬁt increased by 9 per cent to £1,442 million. The post-tax return on average shareholders’ equity was 23.5 per cent
and the post-tax return on average risk-weighted assets increased to 1.95 per cent, from 1.87 per cent in 2003.

Group net interest income from continuing operations increased by £176 million, or 4 per cent, and average interest-earning assets increased
by 8 per cent to £170 billion. Strong consumer lending growth led to increases of £2.6 billion in average personal lending and credit card
balances and £8.9 billion in average mortgage balances. 

The Group net interest margin from continuing operations decreased by 11 basis points to 2.89 per cent, after adjusting for the impact of a
change in the middle of 2004 in the Group’s wholesale liquidity and funding strategy towards the use of more capital efﬁcient reverse repurchase
agreements, which have been excluded from the net interest margin calculation. This margin reduction reﬂected the impact of changes in
business mix and lower margins in the Group’s credit card, personal lending and mortgages portfolios as a result of competitive pressures.
During the second half of 2004, however, we started to see a slowdown in the rate of margin erosion in a number of retail product areas. There
has also been further substitution of net interest income for fee income in certain product lines.

Strong growth in loans and advances to customers and banks, partly offset by a reduction in debt securities, led to an 11 per cent increase in
total assets to £280 billion. The Group’s strategy to increase retail lending, particularly in mortgages, credit cards and personal loans, was
reﬂected in a 14 per cent increase in loans and advances to customers to £154 billion. Customer deposits increased by £6 billion, or 5 per cent,
to £122 billion, largely as a result of strong growth in current account credit balances which was supported by further progress in the take-up
of added value current accounts.

Other income from continuing operations, excluding investment variance and changes in economic assumptions, increased by £89 million to
£4,463 million. Prior year comparisons are, however, further distorted by the impact of the sale, in 2003, of the Group’s portfolio of emerging
markets  debt  bonds  and  certain  closed  foreign  exchange  positions  and  customer  redress  provisions.  Excluding  these  items,  other  income
increased by 7 per cent. Fees and commissions receivable increased by 5 per cent to £3,124 million as a result of higher income from the
strong volume growth in credit and debit card services, partly as a result of the acquisition of the Goldﬁsh credit card portfolio in September
2003, an increase in mortgage related fees, reﬂecting the growth in new mortgage lending during the year, and an increase in fees from large
corporate business and asset-based lending, as a result of growing customer transaction volumes. 

Income from long-term assurance business, excluding the impact of customer redress provisions, increased by 32 per cent to £590 million as
a result of signiﬁcantly improved proﬁtability in the Scottish Widows life and pensions business. There was also a £50 million increase in gains
on the sales of assets, largely the realisation of venture capital investments.

Operating expenses on a continuing operations basis, excluding the impact of customer redress provisions, continued to be tightly controlled
and increased by only 2 per cent to £4,817 million. Signiﬁcant improvements have been made in processing and operational efﬁciency and
the Group has continued to expand its programme of offshoring a number of its processing and back ofﬁce operations to India. As a result of
this constant focus on day-to-day operating cost control, the Group’s cost:income ratio improved to 51.1 per cent, from 52.5 per cent in 2003.
Revenue growth exceeded cost growth in each division and at Group level.

Much of the Group’s new retail lending during 2004 has been to existing customers where the Group has a better understanding of each
individual customer’s total ﬁnancial position and this, in conjunction with a relatively benign economic environment and increased corporate
liquidity,  has led  to  credit  quality  remaining  strong  throughout  the  Group.  Notwithstanding  substantial  growth  in  loans  and  advances  to
customers, the provisions charge for bad and doubtful debts within the Group’s continuing operations was 2 per cent lower than in 2003 and,
as a result, the Group’s provisions charge expressed as a percentage of average lending improved to 0.59 per cent, compared to 0.66 per cent
in 2003. Non-performing lending was £1,240 million representing 0.8 per cent of total lending, down from 0.9 per cent at 31 December 2003.

During 2004 there has been an increase in the level of complaints relating to past sales and performance of certain endowment based and
long-term savings products. Whilst the Group maintains provisions for customer redress in respect of past product sales, the adequacy of these
provisions has been reviewed in the light of ongoing experience. As a result, an additional provision of £112 million has been made. 

The Group’s capital position remains satisfactory. At the end of 2004, the total capital ratio was 10.0 per cent and the tier 1 capital ratio was
8.9 per cent. Risk-weighted assets increased by 12 per cent to £132.2 billion, reﬂecting strong growth in consumer lending and mortgages,
higher lending in Corporate Markets and the acquisition of a UK corporate loan portfolio from Danske Bank which added risk-weighted assets
of some £2.0 billion. The Group continues to plan for risk-weighted asset growth of mid-to-high single digits over the next few years, and
expected proﬁt retentions are sufﬁcient to support this level of risk-weighted asset growth within the Group’s current capital management policy.
Proﬁt retentions for 2004 totalled £507 million.

12 LLOYDS TSB GROUP

  
     
Operating and financial review and prospects

Scottish Widows continues to be one of the most strongly capitalised life assurance companies in the UK. We remain satisﬁed with the overall
capital position of  Scottish  Widows when calculated  using the  Financial Services  Authority’s (FSA) new  ‘realistic’ basis of balance sheet
reporting, and the ﬁrst Individual Capital Assessment under the new FSA regime has been completed and shows that our capital requirements
are well covered. At the end of December 2004 the working capital ratio of the Scottish Widows Long-Term Fund, applying the FSA’s new
realistic basis, was an estimated 19.0 per cent. The required risk capital margin was covered over nine times. Scottish Widows has also paid
a 2004 dividend of £200 million to Lloyds TSB reﬂecting the start of an expected regular dividend stream.

Recognising the Group’s high existing dividend payout ratio, and reﬂecting a desire to maintain capital ﬂexibility to continue making value
enhancing acquisitions, such as the acquisition of Danske Bank’s UK corporate loan portfolio in December 2004, the board has decided to
maintain the ﬁnal dividend at 23.5p per share to make a total for the year of 34.2p per share. This represents a dividend yield for shareholders
of 7.2 per cent, calculated using the 31 December 2004 share price of 473p.

LLOYDS TSB GROUP   13

Operating and financial review and prospects

UK Retail Banking

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

Proﬁt before tax, before provisions for customer redress

Cost:income ratio, before provisions for customer redress
Total assets (year-end)
Total risk-weighted assets (year-end)

† Restated, as explained on page 3.

2004
£m

3,198
1,639

4,837
(2,513)

2,324
(673)
–

1,651

1,751

49.9%
£101.6bn
£60.5bn

2003†
£m

3,137
1,533

4,670
(2,583)

2,087
(594)
(22)

1,471

1,671

51.0%
£90.5bn
£54.1bn

Proﬁt before tax from UK Retail Banking increased by £180 million, or 12 per cent, to £1,651 million, compared to £1,471 million in 2003,
supported by continued strong growth in the Group’s consumer lending portfolios, partly offset by lower product margins, higher current account
credit balances, improved current account fee income, tight cost control and a lower provision for customer redress. Excluding the impact of
provisions for customer redress, proﬁt before tax in UK Retail Banking increased by 5 per cent, with income growth of 4 per cent and cost growth
of 1 per cent.

During 2004, we completed the restructure of our retail branch network through the establishment of 165 proﬁt centred local markets. Initially,
we particularly focused on developing our business in the London and South East markets where Lloyds TSB is currently under represented.
Good progress has been made and, in our test markets, we achieved higher growth in quality customer recruitment, and greater improvement
in levels of customer satisfaction than elsewhere in the branch network, and this is now starting to deliver an improved sales performance.

In 2004, market shares were increased or maintained in most key product areas including gross and net new mortgage lending, personal loans
and  credit cards. Income, proﬁt and economic proﬁt per customer all improved during 2004. Strong growth in volumes was achieved with
personal loans outstanding at 31 December 2004 of £10.7 billion, an increase of 12 per cent during the year, and card balances of £7.5 billion,
an increase of 12 per cent. Gross new mortgage lending increased by 9 per cent to a record £26.3 billion, compared with £24.2 billion in
2003.  Net  new  lending  increased to  £9.3  billion  resulting  in  a  market  share  of  net  new  lending  of  9.2  per  cent,  and  mortgage  balances
outstanding increased by 13 per cent to £80.1 billion. Credit balances on current accounts and savings and investment accounts increased by
7 per cent.

Within personal loans, key initiatives have been the increased use of behavioural and risk-based pricing, leveraging our customer relationship
management capabilities to enable the Group to deliver more competitive pricing to better quality customers and to price by distribution channel
within our existing customer base. 99 per cent of new personal loans, and 75 per cent of new credit cards, sold during 2004 were to existing
customers, where the Group has a better understanding of an individual customer’s total ﬁnancial proﬁle. The Group has also continued to avoid
sub-prime  lending.  Dynamic  delinquency  measures, on  a  rolling 12 month basis, show  an  improving  position  for  new  business  written. 
We have also continued to rationalise back ofﬁce operations to improve efﬁciency and levels of customer service and satisfaction. 

Operating expenses were well controlled throughout the business and as a result, excluding provisions for customer redress, increased by only
£30 million, or 1 per cent, to £2,413 million compared with 4 per cent growth in income during the year.

The bad debt provisions charge increased by £79 million, or 13 per cent, to £673 million. £37 million of this increase reﬂected the acquisition
in September 2003 of the Goldﬁsh credit card and personal lending portfolios with the remainder reﬂecting volume related asset growth in
personal  loan  and  credit  card  lending.  The  provisions  charge  as  a  percentage  of  average  lending  for  personal  loans  and  overdrafts  fell  to 
4.20  per  cent,  from  4.25  per  cent  in  2003,  while  the  charge  in  the  credit  card  portfolio  increased  to  3.42  per  cent,  from  3.19  per  cent 
in 2003. In the mortgages business, there was a net provision release of £42 million (2003: £18 million release), reﬂecting the continuing
low level  of losses in a  climate of rising house prices and historically low interest rates.  Overall,  the  provisions  charge  as  a  percentage  of 
average lending was 0.71 per cent, compared to 0.72 per cent in 2003, and the arrears position remained satisfactory.

C&G continues to focus on prime lending market segments, and has maintained its policy of not exceeding a 95 per cent loan-to-value ratio on
new lending. The average indexed loan-to-value ratio on the C&G mortgage portfolio was 41 per cent (31 December 2003: 43 per cent), and
the average loan-to-value ratio for C&G new mortgages and further advances written during 2004 was 62 per cent (2003: 62 per cent). At
31 December 2004, 88 per cent of C&G mortgage balances had an indexed loan-to-value ratio of less than 80 per cent and only 0.3 per cent
of balances had an indexed loan-to-value ratio in excess of 95 per cent.

14 LLOYDS TSB GROUP

Operating and financial review and prospects

Customers are increasingly choosing to buy via direct channels and continued investment in our direct channel capabilities has supported good
levels of business growth. Our internet bank now has 3 million registered users and, in 2004, 1.2 million product sales were achieved through
the internet, an increase of 39 per cent compared to 2003. Over 400 million transactions were processed through internet banking, an increase
of 60 per cent on 2003. Sales through direct channels now represent 50 per cent of total sales.

Lloyds TSB remains a leader in the added value current account market, with over 4 million customers. Quality customer current account
recruitment  increased  by  20 per  cent,  compared  with  2003,  whilst  quality  current  account  attrition  was  11 per  cent  lower,  reﬂecting
improvements made in levels of process quality, customer service and customer satisfaction.

LLOYDS TSB GROUP   15

Operating and financial review and prospects

Insurance and Investments

Life and pensions 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

Proﬁt before tax (life and pensions)*

Unit trusts
Unit trust distribution costs

Proﬁt before tax (unit trusts)

Proﬁt before tax (life, pensions and unit trusts)*
General insurance*
Scottish Widows Investment Partnership

Proﬁt before tax*

2004
£m

419
(231)

188

300
(41)
(39)

220
(12)
(11)
167

552

75
(22)

53

605
160
8

773

Proﬁt before tax, excluding provisions for customer redress*
New business margin (life and pensions)

785
28.6%

† Restated, as explained on page 3.

* Excluding changes in economic assumptions and investment variance.

2003†
£m

396
(241)

155

283
(16)
(75)

192
(100)
(13)
153

387

62
(38)

24

411
153
1

565

665
25.8%

Proﬁt before tax from Insurance and Investments, excluding changes in economic assumptions, investment variance and customer redress
provisions, increased by 18 per cent to £785 million, from £665 million in 2003. On the same basis, proﬁt before tax from our life, pensions
and  unit  trust  businesses  increased  by  £106 million,  or  21 per  cent,  to  £617 million.  The  Group’s  strategy  to  improve  its  proﬁt  mix  by
focusing on more proﬁtable, less capital intensive, business whilst constantly seeking to improve process and distribution efﬁciency has led to
a 21 per cent increase in new business contribution to £188 million. As a result of this improved capital efﬁciency, strong sales of pensions
and single premium investments, and a reduced emphasis on certain lower return products such as stakeholder pensions, the life and pensions
new business margin increased to 28.6 per cent, from 25.8 per cent in 2003.

Proﬁt before tax from existing business, excluding provisions for customer redress, increased by £28 million, or 15 per cent, to £220 million.
The expected return from existing business, which largely reﬂects the unwinding of the long-term discount rate applied to the expected cash
ﬂows from the Group’s portfolio of in-force business, was £17 million, or 6 per cent, higher at £300 million. 

During 2004, there was a net charge of £80 million from changes in actuarial assumptions and experience variances, compared to a net charge
of £91 million in 2003. Higher margins, lower distribution costs and an improved stock market performance led to a signiﬁcant improvement
in the proﬁt before tax from unit trusts, despite a reduction in the level of unit trust sales.

Pre-tax proﬁt from Scottish Widows Investment Partnership (‘SWIP’) increased to £8 million, compared with £1 million in 2003, reﬂecting
improved market performance and increased revenues from new business. SWIP won a record £2.1 billion of gross new business in 2004 and
increased its assets under management by 6 per cent to £82 billion. The investment performance of ﬁxed income and property remained strong
in 2004. Corporate composite bonds outperformed the market in the three year period to 31 December 2004, and the principal property unit-
linked funds have  performed in the  top quartile in each of  the last three years. UK  and European equity performance has shown steady
improvement over 2004 and UK equities within SWIP’s largest institutional funds have been signiﬁcantly ahead of the benchmark in the second
half of 2004. SWIP has introduced a new simpliﬁed fund range to support Lloyds TSB’s bancassurance offer.

Overall, weighted sales in 2004 increased to £743.1 million, compared to £733.4 million in 2003 with 10 per cent growth in IFA sales to
£431.6 million. Direct sales grew by 17 per cent to £72.2 million, while branch network sales were 14 per cent lower at £238.9 million largely
reﬂecting the wider market trend of lower single premium unit trust sales. 

In life and pensions, supported by growth in all channels, weighted sales increased by 9 per cent to £656.7 million, resulting in an increase
in the Group’s market share to 7.5 per cent, from 7.0 per cent in 2003. Through the branch network and direct channels, the Group’s market
share increased to 8.9 per cent, from 7.8 per cent in 2003, whilst the Group’s market share in the IFA market improved to 7.0 per cent, from
6.7 per cent in 2003.

16 LLOYDS TSB GROUP

Operating and financial review and prospects

Weighted sales (regular + 1/10 single):
Life and pensions
Unit trusts

Life, pensions and unit trusts

Weighted sales by distribution channel:
Branch network
Independent ﬁnancial advisers
Direct
Other, including International

Life, pensions and unit trusts

Group funds under management:
Scottish Widows Investment Partnership
UK Wealth Management
International

General insurance

2004
£m

656.7
86.4

743.1

238.9
431.6
72.2
0.4

743.1

2004
£bn

82
13
13

108

2003
£m

601.7
131.7

733.4

278.8
391.6
61.6
1.4

733.4

2003
£bn

77
11
15

103

Proﬁt before tax, excluding investment variance, from our general insurance operations increased by £7 million, or 5 per cent, to £160 million.

Continued progress in improving levels of business retention and higher product margins led to premium income from underwriting increasing
by £19 million, or 4 per cent. Home insurance income increased by 8 per cent. Insurance broking commission income decreased by £18 million
as a £26 million increase in income from creditor insurance was offset by a £47 million reduction in other commissions, reﬂecting lower proﬁt
sharing income. There was a signiﬁcant improvement in broking income from creditor insurance in the second half of the year, partly reﬂecting
improvements in personal loan and credit card penetration rates.

The  business  strategy  to  increase  investment  in  more  cost  efﬁcient  distribution  through  direct  channels  is  starting  to  create  a  shift  from
face-to-face channels towards direct channels. As a result gross written premiums from new policies sold through direct channels increased by
12 per cent in 2004. Gross written premiums for new policies sold via the internet increased by 37 per cent.

Claims fell by £12 million to £224 million, compared to 2003, and the claims ratio fell to 38 per cent compared with 42 per cent in 2003,
reﬂecting benign weather conditions and improved leverage of the supply chain. The combined ratio relating to the underwriting business was
83.2 per cent in 2004.

Premium income from underwriting:
Creditor
Home
Health
Reinsurance premiums

Commissions from insurance broking:
Creditor
Home
Health
Other

Proﬁt before tax*

† Restated, as explained on page 3.

* Excluding investment variance.

2004
£m

114
442
27
(29)

554

377
30
19
160

586

160

2003†
£m

104
410
43
(22)

535

351
30
16
207

604

153

LLOYDS TSB GROUP   17

Operating and financial review and prospects

Wholesale and International Banking

Net interest income 
Other income

Total income
Operating expenses

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

(Loss) proﬁt on sale of businesses

Proﬁt before tax

Cost:income ratio*
Total assets (year-end) 
Total risk-weighted assets (year-end) 

† Restated, as explained on page 3.

* Excluding trading results of discontinued operations.

2004
£m

1,966
1,641

3,607
(2,090)

1,517
(193)
(52)

1,272
(15)

1,257

57.9%
£113.0bn
£71.1bn

Continuing
operations
2003†
£m

1,875
1,561

3,436
(2,048)

1,388
(306)
(44)

1,038
–

1,038

Discontinued
operations
2003
£m

511
142

653
(272)

381
(63)
–

318
865

1,183

Total
2003†
£m

2,386
1,703

4,089
(2,320)

1,769
(369)
(44)

1,356
865

2,221

59.6%
£101.3bn
£62.8bn

Wholesale and International Banking proﬁt before tax, excluding proﬁt/loss on sale of businesses and trading results of discontinued operations,
increased by £234 million, or 23 per cent, to £1,272 million, from £1,038 million in 2003. On the same basis income growth of 5 per cent
exceeded cost growth of 2 per cent, leading to an improvement in the cost:income ratio to 57.9 per cent. Our focus on cross-selling and capital
efﬁciency has led to an increase in the post-tax return on average risk-weighted assets to 1.42 per cent compared with 1.23 per cent in 2003.
In Wholesale, there was strong proﬁt growth in Corporate Markets, Business Banking and Asset Finance, in addition to a reduction in provisions
for bad and doubtful debts. 

Excluding the trading results of businesses sold in 2003 net interest income increased by £91 million, or 5 per cent, reﬂecting higher income
from improved margins in Corporate Banking and the Asset Finance businesses, and strong growth in customer lending in Asset Finance. Other
income increased by £80 million, partly as a result of a £50 million increase in gains on the sales of assets, largely the realisation of venture
capital investments by Lloyds TSB Development Capital. Costs were tightly controlled, 2 per cent higher at £2,090 million, reﬂecting higher
staff related  costs  and  increased investment  spend  within  Corporate  Markets,  partially  offset  by  lower  operating  lease  depreciation  within
Asset Finance.

The charge for provisions for bad and doubtful debts decreased by £113 million to £193 million. The charge in Wholesale fell by £68 million
to £232 million, as a result of a decrease in provisions from the corporate lending portfolio, partially offset by higher charges in the Asset Finance
business. In International Banking there was a credit of £39 million mainly reﬂecting a £30 million release from the general provision against
the Group’s exposures in Argentina.

We continue to deepen customer relationships, and the creation of an integrated regional sales structure, bringing together product specialists
with relationship managers, has already started to generate positive results, with a 59 per cent increase in cross-selling income within Corporate
Markets including an 86 per cent increase in Financial Markets cross-selling income to £69 million in 2004. In Corporate Markets, which
incorporates Corporate Banking, Structured Finance and Financial Markets, proﬁt before tax grew by 25 per cent from £504 million in 2003
to £631 million, reﬂecting an increase in the contribution from both relationship and transactional business driven by a combination of higher
income and a reduction in provisions.

In December 2004, we agreed the acquisition of a UK corporate loan portfolio from Danske Bank comprising some 110 relationships, with
total assets of £1.2 billion and risk-weighted assets of some £2.0 billion. The transaction is expected to enable us to deepen the relationships
we have with a number of our existing corporate customers and acquire some important new corporate relationships to support the growth
within our Corporate Markets businesses.

Proﬁt before tax in Business Banking grew by £23 million, or 22 per cent, to £126 million reﬂecting good growth in customer income and tight
control of costs. Customer deposits rose by 3 per cent to £10.3 billion and customer lending increased by 9 per cent to £6.0 billion. Business
Banking continued to grow its customer franchise, with net customer recruitment of some 12,000 during the year, regaining leadership in the
start-up market with a share of 22 per cent in 2004. 

Proﬁt before tax in Lloyds TSB Asset Finance increased by 27 per cent to £202 million, compared with £159 million in 2003, largely reﬂecting
the continued proﬁtable development of the motor and leisure, and contract hire businesses. In the personal and retail finance business, new
business volumes have increased by some 9 per cent, increasing market share. Lloyds TSB Commercial Finance has retained market leadership,
measured by client numbers, with a 19 per cent market share, and the motor and leisure business continues to be the largest independent
lender in the UK motor and leisure point of sale market with a market share of 20 per cent. 

In  International  Banking,  proﬁt  before  tax,  excluding  the  proﬁt/loss  on  sale  of  businesses  and  trading  results  of  discontinued  operations,
increased by £27 million, or 21 per cent, to £157 million, reﬂecting a £45 million reduction in provisions, including a £30 million general
provision release in Argentina.

During 2004, the Group completed the sale of its businesses in Panama, Guatemala, Honduras, Argentina and Colombia resulting in a net loss
on disposal of £15 million. 

18 LLOYDS TSB GROUP

Operating and financial review and prospects

Central group items

Accrual for payment to Lloyds TSB Foundations
Other ﬁnance income
Funding cost of acquisitions less earnings on capital
Proﬁt on sale of emerging markets debt portfolio and certain closed foreign
exchange positions
Central costs and other unallocated items

2004
£m

(31)
39
(342)

–
1

(333)

2003†
£m

(31)
34
(345)

295
35

(12)

† Restated, as explained on page 3.

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 2004, the Group accrued £31 million for payment to the Lloyds TSB Foundations.

During 2003 improved secondary bond market conditions allowed the Group to sell its remaining portfolio of emerging markets debt securities.
Proﬁts on these bond sales, and certain closed foreign exchange positions, in 2003 totalled £295 million.

LLOYDS TSB GROUP   19

Operating and financial review and prospects

Risk management

Risk as a strategic differentiator

Risk awareness has improved signiﬁcantly. The ground work of embedding the risk governance framework has been completed and the challenge and support
provided by specialist risk functions has been located closer to business units, whilst maintaining independence. This is reﬂected in dual reporting lines to
both the chief risk director and business managers. Risk analysis has been strengthened and a new reporting system has been developed and implemented
which better identiﬁes opportunities as well as risks, improves the ability to take an aggregate view of the overall risk portfolio and assigns clear responsibilities
and timetables at Group and divisional level for risk mitigation strategies. Risk continues to be a key component of all routine management information
reporting and is embedded in the balanced scorecards, which are cascaded to every member of staff. The objective is to go beyond risk mitigation and control
to developing risk capabilities as a key strategic differentiator for Lloyds TSB.

s
e
i
t
i
l
i

b
a
p
a
C

Regulatory requirements

Differentiating excellence 
in risk management

Defining and promoting 
effective use of the 
Group’s risk capacity

Risk control

Effectiveness

Risk proﬁle

Having worked to reduce risk and earnings volatility during 2003 by tactically selling part of our portfolio of businesses, this year’s focus has been more on
improving the understanding of risk. Our credit disciplines are strong, which will leave us well positioned, should there be any adverse change in the economic
climate during 2005 and as we selectively seek to increase our lending portfolios. Allied to this there has been a much closer alignment between risk and the
strategic planning round both in terms of identifying risks to the delivery of the plans and change in risk appetite arising from those plans.

Risk management framework

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. The framework strengthens the 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 seeking to increase shareholder value.

Risks which the business assumes are broken down into eleven common risk drivers (shown on page 21). Business and divisional risk functions use 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;  seeking to ensure effective  mitigating  action  is  being  taken  where
appropriate and also that the risk appetite allocated to them is proﬁtability and prudently deployed. Divisional risk proﬁle reports are reviewed by the group
business risk committee to seek to ensure that group executive directors and the chief risk director are aware of risk exposures and are comfortable these are 
being  effectively  managed.  During  the  year  a  new  group  consolidated  risk  report  was  developed  and  implemented  to  further  support  the  identiﬁcation and 
control of risk.

The Group is developing an improved approach towards its risk appetite (deﬁned as the extent and categories of risk which the board regards as appropriate
and acceptable for the Group to bear). Adoption of the principles and metrics under development has the objective of deriving Lloyds TSB’s risk appetite and
processes  explicitly  from  its  strategic  objectives  and  the  commitments  it  makes  to  all  its  stakeholders  (customers,  shareholders,  staff,  debt  holders  and
regulators). This work is ongoing.

20 LLOYDS TSB GROUP

Operating and financial review and prospects

Risk language

Lloyds TSB Group has a risk language in which all risks are classiﬁed within one or more of the eleven risk drivers set out below. 

Governance, people and organisation

Strategy

Credit

Market

Insurance

Operations

Product and service

Financial

Customer treatment

Legal and regulatory

Change management

Sub-risks have been developed for these high level risks to further reﬁne the identiﬁcation and classiﬁcation of risk and 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 more detailed language has been identiﬁed for these operational risks.

The Group’s high level policies and reporting to the group business risk committee, risk oversight committee, audit committee and board are aligned to the
risk drivers.

Risk governance

The changing regulatory environment faced by the Group’s businesses, and developments in best practice, prompted the Group during 2003 to extensively
review its risk governance structures and deliver more effective risk management. The process of embedding these changes has progressed during 2004 and
is now substantially complete. In addition, further enhancements were made during the year with a solid reporting line established between the divisional risk
ofﬁcers and the chief risk director.

Board and committees

Lloyds TSB 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

Business risk functions

Board and board committees

Direct reporting line

Management committees

Functional reporting line to support committees

Personnel

Functions

The  risk  oversight  responsibilities  of  the  board,  audit  committee  and  risk  oversight  committee  are  shown  in  the  corporate  governance  section  on  pages 
43 and 44, 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 Group’s risk management framework and the clear articulation
of the Group’s risk policies, and reviews the Group’s aggregate risk exposures and concentrations of risk. The group executive committee’s duties are described
more fully on page 44.

LLOYDS TSB GROUP   21

Operating and financial review and prospects

Directors of the 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 Group’s high level policies and within the parameters set by the
board, group executive committee, Group Risk and the divisional risk ofﬁcers. The policies and parameters are overseen by the risk oversight committee, the
group business risk committee, the group asset and liability committee, Group Risk and the divisional risk ofﬁcers.

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

Divisional risk ofﬁcers provide oversight of risk management activity within each of the 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 wide ranging and current perspective
on material risks facing the Group.

The  director  of  group  audit  provides  the  required  independent  assurance  to  the  board  and  audit  committee  that  risks  within  the Group  are  recognised,
monitored and managed within acceptable parameters. Group Audit is fully independent of Group Risk, 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 Group’s  risk  appetite.  As  shown  on  page  21,  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 seeks to provide the 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 Group. These arrangements will
enable the Group to better anticipate and pre-empt risks, and to manage more effectively those risks which crystallise.

Reﬂecting the importance the 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.

There is an annual control self-assessment exercise under which key businesses and head ofﬁce functions across the Group review speciﬁc controls and certify
the accuracy of their assessments.

Basel

The Capital Requirements Directive will come into force for all European banks at the start of 2007, although the ﬁnal rules to be applied in the UK are only
likely to be published in 2006. These will be subject to further consultation, and the Lloyds TSB Group has been playing a full part with the regulatory authorities
in attempting to shape them. The Group aspires to an Internal Ratings Based approach to credit risk and an Advanced Measurement Approach to operational
risk. Accordingly, a considerable investment is being made in order to meet the standards required for these more advanced approaches. As well as meeting
the compliance imperative, beneﬁts to the Group will accrue through further enhancement of our risk management and capital allocation capabilities. 

22 LLOYDS TSB GROUP

Operating and financial review and prospects

Credit risk 

Deﬁntion

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

Control

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

Portfolio analysis. With Group Risk, 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.

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

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. The formulation of concentration limits on certain industries and sectors. Group Risk 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. The Group has limited exposure to such instruments.

Credit risk arising from the use of derivatives. Note 47 shows the total notional principal amount of interest rate, exchange rate and equity and other
contracts outstanding at 31 December 2004. The notional principal amount does not, however, represent the Group’s real exposure to credit risk, which is
limited to the current cost of replacing contracts with a positive value to the Group, should the counterparty default. This replacement cost is also shown in
note 47. 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.

A number of tools, including group level credit policy where appropriate, are used to control the 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 to communicate the Group’s risk appetite for

speciﬁc types of business, primarily in the non-retail markets.

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

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

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

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

aggregate exposure throughout the Group.

• Monitoring  and  controlling  residual  value  risk  exposure.  The 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 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 Group policy. Businesses’ lending authorities are delegated by ofﬁcers holding divisional lending authority.
All material authorities are advised to Group Risk.

Credit quality is supported by specialist units established within the 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.

Credit risk exposures in the insurance businesses arise primarily from holding investments and from exposure to reinsurers. Control is exercised over those
exposures through a suitable combination of formal limits, credit policy parameters and high level committee oversight.

LLOYDS TSB GROUP   23

Operating and financial review and prospects

Market risk

Deﬁnition 

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 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. The Group’s insurance activities also
expose it to market risk. The Group’s pension schemes are exposed to signiﬁcant risks from the constituent parts of their assets, primarily equity and interest
rate risk, and from the present value of their liabilities.

Control

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, 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. 

Trading is restricted to a number of specialist centres, authorised by Group Treasury, the most important centre being Financial Markets in London. The level
of exposure is strictly controlled and monitored within approved limits by Group Treasury. Most of the 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 (including 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 and losses. 

Market risk in the wholesale banking books is managed in the UK by Financial Markets 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.

Market risk in the Group’s retail portfolios and in the Group’s capital funds arises from the different repricing characteristics of the Group’s banking assets and
liabilities and is managed by Group Balance Sheet Management.

Limits to control interest rate risk within the 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 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. Some centres have, in addition, adopted benchmark proﬁles for investment of interest rate insensitive
liabilities as approved by Group Treasury.

Derivatives are used to meet customers’ ﬁnancial needs; as part of the Group’s trading activities; and to reduce the Group’s own exposure to ﬂuctuations in
interest and exchange rates. The principal derivatives used by the 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 Group trades to seek to ensure that there are no undue concentrations of activity and risk.

Market risk exposures from the insurance businesses are controlled via approved investment policies consistent with the Group’s overall risk appetite and
regularly reviewed by the group asset and liability committee.

The group asset and liability committee liaises with the pension scheme trustees with regard to strategies for the overall mix of pension scheme assets.

Trading risk exposures from banking activities

The primary measure within the Group is the Value at Risk (VaR) 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 VaR for the years ended 31 December 2004 and 2003 based on the Group’s global trading positions was as detailed in the table
below (the table also aggregates potential loss measures from options portfolios).

Interest rate risk
Foreign exchange risk
Equity risk
Total VaR (no diversiﬁcation)

31 December 2004

31 December 2003

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

0.7
0.2
0.0
0.9

0.9
0.3
0.0
1.3

1.7
0.6
0.0
2.0

0.5
0.2
0.0
0.8

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

Measurement techniques. A variety of techniques are used to quantify the market risk arising from the 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 Group level, to simulate extreme conditions to supplement these core measures.

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 VaR methodology:

• 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 signiﬁcantly 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. 

24 LLOYDS TSB GROUP

Operating and financial review and prospects

• 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. 

• 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 the Group’s approach to managing trading market risk, it is supplemented by position and sensitivity
limits and stress testing. 

Structural interest risk exposures from banking activities

The 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 the Group to hedge its exposure.

The simulation models used by the 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 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 2005 would decrease net interest income
by £80.7 million for the 12 months to 31 December 2005, while a hypothetical immediate and sustained 100 basis point decrease in interest rates would
increase net interest income by £76.3 million. An analysis by currency is shown below.

UK
£m

North
America
£m

Asia &

Europe &
Australasia Middle East
£m

£m

Total
2005
£m

Total
2004
£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

(48.7)

3.5

(1.0)

(34.5)

(80.7)

(88.3)

44.3

(3.5)

1.0

34.5

76.3

84.0

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 particular
no changes to product margins. 

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.

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

Liabilities arising in the course of business from the 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 the 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.

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 Financial
Markets 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  Financial  Markets 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.  Limits  are  issued  to  the  international  businesses  on  interest  rate  gaps  or,  where  more 
appropriate, VaR.

Foreign exchange exposures from banking activities

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

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. 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 on the previous page.

Risk arises from the Group’s investments in its overseas operations. The 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.

LLOYDS TSB GROUP   25

Operating and financial review and prospects

The structural position is managed by Lloyds TSB Group Capital Funds having regard to the currency composition of the 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 exchange rate movements on the published risk
asset ratio. 

The Group’s structural position at 31 December 2004 is set out in note 47d to the ﬁnancial statements. The position implies that at 31 December 2004 a
hypothetical increase of 10 per cent in the value of sterling against all other currencies would have led to an £82 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.

Market risk exposures in the insurance businesses

Market risk exposure depends upon the nature of the funds in question:

• With-proﬁts funds are managed in accordance with the relevant fund’s Principles and Practices of Financial Management. This leads to assets and liabilities 

that are mismatched with the aim of generating a higher rate of return to meet policyholders’ expectations.

• Unit-linked liabilities are matched with the same assets that are used to deﬁne the liability but future fee income is dependent upon the performance of

these assets.

• For other insurance liabilities the investment strategy is determined by the term and nature of the underlying 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 insured events 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 three portfolios: the surplus in the non-participating fund within the
Long-Term  Fund  of  Scottish  Widows  plc,  assets  in  shareholder  funds  of  life  assurance  companies  and  an  investment  portfolio  within  the  General
Insurance business.

Market risks are monitored using stochastic modelling.

The surplus in the Non-Participating Fund of Scottish Widows plc exists to provide the Long-Term Fund with liquidity and working capital. The surplus also
forms  a  capital  reserve  to  support  the  investments  managed  on  behalf  of  the  With-Proﬁts  Fund  of  Scottish  Widows  plc.  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 helps maintain the value of the reserve as a proportion of the underlying 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.

Assets held in shareholder funds are invested in money market funds, gilts and investment grade bonds so as to reduce the risk of statutory insolvency in
the event of market crashes.

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 the group asset and liability
committee supported by Group Risk.

Investment holdings are diversiﬁed across markets and, within markets, across sectors. Holdings of individual assets are diversiﬁed to minimise speciﬁc risk
and large individual exposures are monitored closely. For assets held outside unit-linked funds, investments are only permitted in countries and markets which
are sufﬁciently regulated and liquid.

Equity derivatives are used by the 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.

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’ on page 28).

The composition, and value, of both the Scottish Widows plc Non-Participating Fund and the General Insurance portfolio are reported to Group Risk on a
monthly basis and a VaR is calculated which is presented to the group asset and liability committee. 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 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. In addition the risks are
calculated based on a 99 per cent conﬁdence level and a ten day holding period. 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 2004 and 2003 on a 99 per cent conﬁdence
ten day basis.

31 December 2004

31 December 2003

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

Closing
£m

Average
£m

Maximum
£m

Minimum
£m

15.5
2.4
55.2
73.1

16.1
2.7
54.2
73.0

17.9
3.4
56.4
75.9

11.2
2.2
51.6
67.1

15.1
3.6
52.1
70.8

16.3
4.0
63.0
83.3

24.3
4.6
80.0
107.5

13.2
3.3
51.8
70.8

Interest rate risk
Foreign exchange risk
Equity risk
Total VaR

26 LLOYDS TSB GROUP

Operating and financial review and prospects

Insurance risk 

Deﬁnition

The risk of loss arising from the sensitivity of proﬁts to movements in insurance claims, expenses and persistency experience and expectation. It also covers
the risk of inadequate underwriting and/or reinsurance of insured risks and movements in the cost of providing beneﬁts from the Group’s pension schemes
that result from social and demographic factors.

Control

Control is exercised primarily through a suitable combination of high level committees/boards. For the life assurance businesses the key control body is the
Scottish Widows plc board with the more signiﬁcant risks also being subject to approval by the Lloyds TSB group executive committee and/or the Lloyds TSB
Group board. For the general insurance businesses the key control body is Lloyds TSB Insurance executive committee with the more signiﬁcant risks again
being subject to Lloyds TSB group executive committee and/or Lloyds TSB Group board approval. All Group pension scheme issues are covered by the group
asset and liability committee.

Insurance risks are measured through deterministic studies of the impact of different insurance market scenarios on the future free assets of the business
together with relevant stochastic modelling.

Limits are used as a control mechanism for insurance risk at policy level.

Insurance risk exposures

Some insurance risks are retained while others are reinsured with external underwriters. The retained risk level is carefully controlled and monitored, with
close attention being paid to the analysis of underwriting experience, claims management, 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 with signiﬁcant mortality risk and morbidity risk being
transferred to our chosen reinsurers.

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’ on page 28).

Expenses are monitored by an analysis of the Group’s experience relative to budget. Reasons for any signiﬁcant divergence from expectation are investigated
and remedial action taken.

Persistency rates are regularly assessed by reference to appropriate risk factors.

Operations risk

Deﬁnition

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

Control

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 Group’s risk appetite. Where appropriate, risk is mitigated by way of insurance. 

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

Legal and regulatory risk 

Deﬁnition

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

Control

Each  business  has  a  nominated  individual  with  ‘compliance  oversight’  responsibility  under  FSA 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 Group is subject, and to
monitor and report on adherence to these rules and regulations.

All  compliance  personnel  also  have  a  reporting  line  to  the group  compliance  director,  who sets  compliance  standards  across  the Group  and  provides
independent reporting and assessment to the board and business directors.

Group Compliance includes a dedicated unit, led by the group ﬁnancial crime director, which is responsible for ensuring that the 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.

LLOYDS TSB GROUP   27

Operating and financial review and prospects

Customer treatment risk

Deﬁnition

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

Control

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

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

A framework is in place to guide the consideration and documentation of customer treatment risk when developing policies and procedures. The 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. The Group also provides
its staff with clear FSA compliant guidelines and processes for dealing with customer complaints.

Strategy risk

Deﬁnition

This comprises the risks arising from the adoption of the 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.

Control

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 Group’s plan.

The 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 Group’s key strategies and plans. Group Risk conducts oversight to ensure the business plans remain
consistent with the Group’s strategy.

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  conducts, where appropriate, an  independent  risk  assessment  of  the  target  company  and  its  proposed  integration  into the
Lloyds TSB Group.

A common approach is applied across the 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 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
Group level. The Group’s economic capital model covers credit, market, insurance, business and operational risks.

Product and service risk

Deﬁnition

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 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.

Control

The 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.

Businesses maintain a range of products to meet customers’ needs and the business strategy and 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 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 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.  Procedures require that terms and  conditions  (to  include  mandates,  agreements  and  other
documentation) are approved by legal advisers and reviewed periodically.

28 LLOYDS TSB GROUP

Operating and financial review and prospects

New  product  approval. The Group  deﬁnes  a  new  product  as  a  new  or  amended  product  that  introduces  a  signiﬁcantly  different  risk  proﬁle  at
Group or business level. In line with deﬁned policy, businesses provide divsional risk management with details of new products at an early stage of product
or service development to ensure compliance with the 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 divisional 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.

Change management risk

Deﬁnition

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.

Control

To deliver the Group’s strategic aims, change must be managed in an effective, risk-aware and appropriately controlled manner throughout the organisation.
The Group’s Change Management Standards ensure appropriate control across the 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 Group’s 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.

Governance, people and organisation

Deﬁnition

This is the risk of loss from poor corporate governance at Group and business level. It includes sub-optimal organisational structuring, or failure to recruit,
manage and retain appropriately skilled staff to achieve business objectives. Group policy for managing governance, people and organisation risk is deﬁned
in the Group Policy Manual. It deﬁnes the way the 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.

Control

Management of risks. The 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 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 Group  and  its  customers  are  evaluated.  The 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.

Information and communication. It is the Group’s policy for the board and senior management at both 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 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 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. The Group has a code of business conduct, which applies to the group chief executive, the group ﬁnance director, 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 Group’s  website  at
www.lloydstsb.com.

Performance and reward management. The 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 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.

LLOYDS TSB GROUP   29

Operating and financial review and prospects

Financial soundness

Deﬁnition

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

Liquidity risk is deﬁned as the risk of a loss arising from the 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. 

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 Group’s capital ratios, calculated in line with the requirements of the FSA, are set out in detail on page 31.

Control

A policy is in place which requires a common methodology to measuring liquidity across the 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. The Group complies with the FSA’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 the Group’s compliance with the new liquidity framework being proposed by the FSA. 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. 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 Treasury.

For non-linked funds investments are arranged to minimise the possibility of being a distressed seller whilst at the same time investing to meet policyholder
obligations. For unit-linked business, deferral provisions are designed to give time to realise linked assets without being a forced seller.

Lloyds TSB Group and its regulated subsidiary banks have been allocated an Individual Capital Ratio by the FSA, 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 FSA, together with
proposed remedial action; no such notiﬁcations have been made during 2004. 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.

Capital ratios are a key factor in the 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 Group’s capital to movements in equity markets. 

The Group seeks to use appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates. Each
reporting entity within the 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 approval of management accounts at a determined level of detail, ensuring consistency with ﬁnancial accounts, and preparation of
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.

Liquidity sources

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.

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 2004, Lloyds TSB Group plc had
£1,358  million  of  subordinated  debt  in  issuance  compared  with  £10,252  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 2004, the credit ratings of Lloyds TSB Bank were as follows:

Moody’s
Standard & Poor’s
Fitch

Senior debt

Aaa
AA
AA+

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.

30 LLOYDS TSB GROUP

Operating and financial review and prospects

A signiﬁcant part of the liquidity of the 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 2004, amounts deposited by customers increased by £5,566 million from £116,496 million at 31 December 2003 to £122,062 million at
31 December 2004. 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 £5,097 million had been utilised for senior funding at 31 December 2004,
and a commercial paper programme, under which £3,281 million had been utilised at 31 December 2004.

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

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. 

The 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 bad debt 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 the Group’s regulatory capital.

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. 

Capital:
Tier 1
Tier 2

Supervisory deductions

Total regulatory capital

Total risk-weighted assets

Risk asset ratios:
Total capital
Tier 1

Post-tax return on average risk-weighted assets

31 December
2004
£m

11,725
8,800

20,525
(7,252)

13,273

132,173

10.0%
8.9%

2.01%

31 December
2003
£m

11,223
8,935

20,158
(6,898)

13,260

117,732

11.3%
9.5%

2.63%

At 31 December 2004, the risk asset ratios were 10.0 per cent for total capital and 8.9 per cent for tier 1 capital. The 8.9 per cent tier 1 capital ratio
appears higher than would perhaps be expected and reﬂects the higher level of supervisory deductions resulting from the Group’s signiﬁcant investment in
its life assurance operations.

The 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. Management
will keep all options for the utilisation of capital under review.

There are strict limits imposed by the regulatory authorities as to the proportion of the Group’s regulatory capital base that can be made up of subordinated
debt and preferred securities. The Group’s capacity to raise new debt capital for regulatory purposes increases as proﬁts are retained; at 31 December 2004,
the Group had capacity to raise approximately £2,900 million of tier 2 debt capital, compared to approximately £2,300 million at 31 December 2003. 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 Group seeks to ensure that even in the event of such restrictions the total capital ratio will remain adequate.

During 2004, total capital for regulatory purposes increased by £13 million to £13,273 million. Tier 1 capital increased by £502 million, mainly as a result
of proﬁt retentions. However, tier 2 capital decreased by £135 million largely due to the reduction in the Group’s general bad debt provision. There was an
increase in supervisory deductions of £354 million, mainly as a result of an increase of £300 million in the long-term assurance business attributable to the
shareholder to £6,781 million, from £6,481 million in December 2003.

LLOYDS TSB GROUP   31

Operating and financial review and prospects

Corporate responsibility

Lloyds TSB Group has long recognised the importance of corporate responsibility (sometimes described as corporate social responsibility). 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 corporate responsibility
indices, league tables and investor ratings.

The Group recognises that social, ethical and environmental (SEE) issues bring both risks and opportunities. The Group’s full response to such issues is
detailed in its separate corporate responsibility report, The community and our business, (see page 9 for details).

The Group  has  a  corporate  responsibility  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 corporate
responsibility performance annually and individual issues are subject to board discussion throughout the year. During 2003, the Group introduced a human
rights policy and in 2004 has conducted a self-assessment audit that conﬁrms compliance with the policy in all countries of operation. 

The board believes that the systems in place to manage signiﬁcant SEE risks are effective and provide adequate information to identify and assess the short
and  long-term  risks  arising  from  SEE  matters.  One  of  the  most  signiﬁcant  risks  is  that  posed  by  climate  change,  which  affects  the  whole  business  of
insurance – claims, regulation, investment returns and operating costs. Storm and ﬂood damage claims in the UK have doubled to £6 billion since 1998.
Lloyds TSB Insurance recognises this risk and is working with the Association of British Insurers and the government to prevent further building on ﬂood plains.
In  addition  it  offers  advice  to  homeowners  on  how  to  protect  their  properties  against  extreme  weather  conditions.  These  measures  have  ensured  that
Lloyds TSB Insurance is currently able to continue offering cover to renewing customers in areas considered prone to ﬂooding, while managing its exposure
through pricing and underwriting controls.

The board is satisﬁed that relevant corporate responsibility risks have been assessed during 2004 and that they do not pose a material threat to the Company.

During 2004 the Group further embedded 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 corporate responsibility 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 corporate responsibility related policies and procedures.

32 LLOYDS TSB GROUP

Operating and financial review and prospects

Future accounting developments

International Financial Reporting Standards

From 1 January 2005, the Group is using International Financial Reporting Standards (‘IFRS’) as its primary ﬁnancial reporting framework. The Group will
report IFRS results for the ﬁrst time in its interim report for the six months to 30 June 2005 and in its 2005 annual report. Comparative information in these
reports will be fully reconciled to reported UK GAAP numbers.

As a 2005 ﬁrst-time adopter of IFRS, the Group is required to prepare an opening balance sheet as at 1 January 2004. Most accounting policy adjustments
to  apply  IFRS  retrospectively  will  be  made  against  retained  earnings  in  this  opening  balance  sheet. However,  transitional  adjustments  relating  to  those
standards for which comparatives are not required to be restated will be made on 1 January 2005. Restated comparatives are not required for IAS 32 Financial
Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts.

A steering committee has been overseeing the adoption of IFRS for the Group and has closely monitored developments in IFRS and the impact for the Group’s
accounting policies and ﬁnancial position. Work streams evaluated the impact of speciﬁc accounting changes and undertook signiﬁcant work during 2004
including technical analysis, development of IFRS-compliant solutions and project management of necessary systems and process changes. The Group has
been preparing its internal management accounts using IFRS since 1 January 2005.

The overall impact on net assets and earnings up to 1 January 2005 is not expected to be signiﬁcant. From 1 January 2005 there will be impacts arising
from  changes in  the  fair  values  of  ﬁnancial  assets  and  liabilities, and volatility  arising  from  ineffective  hedges. The  future  impact  for fee  income,  lease
accounting and accounting for insurance business will depend on the mix of business and the rate of new business growth. The following areas have been
identiﬁed as having the greatest impact upon the Group.

Area of impact

IFRS treatment

Loan impairment

Equity to debt reclassiﬁcation

Fee income

Goodwill

Derivatives, hedging and
investment securities

IFRS adopts an incurred loss model for impairment losses on loans and provides guidance on the measurement of
impairment.  An  allowance  is  raised  for  losses  in  respect  of  exposures  that  are  known  to  be  impaired.  The required
allowance is computed by comparing the book value of the loans with the net present value of the expected future cash
ﬂows from the loans discounted at their effective interest rates or, as a practical expedient for variable rate loans, using
observable market prices. Exposures found not to be impaired are placed into pools of similar assets with similar risk
characteristics to be collectively assessed for losses that have been incurred, but not yet identiﬁed. For such exposures,
the required allowance is estimated on the basis of historical loss experience for assets with credit risk characteristics
similar to those in the collective pool. The historical loss experience is adjusted based on current observable data. These
more prescriptive requirements are expected to lead to increased volatility in the charge made to the income statement.

The classiﬁcation of the majority of the Group’s capital and subordinated debt instruments will continue to follow their
current treatment. However, the limited voting ordinary shares of Lloyds TSB Group plc will be reclassiﬁed as debt. In
addition, the Group’s preferred securities, which are treated as non-equity minority interests under UK GAAP, will be
reclassiﬁed as debt. Distributions on these securities will be shown as interest expense rather than as minority interests. 

Revised rules governing the accounting for fee income will result in more fees being deferred on initial receipt, and
recognised either as an adjustment to yield or over the period of service. Fees required to be treated as an adjustment
to yield will be recognised in interest income rather than fee income. On initial application, certain fees that have
previously been credited to the proﬁt and loss account under UK GAAP will be recognised in the balance sheet, with
a corresponding reduction in retained earnings.

The current Group policy of amortising goodwill arising on acquisitions after 1 January 1998, with the exception of 
the goodwill which arose on the acquisition of Scottish Widows, will cease. Instead, all goodwill will be subject to
impairment testing annually, or more frequently if events or circumstances indicate that it might be impaired. This
change in policy will result in increased volatility of future earnings in the event that impairment losses are identiﬁed.

All derivatives contracts will be carried at fair value on the Group’s balance sheet and movements in their fair value
reﬂected in the income statement. The resulting income statement volatility can be mitigated by the application of
hedge accounting. IFRS permits the use of two kinds of hedge accounting: fair value and cash ﬂow hedge accounting.
The  Group is expected  to  make  greater  use of fair  value  hedge  accounting  which  seeks  to  match, in  the  income
statement, changes in the fair values of the hedged items with the changes in the fair value of the related derivatives.
Cash ﬂow hedge accounting is expected to be used to a lesser extent; adjustments reﬂecting the movements in the fair
values of the derivatives concerned are made to a separate reserve in equity and recycled to the income statement as
the related cash ﬂows occur. IFRS contains detailed requirements for documentation of hedge relationships and testing
their effectiveness.  To  the  extent  that  a  hedge  is  ineffective,  the  impact  is  reﬂected  in  the  income  statement.
An adjustment will  be  made against  retained earnings on transition to  eliminate the effects of  the  asymmetrical
accounting for derivative transactions entered into between the Group’s banking and trading activities.

Investment securities are classiﬁed as either held-to-maturity investments, available-for-sale ﬁnancial assets or at fair
value through proﬁt or loss.  While many of the Group’s investment securities will be classiﬁed as available-for-sale and
will be required to be measured at fair value with changes in their fair values going to a separate reserve in equity,
investment securities backing insurance business will be designated at fair value through proﬁt or loss.

Derecognition of ﬁnancial liabilities

Under IFRS a ﬁnancial liability may only be derecognised after it has been settled or alternatively the debtor has been
legally released from the liability, either by process of law or by the creditor. Upon adoption of IFRS, certain ﬁnancial
liabilities previously released to the proﬁt and loss account will be reinstated.

Consolidation of subsidiaries
and Special Purpose Entities

IFRS requires line-by-line consolidation for all subsidiaries. Consequently, the Group is no longer permitted to report
the results and balances of the life assurance business on one line; instead these amounts must be broken down into
their  constituent  parts  and  allocated  to  the  appropriate  line  items.  IFRS  will  also  require  consolidation  of  several
entities that the Group was not required to consolidate under UK GAAP. These relate to the entities supporting the
Group’s  securitisation  conduits,  which  facilitate customers’ own  securitisations,  and  to  Open  Ended  Investment
Companies (OEICs) where the Group, through the Scottish Widows life funds, has an interest. This will have the effect
of grossing-up the balances reported in the income statement and on the balance sheet.

LLOYDS TSB GROUP   33

Operating and financial review and prospects

Area of impact

Netting

Insurance

Depreciation 

Dividends

Capitalisation of software

Leasing

Share-based payments

IFRS treatment

IFRS prohibits ﬁnancial assets and ﬁnancial liabilities from being offset unless there is a legal right of set-off and the
asset and liability are normally settled on a net basis. In the banking business, this will result in the grossing-up on
the balance sheet of assets and liabilities subject to set-off arrangements that are presented net under UK GAAP. In
the  case  of  insurance  business,  insurance  liabilities  will be presented  without  offsetting  them  against  related
reinsurance assets.

Under IFRS, investment contracts without discretionary participation features (DPF) do not meet the deﬁnition of an
insurance contract and are accounted for as ﬁnancial instruments. The Group’s life assurance business will continue
to  account  for  insurance  contracts  and  DPF  investment  contracts  as  it  has  under  UK  GAAP.  The  signiﬁcant  IFRS
impacts are the removal  of that portion  of the  UK GAAP embedded  value which  represents the  value  of in-force
business relating to investment contracts, the recognition of an asset for deferred acquisition costs (DAC) in connection
with writing new investment contract business and the deferral of fee income (as discussed above), which for the life
assurance business represents up-front income in respect of investment contracts sold. The DAC asset is amortised
over the lives of the related contracts. For the Group’s general insurance operation, claims equalisation provisions are
no longer permitted under IFRS. The majority of the required adjustments will be made against retained earnings at
1 January 2005.

In addition to the impact for depreciation of operating lease assets outlined below, IFRS requires property, plant and
equipment to be depreciated since the date of acquisition. Under UK GAAP, long leasehold and freehold properties
have been depreciated only since 1 January 2000. There will be no effect upon the Group’s income statement until
the properties concerned are disposed of at which point any gain on sale will increase or any loss will be reduced.

Under  IFRS  equity  dividends  declared  after  the  balance  sheet  date  may  not  be  included  as  a  liability  at  the
balance sheet  date.  Consequently,  the  2003  ﬁnal  dividend  will  be  adjusted  against  opening  retained  earnings  at
1 January 2004.

Currently  only  software  costs  relating  to  separable  new  systems  are  capitalised.  Under  IFRS, costs  relating  to
enhancements that lead to additional system functionality will also be capitalised. The impact on the Group’s income
statement will depend on the level of IT expenditure and whether it meets the criteria for capitalisation.

IFRS requires income from ﬁnance leases to be credited to the income statement so as to give a constant pre-tax rate
of return on the net cash invested; UK GAAP requires a constant post-tax rate of return. In addition, IFRS requires
depreciation on operating lease assets to be charged on the same basis as for tangible ﬁxed assets which for the Group
is a  straight-line  basis.  Under  UK  GAAP  depreciation  is  charged  so  as  to  give  a  constant  rate  of  return  on  the
leased asset.

IFRS  requires  that  a  cost  be  recognised  in  the  ﬁnancial  statements  for  all  options  granted under  executive  and
employee Save-As-You-Earn share option schemes. The total cost recognised represents the fair value of the options
(as determined using an option valuation model) at the grant date, as adjusted for the expected number of forfeitures
and, for executive schemes, the probability that the performance target will not be met. This total cost is spread over
the period to vesting. This will result in an increase in the costs recognised in the Group’s income statement as under
UK GAAP only the intrinsic value of executive share options is charged to the proﬁt and loss account.

34 LLOYDS TSB GROUP

Operating and financial review and prospects

FRS 27

In December 2004 the UK Accounting Standards Board (‘ASB’) issued FRS 27 Life Assurance setting out changes to the way in which life assurance business
should be accounted for and requiring certain additional disclosures; this standard is effective for accounting years ending on or after 23 December 2005.
Although technically not applicable to those reporting under International Financial Reporting Standards in 2005, under the terms of a Memorandum of
Understanding entered into between leading members of the life assurance and bancassurance sectors and the Association of British Insurers and the ASB,
the Group has committed to implementing the requirements of FRS 27 in 2005 and providing additional disclosures in its 2004 accounts. These disclosures
are set out below.

Following the implementation of FRS 27 in 2005 the Group will be required to:

• exclude from the value of in-force business recognised in the balance sheet any amounts that reﬂect future investment margins; and

• measure the  liabilities  of  the  Scottish  Widows  With-Proﬁts  Fund  in  accordance  with  the  FSA’s realistic  capital  regime,  subject  to  certain  speciﬁed

adjustments. Consequential adjustments are made to the related assets.

The exclusion of future investment margins will result in an adjustment to retained earnings as at 1 January 2004 and will lead to increased volatility in the
reported income from long-term assurance business.

The principal subsidiaries involved in the Group’s life assurance operations during the year were Scottish Widows plc (‘Scottish Widows’, the Group’s principal
provider of life assurance, pensions and investment products, which holds the only large with-proﬁts fund managed by the Group), Scottish Widows Annuities
Limited  (a  subsidiary  of  Scottish  Widows  that  accepts  the  reinsurance  of  annuity  business  from  its  parent), Abbey  Life  Assurance  Company  Limited
(‘Abbey Life’) and Lloyds TSB Life Assurance Company Limited (‘Lloyds TSB Life’). Since March 2000 both Abbey Life and Lloyds TSB Life have continued
to  administer  existing  policies  and  have  undertaken only limited new  business.  No  change  in  this  activity  is  anticipated  in  respect  of  Abbey  Life.  On
31 December 2004, Lloyds TSB Life ceased trading and transferred most of its assets and insurance business to Scottish Widows.

Basis of determining regulatory capital of the life assurance business

Available capital resources

Available capital resources represent the excess of assets over liabilities calculated in accordance with detailed regulatory rules issued by the FSA. Different
rules apply depending on the nature of the fund, as detailed below.

Statutory basis. Assets are generally valued on a basis consistent with that used for accounting purposes (with the exception that, in certain cases, the value
attributed to assets is limited) and which follows a market value approach where possible. With the express permission of the FSA, an intangible asset can
be recognised which represents the present value of future releases of prudent margins on business written. The liabilities are calculated using a projection
of future cash ﬂows after making prudent assumptions about matters such as investment return, expenses and mortality. Discount rates used to value the
liabilities are set with reference to the risk adjusted yields on the underlying assets in accordance with the FSA rules. Other assumptions are based on recent
actual experience, supplemented by industry information where appropriate. The assessment of liabilities does not include future bonuses for with-proﬁts
policies that are at the discretion of the Company, but does include a value for policyholder options likely to be exercised. 

‘Realistic’ basis. The FSA requires each life assurance company which contains a with-proﬁts fund in excess of £500 million, including Scottish Widows,
to carry out a ‘realistic’ valuation of that fund. The word ‘realistic’ in this context reﬂects the terminology used for reporting to the FSA and is an assessment
of the ﬁnancial position of a with-proﬁts fund calculated under a prescribed methodology. The methodology has the effect of limiting the assumed average
future investment return to the risk free rate and represents a best estimate of a theoretical market value of the liabilities. 

The valuation of with-proﬁts assets in the With-Proﬁts Fund on a realistic basis differs from the valuation on a statutory basis as, in respect of non-proﬁts
business written in the With-Proﬁts Fund, it includes the present value of the anticipated future release of the prudent margins for adverse deviation. The
realistic valuation uses the market value of assets without the limit affecting the statutory basis noted above. 

The realistic valuation of liabilities is carried out using a stochastic simulation model which values liabilities on a basis consistent with tradable market option
contracts (a ‘market-consistent’ basis). The model takes account of policyholder behaviour on a best-estimate basis and includes an adjustment to reﬂect
future uncertainties where the exercise of options by policyholders might increase liabilities. Further details regarding the stochastic simulation model are given
below in the section entitled ‘Options and guarantees’.

Regulatory capital requirements

Each life assurance company must retain sufﬁcient capital to meet the regulatory capital requirements mandated by the FSA; the basis of calculating the
regulatory capital requirement is given below. For the companies described above, with the exception of Scottish Widows, the regulatory capital requirement
is a combination of amounts held in respect of actuarial reserves and sums at risk (the Long-Term Insurance Capital Requirement) and amounts required to
cover various stress tests. The regulatory capital requirement is deducted from the available capital resources to give ‘statutory excess capital’.

For Scottish Widows, a further test is required in respect of the With-Proﬁts Fund which compares the level of ‘realistic excess capital’ to the ‘statutory excess
capital’ of the With-Proﬁts Fund and, in circumstances where the ‘realistic excess capital’ position is less, the Company is required to hold additional capital
to cover the shortfall. The ‘realistic excess capital’ is calculated as the difference between realistic assets and realistic liabilities of the With-Proﬁts Fund
with a  further  deduction  to  cover  various  stress  tests.  Any  additional  capital  requirement  under  this  test  is  referred  to  as  the  With-Proﬁts  Insurance
Capital Component.

The determination of realistic liabilities of the With-Proﬁts Fund in respect of Scottish Widows includes the value of internal transfers expected to be made from
the With-Proﬁts Fund to the Non-Participating Fund of Scottish Widows. These internal transfers include charges on policies where the associated costs are
borne by the Non-Participating Fund. The value of the transfers exceeds the value of the costs which, in the case of Scottish Widows, results in the somewhat
artiﬁcial increase in the With-Proﬁts Insurance Capital Component of over £500 million.

Constraints over available capital resources

Scottish Widows was created following the demutualisation of Scottish Widows Fund and Life Assurance Society in 2000. The terms of the demutualisation
are governed  by  a  Court-approved  Scheme  of  Transfer  (the  ‘Scheme’)  which,  inter  alia,  created  a  With-Proﬁts  Fund  and  a  Non-Participating  Fund  and
established protected capital support for the with-proﬁts policyholders in existence at the date of demutualisation. Much of that capital support is held in the
Non-Participating Fund and, as such, the capital held in that fund is subject to the constraints noted below.

LLOYDS TSB GROUP   35

Operating and financial review and prospects

Requirement to maintain a Support Account. The Scheme requires the maintenance of a ‘Support Account’ within the Non-Participating Fund. The quantum
of  the  Support  Account  is  calculated  with  reference  to  the  value  of  assets  backing  current  with-proﬁts  policies  which  also  existed  at  the  date  of
demutualisation and must be maintained until the value of these assets reaches a minimum level. Assets can only be transferred from the Non-Participating
Fund if the value of the remaining assets in the fund exceeds the value of the Support Account. Scottish Widows has obtained from the FSA permission to
include the value of the Support Account in assessing the realistic value of assets available to the With-Proﬁts Fund. At 31 December 2004, the value of
surplus admissible assets in the Non-Participating Fund was £2,222 million and the value of the Support Account was £1,265 million.

Further  Support  Account. The  Further  Support  Account  is  an  extra  tier  of  capital  support  for  the  with-proﬁts  policies  in  existence  at  the  date  of
demutualisation. The Scheme requires that assets can only be transferred from the Non-Participating Fund if the economic value of the remaining assets in
the fund exceeds the aggregate of the Support Account and Further Support Account. Unlike the Support Account test, the economic value used for this test
includes both admissible assets and the present value of future proﬁts of business written in the Non-Participating Fund or by any subsidiaries of that fund.
The  balance  of  the  Further  Support  Account  is  expected  to  reduce  to  nil  by  the  year 2030.  At  31  December  2004,  the  net  economic  value  of  the 
Non-Participating Fund and its subsidiaries for the purposes of this test was £4,185 million and the combined value of the Support Account and Further
Support Account was £2,704 million.

Other restrictions in the Non-Participating Fund. The Scheme states that no amounts can be transferred from the Non-Participating Fund of Scottish Widows
unless there are sufﬁcient assets within the Long-Term Fund to meet both policyholders reasonable expectations in light of liabilities in force at a year end
and the new business expected to be written over the following year.

Financial information calculated on a ‘realistic’ basis

The estimated ﬁnancial position of the With-Proﬁts Fund of Scottish Widows at 31 December 2004, calculated on a ‘realistic’ basis, is given in the following table,
in the form that the information will be reported to the FSA. As a result of the capital support arrangements, it is considered appropriate to also disclose the
‘realistic’ ﬁnancial position of the Long-Term Fund of Scottish Widows as a whole, which consists of both the With-Proﬁts Fund and the Non-Participating Fund.

With-Proﬁts Fund
£m

Long-Term Fund
£m

Realistic value of assets of fund
Support arrangement assets (value of ‘Support Account’)

Realistic value of assets available to the fund
Realistic value of liabilities of fund

Working capital for fund

Working capital ratio for fund

17,814
1,265

19,079
(18,108)

971

5.1%

22,012
–

22,012
(17,827)

4,185

19.0%

Scottish  Widows  continues  to be  well capitalised  with  the working  capital ratios for the  With-Proﬁts Fund and  the Long-Term  Fund being  an estimated
5.1 per cent and 19.0 per cent respectively.

The realistic liabilities of the With-Proﬁts Fund disclosed above include amounts payable from the With-Proﬁts Fund to the Non-Participating Fund of Scottish
Widows in respect of the shareholders’ share of future bonuses and other charges due as a result of the Scheme. The value of the liabilities excluding the
shareholders’ share of future bonuses is £17,988 million. The value of the liabilities excluding the value placed on all interfund transfers is £17,353 million,
and the value of excess assets in the With-Proﬁts Fund after eliminating those amounts (excluding the value of the Support Account) is £461 million.

36 LLOYDS TSB GROUP

Operating and financial review and prospects

The  following  table  reconciles  the  value  of  the  Long-Term  Fund  of Scottish Widows quoted  above  to  the  total  shareholders’ funds  attributable  to  the  life
assurance business of the Group, calculated on a modiﬁed statutory solvency basis:

Total shareholders’ funds on a modiﬁed statutory solvency basis* (note 29)
Adjustments to restate amounts onto an FSA statutory basis

Available capital resources on an FSA statutory basis excluding the With-Proﬁts Fund
Fund for future appropriations**

Total available capital resources on an FSA statutory basis
Capital resources held outside the Long-Term Fund of Scottish Widows
Net effect of adjustments to restate amounts onto a realistic basis

Excess assets in the Long-Term Fund of Scottish Widows on a realistic basis

Life assurance
business
£m

4,581
(502)

4,079
1,354

5,433
(1,260)
12

4,185

* A reconciliation of the total shareholders’ funds on a modiﬁed statutory solvency basis (£4,581 million) to the amount included in the Group’s balance sheet on

an embedded value basis (£6,781 million) is included in note 29(h) to the ﬁnancial statements.

** The fund for future appropriations included in the table relates to the With-Proﬁts Fund of Scottish Widows only; the ﬁgure disclosed in note 29(h) to the ﬁnancial

statements (£1,379 million) includes £25 million in respect of the other life funds of the Group.

Capital sensitivities

Shareholders’ funds

Shareholders’ funds outside the long-term business fund are mainly invested in assets that are less sensitive to market conditions.

With-Proﬁts Fund

The with-proﬁts realistic liabilities and the available capital for the With-Proﬁts Fund are sensitive to both market conditions and changes to a number of
non-economic assumptions that affect the valuation of the liabilities of the fund. The available capital resources (and capital requirements) are most sensitive
to the level of the stock market, with the position worsening at lower stock market levels as a result of the guarantees to policyholders increasing in value. An
increase in the level of equity volatility implied by the market cost of equity put options also increases the market consistent value of the options given to
policyholders and worsens the capital position.

The most critical non-economic assumptions are the level of take-up of options inherent in the contracts (higher take up rates are more onerous), mortality
rates (lower mortality rates are more onerous) and lapses prior to dates at which a guarantee would apply (lower lapse rates are generally more onerous where
guarantees are in the money). The sensitivity of the capital position and capital requirements of the With-Proﬁts Fund is partly mitigated by the actions that
can be taken by management.

Other long-term funds

Outside the With-Proﬁts Fund, assets backing actuarial reserves in respect of policyholder liabilities are invested so that the values of the assets and liabilities
are broadly matched. The most critical non-economic assumptions are mortality rates in respect of annuity business written (lower mortality rates are more
onerous). The Group has reduced its exposure to deteriorating mortality rates in respect of life assurance contracts through its reinsurance arrangements. In
addition, poor cost control would gradually depreciate the available capital and lead to an increase in the valuation of the liabilities (through an increased
allowance for future costs).

Formal intra-group capital arrangements

Scottish Widows has a formal arrangement with one of its subsidiary undertakings, Scottish Widows Unit Funds Limited, whereby the subsidiary company
can draw down capital from Scottish Widows to ﬁnance new business which is reinsured from the parent to its subsidiary. Scottish Widows has also provided 
subordinated loans to its fellow group undertakings, Scottish Widows Annuities Limited and Scottish Widows Bank plc. 

LLOYDS TSB GROUP   37

Operating and financial review and prospects

Options and guarantees

The Group has sold insurance products that contain options and guarantees, both within the With-Proﬁts Fund and in other funds.

Options and guarantees within the With-Proﬁts Fund

The most signiﬁcant options and guarantees provided from within the With-Proﬁts Fund are in respect of guaranteed minimum cash beneﬁts on death, maturity,
retirement or certain policy anniversaries, and guaranteed annuity options on retirement for certain pension policies. As noted above, under the realistic capital
regime of the FSA, the liabilities of the With-Proﬁts Fund are valued using a market-consistent stochastic simulation model. This model is used in order to
place a value on the options and guarantees which captures both their intrinsic value and their time value.

The most signiﬁcant economic assumptions included in the model are:

• Risk-free yield curve. This is derived from the yield on UK gilts, with an additional 0.1 per cent yield assumed to be risk-free;

• Investment volatility. This is derived from derivatives where possible, or historical observed volatility where it is not possible to observe meaningful prices.

As at 31 December 2004, the assumptions were set at 18 per cent for equities, 15 per cent for properties and 13 per cent for interest rates.

The model includes a matrix of the correlations between each of the underlying modelled asset types. The correlations used are consistent with long-term
historical returns. The most signiﬁcant non-economic assumptions included in the model are management actions (in respect of investment policy and bonus
rates), guaranteed annuity option take up rates and assumptions regarding persistency (both of which are based on recent actual experience), and assumptions
regarding mortality (which are based on recent actual experience and industry tables).

Options and guarantees outside the With-Proﬁts Fund of Scottish Widows

Abbey Life currently has a number of policies in-force which have a guaranteed annuity option. In total it holds statutory reserves of £288 million to cover
this liability at 31 December 2004. These reserves have been determined using prudent future interest rate, mortality rate and rate of annuity option take-up
assumptions and exceed the value that would be placed on them using a market-consistent stochastic model. It is estimated that a 0.5 per cent reduction in
future interest rates would increase the liability by some £45 million.

Under some of Abbey Life’s older contracts, the maturity value or the surrender value at the end of the selected period is guaranteed to be not less than total
premiums paid or sums assured. The total provision for these options was £11 million at 31 December 2004 and was established using stochastic techniques
after making prudent assumptions. 

In both Abbey Life and Scottish Widows, certain personal pension policyholders, for whom reinstatement to their occupational pension scheme was not an
option, have been given a guarantee that their pension and other beneﬁts will correspond in value to the beneﬁts of the relevant occupational pension scheme.
The key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital
status at retirement and future investment returns. There is currently a provision, calculated on a deterministic basis, of £89 million in respect of those
guarantees.  If  future  salary  growth  were 0.5  per  cent  per  annum  greater  than  assumed,  the  liability  would  increase  by  some  £6 million.  If yields  were
0.5 per cent lower than assumed, the liability would increase by some £15 million.

38 LLOYDS TSB GROUP

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 2000 and 2001 were audited
by PricewaterhouseCoopers, independent accountants; the ﬁnancial statements for each of the years 2002 to 2004 have been audited by their successor ﬁrm
PricewaterhouseCoopers LLP, independent accountants.

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 and non-equity)
Customer accounts
Undated subordinated loan capital
Dated subordinated loan capital
Loans and advances to customers
Assets2
Total assets

Share information 1
Basic earnings per ordinary share
Diluted earnings per ordinary share
Net asset value per ordinary share
Dividends per ordinary share 3
Market price (year-end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions) 6

Financial ratios (%) 1,4
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
Cost:income ratio 5

Capital ratios (%) 1
Total capital
Tier 1 capital

2004

2003

2002

2001

2000

4,920
39
4,608
4,650
(866)
3,493
2,489
2,421
1,914

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

1,419
9,977
122,062
5,852
4,400
154,240
225,079
279,843

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

43.3p
43.0p
176p
34.2p
473p
953
5,596

79.1
24.3
1.17
2.01
4.7
51.4

10.0
8.9

58.3p
58.1p
170p
34.2p
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
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
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
708p
1,026
5,507

63.3
21.2
1.68
3.08
7.8
48.7

8.6
7.9

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 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 comprise 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 Averages are calculated on a monthly basis from the consolidated ﬁnancial data of Lloyds TSB Group.

5 The cost:income ratio is calculated as total operating expenses as a percentage of total income.

6 This ﬁgure excludes 79 million limited voting ordinary shares.

LLOYDS TSB GROUP   39

 
The board

(cid:2) +

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 62. 

David P Pritchard++
Deputy Chairman
(leaving on 5 May 2005)
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 60. 

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.
Board member of the Institute for
the Future. Aged 62.

Ewan Brown CBE FRSE (cid:4) **(cid:2) +
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 62.

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 63.

40 LLOYDS TSB GROUP

Non-executive directors

Maarten A van den Bergh

Christopher S Gibson-Smith

David P Pritchard

Sir Julian Horn-Smith

Wolfgang C G Berndt

DeAnne S Julius

Ewan Brown 

Angela A Knight

Gavin J N Gemmell

Christopher S Gibson-Smith ✠ †(cid:2)
(leaving on 5 May 2005)
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 59. 

Sir Julian Horn-Smith✠ †+
Joined the board on 1 January
2005. Joined Vodafone in 1984
and held a number of senior and
general management
appointments before being
appointed to the board of that
company in 1996 and deputy
chief executive officer in 2005.
Previously held positions in
Rediffusion from 1972 to 1982
and Mars GB from 1982 to
1984. A non-executive director
of Smiths Group. Aged 56.

DeAnne S Julius CBE ✠ †(cid:2)
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 BP, Serco Group and Roche
Holdings SA. Aged 55.

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 and the Port of
London Authority. Aged 54. 

* Member of the audit committee 
** Chairman of the audit committee
(cid:2) Member of the nomination committee

Chairman of the nomination committee
† Member of the remuneration committee
†† Chairman of the remuneration committee
+ Member of the risk oversight committee
++ Chairman of the risk oversight committee

Independent director

(cid:4) Senior independent director

(cid:2)
(cid:2)
✠
Executive directors

J Eric Daniels 

G Truett Tate 

Michael E Fairey

Helen A Weir

Archie G Kane

The board

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 53.

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. He is also acting as
interim group executive director,
UK Retail Banking. 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. President of
The British Quality Foundation. 
Aged 56.

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 52. 

G Truett Tate
Group Executive Director,
Wholesale and International
Banking
Joined the Group in 2003 as
managing director, Corporate
Banking before being appointed
to the board in 2004. Served with
Citigroup from 1972 to 1999,
where he held a number of senior
and general management
appointments in the USA, South
America, Asia and Europe. He
was president and chief executive
officer of eCharge Corporation
from 1999 to 2001 and
co-founder and vice chairman
of the board of Chase Cost
Management Inc from 1996
to 2003. Aged 54.

Helen A Weir
Group Finance Director 
Joined the board in 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 42.

Company Secretary
Alastair J Michie FCIS FCIBS

LLOYDS TSB GROUP   41

Directors’ report

Results and dividends

The consolidated proﬁt and loss account on page 59 shows a proﬁt attributable to shareholders for the year ended 31 December 2004 of £2,421 million.

An interim dividend of 10.7p per ordinary share was paid on 6 October 2004 and a ﬁnal dividend of 23.5p per ordinary share will be paid on 4 May 2005.
These dividends will absorb £1,914 million.

Principal activities, business review and future developments

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. A review of the business and an indication of future developments are given on pages 5 to 38.

Authority to purchase shares

The authority for the Company to purchase, in the market, up to 567 million of its shares, representing some 10 per cent of the issued ordinary share capital,
expires at the annual general meeting. Shareholders will be asked, at the annual general meeting, to give a similar authority. 

Directors

Biographical  details  of  directors  are  shown  on  pages  40 and 41.  Particulars  of  their  emoluments  and  interests  in  shares  in  the  Company  are  given  on 
pages 47 to 57.

The Earl of Selborne left the board at the annual general meeting in 2004. Mr Hampton, Mr Targett, Sir Tom McKillop and Mr Ayliffe left the board on
12 January 2004, 30 April 2004, 31 December 2004 and 31 January 2005, respectively. Dr Gibson-Smith and Mr Pritchard will leave the board at the
annual general meeting in 2005.

Mrs Weir joined the board on 26 April 2004 and was elected at the annual general meeting on 21 May 2004.

Mr Tate and Sir Julian Horn-Smith joined the board on 1 August 2004 and 1 January 2005, respectively. 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  Gemmell,  Mr  Fairey  and  Dr  Julius  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  £31,571,000 (2003:  £31,712,000)  including  £31,230,000
(2003: £31,450,000) under deeds of covenant to the four Lloyds TSB Foundations, which will be paid during 2005. 

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 113.

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 2004, the number of days required to be shown in this report, to comply with the
provisions of the Companies Act 1985, is nil.

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
3 March 2005

42 LLOYDS TSB GROUP

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
listing rules. The Group has complied with the provisions of the code, and has done so throughout the year regarding the code 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 three-year renewable terms, which may be terminated without
notice or payment of compensation.

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 advisers; 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 board evaluates its performance and that of its committees and individual directors. The process adopted, using an internally produced questionnaire,
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 board’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.

Meetings with shareholders

In order to develop an understanding of the views of major shareholders, the board receives regular reports from the group ﬁnance director and the director
of investor relations.

The  chairman,  the  group  chief  executive  and  the  group  ﬁnance  director  also have  meetings  with  representatives  of  major  shareholders and  the  senior
independent director and the chairman of the audit committee attend some of these meetings. In addition, all directors are invited to attend investment analysts’
and stockbrokers’ brieﬁngs on the ﬁnancial results. 

All shareholders are encouraged to attend and participate in the Group’s annual general meeting.

Each resolution considered at the annual general meeting in 2004 was decided on a poll. Votes representing some 50 per cent of the total number of shares
in issue were cast and each resolution was passed by a substantial majority. Details of the poll results are available from the company secretary.

The resolutions to be considered at the annual general meeting in 2005 will also be decided on a poll. Details of the results will be announced on our 
website, www.lloydstsb.com and will also be available from the company secretary.

Audit committee

The audit committee comprises Mr Brown (chairman), Mr Gemmell and Mrs Knight. The committee’s terms of reference are available from the company
secretary and are displayed on the Company’s website www.lloydstsb.com.

The audit committee met ﬁve times in 2004, 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, in discussion with them, has assessed their independence and objectivity (more
information about which is given in note 4 to the accounts, in relation to the procedure for approving fees for audit and non-audit work) 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 internal control, risk management and

LLOYDS TSB GROUP   43

Corporate governance

compliance  with  ﬁnancial  services  legislation  and  regulations (more  information about which  is  given in the note about internal control on  page  46);
procedures by which staff may raise concerns in conﬁdence; 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 the committee’s 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.

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 may have speciﬁc powers delegated to it by the board from time to time and following the exercising of these powers, it reports to the board.

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 and the clear articulation
of the Group’s risk policies, and in reviewing the Group’s aggregate risk exposures and concentrations of risk.

The committee may have speciﬁc powers delegated to it by the board from time to time and following the exercising of these powers, it reports to the board.
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), Mr Brown, Dr Gibson-Smith and Dr Julius, 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 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.

During the  year, the committee met three times and recommended  the appointment of two executive directors and one non-executive director. In that
regard, detailed role speciﬁcations were drawn up, external search consultants were engaged and candidates were interviewed by committee members and
other directors.

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 Dr Berndt (chairman), Dr Gibson-Smith, Sir Julian Horn-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 a speciﬁed amount.

All the independent non-executive directors are invited to attend meetings if they wish, and they receive the minutes and have the opportunity to comment
and have their views taken into account before the committee’s decisions are implemented. 

The remuneration committee met ﬁve times in 2004 and further information about its membership and work is given in the directors’ remuneration report on
pages 47 to 57.

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

The risk oversight committee comprises Mr Pritchard (chairman), Mr van den Bergh, Mr Brown and Sir Julian Horn-Smith. 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 division. The risk oversight committee reports to the board on its deliberations after each meeting.

44 LLOYDS TSB GROUP

Corporate governance

Attendance at meetings

The  attendance  of  directors  at  board  meetings  and  at  meetings  of  the  audit,  nomination, remuneration  and risk oversight committees  during  2004  was 
as follows:

Board

Audit
committee

Nomination Remuneration Risk oversight
committee
committee

committee

9

8
9
9
9
9
9
8
9
8
9
3
9
6

9
7
4
3

5

5

5

5

2

3

2
3

3

1

5

5

5
4

4

4

4

4

1

2

Number of meetings during the year

Current directors who served during 2004
W C G Berndt
Ewan Brown1
J E Daniels
M E Fairey
G J N Gemmell
C S Gibson-Smith 2
D S Julius
A G Kane
A A Knight
D P Pritchard
G T Tate3
M A van den Bergh
H A Weir4

Former directors who served during 2004
P G Ayliffe5
Sir Tom McKillop6
Lord Selborne7
S C Targett8

1 Appointed to the nomination committee from 3 March 2005

2 Appointed to the nomination committee from 21 May 2004

3 Appointed to the board from 1 August 2004

4 Appointed to the board from 26 April 2004

5 Left the board on 31 January 2005

6 Left the board on 31 December 2004

7 Left the board on 21 May 2004

8 Left the board on 30 April 2004

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 (‘the 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 59 to 112, the Company and the Group have used appropriate accounting policies, 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 and the Group keep proper accounting records which disclose with reasonable accuracy the
ﬁnancial position of the Company and the Group 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 Company and the Group and to prevent and
detect fraud and other irregularities.

A copy of the ﬁnancial statements of the Company is placed on the website of Lloyds TSB Group plc. The directors are responsible for the maintenance
and integrity of statutory and audited information on the Company’s website. Information published on the internet is accessible in many countries with
different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation
in other jurisdictions.

LLOYDS TSB GROUP   45

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 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 the key businesses and head ofﬁce functions review speciﬁc controls and attest to the accuracy of their assessments.
The material controls covered by this assessment include risk management, organisational control, legal and regulatory, ﬁnance and information technology.
As in previous years, this exercise was completed for the year ended 31 December 2004. All returns have been satisfactorily completed and appropriately
certiﬁed. 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.

46 LLOYDS TSB GROUP

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 44.

The remuneration committee

The members of the remuneration committee during 2004 were Sir Tom McKillop (chairman until 31 December 2004), Dr Berndt, Dr Gibson-Smith, and
Dr Julius. From 1 January 2005, Dr Berndt became chairman and Sir Julian Horn-Smith joined the committee.

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 2004, 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.

Mr van den Bergh, Mr Daniels, Mr Fairey, Mr Hijkoop (Director of Group Human Resources) and Mr Wilson (Compensation & Beneﬁts Director) provided
advice to the committee (other than for their own remuneration). 

Directors’ remuneration policy

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 and retain executive directors and senior management of the highest calibre and motivate them
to perform to the highest standards. The main principles are:

• Basic salary reﬂects the market median of companies in the FTSE 30 and total compensation should be at the market upper quartile providing performance

is at that level.

• The majority of total compensation is linked to the achievement of stretching performance targets. 

• The long-term rewards are aligned to shareholders’ interests and executive directors are expected to build a shareholding in the Group over a period of four

years equivalent to the value of one times the director’s annual basic salary.

• The overall package reﬂects market practice and takes account of the terms and conditions applying to other employees of the Group. 

There is no intention to change these principles in 2005.

Executive  directors’  remuneration  is  made  up  of  basic  salary,  annual  bonus,  long-term  incentives,  pensions  and  other  beneﬁts.  In  2005, approximately
75 per cent (82 per cent for the group chief executive) of an executive director’s potential direct remuneration (salary, annual bonus and long-term incentives)
will be performance related (see illustrative charts below). The value of long-term incentives is the expected value calculated by using a ‘binomial’ model,
which is a widely accepted methodology for this purpose.

Group chief executive

Other executive directors

18%

32%

50%

Basic salary

Annual incentives

Long-term incentives

50%

25%

25%

The chairman and deputy chairman receive remuneration which comprises basic salary and beneﬁts which are broadly similar to the executive directors, but
they do not participate in the annual bonus and long-term incentive arrangements. The deputy chairman has pension beneﬁts which accrued during his service
as an executive director and pension beneﬁts are accruing for the chairman as described on page 53.

LLOYDS TSB GROUP   47

Directors’ remuneration report

The fees of the independent 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 responsibilities of the role and to attract individuals
with  relevant  skills,  knowledge  and  experience.  The  fees  are  neither  performance  related  nor  pensionable and are comparable with those paid by other
companies. The annual fees are listed below: 

Annual fees from 1 April 2005

Annual fees pre-April 2005

Board

Audit committee chairmanship

Audit committee membership

Nomination committee membership

Remuneration committee chairmanship

Remuneration committee membership
Risk oversight committee membership

£50,000

£40,000

£15,000

£5,000

£20,000

£15,000
£15,000

£45,000

£15,000

£10,000

–

£12,500

£10,000
–

Independent non-executive directors who serve on boards of subsidiary companies may also receive fees from the subsidiaries.

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. Basic salary increases for other employees across the Group will be in the range of 0-10 per cent, 
and the salary increases awarded to executive directors are consistent with this policy. Details of salaries payable to executive directors in 2005 are shown 
on page 50.

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 executive directors except Mr Daniels, individual bonus awards for 2005 will be made from a bonus pool based on Group performance with pre-determined
targets relating to proﬁt before tax and economic proﬁt. As in 2004, the maximum size of the bonus pool applicable to these executive directors will remain
at 100 per cent of the aggregate of their basic salaries. An amount equal to 75 per cent of these executive directors’ basic salaries will form the bonus pool
on the achievement of a stretching budget for 2005; failure to achieve at least 90 per cent of this budget will result in no bonus pool. These executive directors
will be considered for awards 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 level of any bonus award distributable from the pool to any individual has been set at 150 per cent
(100 per cent for 2004) of salary for exceptional performance, to reﬂect the competitive market position for total earnings opportunity. 

The maximum annual bonus opportunity for 2005 for Mr Daniels has also been set at 150 per cent (125 per cent for 2004) of basic salary for exceptional
peformance,  to  increase  the  proportion  of  pay  which  is  performance  linked  and  to  reﬂect  the  competitive  market  position  for  total  earnings  opportunity. 
An amount equal to 112.5 per cent of basic salary will be available on the achievement of stretching budget targets relating to proﬁt before tax and economic
proﬁt; failure to achieve at least 90 per cent of these performance targets would result in no bonus payment. The actual level of bonus award made will take
account of individual performance and contribution.

PricewaterhouseCoopers LLP check the calculation of the annual incentive payments for executive directors based on the achievement of performance against
targets set. In respect of performance in 2004, bonuses ranging from 40 per cent to 125 per cent have been paid to the directors with an average payment
of 89 per cent of salary.

Under the performance share plan agreed at the annual general meeting in May 2004, executive directors are required to defer 50 per cent of any bonus
payable 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. The amounts deferred into bonus shares in respect of the 2004 bonus, before the deduction of income tax, will be: 

Name
Amount

J E Daniels
£468,750

M E Fairey
£259,000

A G Kane
£180,000

G T Tate
£93,750

H A Weir
£135,000

Under the new plan, executives will 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 the three year period ending 31 December 2007, 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 a
sliding scale will apply. If the TSR performance is below median no performance shares will be awarded. There will be no retest. In December 2004, the
Inland Revenue issued new guidance which will require income tax to be deducted before the deferral into bonus shares. This is a change that effectively 
would alter the balance under the long-term arrangements, and as a result would reduce any performance related match. Therefore, to avoid this inbalance,
where a match with performance shares is justiﬁed it will be made on a notional deferral as if income tax had not been deducted at the outset. This maintains
the intention of the original design of the plan.

The other companies in the comparator group will be:

Alliance & Leicester
Bradford & Bingley
Legal & General
Royal & Sun Alliance

Aviva
Friends Provident
Northern Rock
Standard Chartered

Banco Santander
HBOS
Prudential

Barclays
HSBC Holdings
Royal Bank of Scotland

The remuneration committee believes that the out-performance of Lloyds TSB Group’s TSR compared with that of the companies in the comparator group will
demonstrate the success of the Group’s strategy.

48 LLOYDS TSB GROUP

Directors’ remuneration report

Long-term rewards

Executive share option schemes

In 2004, options were 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 was one and a half 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, that could be
increased to four times annual basic salary multiplied by 3.5). The table on pages 55 and 56 gives the number of options granted.

A performance condition was set when the grant of options was made and the options will not normally be exercisable unless the condition is met. The
performance condition requires the Company’s ranking, based on 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 other constituents of 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

In 2005, 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 three times annual basic
salary,  although  in  exceptional  circumstances,  for  example  on  the  recruitment  of  a  new  executive  director,  that  could  be  increased  to  four  times  annual
basic salary.

A performance condition is set when the grant of options is made and the options cannot normally be exercised unless the condition has been met. 

The performance condition for options granted from 2005 will be based on TSR over the relevant (three year) period measured against the group of 14 ﬁnancial
services companies listed on page 48. The options will become exercisable in full if the Company is placed fourth or above in the comparator group (at or
above the upper quartile) 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.

The following table illustrates the percentage of the grant which would be exercisable depending on the Company’s TSR ranking within the comparator group,
shown on page 48.

Ranking position within comparator group

Per cent of option which may be exercised

1
2
3
4
5
6
7
8
9 or below

100
100
100
100
82.5
65
47.5
30
Nil – options not exercisable

The remuneration committee believes that the out-performance of Lloyds TSB Group’s TSR compared with those of the companies in the comparator group
will demonstrate the success of the Group’s strategy. The Company uses data provided by Alithos Limited to assess the Company’s performance against the
comparator group for the purposes of the executive share option scheme and the performance share plan, and PricewaterhouseCoopers LLP check the results
of the testing of the performance condition.

Other share plans

The executive directors, the chairman and the deputy chairman are also eligible to participate in the Lloyds TSB Group ‘sharesave’ scheme and the Lloyds TSB
Group ’shareplan’. These are ‘all-employee’ share schemes and, therefore, performance conditions do not apply. 

LLOYDS TSB GROUP   49

Directors’ remuneration report

Dilution

The following charts illustrate the available dilution capacity for the Company’s share schemes.

Dilution capacity – all schemes
(10% in any consecutive 10 years)

Dilution capacity – executive schemes
(5% in any consecutive 10 years)

161.5

45.9
45.9

398.1  

233.9

Shares used (million)

Shares remaining (million)

Pensions

Executive directors are entitled to participate either in the Group’s deﬁned beneﬁt pension schemes (based on salary and length of service, with a maximum
pension of two thirds of ﬁnal salary), or the Group’s deﬁned contribution scheme (under which their ﬁnal entitlement will depend on their contributions and
the ﬁnal value of their fund). The deﬁned beneﬁt schemes are closed to new entrants on recruitment.

Service agreements

Lloyds TSB Group’s 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.

Notice to be given by the Company

Salary from 1 January 2005

Date of service agreement

J E Daniels
M E Fairey
A G Kane
G T Tate
H A Weir
M A van den Bergh
D P Pritchard

12 months
12 months
12 months
12 months
12 months
8 weeks
8 weeks

£825,000
£545,000
£475,000
£475,000
£475,000
£475,000
£253,000

19 October 2001
28 August 1991
9 February 2000
29 July 2004
4 March 2004
28 July 2000
7 April 2003

It is now the Group’s policy (subject to existing contractual arrangements) that where compensation on early termination is due, it should be restricted to basic
salary and bonus to the extent earned. Payments will be on a phased basis and mitigated in the event that alternative employment is secured. Bonus payments
should relate to the period of actual service, rather than the full notice period, and will be determined on the basis of performance.

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 publicly quoted 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 post entails personal responsibility. Executive directors are generally allowed to accept one non-executive directorship.

During 2004, one of the current executive directors received a fee of £11,300, which was retained, for serving as a non-executive director of another company.

50 LLOYDS TSB GROUP

Directors’ remuneration report

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  
1999

31 Dec  
2000

31 Dec  
2001

31 Dec  
2002

31 Dec  
2003

31 Dec  
2004

120

100

80

60

40

20

0

Lloyds TSB Group plc

FTSE 100 Index

Rebased to 100 on 31 December 1999

Source : Datastream

LLOYDS TSB GROUP   51

 
Directors’ remuneration report

Audited information

Directors’ emoluments for 2004

Current directors who served during 2004
Executive directors
J E Daniels
M E Fairey
A G Kane
G T Tate
H A Weir

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

Former directors who served during 2004
P G Ayliffe
P R Hampton
Sir Tom McKillop
Lord Selborne
S C Targett

Former directors who served during 2003
M D Ross
Others

Salaries/
fees
£000

Other beneﬁts

Cash
£000

Non cash 
£000

Performance- Compensation
for loss of
ofﬁce
£000

related
payments
£000

2004
Total
£000

2003
£000

750
518
450
187
309

442
243
55
84
110
55
55
93

400
15
57
22
160

181
413
16
20
50

12
9

27
2

121

12
13
19
3
16

960
534
373
193
279

20

7

160

342

1

2

1,903
1,478
858
403
654

1,064
1,140
622
–
–

454
279
55
84
110
55
55
93

588
359
57
22
283

435
377
32
70
100
45
45
58

328
733
49
42
587

683
635

332

356

688

4,005

851

86

2,838

698

8,478

7,045

The cash column under ‘other beneﬁts’ includes ﬂexible beneﬁts payments (4 per cent of basic salary), the housing allowance and tax planning allowance for
Mr Daniels, pension contributions for those in the deﬁned contribution scheme (Mrs Weir and Mr Tate) 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 cap relating to pensions, introduced by the Finance Act 1989.
The amount shown for Mr Targett relates primarily to his relocation expenses. The non cash column includes amounts relating to the use of a company car, private
medical insurance and life insurance cover. It also includes the value of any matching shares which are received under the terms of shareplan, through which
employees have the opportunity to purchase shares up to a maximum of £125 per month and receive matching shares on a one for one basis up to a maximum
value of £30 per month, rounded down to the nearest whole share. 

Performance-related payments relate to cash bonuses based on Group performance and the attainment of pre-determined targets relating to proﬁt before tax
and economic proﬁt. For 2004, bonuses ranging from 40 per cent to 125 per cent are payable to the directors with an average payment of 89 per cent of
salary. These payments also include the value of any award made under shareplan, the ﬁrst £3,000 of which is made in the form of shares in Lloyds TSB
Group plc.

Mr Ayliffe’s employment has been terminated from 31 March 2005 and the payments to which he is entitled will be settled in accordance with his contractual
entitlement. Full details will be reported in the 2005 report and accounts.

Mr Hampton’s employment was terminated on 12 January 2004. He has received payments in accordance with his contractual entitlement.

The amount shown for Mr Ross reﬂects payments he received in accordance with his contractual entitlement.

52 LLOYDS TSB GROUP

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 have a normal retirement age of 60. In the event of death in service, a lump sum of four times salary is payable plus, for members of a deﬁned
beneﬁt  scheme,  a  spouse’s  pension  of  two-thirds of  the  member’s  prospective  pension.  On  death  in  retirement,  a  spouse’s  pension  of  two-thirds of  the
member’s pension is payable. The deﬁned beneﬁt schemes are non-contributory. Members of deﬁned contribution schemes are required to contribute.

Deﬁned contribution scheme members

Mr Targett was a member of a deﬁned contribution scheme. During the period 1 January 2004 to 30 April 2004 the employer made contributions totalling
£24,000. As he left before completing two years service no beneﬁts will be vested under the deﬁned contribution scheme in respect of him.

Mr Tate is a member of a deﬁned contribution scheme. He joined the Lloyds TSB Group on 4 August 2003. During the year to 31 December 2004, the
employer has made contributions to the deﬁned contribution scheme in respect of him totalling £47,760 of which £24,843 related to the period since his
appointment as a director.

Mrs Weir is a member of a deﬁned contribution scheme. She joined the Lloyds TSB Group on 26 April 2004. During the year to 31 December 2004, the
employer has made contributions to the deﬁned contribution scheme in respect of her totalling £26,224.

Deﬁned beneﬁt scheme members

Accrued
pension at

Accrued
pension at
31 December 31 December
2003
£000
(b)

2004
£000
(a)

Change in

Transfer
Transfer
value at
value at
accrued 31 December 31 December
2004
2003
pension
£000
£000
£000
(c)
(d)
(a)-(b)

Change in

Additional
pension
earned to
transfer 31 December
2004
£000
(e)

value
£000
(c)-(d)

P G Ayliffe
J E Daniels
M E Fairey
P R Hampton
A G Kane

132
77
226
28
216

98
51
186
17
170

34
26
40
11
46

1,780
1,139
3,996
365
3,029

1,245
711
3,052
208
2,233

535
428
944
157
796

30
24
34
10
41

Transfer
value of the
increase
£000
(f)

406
358
609
133
582

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

10

7

3

136

85

51

3

42

Mr Hampton’s pension entitlement at 31 December 2004 includes an additional 12 months service in respect of his notice period in accordance with the
terms of his contract.

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 2004 and 2003,
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 2004 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 have not changed during
the year.

Column (d) is the equivalent transfer value, but calculated as at 31 December 2003 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.

LLOYDS TSB GROUP   53

Directors’ remuneration report

Directors’ interests

The interests, all beneﬁcial, of those who were directors at 31 December 2004 in shares in Lloyds TSB Group were:

Shares

Executive directors
J E Daniels
M E Fairey
A G Kane
G T Tate
H A Weir

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

Former executive director
P G Ayliffe

At 1 January 2004
(or later date of 
appointment)

At 31 December
2004

At 3 March

2005†

38,198
77,881
99,041

37,007
76,605
97,769
701
–

5,079
5,178
40,000
3,787
70,000
3,151
2,000
3,540

38,136
77,858
98,979
701
1,699

5,079
10,566
46,000
4,027
70,000
3,151
2,000
4,940

91,216

92,453

† The changes in beneﬁcial interests between 31 December 2004 and 3 March 2005 related to ‘partnership’ and ‘matching’ shares acquired under shareplan.

Sir Julian Horn-Smith joined the board on 1 January 2005 and at 3 March 2005 he had a beneﬁcial interest in 5,000 shares in Lloyds TSB Group plc.

Non-beneﬁcial interests

Directors had non-beneﬁcial interests as follows:

Mr Ayliffe, Mr Daniels, Mr Fairey, Mr Kane, Mr Pritchard, Mr Tate, Mr van den Bergh and Mrs Weir, together with some 77,000 other employees, were potential
beneﬁciaries in the 1,364 and 1,467,422 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. 162,692 and 1,609,602 shares, respectively, were held by these trusts at the beginning of the year.
These holdings were 1,364 and 1,453,954 respectively on 3 March 2005. In addition, the above directors, with the exception of Mr van den Bergh, together
with some 77,000 other employees, were potential participants in shareplan and were, therefore, treated as interested in the 471,989 shares held at the end
of  the  year  by  the  trustee  of  the  shareplan.  2,163,267  shares  were  held  by  the  trustee  at  the  beginning  of  the  year.  This  holding  was  582,350 on
3 March 2005.

54 LLOYDS TSB GROUP

Directors’ remuneration report

Audited information

Interests in share options

At 1 January 2004
(or later date of
appointment)

Granted
during
the year

Exercised/
lapsed during
the year

At 31 December
2004

Current directors
who served
during 2004

J E Daniels

M E Fairey

A G Kane

D P Pritchard

G T Tate

939,177

555,992

523,255

4,687

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

348,837
268,336

Exercise
price

694p
715p
284p
394.25p
430p
419.25p

474p
510p
859.5p
817p
549.5p
615.5p
655p
733p
715p
284p
348p
394.25p
419.25p

321p
510p
880p
887.5p
549.5p
615.5p
655p
733p
715p
284p
394.25p
419.25p

416p
859.5p
817p
549.5p
615.5p
655p
733p
715p

430p
419.25p
403p

424.75p
321p

Exercise periods

From

To

1/11/2004
6/3/2005
1/6/2006
21/2/2006
14/8/2006
18/3/2007

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
18/3/2007

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
18/3/2007

15/5/2001
2/8/2002
6/3/2003
8/8/2003
6/3/2004
21/8/2004
6/3/2005

14/8/2006
18/3/2007
12/8/2007

31/10/2011
5/3/2012
30/11/2006
20/2/2013
13/8/2013
17/3/2014

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
17/3/2014

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
17/3/2014

14/5/2008
1/8/2009
5/3/2010
7/8/2010
5/3/2011
20/8/2011
5/3/2012

13/8/2013
17/3/2014
11/8/2014

29/4/2007
1/11/2009

28/4/2014
30/4/2010

Notes

e, g, i
e, h, i
a, h
e, 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, i
e, g, i
e, h, i
a, h
a, h
e, h
e, h 

c, f
c, f, i
c, f, i
c, g, i
d, g, i
d, g, i
d, g, i
e, g, i
e, h, i
a, h
e, h
e, h

j
c, f, i
c, g, i
d, g, i
d, g, i
d, g, i
e, g, i
e, h, i

e, h
e, h
e, h

e, h
a, h

907,780
330,419
3,327
599,239
305,232
939,177

797
54,000
48,000
57,000
85,896
10,931
42,884
148,618
345,104
1,330
531
663,157
555,992

25,000
40,000
50,000
27,000
64,786
11,841
34,759
118,178
275,349
5,783
529,105
523,255

–
50,000
40,000
71,519
10,385
36,374
127,131
286,363

348,837
268,336
195,409

556,208
5,093

H A Weir

–

195,409

556,208
5,093

Share retention plan
J E Daniels

216,763

216,763

(see page 57)

1/1/2005

30/6/2005

LLOYDS TSB GROUP   55

Exercise periods

From

To

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
18/3/2007

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
17/3/2014

Notes

a, h
c, f
c, f, i
c, f, i
c, g, i
d, g, i
d, g, i
d, g, i
e, g, i
e, h, i
e, h
e, h
e, h

Directors’ remuneration report

Interests in share options (continued)

Former directors
who served
during 2004

P G Ayliffe 

P R Hampton

S C Targett

Share plan 2003
S C Targett

a) Sharesave.

At 1 January 2004

Granted
during
the year

Exercised/
lapsed during
the year

At 31 December
2004 (or earlier
date of leaving
the board)

3,327
13,000
12,000
20,000
3,000
23,657
10,560
16,717
44,562
104,895
218,769
177,034

326,351
3,327
642,739

759,036
2,658

429,338

558,139

326,351§
3,327§
642,739§

759,036§
2,658§
558,139§

331,125

331,125§

3,327
13,000
12,000
20,000
3,000
23,657
10,560
16,717
44,562
104,895
218,769
177,034
429,338

–
–
–

–
–
–

–

Exercise
price

284p
321p
510p
880p
887.5p
549.5p
615.5p
655p
733p
715p
394.25p
430p
419.25p

740p
284p
394.25p

311.25p
348p
419.25p

(see page 57)

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 426.5p. In that regard Mr Pritchard made a gain of £492. 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.

§ These share options lapsed when Mr Hampton and Mr Targett left the board on 12 January 2004 and 30 April 2004, respectively.

The market price for a share in the Company at 1 January 2004 and 31 December 2004 was 448p and 473p, respectively. The range of prices between
1 January 2004 and 31 December 2004 was 391.75p to 476.25p. 

None of the other directors at 31 December 2004 had options to acquire shares in Lloyds TSB Group plc or its subsidiaries.

56 LLOYDS TSB GROUP

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 2004

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 2004 Lloyds TSB Group was ranked: 

10th after four years of the performance period for options granted in 2001; 

14th after three years of the performance period for options granted in 2002; 

15th after two years of the performance period for options granted in 2003; and

6th after one year of the performance period for options granted in 2004

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 was
designed to encourage him to remain with Lloyds TSB Group plc. The option was not subject to any performance condition and vested on 31 December 2004,
with a six month exercise period ﬁnishing on 30 June 2005. Full details of the plan were set out in the 2002 annual report.

Lloyds TSB Group plc share plan 2003

The option granted to Mr Targett to acquire 331,125 ordinary shares when he joined the Group lapsed following his departure.

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
3 March 2005

LLOYDS TSB GROUP   57

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 65 to 68. 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 45. 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  unaudited  part  of  the  directors’  remuneration  report  and  the  corporate
governance statement.

We review whether the corporate governance statement on pages 43 to 46 reﬂects the Company’s compliance with the nine provisions of the 2003 Financial
Reporting Council’s Combined Code 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 2004 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
3 March 2005

58 LLOYDS TSB GROUP

Consolidated profit and loss account   

for the year ended 31 December 2004

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 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
(Loss) 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 for the year

Earnings per share
Diluted earnings per share

* See note 6

Note

2004
£ million

Continuing
operations
2003
£ million

Discontinued
operations

2003*
£ million

Total
2003
£ million

423
9,972
5,475

4,920
39

3,124
(744)
271
715
554
688
4,608

9,567

4,284
633
4,917

4,650
224

953
(87)
866
52

3,508
–
(15)

3,493
1,004

2,489

26
42

2,421
1,914

507

43.3p
43.0p

45

3
29

4
23,24

15

5

20
6

7
8

39

9
10

41

11
11

389
8,484
4,129

4,744
34

2,987
(688)
525
436
535
682
4,477

9,255

4,229
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
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
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

The accompanying notes are an integral part of the ﬁnancial statements.

LLOYDS TSB GROUP   59

     
Consolidated balance sheet

at 31 December 2004

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.

The directors approved the accounts on 3 March 2005.

Maarten A van den Bergh
Chairman

J Eric Daniels
Group Chief Executive

Helen A Weir
Group Finance Director

Note

2004
£ million

2003
£ million

12
13
14
17
18

20

23
24
27
28
29

29

1,078
1,462
92
23,565
154,240
25,194
215

1,195
1,447
539
15,547
135,251
28,669
458

84
(31)
53
2,425
4,181
3,220
2,573
6,781

85
(31)
54
2,513
3,918
3,944
1,918
6,481

225,079
54,764

201,934
50,078

279,843

252,012

60 LLOYDS TSB GROUP

Consolidated balance sheet

at 31 December 2004

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 and non-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.

Note

2004
£ million

2003
£ million

31
32

33
34
35
45

36
37

38
38

39

40
41
41
41
42

29

46

39,738
122,062
631
27,217
6,619
3,866
2,231

1,473
417

5,852
4,400
10,252

46
550
596
1,419
1,145
343
7,070
9,977

23,955
116,496
626
25,922
7,007
3,206
2,139

1,376
402

5,959
4,495
10,454

44
683
727
1,418
1,136
343
6,727
9,624

225,079
54,764

201,934
50,078

279,843

252,012

71
6,786
1,669

8,526

299
6,122
2,604

9,025

85,290

79,335

LLOYDS TSB GROUP   61

Company balance sheet

at 31 December 2004

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
Cash balances with group undertakings

Current liabilities
Amounts falling due within one year:
Amounts owed to group undertakings
Other creditors
Dividend payable

Net current liabilities

Total assets less current liabilities
Creditors
Amounts falling due after more than one year:
Loan capital

Net assets

Capital and reserves
Called-up share capital
Share premium account
Revaluation reserve
Proﬁt and loss account

Shareholders’ funds (equity and non-equity)

The accompanying notes are an integral part of the ﬁnancial statements.

The directors approved the accounts on 3 March 2005.

Maarten A van den Bergh
Chairman

J Eric Daniels
Group Chief Executive

Helen A Weir
Group Finance Director

Note

2004
£ million

2003
£ million

21
21

38

40
41
41
41

42

11,080
1,723
12,803

1,390
97
208
1,695

1,741
107
1,315
3,163
(1,468)

10,753
1,723
12,476

1,387
88
362
1,837

1,913
106
1,314
3,333
(1,496)

11,335

10,980

1,358

9,977

1,419
1,145
5,014
2,399

9,977

1,356

9,624

1,418
1,136
4,687
2,383

9,624

62 LLOYDS TSB GROUP

Other statements

Statement of total recognised gains and losses

for the year ended 31 December 2004

Proﬁt attributable to shareholders
Currency translation differences on foreign currency net investments
Actuarial losses recognised in post-retirement beneﬁt schemes
Deferred tax thereon 

Total recognised gains and losses relating to the year
Prior year adjustments in respect of changes in accounting policy in 2003

Total gains and losses recognised during the year

Historical cost proﬁts and losses

for the year ended 31 December 2004

Note

2004
£ million

2003
£ million

45

2,421
(11)
(237)
71
(166)

2,244
–

2,244

3,254
118
(6)
2
(4)

3,368
(29)

3,339

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 2004

Proﬁt attributable to shareholders
Dividends

Proﬁt 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

Net increase in shareholders’ funds
Shareholders’ funds at beginning of year

Shareholders’ funds at end of year

The accompanying notes are an integral part of the ﬁnancial statements.

Note

45
40,41
43
6

2004
£ million

2,421
(1,914)

507
(11)
(166)
10
10
3

353
9,624

9,977

2003
£ million

3,254
(1,911)

1,343
118
(4)
45
(2)
181

1,681
7,943

9,624

LLOYDS TSB GROUP   63

Consolidated cash flow statement     

for the year ended 31 December 2004

Net cash inﬂow from operating activities

Dividends received from joint ventures and associated undertakings

Returns on investments and servicing of ﬁnance:
– Dividends paid to equity minority interests
– Payments made to non-equity minority interests
– Interest paid on subordinated liabilities (loan capital)
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 and maturities of ﬁxed asset investments
– Additions to tangible ﬁxed assets
– Disposals of tangible ﬁxed assets
Net cash (outﬂow) inﬂow from capital expenditure and ﬁnancial investment

Acquisitions and disposals:
– Additions to interests in joint ventures
– Acquisition of group undertakings and businesses
– Disposal of group undertakings and businesses 
Net cash (outﬂow) inﬂow 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 transactions in own 

shares held in respect of employee share schemes
– Repayments of subordinated liabilities (loan capital)
– Repayment of minority investment in subsidiaries
– Capital element of ﬁnance lease rental payments
Net cash (outﬂow) inﬂow from ﬁnancing

Note

49a

49d
49d

49e
49g

49d

49d
49d
49d

2004
£ million

2003
£ million

3,469

2

(24)
(44)
(606)
(674)

(656)
(107)
(763)

(10,088)
9,732
(1,183)
243
(1,296)

–
(16)
(25)
(41)

772

5

(14)
(81)
(600)
(695)

(598)
(186)
(784)

(35,420)
36,281
(778)
287
370

(12)
(1,106)
2,382
1,264

(1,913)

(1,908)

(1,216)

(976)

699

11
(764)
(132)
(1)
(187)

533

32
(75)
–
(1)
489

Decrease in cash

49c

(1,403)

(487)

The accompanying notes are an integral part of the ﬁnancial statements.

64 LLOYDS TSB GROUP

     
Notes to the accounts

1 Accounting policies

Accounting policies are unchanged from 2003.

In  December  2004,  the  Accounting  Standards  Board  (‘ASB’)  issued  Financial  Reporting  Standard  27  ‘Life  Assurance’.  The  Group  will  implement  the
requirements of this standard in its 2005 accounts; however, in accordance with the Memorandum of Understanding entered into by leading members of
the  life  assurance  and  bancassurance  sectors  and  the  Association  of  British  Insurers  with  the  ASB,  certain  additional  disclosures  have  been  given  in
‘Operating and ﬁnancial review and prospects’ attached to these accounts.

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.

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.

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  2004  would  be  £92 million  lower  (2003:  £93  million  lower),  with  a  corresponding  reduction  in  reserves  of  £450 million
(2003: £358 million); intangible assets on the balance sheet would also be £450 million lower (2003: £358 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.

LLOYDS TSB GROUP   65

Notes to the accounts

1 Accounting policies (continued)

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 has general provisions, held 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 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 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 expected net realisable value and interest is no longer charged to the customer’s account as the likelihood of its recovery is considered
remote. 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.

Debt securities and equity shares held for dealing purposes are included at market value. In circumstances where securities are transferred between the
dealing  and  investment  portfolios,  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.

66 LLOYDS TSB GROUP

Notes to the accounts

1 Accounting policies (continued)

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 both deﬁned beneﬁt and deﬁned contribution post-retirement beneﬁt schemes.

Full actuarial valuations of the Group’s principal 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, after deducting 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 foreign exchange gains and losses, which arise
from normal trading activities, are included in the proﬁt and loss account.

o Long-term assurance business 

The Group accounts for its interest in long-term assurance business using the embedded value basis of accounting. 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 present 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.

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. 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 of the Group’s life assurance operations are legally owned by the Group, 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.

LLOYDS TSB GROUP   67

Notes to the accounts

1 Accounting policies (continued)

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 Sale and repurchase transactions

Securities which have been sold with an agreement to repurchase continue to be shown on the balance sheet and the sale proceeds recorded within deposits
by banks or customer accounts as appropriate. Securities acquired in reverse sale and repurchase transactions are not recognised on the balance sheet and
the purchase price is recorded within loans and advances. The difference between the sale price and repurchase price is accrued evenly over the life of the
transaction and charged or credited to the proﬁt and loss account as interest payable or receivable.

r 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.

68 LLOYDS TSB GROUP

Notes to the accounts

2 Segmental analysis

The Group’s activities are organised into three businesses: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Services
provided by UK Retail Banking encompass the provision of banking and other ﬁnancial services, private banking 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

Insurance
and
Investments
£m

Wholesale
and
International
Banking
£m

Central
group items
£m

Continuing Discontinued
operations
£m

operations§

£m

Year ended 31 December 2004

Net interest income
Other ﬁnance income
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
Loss on sale of businesses

UK Retail
Banking
£m

3,198
–
1,639

4,837
(2,513)

2,324
–
(673)
–
–

44
–
497

541
(149)

392
(224)
–
–
–

Proﬁt (loss) before tax

1,651

168

Year ended 31 December 2003*

Net interest income
Other ﬁnance income
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

3,137
–
1,533

4,670
(2,583)

2,087
–
(594)
–
(22)
–

38
–
505

543
(141)

402
(236)
–
–
–
–

Proﬁt (loss) before tax

1,471

166

99
–
1,315

1,414
(272)

1,142
(224)
–
–
–

1,966
–
1,641

3,607
(2,090)

1,517
–
(193)
(52)
(15)

(343)
39
13

(291)
(42)

(333)
–
–
–
–

4,920
39
4,608

9,567
(4,917)

4,650
(224)
(866)
(52)
(15)

918

1,257

(333)

3,493

–
–
–

–
–

–
–
–
–
–

–

Total
£m

4,920
39
4,608

9,567
(4,917)

4,650
(224)
(866)
(52)
(15)

3,493

81
–
1,084

1,875
–
1,561

1,165
(261)

3,436
(2,048)

904
(236)
–
–
–
–

1,388
–
(306)
(44)
–
–

(349)
34
299

(16)
(9)

(25)
–
13
–
–
–

4,744
34
4,477

9,255
(4,901)

4,354
(236)
(887)
(44)
(22)
–

511
–
142

5,255
34
4,619

653
(272)

9,908
(5,173)

381
–
(63)
–
–
865

4,735
(236)
(950)
(44)
(22)
865

668

1,038

(12)

3,165

1,183

4,348

55
–
818

873
(123)

750
–
–
–
–

750

43
–
579

622
(120)

502
–
–
–
–
–

502

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
2004
£m

International
2004
£m

Total
2004
£m

Domestic
2003
£m

International
2003
£m

Continuing Discontinued
operations
2003
£m

2003
£m

operations§

9,992
39
2,980
249
715
554
682

403
–
144
22
–
–
6

10,395
39
3,124
271
715
554
688

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

15,211

575

15,786

13,279

793

14,072

1,452

15,524

Proﬁt on ordinary activities before tax

3,295

198

3,493

2,810

355

3,165

1,183

4,348

LLOYDS TSB GROUP   69

Notes to the accounts

2 Segmental analysis (continued)

Class of business
UK Retail Banking
Insurance and Investments:
General insurance
Life, pensions, unit trusts and asset management 

Wholesale and International Banking
Central group items

Geographical area**
Domestic
International

Net Assets†

2004
£m

Net Assets†
2003
£m

Assets‡
2004
£m

Assets‡
2003
£m

2,991

2,555

101,615

90,541

427
6,908
7,335
4,469
(4,772)

10,023

9,369
654

10,023

470
6,531
7,001
4,390
(4,278)

9,668

9,069
599

9,668

1,084
9,141
10,225
112,968
271

225,079

212,197
12,882

225,079

1,009
8,835
9,844
101,286
263

201,934

189,162
12,772

201,934

* From the beginning of 2004 the Group changed its UK branch and other distribution networks from cost centres to proﬁt centres and, consequently, amended
the internal commission arrangements between these networks and the insurance product manufacturing businesses within the Group. The effect of this change
has been to redistribute income from the insurance segments to UK Retail Banking and, to a lesser extent, to Wholesale. In addition, certain costs previously
included in Central group items were reallocated to the operating segments. The 2003 segmental analysis has been restated to reﬂect these changes on a
consistent basis.

** 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 related 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

2004
£m

178
93

271

2003
£m

228
332

560

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

The average number of persons on a headcount basis 
employed by the Group during the year was as follows:
UK
Overseas

2004
£m

2,069
140
338

2,547
1,737

4,284

74,924
3,372

78,296

2003
£m

2,092
143
353

2,588
1,888

4,476

73,814
10,288

84,102

The above staff numbers exclude 4,657 (2003: 5,202) staff employed in the long-term assurance business. Costs of £190 million (2003: £194 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 52 to 57.

70 LLOYDS TSB GROUP

Notes to the accounts

4 Administrative expenses (continued)

Statutory audit
Other audit related fees:
– Audit related regulatory reporting
– Further assurance services
Total other audit related fees

Audit and audit related fees
Tax advisory
Other non-audit fees:
– Due diligence services
– Other
Total other non-audit fees

Total fees

2004
£m

5.2

0.9
6.4
7.3

12.5
0.8

0.9
0.3
1.2

14.5

2003
£m

5.5

0.9
3.3
4.2

9.7
1.6

0.7
0.2
0.9

12.2

The auditors’ remuneration for the holding company was £51,500 (2003: £51,500).

During the year the auditors also earned fees of £0.6 million (2003: £0.6 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  advice  provided in  relation  to  the  Group’s preparations for  the  implementation of International
Financial Reporting Standards and the requirements of the Sarbanes-Oxley Act together with the costs of the audit of the Group’s Form 20-F ﬁling.

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. The auditors are not permitted to provide management consultancy services to the Group.

The Group has procedures to ensure that fees for audit and non-audit services are approved in advance. The audit committee has established de minimis
fee limits for particular detailed types of service and has approved in advance all non-audit assignments where the fee falls below the relevant limit. All
statutory audit work as well as non-audit assignments where the fee is expected to exceed the relevant limit are subject to individual pre-approval by the
audit committee. 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

2004
£m

43
9

52

2003
£m.

42
2

44

LLOYDS TSB GROUP   71

Notes to the accounts

6 (Loss) proﬁt before tax on sale of businesses

Proﬁt on sale of businesses in Argentina (tax: £6 million)
Loss on sale of businesses in Colombia (after charging £3 million of goodwill 
previously written off to reserves) (tax: nil)
Loss on sale of businesses in Panama, Guatemala and Honduras (tax: £1 million)
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)

2004
£m

6

(20)
(1)
–

–

–

(15)

2003
£m

–

–
–
(15)

(41)

921

865

During 2004 the Group completed the sale, announced on 19 July 2004 and completed on 19 November 2004, of the business of the branch of Lloyds
TSB Bank plc in Argentina; the sale, announced on 19 July 2004 and completed on 30 November 2004 of the Group’s principal businesses in Colombia
comprising its interests in Lloyds TSB Bank S.A. and in Lloyds Trust S.A. and certain offshore assets; and the sales, announced on 1 December 2003, of
substantially all of the businesses of the branches of Lloyds TSB Bank plc in Panama, Guatemala and Honduras which were completed on 30 April 2004,
4 June 2004 and 1 October 2004 respectively.

During 2003 the Group completed the sales of its French fund management and private banking businesses, including its subsidiaries Lloyds Bank SA,
Chaillot Assurances SA and Capucines Investissements SA; 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; and its subsidiary, NBNZ Holdings
Limited, comprising the Group’s New Zealand banking and insurance operations.

The trading results of the businesses sold in 2004 were not material to the Group. Discontinued operations in 2003 comprised the businesses in New
Zealand, Brazil and France sold in that year.

7 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)

2004
£m

3,742
422
126

212
17
601

2003
£m

3,495
446
47

220
18
622

72 LLOYDS TSB GROUP

Notes to the accounts

8 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

2004
£m

841
(38)
803
(58)

745

119
(5)
114

859
146
(1)

1,004

2003
£m

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

784

144
(15)
129

913
119
(7)

1,025

The charge for tax on the proﬁt for the year is based on a UK corporation tax rate of 30 per cent (2003: 30 per cent).

In addition to the tax charge in the proﬁt and loss account detailed above, £71 million (2003: £2 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:

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
– Speciﬁcally allowable, unallowable and non-taxable items
– Net tax effect of disposals
– Tax deductible coupons on non-equity minority interests
– 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

2004
£m

3,493
1,048

9
(14)
(5)
(12)
(12)
(86)
(60)
(16)
7

859

86
60
(1)

1,004

28.7%

2003
£m

4,348
1,304

9
(9)
(10)
(276)
(12)
(105)
(14)
16
10

913

105
14
(7)

1,025

23.6%

LLOYDS TSB GROUP   73

Notes to the accounts

8 Tax on proﬁt on ordinary activities (continued)

c Factors that may affect the future tax charge

The current tax charge includes a charge of £199 million (2003: charge of £157 million) in respect of notional tax on the shareholder’s interest in the
movement in value of the long-term assurance business (note 29b). 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.

Future transfers from Scottish Widows plc’s long-term business fund to its shareholder’s fund will be subject to a shareholder tax charge. Under FRS 19, no
provision is required to be made since the timing of such transfers is under Scottish Widows plc’s control. The potential deferred tax liability (undiscounted)
not recognised on the balance sheet is approximately £230 million (2003: £110 million).

9 Proﬁt for the ﬁnancial year attributable to shareholders

The proﬁt attributable to shareholders includes a proﬁt of £1,921 million (2003: £1,880 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.

10 Ordinary dividends

Interim: paid
Final: proposed

2004
pence per share

2003
pence per share

10.7
23.5

34.2

10.7
23.5

34.2

2004
£m

599
1,315

1,914

2003
£m

597
1,314

1,911

No dividends have been paid on the £100 of 6 per cent non-cumulative redeemable preference shares issued in the year (see note 40). Dividends are being
accrued at the rate of 6 per cent per annum and the ﬁrst payment is due in March 2005.

11 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

2004

£2,421m
5,590m
35m
5,625m
43.3p
43.0p

2003

£3,254m
5,581m
18m
5,599m
58.3p
58.1p

† 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 6 million (2003: 8 million) ordinary shares representing the Group’s

holdings of own shares (note 43).

74 LLOYDS TSB GROUP

Notes to the accounts

12 Treasury bills and other eligible bills

2004
Balance sheet
£m

2004
Valuation
£m

2003
Balance sheet
£m

2003
Valuation
£m

75
13

88

4

92

–
18
74

92

–

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:
At 1 January 2004
Exchange and other adjustments
Additions
Bills sold or matured
Adjustments on disposal of businesses
Amortisation of premiums and discounts

At 31 December 2004

77
13

90

4

94

Cost
£m

528
(3)
430
(830)
(37)
–

88

308
222

530

9

539

336
70
133

539

2

Premiums
and discounts
£m

2
–
–
(5)
–
3

–

305
218

523

9

532

Total
£m

530
(3)
430
(835)
(37)
3

88

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 
£1 million would be payable (2003: £2 million 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.

13 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

2004
£m

2,483
21,083

23,566
(1)

23,565

2,477

16,763
2,243
1,422
661
(1)

23,565

2003
£m

2,292
13,273

15,565
(18)

15,547

3,768

7,637
2,329
1,496
335
(18)

15,547

LLOYDS TSB GROUP   75

Notes to the accounts

14 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

2004
£m

144,708
4,828
6,387

155,923
(1,662)
(21)

154,240

28,748
9,878
35,301
81,996
(1,662)
(21)

154,240

15,805

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

The  cost  of  assets  acquired  during  the  year  for  letting  to  customers  under  ﬁnance  leases  and  hire  purchase  contracts  amounted  to  £5,472  million
(2003: £4,478 million).

Equipment leased to customers, which is stated after deducting £4,551 million (2003: £4,907 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

2004
£m

247
282
1,516
4,342

6,387

2003
£m

91
345
1,465
4,569

6,470

76 LLOYDS TSB GROUP

Notes to the accounts

15 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

At 31 December 

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

2004
Speciﬁc
£m

1,313
(11)
(21)
3
(1,028)
174

1,571
(618)
953

1,383

1,663

1
1,662

1,663

2004
General
£m

382
–
(12)
(3)
–
–

12
(99)
(87)

280

2004
£m

567
673

1,240
(914)
(21)

305

2003
Speciﬁc
£m

1,334
(1)
(49)
50
(1,145)
178

1,552
(606)
946

1,313

1,695

18
1,677

1,695

2003
General
£m

433
–
(5)
(50)
–
–

9
(5)
4

382

2003
£m

633
585

1,218
(916)
(28)

274

LLOYDS TSB GROUP   77

Notes to the accounts

16 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
USA
Europe
Rest of the world
Total international

Provisions for bad and doubtful debts*
Interest held in suspense*

2004
£m

2,076
3,292
1,877
6,753
5,775
12,103

80,065
22,833
6,387
4,828
5,321

151,310

125
2,385
1,587
516
4,613

155,923
(1,662)
(21)

154,240

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

* 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. 

78 LLOYDS TSB GROUP

Notes to the accounts

17 Debt securities

Investment securities
Government 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
Corporate debt securities
Mortgage backed securities
Other asset backed 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

4,524
51
5,733
504
14

25,194

4,090
21,104

25,194

5,048
11,825
5,080
76
2,763
402

25,194

Unamortised discounts net of premiums on investment securities

56

Investment securities
Listed
Unlisted

Other securities
Listed
Unlisted

8,925
5,443

14,368

10,378
448

10,826

2004
Balance sheet
£m

2,211
1,901
2,581
2,774
3,761
1,140

2004
Valuation
£m

2,213
1,902
2,587
2,781
3,756
1,141

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

14,368

14,380

13,741

13,754

4,524
51
5,733
504
14

25,206

8,931
5,449

14,380

10,378
448

10,826

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

341

8,162
5,579

13,741

14,374
554

14,928

7,253
106
6,785
664
120

28,682

8,173
5,581

13,754

14,374
554

14,928

LLOYDS TSB GROUP   79

Notes to the accounts

17 Debt securities (continued)

Movements in investment securities:
At 1 January 2004
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 2004

Cost
£m

13,731
(484)
9,637
281
(8,787)
(23)
–
–

14,355

Premiums
and discounts
£m

Provisions
£m

109
–
–
–
(2)
–
–
14

121

99
(2)
–
–
(25)
(7)
43
–

108

Total
£m

13,741
(482)
9,637
281
(8,764)
(16)
(43)
14

14,368

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
£4 million (2003: £3 million) would be payable 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. 

18 Equity shares

Investment securities
Listed
Unlisted

Other securities
Listed

Movements in investment securities:
At 1 January 2004
Exchange and other adjustments
Additions
Disposals
Adjustments on disposal of businesses
Charge for the year

At 31 December 2004

2004
Balance sheet
£m

2004
Valuation
£m

2003
Balance sheet
£m

2003
Valuation
£m

5
34

39

176

215

7
56

63

176

239

Cost
£m

41
(1)
21
(12)
(1)
–

48

5
30

35

423

458

Provisions
£m

6
(1)
–
(5)
–
9

9

5
126

131

423

554

Total
£m

35
–
21
(7)
(1)
(9)

39

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 exempt or 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.

80 LLOYDS TSB GROUP

Notes to the accounts

19 Assets transferred under sale and repurchase transactions

Assets subject to sale and repurchase agreements:
Treasury bills and other eligible bills
Debt securities

2004
£m

117
10,454

10,571

2003
£m

136
4,503

4,639

These  investments  have  been  sold  to  third  parties  but the  Group  is  committed  to  reacquire  them  at  a  future  date  and  at  a  predetermined  price. At
31 December 2004 the Group held £12,783 million (2003: £2,643 million) of securities as collateral under reverse repurchase agreements. The above
disclosure includes assets held through these agreements and subsequently resold as collateral for the Group’s own transactions.

20 Interests in joint ventures

At 1 January 2004
Share of losses

At 31 December 2004

The Group’s largest investments are in two joint ventures:

Group interest

iPSL
GF Two Limited (formerly Goldﬁsh Holdings Limited)

19.5% of issued ordinary share capital
25.0% of issued ordinary share capital

£m

54
(1)

53

Nature of business

Cheque processing
No longer trading

In  the  year  ended  31  December  2004  £16 million  (2003:  £25  million)  of  fees  payable  to  iPSL  have  been  included  in  the  Group’s  administrative
expenses and  £3  million  (2003:  £3  million)  of  charges  to  iPSL  have  been  included  in  the  Group’s  income.  The  Group  has  also  prepaid  £17 million
(2003: £13 million) of fees in respect of 2005 and this amount is included in prepayments and accrued income. 

GF One Limited (formerly Goldﬁsh Bank Limited, a wholly owned subsidiary of GF Two Limited) has lent £44 million (2003: nil) to the Group and this
amount is included in customer accounts. Interest payable to GF One Limited of £1 million (2003: nil) has been charged to the Group’s proﬁt and loss
account and capitalised in this balance.

In the year ended 31 December 2003 £7 million of interest receivable from GF One Limited and £6 million of charges to GF One Limited in respect of
administrative costs were included in the Group’s income.

Included in the gross assets disclosed on the balance sheet is an investment of £3 million (2003: £3 million) in associated undertakings.

21 Interests in group undertakings

At 1 January 2004
Revaluation
Disposal

At 31 December 2004

Shares in banks
Shares in other group undertakings

Total – all unlisted

Shares
£m

10,753
328
(1)

11,080

2004
£m

11,080
–

11,080

Loans
£m

1,723
–
–

1,723

2003
£m

10,752
1

10,753

On an historical basis, shares in group undertakings would have been included at cost of £6,066 million (2003: £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.

LLOYDS TSB GROUP   81

Notes to the accounts

21 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:

Country of
registration/
incorporation

Percentage of
equity share
capital and
voting rights held

Nature of business

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 Offshore 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 Asset Finance Division Limited 
Black Horse Limited
Scottish Widows plc
Scottish Widows Annuities Limited

† Indirect interest

England
England
England
England
England
England
Jersey
Scotland
England
England
England
England
England
England
Scotland
Scotland

100%
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†

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
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  Belgium,  Dubai,  Ecuador,  Gibraltar,  Hong  Kong,  Japan,  Luxembourg,
Malaysia, Monaco, Netherlands, Paraguay, Singapore, Spain, Switzerland, Uruguay, the USA and a representative ofﬁce in Iran.

82 LLOYDS TSB GROUP

Notes to the accounts

22 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

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

(Loss) proﬁt on ordinary activites after taxation
Dividends paid

(Loss) proﬁt for the year

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

Cash ﬂow statement
Net cash inﬂow from operating activities

23 Intangible ﬁxed assets

Goodwill
At 1 January 2004
Acquisition adjustment
Adjustments on disposal of businesses
Charge for the year

At 31 December 2004

2004
£m

–
(74)
116

42
(57)

(15)
5

(10)
–

(10)

–
–
1,742
49

1,791

1,527
–
260
4

1,791

388

2003
£m

–
(59)
93

34
(36)

(2)
6

4
–

4

–
–
1,408
23

1,431

1,309
–
108
14

1,431

132

Cost
£m

2,626
(34)
(14)
–

2,578

2004
£m

132
(83)
(8)

41
–

41
(5)

36
(24)

12

410
3,770
–
36

4,216

–
3,272
31
913

4,216

52

2003
£m

82
(52)
(2)

28
–

28
(2)

26
_

26

345
3,718
–
34

4,097

672
3,123
18
284

4,097

1,173

Amortisation
£m

Net book value
£m

113
–
(4)
44

153

2,513
(34)
(10)
(44)

2,425

LLOYDS TSB GROUP   83

Notes to the accounts

24 Tangible ﬁxed assets

Cost:
At 1 January 2004 
Exchange and other adjustments
Adjustments on disposal of businesses
Additions
Disposals

At 31 December 2004

Depreciation:
At 1 January 2004
Exchange and other adjustments
Adjustments on disposal of businesses
Charge for the year (£589 million in total; 2003: £646 million)
Disposals

At 31 December 2004

Balance sheet amount at 31 December 2004

Balance sheet amount at 31 December 2003

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

2,186
(1)
(13)
262
(109)

2,325

1,296
(1)
(8)
257
(81)

1,463

862

4,181

890

3,918

1,192
–
(10)
73
(18)

1,237

416
–
(4)
66
(5)

473

764

776

2004
£m

349
140
275

764

695

2,518
(46)
–
801
(471)

2,802

266
(4)
–
266
(281)

247

2,555

2,252

2003
£m

369
133
274

776

705

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

2004
£m

378
128
647
588

1,741

2003
£m

181
330
505
445

1,461

84 LLOYDS TSB GROUP

Notes to the accounts

25 Lease commitments

Annual commitments under non-cancellable operating lease agreements 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

Obligations under ﬁnance leases were:

Amounts payable in:
1 year or less
5 years or less but over 1 year

26 Capital commitments

2004
Premises
£m

6
26
176

208

2004
Premises
£m

1
3

4

2004 
Equipment
£m

–
–
–

–

2004
Equipment
£m

1
1

2

2003 
Premises
£m

7
29
190

226

2003
Premises
£m

–
–

–

2003
Equipment
£m

–
–
–

–

2003
Equipment
£m

–
–

–

Capital  expenditure  contracted  but  not  provided  for  at  31  December  2004  amounted  to  £150 million  (2003:  £77  million)  of  which  £146 million
(2003: £71 million) relates to assets to be leased to customers under operating leases.

27 Other assets

Balances arising from derivatives used for trading purposes (note 47)
Balances arising from derivatives used for hedging purposes
Settlement balances
Other assets

28 Prepayments and accrued income

Interest receivable
Deferred expenditure incurred under cash gift and discount mortgage schemes
Other debtors and prepayments

2004
£m

2,015
254
40
911

3,220

2004
£m

1,075
78
1,420

2,573

2003
£m

2,489
475
54
926

3,944

2003
£m

869
128
921

1,918

LLOYDS TSB GROUP   85

Notes to the accounts

29 Long-term assurance business 

a 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:
At 1 January
Exchange and other adjustments
Proﬁt after tax
Adjustments on disposal of businesses
Dividends

At 31 December

2004
£m

3,842
2,939

6,781

2004
£m

6,481
(16)
516
–
(200)

6,781

2003
£m

3,602
2,879

6,481

2003
£m

6,213
12
296
(38)
(2)

6,481

b 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 contribution. 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, less the costs of acquiring the business, including commissions paid to independent ﬁnancial
advisers 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 c).

Development costs. This represents the costs associated with new product development and implementation of the bancassurance strategy.

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 e.

86 LLOYDS TSB GROUP

Notes to the accounts

29 Long-term assurance business (continued)

Income from long-term assurance business:
New business contribution
Existing business:
Expected return
Experience variances
Assumption changes and other items
Customer remediation provisions (see c)

Development costs
Investment earnings

Operating proﬁt
Investment variance
Changes in economic assumptions (see e)

Income from long-term assurance business before tax
Attributed tax

Income from long-term assurance business after tax

2004
£m

225

289
(41)
(39)
(12)
197
(11)
167

578
139
(2)

715
(199)

516

2003
£m

150

264
(16)
(75)
(100)
73
(13)
153

363
112
(22)

453
(157)

296

This analysis details the components of embedded value income for 2004 and the comparative period. These numbers are not comparable in all respects to the
analysis of life and pensions proﬁtability given on page 16, in the operating and ﬁnancial review, since that analysis includes certain items which are accounted
for outside of the embedded value calculations. In addition, comparatives in the operating and ﬁnancial review have been restated to reﬂect the impact of the
introduction, in 2004, of the management of the Group’s distribution channels as proﬁt centres.

c Customer remediation provisions

Redress to past purchasers of pension policies

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 two years:
At 1 January
Accrual of interest on the provision
Charge for the year
Compensation paid

At 31 December

2004
£m

25
–
–
(12)

13

2003
£m

37
2
44
(58)

25

The review is now nearing completion and management do not expect any further material changes in the provisioning requirement. 

LLOYDS TSB GROUP   87

Notes to the accounts

29 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  Lloyds  TSB  Group  in  February  2000.  As  a  result  of  this  review,  the  Group  is  required  to  pay
compensation to customers in those cases where sales practices are found to have been deﬁcient. A provision has been established to meet the cost of the
payments to those customers; a provision is also held against the estimated cost of redress payments to customers in respect of products sold by the Abbey
Life sales force prior to 1988. During 2004 management has reviewed the adequacy of the provisions held in the light of experience and changing market
conditions and an additional charge of £12 million (2003: £56 million) has been made.

Movements in the provision over the last two years:
At 1 January
Accrual of interest on the provision
Charge for the year
Compensation paid

At 31 December

2004
£m

149
3
12
(140)

24

2003
£m

165
5
56
(77)

149

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 37.

d 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 31 December 2004 of £1.4 billion (2003: £1.4 billion). To the
extent that the Additional Account is insufﬁcient to provide these beneﬁts any shortfall would be met by 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.

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 Lloyds TSB Group, will not be known for many years. However, Scottish Widows has developed, and will continue
to develop, 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.
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 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, 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.

e 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 2004 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

The revised assumptions have resulted in a net charge to the proﬁt and loss account of £2 million.

2004
%

7.40
7.17
4.57
3.76

2003
%

7.60
7.45
4.85
3.80

88 LLOYDS TSB GROUP

Notes to the accounts

29 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 take

into account both the effects of recent actual experience and future expectations 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 (2003: 30 per cent). The normalised investment earnings have been grossed up at a composite longer term tax
rate of 18 per cent (2003: 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.

f Sensitivities

The table below shows the effect on both the embedded value at 31 December 2004 and the new business contribution for the year then ended of theoretical
changes in the main economic assumptions.

Embedded
value
£m

New business
contribution
£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

g 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

6,781
(189)
213
(84)

2004
£m

56,960
35
1,741

58,736
(3,842)

54,894

15,985
31,896
3,150
120
76
5,733

56,960

23,705
246
28,256
1,379
1,308

54,894

225
(26)
30
(12)

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

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
£130 million (2003: £122 million) for own shares held within the with-proﬁt funds.

LLOYDS TSB GROUP   89

Notes to the accounts

29 Long-term assurance business (continued)

h 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 gains (losses) on investments
Unrealised losses on investments 
Other charges
Tax attributable to long-term business
Transfer to 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

Proﬁt on ordinary activities before tax
Tax on proﬁt on ordinary activities

Proﬁt on ordinary activities after tax
Dividends proposed

Proﬁt for the ﬁnancial year

2004
£m

5,575
1,981
2,815
–

10,371
(5,222)
(3,208)
(535)
244
–
–
(110)
(1,084)

456
155
55

666
(170)

496
(200)

296

Income from long-term assurance business after tax reconciles to the proﬁt calculated on a modiﬁed statutory solvency basis as follows:

Income from long-term assurance business attributable to the shareholder after tax
Increase in value-in-force taken to proﬁt

Other differences:
Movement in deferred acquisition costs
Tax adjustment
Other

Proﬁt on ordinary activities after tax on a modiﬁed statutory solvency basis

2004
£m

516
(60)

456

89
7
(56)

496

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
–

250

2003
£m

296
(2)

294

66
(60)
(50)

250

90 LLOYDS TSB GROUP

Notes to the accounts

29 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

† Net of reinsurers’ share of technical provisions

2004
£m

29,069
28,256
1,992

59,317

4,581
1,379
23,705
28,256
1,396

59,317

2003
£m

27,468
25,023
2,018

54,509

4,234
346
23,730
25,023
1,176

54,509

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 on a modiﬁed statutory solvency basis

30 Assets and liabilities denominated in foreign currencies

Assets
Denominated in sterling
Denominated in other currencies

Liabilities
Denominated in sterling
Denominated in other currencies

2004
£m

6,781
(2,939)

3,842

585
152
2

4,581

2004
£m

171,704
53,375

225,079

171,587
53,492

225,079

Assets and liabilities exclude long-term assurance assets attributable to policyholders and liabilities to policyholders.

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

LLOYDS TSB GROUP   91

Notes to the accounts

31 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

2004
£m

5,183

31,833
2,500
21
201

39,738

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

32 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

2004
£m

180
33,029
33,209

32
6,497
6,529

39,738

2004
£m

93,846

18,938
2,442
5,632
1,204

122,062

The breakdown of customer accounts between the domestic and international ofﬁces of the Group is set out below:

2004
£m

3,529
115,699
119,228

296
2,538
2,834

122,062

Domestic:
Non-interest bearing
Interest bearing

International:
Non-interest bearing
Interest bearing

92 LLOYDS TSB GROUP

2003
£m

7,455

15,002
1,197
69
232

23,955

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

2003
£m

3,328
109,384
112,712

358
3,426
3,784

116,496

Notes to the accounts

33 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

2004
£m

167
144
1,053
3,999

5,363

18,489
2,941
424
–
21,854

27,217

2003
£m

711
81
1,099
3,623

5,514

17,942
2,015
283
168
20,408

25,922

Debt  securities  in  issue  include  certiﬁcates  of  deposit  of  £15,226  million  (2003:  £16,415  million)  and  commercial  paper  of  £6,473  million
(2003: £3,625 million). An amount of £5,097 million (2003: £5,184 million) relating to debt securities issued under the Group’s Euro Medium Term Note
programme is included in these ﬁgures.

34 Other liabilities

Balances arising from derivatives used for trading purposes (note 47)
Balances arising from derivatives used for hedging purposes
Current tax
Dividends
Settlement balances
Other liabilities

35 Accruals and deferred income

Interest payable
Other creditors and accruals

2004
£m

3,135
667
399
1,315
38
1,065

6,619

2004
£m

1,581
2,285

3,866

2003
£m

3,499
503
503
1,314
40
1,148

7,007

2003
£m

1,216
1,990

3,206

LLOYDS TSB GROUP   93

Notes to the accounts

36 Deferred tax

Short-term timing differences
Accelerated depreciation allowances

At 1 January 2004
Exchange and other adjustments 
Adjustments on disposal of assets
Charge for the year

At 31 December 2004

2003
£m

(229)
1,605

1,376

2004
£m

(196)
1,669

1,473

£m

1,376
(26)
(23)
146

1,473

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 2004 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 £956 million (2003: £916 million) (note 45).

37 Other provisions for liabilities and charges

At 1 January 2004 
Exchange and other adjustments 
Adjustments on disposal of businesses
Provisions applied
Charge for the year

At 31 December 2004

Customer remediation provisions

Customer
remediation
provisions
£m

97
–
–
(105)
100

92

Insurance
provisions
£m

219
(6)
–
(203)
224

234

Vacant
leasehold property
and other
£m

86
–
(1)
(13)
19

91

Total
£m

402
(6)
(1)
(321)
343

417

The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, where the original sales
processes are found to have been deﬁcient. During 2004 management have again reviewed the adequacy of the provisions held having regard to current
complaint volumes and the level of payments being made and as a result an additional charge of £100 million (2003: £200 million) has been made.

At 31 December 2004 the provisions held mainly related to past sales of mortgage endowment policies. 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
the Group and also by third parties. The principal assumptions that have been made in the calculation of the provision relate to the number of cases that
are likely to require redress and the estimated average cost per case. The ultimate cost and timing of the payments remains highly uncertain and will be
inﬂuenced by external factors beyond the control of management, such as regulatory actions, media interest and the performance of the ﬁnancial markets.
However, it is expected that the majority of the expenditure will be incurred over the next two years.

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,  a  claims  equalisation  provision  is
maintained in relation to property 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 run off during the
remaining life of the leases concerned; the run off period currently averages 5 years. Where a property is disposed of earlier than anticipated, any remaining
balance in the provision relating to that property is released.

94 LLOYDS TSB GROUP

Notes to the accounts

38 Subordinated liabilities

Undated loan capital 
Dated loan capital 

Notes

Group
2004
£m

5,852
4,400

Group
2003
£m

5,959
4,495

Total subordinated liabilities

10,252

10,454

Company
2004
£m

497
861

1,358

Company
2003
£m

497
859

1,356

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
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)
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)
57/8% Subordinated Guaranteed Bonds 2014 (c750 million)
57/8% Subordinated Notes 2014
67/8% Subordinated Notes 2015
Subordinated Step-up Floating Rate Notes 2016 
callable 2011 (c500 million)
Subordinated Floating Rate Notes 2020 (c100 million)
95/8% Subordinated Bonds 2023
5.75% Subordinated Step-up Notes 2025 callable 2020

a

b

c

g

a
f

d, g

h

f
f
f

f

e

a
e

a, i
a

i

389
259
311
100
526

512

877

105
407

350

101

497
267
199
455

497

419
279
335
100
523

550

874

105
407

349

104

496
267
199
455

497

5,852

5,959

–
–
–
250
299
270
100
100

–
281
207
100
149
582
462
148
345

353
70
338
346

5
400
100
249
299
269
100
100

279
281
223
100
149
578
461
148
345

–
70
339
–

–
–
–
–
–

–

–

–
–

–

–

–
–
–
–

497

497

–
–
–
250
–
–
–
–

–
–
–
–
149
–
462
–
–

–
–
–
–

–
–
–
–
–

–

–

–
–

–

–

–
–
–
–

497

497

–
–
–
249
–
–
–
–

–
–
–
–
149
–
461
–
–

–
–
–
–

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.

† Any repayments of undated loan capital would require the prior consent of the Financial Services Authority.

4,400

4,495

861

859

LLOYDS TSB GROUP   95

Notes to the accounts

38 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) Issued during 2004 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

39 Non-equity minority interests

Non-equity minority interests comprise:

Group
2004
£m

–
250
769
3,381

4,400

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‡

Group
2003
£m

505
–
917
3,073

4,495

2004
£m

302
248

550
–
–

550

Company
2004
£m

Company
2003
£m

–
250
–
611

861

–
–
249
610

859

2003
£m

301
248

549
100
34

683

* 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 233 basis points 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 350 basis points 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 constituted 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. During 2004 the partnership was dissolved and the capital returned to the
partners.

‡ These securities constituted interests in LM ABS Investment Partnership, an English law general partnership in which the principal partner was Lime Street

(Funding) Limited, a wholly owned subsidiary of the Group. During 2004 the partnership was dissolved and the capital returned to the partners.

96 LLOYDS TSB GROUP

Notes to the accounts

40 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 under employee share schemes (3 million shares)

At 31 December

Limited voting ordinary shares of 25p each
At 1 January and 31 December

2003

£m
1,728
20
44

1,792

US$m
40

cm
40

¥m
1,250

2004

£m
1,728
20
44

1,792

US$m
40

ccm
40

¥m
1,250

2004
£m

1,398
1

1,399

20

1,419

In addition, during the year the directors approved the allotment at par of 400 6 per cent non-cumulative redeemable preference shares of 25p each. The
shares, which are redeemable at the option of the Company at any time, carry the rights to a ﬁxed rate non-cumulative preferential dividend at a rate of
6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be maintained if the
dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company.

Number of shares in issue:

Ordinary shares of 25p each

Limited voting ordinary shares of 25p each

6% Non-Cumulative Redeemable Preference shares of 25p each

2004

5,596,397,111

78,947,368

400

2003

5,593,737,422

78,947,368

–

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 2004, options to acquire 162 million Lloyds TSB Group ordinary shares of 25p each were outstanding under the executive share option
schemes, the share retention plan and the staff sharesave share option schemes exercisable up to 2014. These include the option, described on page 57,
to acquire 216,763 shares under the share retention plan: otherwise the options are exercisable at prices ranging from 243p to 888p per share.

LLOYDS TSB GROUP   97

Notes to the accounts

41 Reserves

Share premium account (the Group and the Company):
At 1 January 2004
Premium arising on issue of shares

At 31 December 2004 

Merger reserve (the Group):
At 1 January and 31 December 2004 

Proﬁt and loss account (the Group):
At 1 January 2004
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 for the year

At 31 December 2004

Revaluation reserve (the Company):
At 1 January 2004
Transfer to proﬁt and loss account
Increase in net tangible assets of subsidiary undertakings

At 31 December 2004

Proﬁt and loss account (the Company):
At 1 January 2004 
Movements in relation to own shares (note 43)
Transfer from revaluation reserve
Proﬁt for the year

At 31 December 2004 

£m

1,136
9

1,145

343

6,727
(11)
(166)
10
3
507

7,070

4,687
(1)
328

5,014

2,383
8
1
7

2,399

The proﬁt and loss account reserves of the Group at 31 December 2004 include approximately £1 billion (2003: £1 billion) 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  2004  are  stated  after  including  a  deﬁcit  of  £2,231  million  relating  to  the  Group’s
post-retirement deﬁned beneﬁt schemes (2003: £2,139 million) and after deducting £31 million (2003: £39 million) in respect of own shares held.

The  cumulative  amount  of  premiums  on  acquisitions  written  off  against  Group  reserves  during  previous  years  amounts  to  £2,087  million
(2003: £2,090 million) of which £1,682 million (2003: £1,662 million) was within the last 10 years. 

42 Shareholders’ funds

Equity
Non-equity

Group
2004
£m

9,977
–

9,977

Group
2003
£m

9,624
–

9,624

Company
2004
£m

9,977
–

9,977

Company
2003
£m

9,624
–

9,624

Non-equity shareholders’ funds comprise 400 non-cumulative redeemable preference shares of 25p each which were issued during 2004 at par.

98 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

2004
£m

14

14
17

31

2003
£m

22

22
17

39

* 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 Lloyds TSB Group. The Company has lent £20.6 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 2004, 1.5 million shares were held by the trustees with a cost of
£11.5 million (2003: 1.6 million shares with a cost of £12.6 million).

Lloyds TSB 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. At 31 December 2004, 1,364 shares were held by the
QUEST (2003: 0.2 million shares with a cost of £0.7 million). Under the terms of the QUEST’s trust deed, the trustees have waived all but a nominal
dividend on the shares they hold. 

The Lloyds TSB Group Shareplan (‘Shareplan’) has been established for the purpose of providing an enhanced remuneration package for employees. The
shares are used to provide shares awarded to employees for no consideration, as a percentage of salaries by reference to the proﬁts of Lloyds TSB 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. At 31 December 2004, 0.5 million shares (2003: 2.2 million shares) were held but not
allocated to individual employees by the Shareplan trustees with a cost to the Group of £2.3 million (2003: £9.2 million). The trustees have waived all but
a nominal dividend on the shares they hold.

In  addition,  a  further  0.2 million  ordinary  shares  were  held  by  Lloyds  TSB  Group  Holdings  (Jersey)  Limited  at  31  December  2004  (2003:  0.4  million
shares). These shares, on which the dividend entitlement has been waived, were gifted to Lloyds TSB Group some years ago at nil cost and are used to
satisfy outstanding options or to meet commitments arising under other employee share schemes. 

† The long-term assurance funds of Scottish Widows hold 30.5 million shares (2003: 30.5 million shares) in Lloyds TSB Group plc which were bought prior
to the acquisition of Scottish Widows by Lloyds TSB Group. Due to the structure of these funds, Lloyds TSB Group is effectively exposed to the risks and
rewards of ownership of one tenth of these shares; the risks and rewards of ownership of the remaining nine tenths are borne by the policyholders.

Movements in the amount deducted from reserves in respect of own shares have been as follows:

The Group
At 1 January 2004
Purchases of, and subscriptions for, shares 
Use of shares on exercise of employee options and for other employee share plans
Shares forfeited in the year

At 31 December 2004

The Company
At 1 January 2004
Purchases of, and subscriptions for, shares
Use of shares on exercise of employee options and for other employee share plans
Shares forfeited in the year

At 31 December 2004

£m

39
57
(67)
2

31

22
57
(67)
2

14

The credit of £10 million to Lloyds TSB Group’s proﬁt and loss account reserves represents the net reduction in the cost of own shares of £8 million and
an increase in the accrual in respect of the free shares to be awarded in respect of Shareplan of £2 million.

The credit of £8 million to the Company’s proﬁt and loss account reserves represents the net reduction in the cost of own shares.

LLOYDS TSB GROUP   99

Notes to the accounts

44 Related party transactions

a Transactions, arrangements and agreements involving directors and others

At 31 December 2004, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons
and with ofﬁcers included:

2004
Number of 
persons

2004
Total
£000

2003
Number of 
persons

2003
Total
£000

Loans and credit card transactions:
Directors and connected persons
Ofﬁcers

4
22

3,217
6,747

6
30

3,199
5,355

During 2003 one ofﬁcer purchased a car from the Group for a total consideration of £27,000.

b Group undertakings

Details of the principal group undertakings are given in note 21. 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 20. Information relating to transactions entered into between Group undertakings and the joint
ventures and details of outstanding balances at 31 December 2004 are also shown in note 20.

d Long-term assurance business

The Group enters into 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 2004
Group entities owed £2,254 million (2003: £1,995 million) and were owed £97 million (2003: £136 million); these amounts are included in customer
accounts and loans and advances to customers respectively. Furthermore Scottish Widows plc has provided £50 million (2003: £30 million) of subordinated
loan capital to Scottish Widows Bank plc, which is included in other liabilities. In addition, fees of £201 million (2003: £107 million) were received, and
fees of £49 million (2003: £71 million) were paid, in respect of distribution, asset management and other services.

Certain administrative properties used by Scottish Widows are owned by the long-term assurance funds. During 2004 Scottish Widows paid rent to the long-
term assurance funds amounting to £5 million (2003: £5 million). In addition, at 31 December 2004, the long-term assurance funds owned 30.5 million
ordinary shares in the Company (2003: 30.5 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 2004, the Group’s pension funds had call deposits with Lloyds TSB Bank plc amounting to £14 million (2003: £16 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

2004
£m

32
306

338

2003
£m

33
320

353

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 2003 and
2004, no contributions have been made to the Lloyds TSB Group Pension Scheme No. 2. However, with effect from 1 July 2003 the Group recommenced
contributions  to  the  Lloyds  TSB  Group  Pension  Scheme  No.  1  at  a  rate  of  31.7  per  cent  of  pensionable  salary;  this  was  increased  to  56.5 per cent of
pensionable salary with effect from 1 January 2004. 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 these schemes were carried out as at 30 June 2002; these have been updated to 31 December 2004 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 2004
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
2004
%

31 December
2003
%

31 December
2002
%

2.60
4.14
2.60
5.30

2.50
4.04
2.50
5.40

2.30
3.83
2.30
5.60

100 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 also met a reducing proportion of the cost until 31 December 2004, since which date the only obligation is in respect of the pre 1 January 1996
retirements.

Included  within  other  ﬁnance  income  is  an  interest  cost  of  £4 million  (2003:  £5  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 2004 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 6.7 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
2004
£m

Expected
long-term rate
of return at
31 December
2004 
%

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
%

8,042
550
561
941
959
611

11,664

8.2
4.6
4.3
5.3
6.9
3.6

7,454
551
545
1,033
713
307

10,603

8.1
4.8
4.4
5.4
7.1
3.5

7,175
557
–
491
791
69

9,083

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

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

2004
£m

764
(725)

39

2004
£m

289
17

306

2004
£m

369
(114)
(492)

(237)
71

(166)

8.4
4.5
–
5.6
6.9
3.8

2003
£m

696
(662)

34

2003
£m

269
51

320

2003
£m

802
94
(902)

(6)
2

(4)

LLOYDS TSB GROUP   101

Notes to the accounts

45 Pensions and other post-retirement beneﬁts (continued)

The experience gains and losses recognised can also be analysed 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

2004
£m

369
3.2%

(114)
0.8%

(237)
1.6%

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

The movements in the deﬁcit in the schemes over the last two years have been as follows:

Deﬁcit at beginning of year
Exchange and other adjustments
Other ﬁnance income
Current service costs
Contributions
Past service costs 
Actuarial loss
Adjustments on disposal of businesses

Deﬁcit at end of year

2003
£m

802
7.6%

94
0.7%

(6)
0.0%

2004
£m

11,664
(14,851)

(3,187)
956

(2,231)

2004
£m

(3,055)
(2)
39
(289)
374
(17)
(237)
–

(3,187)

2002
£m

(2,582)
28.4%

(240)
2.0%

(3,299)
27.5%

2001
£m

(2,015)
18.1%

(71)
0.7%

(2,873)
26.9%

2003
£m

10,603
(13,658)

(3,055)
916

(2,139)

2003
£m

(2,931)
(4)
34
(269)
138
(51)
(6)
34

(3,055)

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.

102 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 formal standby facilities, credit lines and other commitments to lend:
Less than 1 year maturity
1 year or over maturity

2004
£m

71
6,786

345
1,324
–
1,669

8,526

431
1,654

63,196
20,009

85,290

2003
£m

299
6,122

1,069
1,534
1
2,604

9,025

368
546

62,440
15,981

79,335

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 24 to 26.

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 a speciﬁed amount of currency at an agreed rate 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.

Derivative 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   103

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

113,601
11,386
2,059
1,922

128,968

275,547
62,797
9,679
7,430
48,278

403,731

4,239

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

Fair value
assets
£m

Fair value
liabilities
£m

1,995
426
44
–

2,465

3,118
28
78
–
–

3,224

282

(3,956)

2,015

Fair value
assets
£m

1,669
328
55
–

2,052

3,346
29
145
–
–

3,520

693

(3,776)

2,489

2,632
581
–
41

3,254

3,631
24
–
163
–

3,818

19

(3,956)

3,135

Fair value
liabilities
£m

2,127
511
14
39

2,691

4,006
29
–
162
–

4,197

387

(3,776)

3,499

31 December 2004

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 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

104 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 2004

Exchange rate contracts:
Spot, forwards and futures
Currency swaps
Options purchased

Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options written

Effect of netting

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

Notional
principal
amount
£m

155
60
1

216

34,196
2,921
111

37,228

Notional
principal
amount
£m

171
459

630

30,816
7,188
40

38,044

Fair value
assets
£m

Fair value
liabilities
£m

3
2
–

5

143
6
–

149

(123)

31

3
–
–

3

350
–
–

350

(123)

230

Fair value
assets
£m

Fair value
liabilities
£m

13
28

41

256
1
–

257

(165)

133

5
10

15

260
1
–

261

(165)

111

The aggregate carrying value of non-trading derivatives with a positive fair value was an asset of £96 million (2003: an asset of £132 million) and with a
negative fair value was a liability of £35 million (2003: a liability of £71 million).

The Company held non-trading derivatives with a notional principal amount of £1,393 million (2003: £1,892 million). 

LLOYDS TSB GROUP   105

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:

Under 1 year
£m

1 to 5 years
£m

Over 5 years
£m

Total
£m

31 December 2004
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 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

117,027
2,015

224,427
521

583
6

342,037
2,542

79,677
1,753

175,306
578

2,886
523

257,869
2,854

8,143
179

165,274
1,426

3,358
258

176,775
1,863

7,005
141

161,584
1,660

1,965
115

170,554
1,916

4,014
276

51,258
1,426

298
18

55,570
1,720

3,865
199

46,689
1,539

556
55

51,110
1,793

129,184
2,470

440,959
3,373

4,239
282

574,382
6,125

90,547
2,093

383,579
3,777

5,407
693

479,533
6,563

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.

2004
£m

855
1,191

2,046
(592)

1,454

2003
£m

1,272
1,350

2,622
(416)

2,206

OECD banks
Other

Net replacement cost
Qualifying collateral held

Potential credit risk exposure

106 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 2004

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

43
19,663
99,216
8,193
121

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

40
1,351
6,443
1,009
–

–
154
6,937
770
–

5
470
36,783
1,976
5

Over
5 years
£m

–
82
6,203
2,527
1

Non-
interest
bearing
£m

Trading
book
£m

Total
£m

–
602
(1,655)
(68)
17,375

4
1,243
313
11,002
4,271

92
23,565
154,240
25,409
21,773

Total assets

127,236

8,843

7,861

39,239

8,813

16,254

16,833

225,079

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

36,802
109,563
18,764
292
1,698
–
(6,577)

2,009
1,083
1,848
–
458
–
635

289
823
1,171
–
–
–
129

122
5,639
1,435
–
1,884
–
(3,330)

81
538
3,999
–
6,212
–
(916)

212
3,825
–
9,008
–
10,550
–

223
591
–
5,937
–
23
10,059

39,738
122,062
27,217
15,237
10,252
10,573
–

Total liabilities

160,542

6,033

2,412

5,750

9,914

23,595

16,833

225,079

Off-balance sheet items

13,254

(3,902)

(2,424)

(9,468)

2,540

–

Interest rate repricing gap

(20,052)

(1,092)

3,025

24,021

1,439

(7,341)

Cumulative interest rate repricing gap

(20,052)

(21,144)

(18,119)

5,902

7,341

–

–

–

–

–

–

–

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

–

–

–

–

–

–

–

LLOYDS TSB GROUP   107

Notes to the accounts

47 Derivatives and other ﬁnancial instruments (continued)

c Fair value analysis 

Financial  instruments  include  ﬁnancial  assets,  ﬁnancial  liabilities  and  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  (such as discounted cash ﬂows, or observations  of  similar recent market
transactions) 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 actually be paid or
received on the maturity or settlement date.

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 2004

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

4
1,556
11,002

814
–
–

4
1,556
11,002

814
–
–

88
176,249
14,407

160,986
27,217
10,252

90
176,712
14,443

160,950
26,924
11,544

108 LLOYDS TSB GROUP

Notes to the accounts

47 Derivatives and other ﬁnancial instruments (continued)

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

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. Details of the Group’s structural foreign currency exposures are as follows:

Functional currency of Group operations

Euro
US dollar
Swiss franc
Other non-sterling

Non-structural currency exposures

2004
£m

289
271
58
202

820

2003
£m

287
255
104
200

846

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 24 to 26.

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 2004, the unrecognised gains on ﬁnancial instruments used for hedging were £272 million (2003: £303 million) and unrecognised losses
were £424 million (2003: £219 million).

The net gains arising in 2003 and earlier years and recognised in 2004 amounted to £3 million. Net losses of £228 million arose in 2004 but were not
recognised in the year.

Of the net losses of £152 million at 31 December 2004, £49 million of net losses are expected to be recognised in the year ending 31 December 2005
and £103 million of net losses in later years.

f Value at risk in trading activities

Details of value at risk in the Group’s global trading activities are given on page 24.

48 Acquisitions

During the year ended 31 December 2003, the Group completed the acquisition of the credit card and personal loan businesses of Goldﬁsh Bank Limited,
together with the Goldﬁsh brand and loyalty programme, for a consideration of £1,096 million, settled in cash. The premium arising of £96 million from
the  effective  payment  to  the  majority  shareholder  was  capitalised  and  is  being  written  off  to  the  proﬁt  and  loss  account  over  its  estimated  useful  life  of
10 years. No signiﬁcant fair value adjustments were made. 

During  the  year  ended  31  December  2002,  the  Group’s  retail  operations  acquired  the  business  of  Accucard,  a  credit  card  technology  development  and
marketing company. Further cash payments of £1 million in respect of this acquisition were made in each of 2003 and 2004.

LLOYDS TSB GROUP   109

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 the shareholder 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 the shareholder (see note 29) as adjusted for dividends. 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
(Increase) decrease in prepayments and accrued income
Increase (decrease) 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
Net charge in respect of deﬁned beneﬁt schemes
Contributions to deﬁned beneﬁt schemes
Interest on subordinated liabilities (loan capital)
Proﬁt on disposal of investment securities
Depreciation and amortisation
Other non-cash movements

Net cash inﬂow from trading activities
Net increase in loans and advances
Net decrease in investments other than investment securities
Net decrease in other assets
Net increase (decrease) in deposits by banks
Net increase in customer accounts
Net increase in debt securities in issue
Net decrease in other liabilities
Net (increase) decrease in items in course of collection/transmission
Other non-cash movements

Net cash inﬂow from operating activities

b Analysis of cash as shown in the balance sheet

Cash and balances with central banks
Loans and advances to banks repayable on demand

2004
£m

3,508
(721)
732
866
(854)
224
(203)
100
(105)
52
(715)
267
(374)
601
(126)
633
(3)

3,882
(28,921)
3,981
956
15,864
6,121
1,859
(115)
(13)
(145)

3,469

2004
£m

1,078
2,477

3,555

2003
£m

3,505
147
(226)
950
(967)
236
(231)
200
(119)
44
(453)
286
(138)
622
(47)
697
(131)

4,375
(11,710)
248
816
(1,000)
7,658
685
(645)
169
176

772

2003
£m

1,195
3,768

4,963

The Group is required to maintain balances with the Bank of England which, at 31 December 2004, amounted to £187 million (2003: £177 million).

c Analysis of changes in cash during the year

At 1 January
Net cash outﬂow before adjustments for the effect of foreign exchange movements
Effect of foreign exchange movements

At 31 December

2004
£m

4,963
(1,403)
(5)

3,555

2003
£m

5,453
(487)
(3)

4,963

110 LLOYDS TSB GROUP

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

2004
£m

2,897
10

2,907

2003
£m

2,852
45

2,897

The amounts shown as  cash inﬂows from  ﬁnancing include proceeds in respect  of the above issues of share  capital together with a  net  cash inﬂow of
£1 million (2003: outﬂow of £13 million) relating to transactions in own shares held in respect of employee share schemes.

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
Repayment of capital to minority shareholders
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
Issue of subordinated liabilities
Repayments of subordinated liabilities
Lease ﬁnancing
Finance lease capital repayments
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 

2004
£m

44
–
26
(24)

46

2004
£m

683
1
(132)
42
(44)

550

2004
£m

10,454
(137)
699
(764)
7
(1)
–

10,258

2004
£m

–

15
–
1

16

2003
£m

37
(1)
22
(14)

44

2003
£m

694
23
–
47
(81)

683

2003
£m

10,169
34
533
(75)
–
(1)
(206)

10,454

2003
£m

1,096

14
(5)
1

1,106

LLOYDS TSB GROUP   111

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

The consideration of £1,096 million was settled in cash in 2003.

g Disposal of group undertakings and businesses

Cash
Loans and advances to banks
Loans and advances to customers
Debt securities and treasury bills
Intangible assets
Deposits by banks
Customer accounts
Debt securities in issue
Subordinated liabilities
Other net assets (liabilities)
Goodwill written back on sale of businesses

(Loss) proﬁt on sale

Cash consideration received
Cash disposed of 

Net cash (outﬂow) inﬂow from disposals

2004
£m

–
–
–
–

–
–

–

2004
£m

46
132
257
59
10
(42)
(327)
(111)
–
9
3

36
(15)

21
(46)

(25)

2003
£m

993
18
2
(13)

1,000
96

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

112 LLOYDS TSB GROUP

Information for shareholders

Analysis of shareholders

at 31 December 2004

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

72,622
423,490
283,044
136,727
20,108
14,251
809
1,105
511

952,667

%

7.62
44.45
29.71
14.35
2.11
1.50
0.09
0.12
0.05

Millions

2.4
143.9
186.7
268.3
136.9
256.2
54.4
367.5
4,180.1

%

0.04
2.57
3.34
4.79
2.45
4.58
0.97
6.57
74.69

100.00

5,596.4*

100.00

* Includes 747 million shares (13.35%) registered in the names of some 847,000 individuals. 222 million shares (3.97%) are held by over
78,000 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
The Capital Group Companies
had interests of 3% and 5.75%,
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 877 1515.
These telephone calls are
charged at 50p per minute,
including VAT, or for details visit
www.londonstockexchange.com

Share dealing facilities
A full range of dealing services
is available through Lloyds TSB
Registrars.

For internet dealing the current
rate of commission for both
purchases and sales is 0.5%,
minimum £17.50. Visit
www.shareview.co.uk/dealing
for full details.

For telephone dealing the current
rate for both purchases and sales
is 0.5%, minimum £20. For full
details please contact 
Lloyds TSB Registrars on: 
Telephone 0870 850 0852.

For postal dealing the current rate
for both purchases and sales is
0.75%, no minimum. For full
details please contact 
Lloyds TSB Registrars on:
Telephone 0870 242 4244.

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
Services, 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. For details
visit www.adrbny.com or email
shareowners@bankofny.com

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
A copy of the Group’s corporate
responsibility report may be
obtained by writing to 
Corporate Responsibility,
Lloyds TSB Group plc,
25 Gresham Street,
London EC2V 7HN. This
information together with the
Group’s code of business
conduct 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 600 3990;
textphone 0870 600 3950.

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. For details visit
www.shareview.co.uk.

Financial calendar 2005

4 March
Results for 2004 announced

16 March
Ex-dividend date for 2004 final
dividend

18 March
Record date for final dividend

6 April
Final date for joining or leaving
the dividend reinvestment plan
for the final dividend

4 May
Final dividend paid

5 May
Annual general meeting in
Glasgow

29 July
Results for half-year to 30 June
2005 announced

10 August
Ex-dividend date for 2005
interim dividend

12 August
Record date for interim dividend

7 September
Final date for joining or leaving
the dividend reinvestment plan
for the interim dividend

5 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
Telephone 0870 600 3990
Overseas +44 (0)121 415 7047

Internet
www.lloydstsb.com

Designed by Starling Design/The Team. 
Printed in the UK by Royle Corporate Print.
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ISO14001 and EMAS accredited mill.

LLOYDS TSB GROUP   113