Annual Report
and Accounts 2007
Building long-term relationships
Our vision
To be the best financial services organisation in the UK
We will achieve this by:
Building strong customer franchises, that are based on deep customer relationships
• that give value to the customer
• that give sustainable earnings growth to the shareholder
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Executing brilliantly
• flawlessly for the customer
• doing what we say we are going to do
Managing our most valuable resource, our people
Our strategy
Build customer franchises
• extending reach and depth of customer relationships
• enhancing product capabilities to build competitive advantage
• improving processing efficiency
• working capital harder
Expand from strength
• look to leverage our financial strength and enhanced capabilities
• new product, customer and geographical markets
Our business priorities
UK Retail Banking
• grow income from existing customer base
• grow income from new customers
• improve productivity
Insurance and Investments
• maximise bancassurance success
• profitably grow the IFA distribution channel
• optimise capital management
Wholesale and International Banking
• grow the Corporate Markets business
• build on the growth momentum in Commercial Banking
• maintain strong asset quality
• continue to improve operational efficiency and cost management
Annual Report
and Accounts 2007
Building long-term relationships
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Our vision
To be the best financial services organisation in the UK
We will achieve this by:
Building strong customer franchises, that are based on deep customer relationships
• that give value to the customer
• that give sustainable earnings growth to the shareholder
Executing brilliantly
• flawlessly for the customer
• doing what we say we are going to do
Managing our most valuable resource, our people
Our strategy
Build customer franchises
• extending reach and depth of customer relationships
• enhancing product capabilities to build competitive advantage
• improving processing efficiency
• working capital harder
Expand from strength
• look to leverage our financial strength and enhanced capabilities
• new product, customer and geographical markets
Our business priorities
UK Retail Banking
• grow income from existing customer base
• grow income from new customers
• improve productivity
Insurance and Investments
• maximise bancassurance success
• profitably grow the IFA distribution channel
• continue to improve operational efficiency and cost management
• optimise capital management
Wholesale and International Banking
• grow the Corporate Markets business
• build on the growth momentum in Commercial Banking
• maintain strong asset quality
Group key performance indicators
The Group at a glance
Profit analysis by division
Our group
UK Retail Banking
Insurance and Investments
Wholesale and International Banking
– Before impact of market dislocation
– Impact of market dislocation
Central group items
Profit before tax*
Volatility
– Insurance
– Policyholder interests
Profit on sale of businesses
Settlement of overdraft claims
Pension schemes related credit
Profit before tax
Earnings per share
2007
£m
1,808
1,056
1,717
(280)
1,437
(382)
2006
£m
1,549
973
1,640
–
1,640
(452)
3,919
3,710
(267)
(233)
657
(76)
–
84
326
–
–
128
4,000
4,248
58.3p
49.9p
* Excluding volatility, profit on sale of businesses, the settlement of overdraft
claims in 2007 and the pension schemes related credit in 2006.
2007 highlights
• Strong financial performance with statutory earnings per share
increased by 17 per cent to 58.3p. Economic profit increased by
21 per cent. Statutory profit before tax was 6 per cent lower at
£4,000 million, largely reflecting adverse policyholder interests volatility.
• Strong underlying profit momentum. Profit before tax up 6 per cent
to £3,919 million notwithstanding impact of global financial markets
turbulence. Excluding the impact of £280 million market dislocation,
profit before tax increased by 13 per cent to £4,199 million.
• High returns maintained, with return on equity of 25.2 per cent.
Improved return on risk-weighted assets, and return on Embedded
Value increased to 9.9 per cent.
• Good income growth. Income growth of 5 per cent, reflecting the
strength and resilience of the Group’s revenue base. Excluding the
impact of market dislocation and insurance grossing, income
increased by 6 per cent.
• Excellent cost management. Cost growth of only 1 per cent,
delivering wide positive jaws. Cost:income ratio improved by
1.8 percentage points to 49.0 per cent. Groupwide productivity
programme exceeded 2007 expectations, and remains on track to
deliver benefits of £250 million in 2008.
• Satisfactory credit quality. Retail impairment charge lower than in
2006. Based on current trends, we do not expect a significant change
in the retail impairment charge in the first half of 2008, compared to
the first half of 2007. Corporate asset quality remains good.
• Strong liquidity and funding position maintained throughout the
recent global financial markets turbulence.
• Excellent capital management. Robust capital ratios maintained.
Satisfactory transition to Basel II, with tier 1 capital ratio increasing to
9.5 per cent. Over £3.6 billion of capital repatriated from Scottish
Widows over the last 3 years.
Group – financial
Income and
cost growth
2007†
Economic profit
£m†
Earnings per share†
Return on equity†
Statutory profit
before tax
£m
-6%
4460
4,248
3,820
4,000
Profit before tax
£m†
+6%
4115
3,710
3,326
3,919
5.25
+5%
1934
+1%
+9%
1,842
53.299999
+8%
50.8p
1,690
1,514
46.9p
42.7p
26.5
24.5%
25.1%
25.2%
Presentation of information
performance including in particular any such statements included in this annual
report; statements about strategic goals, competition, regulation, dispositions
In order to provide a more comparable representation of underlying business
performance, insurance and policyholder interests volatility have been separately
and consolidation or technological developments in the financial services
industry; and statements of assumptions underlying such statements.
0
0
0.00
0
0.000000
0.0
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
I
n
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o
s
t
s
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
Group – non financial
Customer
service
index††
Employee
engagement
index�
Total shareholder return
Service
quality index
Total shareholder
return
74
68.0%
69.7%
70.5%
79.099998
73.0
74.5
75.3
4.5
4.02
4.30
4.19
24.8%
0
2
0
0
5
2
0
0
6
2
0
0
7
0.000000
0.0
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
10.9%
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
7
-12.1%
-17.4%
† Excluding volatility, profit on sale of
businesses, the settlement of
overdraft claims in 2007, the
pension schemes related credit in
2006, and customer redress
provisions and the strengthening of
reserves for mortality in 2005.
†† See Corporate responsibility section
(page 34).
FTSE 350 banks
� See Our people section (page 32).
i Lloyds TSB Group Annual Report and Accounts 2007
Lloyds TSB Group Annual Report and Accounts 2007 ii
Lloyds TSB is a leading UK based financial services group providing a wide range of banking and financial services, primarily in the UK, to personal and
corporate customers. Our main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment
provision. The Group has a large and diversified customer base and services are offered through a number of well recognised brands (Lloyds TSB,
Cheltenham & Gloucester, Scottish Widows), and via a unique distribution capability comprising one of the largest branch networks in the UK and
intermediary channels.
Lloyds TSB Group was formed in 1995 following the merger of Lloyds Bank and TSB and now comprises the Lloyds TSB brand along with Cheltenham &
Gloucester, one of the largest mortgage providers in the UK and Scottish Widows, one of the UK’s largest providers of life, pensions and unit trust products.
Lloyds TSB Group is quoted on the London Stock Exchange and is one of the largest companies within the FTSE 100, with a market capitalisation of
£26.7 billion on 31 December 2007. At the end of 2007 total group assets were £353 billion and the Group has nearly 70,000 employees. Total income for
the 12 months to 31 December 2007 was £18 billion with profit before tax totalling £4 billion.
Our activities are organised into three businesses: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Their respective
contributions are outlined below.
Our divisions – contribution to profit *
UK Retail Banking
£1,808m
Secured lending – mortgages
Unsecured lending – credit cards,
loans and overdrafts
Internet and telephone banking
Current accounts
Savings accounts
Wealth Management
42%
25%
33%
Insurance
and Investments
£1,056m
Life assurance, pensions
and investments
General Insurance
Scottish Widows Investment
Partnership
Wholesale
and International
Banking
£1,437m
Corporate Markets
Commercial Banking
Asset Finance
International Banking
* Excluding volatility, profit on sale of businesses and the settlement of overdraft claims. Also excludes Central Group Items.
Presentation of information and Forward looking statements
analysed for the Group’s insurance businesses. Further information on these
items is shown on pages 30 and 31. In addition, the profit on the sale of
businesses and the settlement of overdraft claims in 2007 and the impact in
2006 of the one-off pension schemes related credit have been separately
analysed in the Group’s results. A reconciliation of this basis of presentation to
the statutory profit is shown on page 10. Certain commentaries also separately
analyse the impact in 2007 of market dislocation.
Forward looking 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, deflation, policies of the Bank of England and other
G7 central banks, interest rate, exchange rate, market and monetary
fluctuations; changing demographic developments including consumer
spending, saving and borrowing habits, technological changes, natural and
other disasters, adverse weather and similar contingencies outside the
This annual report includes certain forward looking statements within the
Lloyds TSB Group’s control; inadequate or failed internal or external processes,
meaning of the US Private Securities Litigation Reform Act of 1995 with respect
people and systems; terrorist acts and other acts of war or hostility and
to the business, strategy and plans of Lloyds TSB Group and its current goals
responses to those acts; changes in laws, regulations, taxation, government
and expectations relating to its future financial condition and performance.
policies or accounting standards or practices; exposure to regulatory scrutiny,
Statements that are not historical facts, including statements about Lloyds TSB
legal proceedings or complaints; changes in competition and pricing
Group’s or management ’s beliefs and expectations, are forward looking
environments; the inability to hedge certain risks economically; the adequacy of
statements. Words such as ‘believes’, ‘anticipates’, ‘estimates’, ‘expects’,
loss reserves; the ability to secure new customers and develop more business
‘intends’, ‘aims’, ‘potential ’, ’will’, ‘would ’, ‘could ’, ‘considered ’, ‘likely ’,
from existing customers; the ability to achieve value-creating mergers and/or
‘estimate’ and variations of these words and similar future or conditional
acquisitions at the appropriate time and prices and the success of the
expressions are intended to identify forward looking statements but are not the
Lloyds TSB Group in managing the risks of the foregoing.
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.
Lloyds TSB Group plc may also make or disclose written and/or oral forward
looking statements in reports filed with or furnished to the US Securities and
Exchange Commission, Lloyds TSB Group plc’s annual review, half-year
Examples of such forward looking statements include, but are not limited to,
announcement, proxy statements, offering circulars, prospectuses, press
projections or expectations of profit attributable to shareholders, provisions,
releases and other written materials and in oral statements made by the
economic profit, dividends, capital structure or any other financial items or ratios;
directors, officers or employees of Lloyds TSB Group plc to third parties,
statements of plans, objectives or goals of Lloyds TSB Group or its management;
including financial analysts. The forward looking statements contained in this
statements about the future trends in interest rates, foreign exchange rates, stock
annual report are made as of the date hereof, and Lloyds TSB Group
market levels and demographic trends and any impact on Lloyds TSB Group;
undertakes no obligation to update any of its forward looking statements.
statements concerning any future UK or other economic environment or
Group key performance indicators
The Group at a glance
2007 highlights
Profit analysis by division
• Strong financial performance with statutory earnings per share
increased by 17 per cent to 58.3p. Economic profit increased by
21 per cent. Statutory profit before tax was 6 per cent lower at
£4,000 million, largely reflecting adverse policyholder interests volatility.
UK Retail Banking
Insurance and Investments
• Strong underlying profit momentum. Profit before tax up 6 per cent
Wholesale and International Banking
to £3,919 million notwithstanding impact of global financial markets
– Before impact of market dislocation
turbulence. Excluding the impact of £280 million market dislocation,
– Impact of market dislocation
Central group items
Profit before tax*
Volatility
– Insurance
– Policyholder interests
Profit on sale of businesses
Settlement of overdraft claims
Pension schemes related credit
Profit before tax
Earnings per share
profit before tax increased by 13 per cent to £4,199 million.
• High returns maintained, with return on equity of 25.2 per cent.
Improved return on risk-weighted assets, and return on Embedded
Value increased to 9.9 per cent.
• Good income growth. Income growth of 5 per cent, reflecting the
strength and resilience of the Group’s revenue base. Excluding the
impact of market dislocation and insurance grossing, income
increased by 6 per cent.
• Excellent cost management. Cost growth of only 1 per cent,
delivering wide positive jaws. Cost:income ratio improved by
1.8 percentage points to 49.0 per cent. Groupwide productivity
programme exceeded 2007 expectations, and remains on track to
deliver benefits of £250 million in 2008.
• Satisfactory credit quality. Retail impairment charge lower than in
2006. Based on current trends, we do not expect a significant change
in the retail impairment charge in the first half of 2008, compared to
the first half of 2007. Corporate asset quality remains good.
• Strong liquidity and funding position maintained throughout the
recent global financial markets turbulence.
• Excellent capital management. Robust capital ratios maintained.
Satisfactory transition to Basel II, with tier 1 capital ratio increasing to
9.5 per cent. Over £3.6 billion of capital repatriated from Scottish
Widows over the last 3 years.
2007
£m
1,808
1,056
1,717
(280)
1,437
(382)
(267)
(233)
657
(76)
–
2006
£m
1,549
973
1,640
–
1,640
(452)
84
326
–
–
128
3,919
3,710
4,000
4,248
58.3p
49.9p
* Excluding volatility, profit on sale of businesses, the settlement of overdraft
claims in 2007 and the pension schemes related credit in 2006.
Group – financial
Statutory profit
before tax
£m
-6%
4460
4,248
3,820
4,000
Profit before tax
£m†
+6%
4115
3,710
3,326
Income and
cost growth
2007†
3,919
5.25
+5%
1934
53.299999
+9%
1,842
+8%
50.8p
26.5
24.5%
25.1%
25.2%
Earnings per share†
Return on equity†
Economic profit
£m†
1,690
1,514
46.9p
42.7p
+1%
I
n
c
o
m
e
C
o
s
t
s
0
0
0.00
0
0.000000
0.0
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
Group – non financial
Customer
service
index††
Employee
engagement
index�
Total shareholder return
Service
quality index
Total shareholder
return
74
68.0%
69.7%
70.5%
79.099998
73.0
74.5
75.3
4.5
4.02
4.30
4.19
24.8%
0
2
0
0
5
2
0
0
6
2
0
0
7
0.000000
0.0
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
FTSE 350 banks
� See Our people section (page 32).
10.9%
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
7
-12.1%
-17.4%
† Excluding volatility, profit on sale of
businesses, the settlement of
overdraft claims in 2007, the
pension schemes related credit in
2006, and customer redress
provisions and the strengthening of
reserves for mortality in 2005.
†† See Corporate responsibility section
(page 34).
Our group
Lloyds TSB is a leading UK based financial services group providing a wide range of banking and financial services, primarily in the UK, to personal and
corporate customers. Our main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment
provision. The Group has a large and diversified customer base and services are offered through a number of well recognised brands (Lloyds TSB,
Cheltenham & Gloucester, Scottish Widows), and via a unique distribution capability comprising one of the largest branch networks in the UK and
intermediary channels.
Lloyds TSB Group was formed in 1995 following the merger of Lloyds Bank and TSB and now comprises the Lloyds TSB brand along with Cheltenham &
Gloucester, one of the largest mortgage providers in the UK and Scottish Widows, one of the UK’s largest providers of life, pensions and unit trust products.
Lloyds TSB Group is quoted on the London Stock Exchange and is one of the largest companies within the FTSE 100, with a market capitalisation of
£26.7 billion on 31 December 2007. At the end of 2007 total group assets were £353 billion and the Group has nearly 70,000 employees. Total income for
the 12 months to 31 December 2007 was £18 billion with profit before tax totalling £4 billion.
Our activities are organised into three businesses: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Their respective
contributions are outlined below.
Our divisions – contribution to profit *
UK Retail Banking
£1,808m
Secured lending – mortgages
Unsecured lending – credit cards,
loans and overdrafts
Internet and telephone banking
Current accounts
Savings accounts
Wealth Management
42%
25%
33%
* Excluding volatility, profit on sale of businesses and the settlement of overdraft claims. Also excludes Central Group Items.
Insurance
and Investments
£1,056m
Life assurance, pensions
and investments
General Insurance
Scottish Widows Investment
Partnership
Wholesale
and International
Banking
£1,437m
Corporate Markets
Commercial Banking
Asset Finance
International Banking
Presentation of information and Forward looking statements
Presentation of information
In order to provide a more comparable representation of underlying business
performance, insurance and policyholder interests volatility have been separately
analysed for the Group’s insurance businesses. Further information on these
items is shown on pages 30 and 31. In addition, the profit on the sale of
businesses and the settlement of overdraft claims in 2007 and the impact in
2006 of the one-off pension schemes related credit have been separately
analysed in the Group’s results. A reconciliation of this basis of presentation to
the statutory profit is shown on page 10. Certain commentaries also separately
analyse the impact in 2007 of market dislocation.
Forward looking statements
This annual report includes certain forward looking statements within the
meaning of the US Private Securities Litigation Reform Act of 1995 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’, ‘would ’, ‘could ’, ‘considered ’, ‘likely ’,
‘estimate’ and variations of these words and similar future or conditional
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, foreign exchange 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, deflation, policies of the Bank of England and other
G7 central banks, interest rate, exchange rate, market and monetary
fluctuations; changing demographic developments including consumer
spending, saving and borrowing habits, technological changes, natural and
other disasters, 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, taxation, government
policies or accounting standards or practices; exposure to regulatory scrutiny,
legal proceedings or complaints; changes in competition and pricing
environments; the inability to hedge certain risks economically; the adequacy of
loss reserves; 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 US Securities and
Exchange Commission, Lloyds TSB Group plc’s annual review, half-year
announcement, 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.
i Lloyds TSB Group Annual Report and Accounts 2007
Lloyds TSB Group Annual Report and Accounts 2007 ii
Contents
Overview
Group key performance indicators
The Group at a glance
Chairman’s statement
Group chief executive’s review
Business Review
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
Governance
The board
Directors’ report
Corporate governance
Directors’ remuneration report
Financial Statements
Independent auditors’ report on the consolidated financial statements
Consolidated financial statements
Notes to the Group accounts
i
ii
2
6
10
15
32
34
36
57
58
60
61
64
76
77
82
Independent auditors’ report on the parent company financial statements
148
Parent company financial statements
Notes to the parent company accounts
Shareholder Information
Shareholder information
Financial calendar
149
152
159
160
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Lloyds TSB Group Annual Report and Accounts 2007 1
Chairman’s statement
The most trusted
bank in Britain
for seven years
running
2 Lloyds TSB Group Annual Report and Accounts 2007
Chairman’s statement
O
v
e
r
v
e
w
i
Lloyds TSB has a very clear vision to be the best financial services
organisation in the UK. In achieving this we aim to be a great place
for our customers to do business; a great place for our people to
work; and to generate good returns for our shareholders. Underlying
these aims we also want to be valued by the communities where we
operate through high ethical standards, respect for our stakeholders,
community involvement and a commitment to corporate
responsibility. I am very pleased to be able to report significant
progress on our journey towards achieving this vision during 2007.
Achieving the vision
We have maintained strong business momentum through the year
to deliver another good set of results with underlying profit before
tax up 6 per cent in 2007 to £3,919 million. Against a turbulent
backdrop, these results are achieved from a business that focuses
tirelessly on the needs of customers and which, as a result, has a
lower risk and a more predictable earnings stream. Our quality of
earnings emerges from the strength of our three high quality
businesses; our UK Retail Bank; our Wholesale and International
Banking division; and our Insurance and Investments division which
includes Scottish Widows.
Our confidence in our business model and its ability to increase
earnings throughout the economic cycle led to our decision to
increase the dividend by 5 per cent year on year. This is the first year
in five that we have increased our dividend and supports our long
term shareholder proposition; going forward, we expect to continue
to grow our dividend whilst continuing to build dividend cover.
“We have maintained strong business
momentum through the year.”
Customer focus
Our customers are critical to our success. Retaining and broadening
these relationships and adding new customers are a key part of our
strategy. This will not be achieved unless we are providing a high
quality service and products that our customers want to buy and
which provide good value for money. Success has been measured
through high levels of customer satisfaction and customer advocacy
and a strong sales performance. It is also measured through
external recognition and I am pleased to report that our businesses
have won a number of awards throughout 2007.
In the UK Retail Bank we were the market leader in new current
account recruitment at the same time as being voted the most
trusted bank in Britain for the seventh year running. In Wholesale
and International Banking we were voted by Finance Directors as
Corporate Bank of the Year at the Real Finance/CBI FDs’ Excellence
Awards for the third year in succession. And in Insurance and
Investments, Scottish Widows was voted Best Individual Pensions
Provider by IFAs at the Financial Adviser Awards. All of these
recognise our commitment to our customers and are the result of
hard work and dedication from our employees who can justifiably
be proud of what we have achieved.
Corporate responsibility
Lloyds TSB has a strong commitment to improving the quality of life
of people in the communities where we work and I am proud of
our achievements in this area.
Our major focus for support is through the four Lloyds TSB
Foundations in England and Wales, Northern Ireland, Scotland and
the Channel Islands. Our commitment is to provide 1 per cent of the
Group’s pre-tax profits to the Foundations and in 2007 we gave
£37 million to support their work. A further £37 million will be
donated in 2008 bringing our total contributions since the Lloyds TSB
merger to over £360 million, making Lloyds TSB one of the largest
charitable donors in the UK. I would strongly encourage you to visit
the website for the Lloyds TSB Foundations at
www.lloydstsbfoundations.org.uk to look at some of the
programmes we support and to see the difference we can make
in helping disadvantaged people to live a fuller life in communities
across the UK.
Our employees also support a wide range of community
programmes, volunteering their time and energy to local causes
and initiatives. I am particularly proud of the work we have done to
support the Group’s 2007 charity partner, Barnardo’s, where to date
almost £1 million has been raised, with fund raising initiatives
continuing into 2008.
Our journey in response to the global issue of climate change
reached a new milestone this year with the introduction of a new
stretching target to reduce our CO2 emissions by 30 per cent by
2012, based on 2002 levels. We are focusing particularly on energy
consumption and efficiency and we recognise that a real
behavioural change is required by all of our people to achieve this
target. To support this change we have introduced a sustainability
network, drawing on champions from across the Group, to raise
awareness and support the initiatives that are required. It is my
firm view that companies that develop the skills, resources and
relationships to manage these challenges will thrive and prosper
in the years ahead.
We cannot eliminate all CO2 emissions so in 2007 we committed to
become carbon neutral by offsetting those emissions that we
cannot reduce. I am pleased to confirm that in 2007 we purchased
sufficient carbon credits to achieve carbon neutrality.
In March 2007 we were the first organisation to become a
domestic partner of the 2012 Olympic and Paralympic Games. This
places Lloyds TSB at the heart of the most exciting world event to
take place in the UK for many decades. Our vision for our
partnership with London 2012 is ‘to inspire and support young
people, communities and businesses all over Britain on their
journey to the Olympic and Paralympic Games and beyond.’
The Games are much more than 16 days of competition. It is about
the journey that young people take toward excellence and
becoming the best and the legacy that we leave for them when the
Games are over. These ideals very much resonate with our own
vision and values and why we are proud to be involved.
Lloyds TSB Group Annual Report and Accounts 2007 3
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Chairman’s statement
Looking after
our customers’
money every day
4 Lloyds TSB Group Annual Report and Accounts 2007
Chairman’s statement
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Corporate governance
Outlook
While the board of any company must ensure that a robust
governance structure is in place, we are equally committed to
fostering a culture throughout the organisation that values
exemplary ethical standards, personal and corporate identity,
teamwork, taking personal responsibility and respect for others.
Our approach to governance is predicated on the belief that there
is a link between high quality governance and the creation of
shareholder value.
Our Group Chief Executive, Eric Daniels, has given real leadership
to the Group. He and his executive have driven financial and
operational success within a strong culture of teamwork and
integrity. It is this work that has created the results that we have
seen through 2007 and will ensure our continued success in
future years.
The board’s ongoing renewal process has continued throughout
the year and we are delighted to have appointed two new
independent non-executive directors since the last annual
general meeting. Philip Green was welcomed to the board on
10 May 2007. He brings valuable experience to the Group through
a very successful business career across a number of different
business sectors including his current role as Chief Executive of
United Utilities and as the former Chief Executive of Royal P&O
Nedlloyd. Sir David Manning will join us on 1 May 2008. Sir David
has a long and distinguished career in the Foreign and
Commonwealth Office where he was most recently Her Majesty’s
Ambassador to the United States of America.
Gavin Gemmell left the board at the end of September, when he
retired as chairman of Scottish Widows. I would like to thank Gavin
for his significant contribution to the Group’s affairs and wish him
well for the future.
Mike Fairey, Deputy Group Chief Executive, will retire in June,
following a wonderful career with the Group spanning 17 years.
Mike joined the TSB group in 1991, became a director of Lloyds TSB
in 1997 and became Deputy Group Chief Executive in 1998. He has
given both loyal service and wise counsel during these years and I
will personally miss his contribution. I would like to thank Mike for
all of his input over the years and wish him well for the future.
As we look forward to 2008, we face the prospect of slowing
global economic activity and all the associated challenges that this
brings. Despite this our strategy remains unchanged. The progress
made over the last four years means that we have a strong capital
position from which we can continue to grow the business. We
believe that our excellent customer proposition, based on high
levels of service quality and committed customer relationships,
leaves us well positioned to continue to grow our returns to
shareholders through 2008 and in future years.
“We have a strong capital position from
which we can continue to grow the
business.”
I would like to thank all of our employees for their contribution to
making 2007 such a successful year. It is the commitment, support
and dedication of every one of our employees that makes so much
difference. I look forward to continuing our journey together in the
years ahead.
Sir Victor Blank
Chairman
21 February 2008
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Lloyds TSB Group Annual Report and Accounts 2007 5
Lloyds TSB Group Annual Report and Accounts 2007 5
Group chief executive’s review
More Britons
count on us
for their current
accounts
6 Lloyds TSB Group Annual Report and Accounts 2007
Group chief executive’s review
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2007 was another good year for Lloyds TSB. We delivered strong
results, despite the more challenging operating environment that
we saw in the second half of the year. Our business performance,
excluding the impact of the market dislocation, continued its strong
momentum as our relationship-based strategy serves us well. We
believe this momentum will carry through to 2008, given we have
a high quality, sustainable earnings stream, driven by the deep
relationships we have with our customers, coupled with the
significant growth potential we have both within our own franchise
and in the UK market as a whole. As a result, we remain confident
as to the Group’s future outlook.
Given this strong performance and confidence in our future
earnings capacity, the board has decided to increase the final
dividend by 5 per cent to 24.7 pence per share. This brings the full
year dividend to 35.9 pence per share, an increase of 5 per cent
over that paid for 2006. Going forward, the board expects to grow
the dividend over time, whilst continuing to build dividend cover.
Strong momentum
On an underlying basis, the Group increased profit before tax by
6 per cent to £3,919 million. Excluding the £280 million charge
arising from the market dislocation, the Group grew profits by
13 per cent from £3,710 million to £4,199 million. Whilst we
cannot overlook the impact of the dislocation on our results,
these numbers are more reflective of the ongoing performance
of the Group.
Our lower risk strategy limited the impact of the abrupt change in
the markets and, consequently, our charge was relatively modest
in comparison to our balance sheet size, our earnings, and the
charges taken by many other organisations. This is in large part
due to the conscious choice to focus the Group’s strategy on
building deep, long-lasting relationships with our customers in
order to deliver high quality, sustainable results over time.
“We have a high quality, sustainable
earnings stream, driven by the deep
relationships we have with our
customers.”
Over the last few years, the successful execution of our strategy
has delivered increasing levels of customer recruitment and
enhanced sales volumes, and in 2007 we saw further progress
on these leading indicators of future profit.
In the Retail Bank, we attracted over one million new current
accounts and we delivered strong flows of new business, with
sales volumes rising 17 per cent. We are now the number one
provider of current accounts, cards and personal loans. In
Insurance and Investments, we have seen good progress in the
sale of bancassurance products to our franchise customers and
sales volumes rose by 20 per cent, with particular success in the
sale of protection products through the branch network.
“We are now number one in terms of the
provision of current accounts, cards and
personal loans.”
In Wholesale and International Banking, we saw similar strong
progress. Our Corporate Markets business is attracting growing
numbers of new customers and recorded a further 46 per cent
improvement in cross-sales. Our Commercial Banking business
attracted good levels of the more valuable switcher accounts and
we remain the leader in terms of the share of the start-up market,
at 21 per cent.
Key to supporting our relationship-focused strategy is the efficient
management of costs and capital, allowing us to continue to invest
in the franchise and drive future growth. Once again we have
delivered a strong performance in these areas.
Costs rose by only 1 per cent, as we continue to embed our
efficiency programmes, and our cost:income ratio improved to
49.0 per cent, from 50.8 per cent in 2006. The extension of our
lean manufacturing and sigma efficiency programmes, the
improvement of our procurement processes and the adoption of
end-to-end processing led to improvements in efficiency as well
as better levels of service quality.
Our capital position is strong. We manage our capital to support
efficient growth, directing capital to our higher growth and higher
return business lines. We continued the capital efficiency
programmes in Scottish Widows, with a further £1.9 billion
repatriated to the Group during the year.
High quality sustainable business
Key to sustaining our strong momentum in future years are the
relationships we are building with our customers, understanding
their needs and developing the products and services to meet
those needs.
As our results in recent periods show, this strategy has served
us well and has a number of benefits. A high percentage of our
income is recurring customer revenue, which is by nature more
stable and sustainable. By building deep relationships, meeting
more of our customers’ needs, we also benefit in that we have a
lower cost of acquiring new sales. Additionally, because we
understand our customers well, we tend to have lower
impairments and thus require less capital. Perhaps as important
as the decision to pursue the relationship strategy, was the
decision not to pursue a product-led strategy which, as we have
seen of late, results in more volatile revenues and carries a
significantly higher risk profile.
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Lloyds TSB Group Annual Report and Accounts 2007 7
Group chief executive’s review
Giving
businesses
what they
need to grow
8 Lloyds TSB Group Annual Report and Accounts 2007
8 Lloyds TSB Group Annual Report and Accounts 2007
8 Lloyds TSB Group Annual Report and Accounts 2007
Group chief executive’s review
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Significant growth potential
Outlook
The UK market represents the second largest economic profit pool
for financial services, with high levels of household financial
wealth. It enjoys the lowest level of unemployment in the G7
economies and despite a likely slow down in 2008, we are
projecting good medium-term economic performance and strong
long-term savings growth.
We estimate that we currently only have a 10 per cent share of the
economic profit pool, and so we have significant potential within
our existing franchise to grow by meeting more of our customers’
needs as well as through adding new customers to our franchise.
“We have significant potential within
our existing franchise to grow.”
To support this growth potential we are investing in developing the
supporting infrastructure in areas such as customer data
management and account planning tools. We continue to enhance
our risk and financial systems and, together, these areas will
ensure we have the necessary platform to safely support our
future growth.
As we look forward to 2008, we do so against a backdrop of
turbulent markets and slowing global economic growth. Despite
these challenges, we are well positioned to deliver further growth
and to take advantage of the opportunities that the current
environment offers.
“We are well positioned to deliver
further growth and to take advantage
of the opportunities that the current
environment offers.”
Our relationship-focused strategy is delivering good results for all
our stakeholders. The events of the last year show that it is effective
in generating sustainable, high quality results through the cycle.
Our prudent approach to risk ensured we experienced minimal
impact from the US sub-prime fall-out. We have a strong capital
position and this will support the future growth of the business.
This has been a year of significant progress across the Group and
let me express my thanks to all our staff for their wonderful
contribution to our success. Relationship businesses thrive on
great staff that understand customers and work towards meeting
their needs. In this last year, the performance of our staff has
been terrific.
J Eric Daniels
Group Chief Executive
21 February 2008
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Lloyds TSB Group Annual Report and Accounts 2007 9
Lloyds TSB Group Annual Report and Accounts 2007 9
Summary of Group results
Our strategy
Our strategy remains to grow the business through developing long
term customer relationships and building our customer franchise. All
our businesses are focused on extending the reach and depth of our
customer relationships, enhancing product capabilities to build
competitive advantage, and improving processing efficiency whilst
working capital harder. This will enable us to achieve our vision of
being the best financial services organisation in the United Kingdom.
The focus on developing our relationships with personal, commercial
and corporate customers, whilst developing innovative products that
meet the needs of existing customers and attract new customers, is a
key driver for income and business growth. Ensuring we become more
efficient in everything we do will help ensure our costs are managed
effectively whilst also enabling us to invest in the business to drive
further growth. Resource allocation is also increasingly important and
significant focus is given to allocating capital to where it will have the
most positive impact on our businesses.
Our focus remains on the core business within the UK and in 2007 we
continued to move out of non-core markets with the sale of Lloyds TSB
Registrars and Abbey Life.
We are already making excellent progress in building the customer
franchise and Lloyds TSB is the leading recruiter of new personal
current accounts in the UK and has the leading share of new business
start-ups. The 2007 results highlight we are on the right track, both in
terms of our financial performance and in making further progress in
the development of our organic growth strategy.
We believe there remains significant opportunity for organic growth
and as we successfully grow the business and develop our skills and
capabilities, we will look to expand from a solid foundation of strength.
This is likely to be through leveraging our financial strength and enhanced
capabilities in new product, customer and geographic markets.
Group results
Net interest income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Profit before tax*
Volatility
– Insurance
– Policyholder interests
Profit on sale of businesses
Settlement of overdraft claims
Pension schemes related credit
2007
£m
2006
£m
6,092
12,636
18,728
(7,522)
11,206
(5,491)
5,715
(1,796)
5,360
13,903
19,263
(8,569)
10,694
(5,429)
5,265
(1,555)
3,919
3,710
(267)
(233)
657
(76)
–
84
326
–
–
128
Profit before tax
4,000
4,248
* Excluding volatility, profit on sale of businesses, the settlement of overdraft
claims in 2007 and the pension schemes related credit in 2006.
Profit before tax
£m†
+6%
Income and
cost growth
2007†
3,919
5.25
+5%
1934
4115
3,710
3,326
Economic profit
£m†
+9%
1,842
1,690
1,514
+1%
0
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† Excluding volatility, profit on sale of
businesses, the settlement of
overdraft claims in 2007, the
pension schemes related credit in
2006, and customer redress
provisions and the strengthening of
reserves for mortality in 2005.
Summary of Group results
In 2007 the Group delivered a strong performance against the backdrop of significant turbulence in global financial markets. Statutory profit
attributable to equity shareholders increased by £486 million, or 17 per cent, to £3,289 million and earnings per share increased by 17 per cent to
58.3p. Economic profit increased by 21 per cent to £2,238 million, and the post-tax return on equity improved from 26.6 per cent to 28.2 per cent.
Profit before tax fell by 6 per cent to £4,000 million, largely as a result of significant adverse policyholder interests volatility.
To enable meaningful comparisons to be made with 2006, the income statement commentaries below exclude insurance related volatility, the profit
on sale of businesses, settlement of overdraft claims in 2007 and the pension schemes related credit in 2006.
Building strong customer relationships
Lloyds TSB’s strategy to build strong customer franchises and grow our business by realising the considerable potential within those franchises
continues to deliver strong results. We have continued to extend the reach and depth of our customer relationships, achieving good sales growth,
whilst also improving productivity and efficiency. The underlying performance of the business remains strong with revenue growth remaining well
ahead of cost growth.
Like many other financial institutions, the Group has been affected by the recent market dislocation; however, the relationship focus of our strategy
has meant that the impact on the Group’s profit before tax was limited to £280 million in 2007 (£188 million reduction in income; £92 million increase
in impairment).
Continued momentum throughout the business
Profit before tax increased by £209 million, or 6 per cent, to £3,919 million, underpinned by good relationship banking momentum, notwithstanding
the impact of the £280 million market dislocation in Corporate Markets. Revenue growth of 5 per cent exceeded cost growth of 1 per cent, with each
division delivering stronger revenue growth than cost growth. Earnings per share increased by 8 per cent to 50.8p and economic profit increased by
9 per cent to £1,842 million. Excluding the impact of market dislocation, Group profit before tax increased by 13 per cent to £4,199 million.
“Lloyds TSB’s strategy to build strong customer franchises and grow our business
by realising the considerable potential within those franchises continues to deliver
strong results.”
Good income growth
Overall, income growth of 5 per cent reflects good progress in delivering our divisional strategies. We have increased income from both new and
existing customers, with strong growth in both assets and liabilities, as well as a significant increase in fee-related income. Excluding the impact of
market dislocation and insurance grossing, income increased by 6 per cent.
Group net interest income, excluding insurance grossing, increased by £349 million, or 7 per cent, to £5,631 million. Customer deposits increased by
12 per cent to £157 billion, supported by strong growth in savings balances in the retail bank, where bank savings increased by 15 per cent and wealth
management balances by 12 per cent. Customer deposits in our Corporate Markets, Commercial and International businesses increased by
18 per cent.
Strong levels of customer lending growth in Commercial Banking and Corporate Markets, and good growth in mortgages and retail deposits, more
than offset the marketwide experience of lower unsecured personal lending balances. Total assets increased by 3 per cent to £353 billion, with an
11 per cent increase in loans and advances to customers.
The net interest margin from our banking businesses decreased by 9 basis points, to 2.79 per cent, with broadly stable product margins but an
adverse mix effect. Stronger growth in finer margin mortgages and flat wider margin unsecured consumer lending contributed to the negative mix
effect which accounted for 9 basis points of margin decline. Overall product margins were 2 basis points lower, reflecting competitive pressures in the
mortgage and asset finance businesses and a move to finer margin secured lending in Commercial Banking. Funding costs improved the margin by
2 basis points. During the second half of 2007, product margins have started to show signs of improving, with increased new business margins
becoming evident in mortgages and corporate lending reflecting a marketwide trend towards more appropriate pricing for risk.
Other income, net of insurance claims and excluding insurance grossing, increased by £133 million, or 2 per cent, to £5,530 million. This reflected
higher fees and commissions receivable as a result of strong growth in added value current accounts and higher insurance commissions in the retail
bank. In addition, good levels of growth were achieved in fee based product sales to corporate and commercial banking customers.
“Overall income growth of 5 per cent reflects good progress in delivering our
divisional strategies.”
Excellent cost management
The Group continues to invest in improving processing efficiency, resulting in continued tight control over costs. During 2007, operating expenses
increased by only 1 per cent to £5,491 million. Over the last 12 months, staff numbers have fallen by 4,552 (7 per cent) to 58,078, largely as a result
of the disposal of Lloyds TSB Registrars and Dutton-Forshaw and further efficiency improvements in back-office processing centres. These
improvements in operational effectiveness have resulted in a further reduction in the Group cost:income ratio from 50.8 per cent to 49.0 per cent.
The Group’s programme of productivity initiatives has continued to deliver significant benefits, improving underlying cost efficiency and creating
greater headroom for further investment in the business. During 2007 the programme delivered net cost reductions of £145 million, exceeding the
previously indicated net benefits of approximately £125 million, with gross benefits of £248 million and reinvestment in further programme initiatives
of £103 million. The Group remains on track to deliver net benefits of approximately £250 million in 2008.
Lloyds TSB Group Annual Report and Accounts 2007 11
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Summary of Group results
Along with a number of other UK banks, during the year the Group has received a number of customer claims for the repayment of overdraft fees.
On 27 July 2007, several banks, together with the Office of Fair Trading, asked the High Court of England and Wales to clarify the legal position
regarding personal current account fees. The 2007 results include a charge of £76 million relating to the settlement of claims during the year, together
with related costs.
Overall credit quality remains satisfactory
Impairment losses increased by 15 per cent to £1,796 million. Our impairment charge on loans and advances expressed as a percentage of average
lending was 0.82 per cent, excluding the impact of market dislocation and the 2007 Finance Act, compared to 0.83 per cent in 2006. Impaired assets
increased by 8 per cent to £5,311 million, less than the rate of lending growth, and now represent 2.5 per cent of total lending, down from
2.6 per cent at 31 December 2006.
In UK Retail Banking, impairment losses decreased by £14 million, or 1 per cent, to £1,224 million. During 2007, we have seen a reduction in the level
of customer insolvencies, improvements in the Group’s collections procedures and better than assumed recoveries. The quality of new unsecured
lending has continued to be strong and our arrears and delinquency trends have improved during the year. In addition, the asset quality of our
mortgage portfolio has remained excellent. Whilst the uncertain UK macroeconomic environment and customer insolvency trends remain key factors
in the outlook for retail impairment, our current lead indicators are good, we are continuing to enhance our underwriting and collections procedures
and the quality of new business remains strong. As a result, based on current trends, we do not expect a significant change in the retail impairment
charge in the first half of 2008, compared to the first half of 2007.
The Wholesale and International Banking charge for impairment losses increased by £264 million to £572 million, including a £92 million impairment
charge relating to the impact of market dislocation in the second half of 2007, and a one-off charge of £28 million relating to the impact of the 2007
Finance Act on the Group’s leasing business. The increase in the impairment charge also reflects a lower level of releases and recoveries in Corporate
Markets and the impact of recent double-digit growth rates in Corporate lending.
“We do not expect a significant change in the retail impairment charge in the first half of
2008, compared to the first half of 2007.”
Limited exposure to assets affected by current capital markets uncertainties
Whilst no bank has been immune to the impact of the turbulence in global financial markets in the second half of 2007, Lloyds TSB’s high quality
business model means that the Group has relatively limited exposure to assets affected by current capital markets uncertainties.
US sub-prime Asset Backed Securities (ABS) and ABS Collateralised Debt Obligations (CDOs)
Lloyds TSB has no direct exposure to US sub-prime ABS and limited indirect exposure through ABS CDOs. During the second half of 2007, the market
value of our holdings in ABS CDOs reduced and, as a result, the Group has taken an income statement charge of £114 million, leaving a residual
investment of £130 million, net of hedges. The write-down largely reflects junior tranches of CDOs which have been written down to the expected
interest payments to be received within the next 12 months. The Group has no exposure to mezzanine ABS CDOs. The Group’s residual investment of
£130 million is stated net of credit default swap (CDS) protection totalling £470 million purchased from a ‘triple A’ rated monoline Financial Guarantor.
At 31 December 2007, the underlying assets supported by this protection had fallen in value, leaving a reliance on the CDS protection totalling
£155 million. In addition, we have £1,861 million of ABS CDOs which are fully cash collateralised by major global financial institutions.
Structured Investment Vehicle (SIV) Capital Notes
At 30 June 2007 the Group’s exposure to SIV Capital Notes totalled £100 million. During the second half of 2007 the Group wrote down the value of
these assets by £22 million, leaving a residual exposure at 31 December 2007 of £78 million. Additionally, at 31 December 2007 the Group had
commercial paper back up liquidity facilities totalling £370 million, of which £98 million had been drawn. All of these liquidity lines are senior facilities.
Since the year end, these facilities have been reduced to £208 million, of which £115 million has been drawn. The Group has no SIV-Lite exposure.
Trading portfolio
In the second half of 2007, Corporate Markets also saw a reduction in profit before tax of approximately £144 million as a result of the impact of
mark-to-market adjustments in the Group’s trading portfolio, to reflect the marketwide repricing of liquidity and credit. At 31 December 2007 the
trading portfolio contained £181 million of indirect exposure to US sub-prime mortgages and ABS CDOs. This super senior exposure is protected by
note subordination.
Available-for-sale assets
At 31 December 2007, the Group’s portfolio of available-for-sale assets totalled £20,196 million (31 December 2006: £19,178 million). A significant
proportion of these assets (£8.3 billion) related to the ABS in Cancara. The residual assets included £3.2 billion Student Loan ABS, predominantly
guaranteed by the US Government, £4.6 billion Government bond and short-dated bank commercial paper and certificates of deposit and £4.1 billion
major bank senior paper and high quality ABS. These available-for-sale assets are intended to be held to maturity however, under IFRS, they are
marked-to-market through reserves. During 2007, a net £413 million reserves adjustment, which has no impact on the Group’s capital ratios, has
been made to reflect a reduction in the value of these assets. These assets are not impaired and we expect to obtain full value for them upon maturity.
The Group’s investment in Cancara, our hybrid Asset Backed Commercial Paper conduit, was £12.0 billion at 31 December 2007, comprising
£8.3 billion ABS and £3.7 billion client receivables transactions. Cancara, which is fully consolidated in the Group’s accounts, is managed in a very
conservative manner, which is demonstrated by the quality and ratings stability of its underlying asset portfolio. At 31 December 2007, the ABS bonds
in Cancara were 100 per cent Aaa/AAA rated by Moody’s and Standard & Poor’s respectively, and there was no exposure either directly or indirectly
to sub-prime US mortgages within the ABS portfolio. Since the year end, ABS totalling £67 million have been downgraded. At 31 December 2007 the
client receivables portfolio included £115 million of US sub-prime mortgage exposure.
Scottish Widows has no exposure to US sub-prime ABS either directly or indirectly through CDOs. The Group holds £25 million of short-dated SIV
commercial paper through Scottish Widows.
12 Lloyds TSB Group Annual Report and Accounts 2007
Summary of Group results
Strong capital management disciplines
Capital efficiency continued to improve throughout the Group, resulting in an increase in post-tax return on average shareholders’ equity to
25.2 per cent, and in the post-tax return on average risk-weighted assets to 1.76 per cent, from 1.72 per cent. In our life assurance and investment
businesses, the post-tax return on embedded value, on a European Embedded Value (EEV) basis, increased to 9.9 per cent, from 9.3 per cent.
At the end of December 2007, the total capital ratio on a Basel I basis was 11.0 per cent and the tier 1 ratio was 8.1 per cent. During the year,
risk-weighted assets increased by 10 per cent to £172.0 billion, reflecting growth in our mortgage and Corporate Markets businesses. Going forward,
we expect high single-digit or low double-digit annual growth in risk-weighted assets, reflecting increased opportunities to continue to grow our
customer lending. The Group has successfully managed the transition to Basel II and the Group’s opening capital ratios on a Basel II basis were
11.0 per cent for total capital and 9.5 per cent for tier 1 capital (page 51).
Scottish Widows remains strongly capitalised and, at the end of December 2007, the working capital ratio of the Scottish Widows Long Term Fund was
an estimated 19.2 per cent (page 54). During 2007, further capital repatriation totalling £1.9 billion was made to the Group, bringing the total capital
repatriation since the beginning of 2005 to over £3.6 billion. On 5 December 2007 Standard & Poor’s announced that it had re-affirmed its
Scottish Widows ‘AA-’ debt rating and placed it on positive outlook.
Maintaining a strong liquidity and funding position
Throughout the recent marketwide liquidity turbulence, Lloyds TSB has maintained a strong liquidity position for both the Group’s funding
requirements, which are supported by our strong and stable retail and corporate deposit base, and those of its sponsored conduit, Cancara. Retail
and corporate deposit inflows have been strong and the Group continues to benefit from its strong credit ratings and diversity of funding sources. This
has resulted in the Group continuing to fund well over the last few months. In January 2008, Moody’s announced that it had re-affirmed its ‘Aaa’
long-term debt rating for Lloyds TSB Bank plc.
“Throughout the recent market-wide liquidity turmoil, Lloyds TSB has maintained a strong
liquidity position.”
Significant reduction in the Group pension schemes’ deficit
The Group’s defined benefit pension schemes’ gross deficit at 31 December 2007 improved by £1,416 million to £683 million, comprising net
recognised liabilities of £2,033 million partly offset by unrecognised actuarial gains of £1,350 million. This improvement reflects an increase in the real
discount rate used to value the schemes’ liabilities and Group contributions to the schemes, which exceeded the cost of accruing benefits.
Substantial profit on sale of non-core businesses
During 2007 the Group sold a number of non-core businesses realising profits on the disposal totalling £657 million. This has further strengthened
the Group’s capital ratios and improved capital flexibility.
In May 2007, Lloyds TSB Group agreed the sale of the business and assets of Lloyds TSB Registrars to Advent International, subject to completion and
other adjustments. The transaction was completed on 30 September 2007, following regulatory approval, and the Group has reported a profit before
tax on the sale of this business of £407 million (tax: £nil).
In July 2007, the Group announced an agreement to sell Abbey Life Assurance Company Limited (Abbey Life) to Deutsche Bank AG. This transaction
was also completed at the end of September 2007 and the Group has reported a profit before tax on the sale of this business of £272 million
(tax: £nil). In addition, a pre-sale dividend of £175 million was paid to Group in June 2007.
Taxation charge
The Group’s tax charge for 2007 was £679 million, which was an effective rate of 17.0 per cent (2006: 31.6 per cent). The effective tax rate is below
the standard UK corporation tax rate as a result of the gains on disposals being either exempt from tax or covered by capital losses arising in earlier
years, a deferred income tax credit following the reduction in the corporation tax rate announced in the 2007 Finance Act, and credits arising on
policyholder interests. Under IFRS, the income statement includes a corresponding charge for policyholder interests within the Group’s profit before
tax. Excluding these items the Group’s effective rate of tax was 28.3 per cent.
The 2007 Finance Act reduction in corporation tax rate from 30 per cent to 28 per cent resulted in a one-off impairment charge of £28 million before
tax (£20 million after tax), relating to a reduction in future rental income within the Group’s leasing business. In addition, the Group’s deferred tax
liabilities at 31 December 2007 were reduced, resulting in a credit to the Group’s tax charge of £110 million. The net impact of these items has been
to increase earnings attributable to shareholders by £90 million during the year.
Delivering accelerated earnings momentum, whilst improving profitability and returns
2007 has been a challenging year for all banks, however Lloyds TSB’s high quality, more conservative business model has withstood the difficulties of
global financial markets turbulence. Strong earnings momentum has continued in the UK retail banking and insurance businesses, and our
relationship focused Corporate and Commercial businesses have also continued to perform well. These strong performances have resulted in a good
level of income growth which, combined with excellent cost control, has resulted in strong underlying profit momentum. The Group has also continued
to maintain satisfactory asset quality. Encouragingly, this performance has not come at the expense of returns, as the Group has continued to improve
both its return on equity and return on risk-weighted assets. As a result, the Group is well placed to maintain the recent momentum established
throughout the business, and we expect to continue to perform well in 2008.
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“The Group is well placed to maintain the recent momentum established throughout the
business, and we expect to continue to perform well in 2008.”
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Lloyds TSB Group Annual Report and Accounts 2007 13
Summary of Group results
Summarised segmental analysis
2007
Net interest income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus (deficit)
Impairment
Profit (loss) before tax*
Volatility
– Insurance
– Policyholder interests
Profit on sale of businesses
Settlement of overdraft claims
UK
Retail
Banking
£m
3,783
1,797
5,580
–
5,580
(2,548)
3,032
(1,224)
Insurance
and
Investments**
£m
68
1,900
1,968
(302)
1,666
(636)
1,030
–
Wholesale
and
International
Banking
£m
2,518
1,773
4,291
–
4,291
(2,282)
2,009
(572)
Central
group
items
£m
(738)
362
Group
excluding
insurance
gross up
£m
5,631
5,832
(376)
11,463
–
(302)
(376)
(6)
(382)
–
11,161
(5,472)
5,689
(1,796)
1,808
1,030
1,437
(382)
3,893
–
–
–
(76)
(267)
–
272
–
–
–
385
–
–
–
–
–
(267)
–
657
(76)
Insurance
gross up**
£m
461
6,804
7,265
(7,220)
45
(19)
26
–
26
–
(233)
–
–
Group
£m
6,092
12,636
18,728
(7,522)
11,206
(5,491)
5,715
(1,796)
3,919
(267)
(233)
657
(76)
Profit (loss) before tax
1,732
1,035
1,822
(382)
4,207
(207)
4,000
2006
Net interest income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus (deficit)
Impairment
Profit (loss) before tax*
Volatility
– Insurance
– Policyholder interests
Pension schemes related credit
UK
Retail
Banking
£m
3,642
1,621
5,263
–
5,263
(2,476)
2,787
(1,238)
1,549
–
–
–
Insurance
and
Investments**
£m
56
1,740
1,796
(200)
1,596
(646)
950
–
950
84
–
–
Wholesale
and
International
Banking
£m
2,177
2,035
4,212
–
4,212
(2,264)
1,948
(308)
Central
group
items
£m
(593)
201
Group
excluding
insurance
gross up
£m
5,282
5,597
(392)
10,879
–
(200)
(392)
(51)
(443)
(9)
10,679
(5,437)
5,242
(1,555)
1,640
(452)
3,687
–
–
–
–
–
128
84
–
128
Profit (loss) before tax
1,549
1,034
1,640
(324)
3,899
Insurance
gross up**
£m
78
8,306
8,384
(8,369)
15
8
23
–
23
–
326
–
349
Group
£m
5,360
13,903
19,263
(8,569)
10,694
(5,429)
5,265
(1,555)
3,710
84
326
128
4,248
* Excluding volatility, profit on sale of businesses, the settlement of overdraft claims in 2007 and the pension schemes related credit in 2006.
** The Group’s income statement includes income and expenditure which are attributable to the policyholders of the Group’s long-term assurance funds. These
items have no impact upon the profit attributable to equity shareholders. In order to provide a clearer representation of the underlying trends within the
Insurance and Investments segment, these items are shown within a separate column in the segmental analysis above.
14 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
UK Retail Banking
Our business
UK Retail Banking provides a wide range of banking and financial
services through our diversified, proprietary distribution network and
highly recognised and well-regarded brands (Lloyds TSB, Cheltenham
& Gloucester and Scottish Widows) to some 16 million personal
customers through over 2,000 branches across the UK. We are the
UK’s largest personal current account bank with over 12 million
current account customers, have the largest number of internet
banking customers in the UK and operate 11 call centres, all in the
UK, taking 70 million calls per year. Lloyds TSB has been voted the
most trusted bank in Britain for seven years running.
Our strategy
UK Retail Banking’s strategic priorities are to grow revenue from its
existing customer base; expand its customer franchise; and
continuously improve productivity and efficiency.
We believe Lloyds TSB can excel through focusing on the needs of our
customers. UK Retail Banking’s strategy is customer centric with our
vision being to help our customers succeed financially so that they
reward us with more of their business, stay with us longer and
recommend us to others. To deliver this we aim to maximise our
advantaged distribution position, our superior risk management skills
and our customer understanding and analytical capability whilst
developing superior customer focused products, creating a culture of
needs based sales and building life long relationships with our
customers. Our people remain a competitive advantage.
UK Retail Banking results
Net interest income
Other income
Total income
Operating expenses*
Trading surplus
Impairment
Profit before tax*
Cost:income ratio*
2007
£m
3,783
1,797
5,580
(2,548)
3,032
(1,224)
2006
£m
3,642
1,621
5,263
(2,476)
2,787
(1,238)
1,808
1,549
45.7%
47.0%
Post-tax return on average risk-weighted assets*
2.13%
1.76%
* Excluding the settlement of overdraft claims.
Total assets
Risk-weighted assets
Customer deposits
31 December
2007
£bn
31 December
2006
£bn
115.0
61.7
82.1
108.4
59.1
75.7
Income and
cost growth
2007†
6.3
+6%
86
Customer
deposits
£bn
+8%
82.1
75.7
71.0
Group UK
mortgage balances
£bn
+7%
107
95.3
88.4
102.0
428
Target customer
recruitment
000s
+16%
408
352
+3%
222
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2
0
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2
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2
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2
0
0
7
† Excluding the settlement of
overdraft claims.
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Lloyds TSB Group Annual Report and Accounts 2007 15
Divisional results
Key highlights
• Excellent profit performance. Profit before tax increased by 17 per cent to £1,808 million, excluding the settlement of overdraft claims.
• Strong income momentum, up 6 per cent, supported by overall sales growth of 17 per cent.
• Excellent progress in growing the current account customer franchise, with over 1 million new current accounts opened, an increase of 17 per cent. New
Added Value Accounts increased by 79 per cent. Lloyds TSB is now the UK market leader in new current account customer recruitment.
• Strong growth in savings deposits resulted in an 11 per cent increase in savings balances, with 15 per cent growth in bank savings.
• Stabilisation in net interest margin, with net interest margin in the second half of 2007 1 basis point higher than in the first half of 2007.
• Continued good cost management, with a clear focus on investing to improve service quality and processing efficiency. Excluding the impact of the settlement
of overdraft claims, operating expenses increased by 3 per cent and there was a substantial improvement in the cost:income ratio to 45.7 per cent.
• The quality of new lending continues to be strong. Arrears levels have continued to improve and the impairment charge in 2007 was lower than in 2006.
Whilst the economic outlook for 2008 is uncertain, we do not expect to experience a significant change in the retail impairment charge in the first half of 2008,
compared to the first half of 2007.
• Improved return on risk-weighted assets, reflecting the impact of double-digit profit growth exceeding the increase in risk-weighted assets.
During 2007, UK Retail Banking continued to make substantial progress in each of its key strategic priorities: growing income from its existing customer base;
expanding its customer franchise; and improving productivity and efficiency. In each of these areas, a key focus has been on improving sales of recurring
income products, such as current accounts and savings products which, combined with higher lending related income, has supported the accelerating rate of
revenue growth.
Profit before tax from UK Retail Banking increased by £183 million, or 12 per cent, to £1,732 million, reflecting strong levels of franchise growth, excellent cost
management and a slightly reduced impairment charge. Excluding the settlement of overdraft claims, profit before tax increased by 17 per cent to £1,808 million.
Total income increased by £317 million, or 6 per cent, supported by higher income from current accounts, savings and personal lending.
The adverse mix effect of strong growth in finer margin mortgages and flat wider margin unsecured personal lending led to an overall reduction in the division’s
net interest margin. Product margins on a year-on-year basis fell slightly reflecting competitive pressures in the mortgage business in the first half of 2007 which
more than offset an increase in retail savings margins. Towards the end of the year, new business margins in the mortgage business started to improve and
this supported a stabilisation in the UK Retail Banking net interest margin in the second half of the year, compared to the first half.
Operating expenses remained well controlled, increasing by 3 per cent, excluding the settlement of overdraft claims. Significant improvements have been
made in the rationalisation of back office operations to improve efficiency and we continue to increase the proportion of front office to back office staff in the
branch network.
Growing income from the customer base
The Retail Bank has continued to make excellent progress, with further strong growth in product sales and continued good revenue growth. We continue to
deliver a very strong performance in the growing savings and investment market, especially in bank savings where we have recently benefited from a
significantly improved rate of deposit growth.
“Overall sales increased by 17 per cent, with improvements over a broad range of
products, especially current accounts, credit cards and bank savings products.”
Overall sales increased by 17 per cent, with improvements over a broad range of products, especially current accounts, credit cards and bank savings products.
Sales volumes were particularly strong in the branch network with an increase of 24 per cent. This continued strong sales growth has been driven from high
levels of product innovation over the last twelve months with the successful launch of a number of enhanced savings products, an improved range of added
value current accounts and the introduction of the innovative Lloyds TSB Duo Airmiles credit card offer. Customer deposits have increased strongly, by 8 per cent
over the last twelve months, with particularly strong progress in growing our bank savings and wealth management deposit balances, with increases of
15 per cent and 12 per cent respectively.
Current account and savings balances
Bank savings
C&G deposits
Wealth management
UK Retail Banking savings
Current accounts
Total customer deposits
31 December
2007
£m
31 December
2006
£m
41,976
14,861
4,939
61,776
20,305
82,081
36,417
14,621
4,402
55,440
20,221
75,661
The Group has delivered good levels of mortgage growth, focusing on prime mortgage business and seeking to maintain economic returns. However, as we
have previously indicated, our market share of net new mortgage lending in the second half of the year was below our outstanding stock position, reflecting
our continued focus on writing value-creating business. The Group continues to focus on those segments of the mortgage market where value can be created
while adopting a conservative approach to credit risk. As a result of our focus on managing for value and the recent marketwide increase in interest spreads,
new business net interest margins have strengthened. Recent levels of mortgage allocations have been stronger and we expect this to translate into robust
balance growth as we move into 2008.
Gross new mortgage lending for the Group totalled £29.4 billion (2006: £27.6 billion). Mortgage balances outstanding increased by 7 per cent to £102.7 billion
and net new lending totalled £6.7 billion, resulting in a market share of net new lending of approximately 6.2 per cent.
We have maintained our market leadership position in personal loans, despite tightened credit criteria and a slowdown in consumer demand. Unsecured
consumer credit balances were broadly flat with personal loan balances outstanding at 31 December 2007 marginally higher at £11.2 billion, and credit card
balances slightly lower at £6.6 billion.
16 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
Expanding the customer franchise
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In addition to the strong growth in product sales from existing customers, the Group has continued to make progress in expanding its customer franchise.
Current account recruitment increased by 17 per cent, compared with last year, supported by the range of added value current accounts, in particular the
Silver Account focusing on foreign nationals. During 2007, the Group opened more than 1 million new current accounts.
“During 2007, the Group opened more than 1 million new current accounts.”
Wealth Management continues to make good progress with its expansion plans, and over 260 advisers have now been trained on an enhanced wealth
management offer comprising private banking, open architecture portfolio management, retirement planning, insurance and estate planning services. As a
result, new Investment Portfolio cases increased by 42 per cent and overall wealth management clients increased by 11 per cent. Total new assets under
management increased by 42 per cent and wealth management banking deposits grew by 12 per cent.
In June 2007, the Group launched the Lloyds TSB Airmiles Duo account, a new, innovative and exclusive credit card that offers a ‘two in one’ easy to manage
account, with one PIN, one statement and two cards, an American Express and a MasterCard on which customers can earn Airmiles. The demand for this new
product has been extremely strong, and over 700,000 cards have been issued to a generally more transactional, high quality, customer segment. As a result,
Lloyds TSB was the UK market leader in new credit card issuance during 2007, and now has the largest and fastest growing loyalty credit card programme in
the UK.
Improving productivity and efficiency
We have continued to make significant progress in reducing levels of administration and processing work carried out in branches and, as a result, we have
increased the number of dedicated customer facing branch network staff by some 4,000 over the last 2 years. Over the same period, branch network staff time
spent on back office administration work has reduced from approximately 35 per cent to around 5 per cent. This has enabled us to increase our focus on
meeting our customers’ needs and has supported the substantially improved branch network sales productivity and service efforts. These improvements have
led to the retail banking cost:income ratio, excluding the impact of the settlement of overdraft claims, improving to 45.7 per cent, from 47.0 per cent last year.
In Telephone Banking we have continued to invest in our market leading speech recognition technology which has supported significant growth in the number
of customers using our automated service. This, combined with further improvements in the efficiency of our contact centre operations, has led to all customer
service calls now being answered from UK based centres.
Impairment levels slightly decreased
Impairment losses on loans and advances decreased by £14 million, or 1 per cent, to £1,224 million, largely reflecting a reduction in the level of customer
insolvencies and the quality of new lending. In addition, collections procedures continue to improve, a particularly important competitive advantage in a slowing
consumer environment, and we achieved better than assumed recoveries. The impairment charge as a percentage of average lending improved to
1.10 per cent, compared to 1.18 per cent last year. Over 99 per cent of new personal loans and 89 per cent of new credit cards sold during 2007 were to existing
customers, where the Group has a better understanding of an individual customer’s total financial position. The level of arrears in the personal loan and credit
card portfolios reduced during 2007, whilst overdraft arrears remained stable.
“We remain very confident in the quality of our mortgage portfolio.”
Mortgage credit quality remains excellent with the impairment charge remaining at a low level of £18 million, or 2 basis points of average mortgage lending.
Arrears in the mortgage business have also fallen. In Cheltenham & Gloucester, the average indexed loan-to-value ratio on the mortgage portfolio was
43 per cent, and the average loan-to-value ratio for new mortgages and further advances written during 2007 was 63 per cent. At 31 December 2007, only
1.7 per cent of balances had an indexed loan-to-value ratio in excess of 95 per cent. We extensively stress-test our lending to changes in macroeconomic
conditions and we remain very confident in the quality of our mortgage portfolio.
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Lloyds TSB Group Annual Report and Accounts 2007 17
Divisional results
Insurance and Investments
Our business
Insurance and Investments offers life assurance, pensions and
investment products, general insurance and fund management services.
The Scottish Widows brand is the main brand for new sales of Lloyds
TSB Group’s life, pensions, Open Ended Investment Companies and
other long-term savings products.
Lloyds TSB General Insurance is the leading distributor of home
insurance in Britain, with products distributed through Lloyds TSB Group
channels and strategic corporate partners.
Scottish Widows Investment Partnership (SWIP) manages funds for
Lloyds TSB Group’s retail life, pensions and investment products. Other
key clients cover both the retail and institutional segments, with SWIP
occupying a top 3 position in terms of retail funds under management.
SWIP has close to £100 billion of funds under management.
Our strategy
Insurance and Investments’ strategic priorities are maximising
bancassurance success, profitably growing IFA sales, improving service
and operational efficiency and optimising capital management.
Within Scottish Widows this will be achieved by developing strong and
enduring relationships, developing market-led propositions and being
easy to do business with. Scottish Widows products are distributed
through Lloyds TSB Group channels, independent financial advisers and
other intermediaries. Scottish Widows was voted Best Individual
Pensions Provider by IFAs and is the most trusted choice for pensions
amongst UK consumers.
Lloyds TSB General Insurance is targeting growing share in chosen
customer segments, developing key insurance partnerships, improving
margins by better customer management and improving service
and efficiency.
Insurance and Investments results
Excluding volatility and profit on disposal of businesses
Net interest income*
Other income*
Total income
Insurance claims*
Total income, net of insurance claims
Operating expenses*
Insurance grossing adjustment (page 14)
2007
£m
68
1,900
1,968
(302)
1,666
(636)
26
2006
£m
56
1,740
1,796
(200)
1,596
(646)
23
Profit before tax
1,056
973
Profit before tax analysis
Life, pensions and OEICs
General insurance
Scottish Widows Investment Partnership
Profit before tax
884
128
44
1,056
Present value of new business premiums (PVNBP)
10,424
PVNBP new business margin (EEV basis)
Post-tax return on embedded value
3.1%
9.9%
* Excluding insurance grossing adjustment.
701
243
29
973
9,740
3.6%
9.3%
Income and
cost growth*
2007
4.3
+4%
New business
sales (PVNBP)
£m
+7%
New
business
margin (PVNBP)†
Return on
embedded
value†
10945
9,740
7,842
10,424
3.78
3.6%
3.2%
3.1%
10.4
9.9%
9.3%
8.0%
-3.0
-2%
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2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
* Excluding volatility and insurance
grossing.
† EEV basis.
18 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
Key highlights
• Strong profit performance. Profit before tax increased by 9 per cent to £1,056 million. Adjusting for the impact of surplus capital repatriation, profit before tax
increased by 13 per cent.
• Good income growth and excellent cost control. Income, net of insurance claims and adjusting for the impact of surplus capital repatriation, increased by
7 per cent. Operating expenses decreased by 2 per cent.
• Good sales performance. 7 per cent increase in Scottish Widows’ present value of new business premiums. Strong progress in increasing bancassurance
sales, up 20 per cent. Good performance in the sale of protection products, corporate pensions and retirement income products.
• Improved returns. On an EEV basis, the post-tax return on embedded value increased to 9.9 per cent. New business margin was robust at 3.1 per cent.
• Robust capital position. Scottish Widows continues to deliver improving capital efficiency and self-financing growth, and a further £1.9 billion of capital was
repatriated to the Group during 2007.
• Increased weather related claims of £113 million, largely relating to the severe flooding in the UK in June and July, contributed to a 47 per cent reduction in
profit before tax in General Insurance.
• Excellent performance in Scottish Widows Investment Partnership. Profit before tax increased by 52 per cent reflecting higher margins and improved mix
of external business.
Scottish Widows life, pensions and OEICs
Profit before tax increased by £183 million, or 26 per cent, to £884 million. The effect of surplus capital repatriation to the Group has been to reduce investment
earnings by a total of £36 million in 2007. Adjusting 2006 for this, profit before tax increased by 33 per cent.
Life and pensions new business profit, on an IFRS basis and excluding volatility, reduced by 5 per cent to £163 million reflecting a change in the mix of investment
products sold through the branch network towards non-embedded value accounted products. Total existing business profit grew by 43 per cent to £551 million,
partly reflecting increased profits from the growing OEIC portfolio, improved cost management and a reduction in adverse assumption changes compared to
2006. The expected return on shareholders’ net assets increased by 43 per cent to £192 million as a result of a higher volume of free assets, driven by strong
equity markets and the impact of regulatory changes in 2006, and a higher expected rate of return.
During 2007, Scottish Widows has continued to make strong progress in each of its key business priorities: to maximise bancassurance success; to profitably
grow IFA sales; to improve service and operational efficiency; and to optimise capital management.
“During 2007, Scottish Widows has continued to make strong progress in each of its key
business priorities.”
Maximising bancassurance success
In 2007, the value of Scottish Widows’ bancassurance new business premiums increased by 20 per cent, building on the success of the simplified product range
for distribution through the Lloyds TSB branch network, Commercial Banking and Wealth Management channels. Sales of protection products were particularly
strong. A new branch network creditor insurance and protection product, which replaced an externally provided creditor product, has led to the significant
increase in protection sales during 2007. In addition, Scottish Widows launched a new protection product, ‘Protection for Life’ towards the end of 2006, which
has performed very well. We have continued to deliver good sales of OEICs following the more than doubling of sales in 2006.
Profitably growing IFA sales
Sales through the IFA distribution channel increased by 2 per cent, following record A-day related sales levels in 2006. Scottish Widows has continued to focus
on the more profitable business areas within the IFA market. Sales of savings and investment products were lower as we chose not to compete in areas which
deliver unsatisfactory returns, although this was partly offset by good growth in OEIC sales. Corporate pensions volumes remained strong following excellent
growth last year and our managed fund business also showed good improvement.
Improving service and operational efficiency
The business has made continued improvements in service and operational efficiencies, and the benefits can be seen in a reduction of expenses by 2 per cent
compared to prior year, notwithstanding the introduction of a number of new products. In addition, customer satisfaction is at its highest ever level. Scottish
Widows received a number of awards for service quality and product innovation, including ‘Best Individual Pensions Provider’ at the Financial Adviser awards
whilst maintaining its top quartile position for lowest servicing and acquisition costs per policy.
Optimising capital management
Scottish Widows has maintained its strong focus on improving capital management. During 2007 Scottish Widows continued to deliver a more capital efficient
product profile and improved internal rates of return. The post-tax return on embedded value, on an EEV basis, increased to 9.9 per cent, from 9.3 per cent last
year. During 2007, £1.9 billion of capital was repatriated to the Group, giving a total capital repatriation of over £3.6 billion since the beginning of 2005.
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Lloyds TSB Group Annual Report and Accounts 2007 19
Divisional results
Present value of new business premiums (PVNBP)
Life and pensions:
Protection
Savings and investments
Individual pensions
Corporate and other pensions
Retirement income
Managed fund business
Life and pensions
OEICs
Life, pensions and OEICs
Single premium business
Regular premium business
Life, pensions and OEICs
Bancassurance
Independent financial advisers
Direct
Life, pensions and OEICs
2007
£m
960
913
2,073
2,141
1,044
486
7,617
2,807
10,424
8,375
2,049
10,424
4,096
5,817
511
10,424
2006
£m
232
1,300
2,219
1,961
960
348
7,020
2,720
9,740
7,321
2,419
9,740
3,421
5,706
613
9,740
Results on a European Embedded Value (EEV) basis
Lloyds TSB continues to report under IFRS, however, in line with industry best practice, the Group provides supplementary financial reporting for Scottish Widows
on an EEV basis. The Group believes that EEV represents the most appropriate measure of long-term value creation in life assurance and investment businesses.
New business profit
Existing business
– Expected return
– Experience variances
– Assumption changes
Expected return on shareholders’ net assets
Profit before tax, adjusted for capital repatriation*
Impact of surplus capital repatriation to Group
Profit before tax*
New business margin (PVNBP)
Embedded value (year end)
Post-tax return on embedded value*
* Excluding volatility and other items.
2007
Life, pensions
and OEICs
£m
326
337
78
(45)
370
207
903
–
903
3.1%
£5,365m
9.9%
2006
Life, pensions
and OEICs
£m
346
403
69
(133)
339
131
816
36
852
3.6%
£6,413m
9.3%
Adjusting for the impact of capital repatriation, EEV profit before tax from the Group’s life, pensions and OEICs business increased by 11 per cent to £903 million.
New business profit fell by £20 million, or 6 per cent, to £326 million, largely reflecting the impact of a higher risk-free discount rate and changes in other
economic assumptions applied to new business. This was however offset by a corresponding credit to the expected return on shareholders’ net assets.
Existing business profit increased by 9 per cent. Expected return decreased by 16 per cent to £337 million, primarily reflecting a lower shareholder benefit this
year from the reduction in the value of realistic balance sheet liabilities and the impact of regulatory changes in 2006. Positive experience variances were driven
by higher annuity profits from Abbey Life. Overall lapse experience was broadly in line with the Group’s expectations, as higher lapse experience in the life and
pensions business was broadly offset by a favourable experience in OEICs. Assumption changes primarily reflect changes to the longer term lapse assumptions
for both life and pensions business and OEICs. The expected return on shareholders’ net assets increased by £76 million, as a result of a higher volume of free
assets, driven by strong equity markets and the impact of regulatory changes in 2006, and a higher expected rate of return.
Overall the post-tax return on embedded value increased to 9.9 per cent from 9.3 per cent. Scottish Widows maintained a strong new business margin of
3.1 per cent. Individual new business product margins remained broadly stable. The overall new business margin fell by 50 basis points however, as a result
of an adverse impact from a higher risk-free discount rate and changes in other economic assumptions applied to new business and the shift in product mix
resulting from the insourcing of a new branch network creditor insurance and protection product. This product generates a lower new business margin, but
delivers good levels of value for the Group.
20 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
Scottish Widows Investment Partnership
Pre-tax profit from Scottish Widows Investment Partnership (SWIP) increased by 52 per cent to £44 million, reflecting increased profitability resulting from higher
margins and an improved mix of external business, a key strategic priority for SWIP. Over the last 12 months, SWIP’s assets under management decreased by
£4.1 billion to £97.6 billion, reflecting the decision by the Trustees of the Lloyds TSB pension schemes to move £5.7 billion into external passive management.
As a result, institutional funds under management reduced by £5.0 billion. The net movement in retail funds, net of expenses and commissions, was an increase
of £2.9 billion.
Movements in funds under management
The following table highlights the movement in retail and institutional funds under management.
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Opening funds under management
Movement in Retail Funds
Premiums
Claims
Surrenders
Net inflow of business
Investment return, expenses and commission
Net movement
Movement in Institutional Funds
Lloyds TSB pension schemes
Other institutional funds
Investment return, expenses and commission
Net movement
Proceeds from sale of Abbey Life
Dividends and surplus capital repatriation
Closing funds under management
Managed by SWIP
Managed by third parties
Closing funds under management
2007
£bn
105.7
11.7
(4.8)
(6.4)
0.5
2.4
2.9
(5.7)
(0.6)
1.3
(5.0)
1.0
(1.9)
102.7
97.6
5.1
102.7
2006
£bn
97.5
11.7
(3.6)
(5.4)
2.7
6.0
8.7
–
(1.3)
1.5
0.2
–
(0.7)
105.7
101.7
4.0
105.7
Including assets under management within our UK Wealth Management and International Private Banking businesses, Groupwide funds under management
decreased by 3 per cent to £122.8 billion.
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Lloyds TSB Group Annual Report and Accounts 2007 21
Divisional results
European Embedded Value reporting - results for year ended 31 December 2007
This section provides further details of the Scottish Widows EEV financial information.
Composition of EEV balance sheet
Value of in-force business (certainty equivalent)
Value of financial options and guarantees
Cost of capital
Non-market risk
Total value of in-force business
Shareholders’ net assets
Total EEV of covered business
2007
£m
2,779
(53)
(178)
(61)
2,487
2,878
5,365
Reconciliation of opening EEV balance sheet to closing EEV balance sheet on covered business
Shareholders’
net assets
£m
Value of in-force
business
£m
As at 1 January 2006
Total profit after tax
Dividends
As at 31 December 2006
Total profit after tax
Profit on disposal of Abbey Life (EEV basis)
– Sale proceeds
– Assets disposed
Dividends
As at 31 December 2007
Analysis of shareholders’ net assets on an EEV basis on covered business
As at 1 January 2006
Total profit after tax
Dividends
As at 31 December 2006
Total (loss) profit after tax
Disposal of Abbey Life (EEV basis)
Dividends
As at 31 December 2007
3,445
873
(746)
3,572
661
985
(474)
511
(1,866)
2,878
Required
capital
£m
2,393
(186)
–
2,207
(238)
(232)
–
1,737
2,941
(100)
–
2,841
107
–
(461)
(461)
–
2,487
Free
surplus
£m
1,052
1,059
(746)
1,365
899
743
(1,866)
1,141
2006
£m
3,220
(56)
(248)
(75)
2,841
3,572
6,413
Total
£m
6,386
773
(746)
6,413
768
985
(935)
50
(1,866)
5,365
Shareholders’
net assets
£m
3,445
873
(746)
3,572
661
511
(1,866)
2,878
22 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
Summary income statement on an EEV basis
New business profit
Existing business profit
– Expected return
– Experience variances
– Assumption changes
Expected return on shareholders’ net assets
Profit before tax, excluding volatility and other items*
Volatility
Other items*
Total profit before tax
Taxation
Impact of Corporation tax rate change
Total profit after tax, excluding profit on sale of Abbey Life
Profit on sale of Abbey Life (EEV basis)
Total profit after tax
2007
£m
326
337
78
(45)
370
207
903
(271)
58
690
(59)
137
768
50
818
* Other items represent amounts not considered attributable to the underlying performance of the business.
Breakdown of income statement between life and pensions, and OEICs
2007
New business profit
Existing business
– Expected return
– Experience variances
– Assumption changes
Expected return on shareholders’ net assets
Profit before tax*
New business margin (PVNBP)
Post-tax return on embedded value*
2006
New business profit
Existing business
– Expected return
– Experience variances
– Assumption changes
Expected return on shareholders’ net assets
Profit before tax*
New business margin (PVNBP)
Post-tax return on embedded value*
* Excluding volatility and other items.
Life and pensions
£m
270
286
35
(105)
216
199
685
3.5%
Life and pensions
£m
287
361
35
(129)
267
160
714
4.1%
OEICS
£m
56
51
43
60
154
8
218
2.0%
OEICS
£m
59
42
34
(4)
72
7
138
2.2%
2006
£m
346
403
69
(133)
339
167
852
176
76
1,104
(331)
–
773
–
773
Total
£m
326
337
78
(45)
370
207
903
3.1%
9.9%
Total
£m
346
403
69
(133)
339
167
852
3.6%
9.3%
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Lloyds TSB Group Annual Report and Accounts 2007 23
Divisional results
Economic assumptions
A bottom up approach is used to determine the economic assumptions for valuing the business in order to determine a market consistent valuation.
The risk-free rate assumed in valuing in-force business is 10 basis points over the 15 year gilt yield. In valuing financial options and guarantees the risk-free rate
is derived from gilt yields plus 10 basis points, in line with Scottish Widows’ FSA realistic balance sheet assumptions. The table below shows the range of resulting
yields and other key assumptions.
31 December
2007
%
31 December
2006
%
Risk-free rate (value of in-force)
Risk-free rate (financial options and guarantees)
Retail price inflation
Expense inflation
Non-market risk
4.65
4.28 to 4.81
3.28
4.18
4.72
3.91 to 5.41
3.23
4.13
An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally will give the mean
expected financial outcome for shareholders and hence no further allowance for non-market risk is required. However, in the case of operational risk and the
With Profit Fund these are asymmetric in the range of potential outcomes for which an explicit allowance is made.
Non-economic assumptions
Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on
management’s view of future experience. These assumptions are intended to represent a best estimate of future experience.
For OEIC business, the lapse assumption is based on recent experience which has been collected over a period that has coincided with favourable investment
conditions. Management have used a best estimate of the long-term lapse assumption which is higher than indicated by this experience. In management’s
view, the approach and lapse assumption are both reasonable.
Sensitivity analysis
The table below shows the sensitivity of the EEV and the new business profit before tax to movements in some of the key assumptions. The impact of a change
in the assumption has only been shown in one direction other than for risk free rate. Where the impact has been shown only in one direction it can be assumed
to be reasonably symmetrical.
2007 EEV/new business profit before tax
100 basis points reduction in risk-free rate1
100 basis points increase in risk-free rate1
10 per cent reduction in market values of equity assets2
10 per cent reduction in market values of property assets3
10 per cent reduction in expenses4
10 per cent reduction in lapses5
5 per cent reduction in annuitant mortality6
5 per cent reduction in mortality and morbidity (excluding annuitants)7
100 basis points increase in equity and property returns8
10 basis points increase in credit spreads9
Impact
on EEV
£m
5,365
161
(115)
(178)
(32)
96
88
(64)
22
nil
(46)
Impact on new
business profit
before tax
£m
326
7
(7)
n/a
n/a
31
19
(5)
3
nil
(6)
1 In this sensitivity the impact takes into account the change in the value of in-force business, financial options and guarantee costs, statutory reserves and
asset values.
2 The reduction in market values is assumed to have no corresponding impact on dividend yields.
3 The reduction in market values is assumed to have no corresponding impact on rental yields.
4 This sensitivity shows the impact of reducing new business maintenance expenses and investment expenses to 90 per cent of the expected rate.
5 This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.
6 This sensitivity shows the impact on our annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate.
7 This sensitivity shows the impact of reducing mortality rates on non-annuity business to 95 per cent of the expected rate.
8 Under a market consistent valuation, changes in assumed equity and property returns have no impact on the EEV.
9 This sensitivity shows the impact of a 10 basis point increase in corporate bond yields and the corresponding reduction in market values. Government bond
yields and the risk-free rate are assumed to be unchanged.
In sensitivities 4 to 7 assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and the statutory reserving
bases. A change in risk discount rates is not relevant as the risk discount rate is not an input to a market consistent valuation.
24 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
General insurance
Commission receivable
Commission payable
Underwriting income (net of reinsurance)
Other income
Net operating income
Claims paid on insurance contracts (net of reinsurance)
Operating income, net of claims
Operating expenses
Profit before tax
Claims ratio
Combined ratio
2007
£m
648
(692)
591
37
584
(302)
282
(154)
128
49%
93%
2006
£m
629
(664)
600
35
600
(200)
400
(157)
243
32%
80%
Profit before tax from our general insurance operations decreased by £115 million, to £128 million, largely as a result of a £113 million increase in weather related
claims, primarily reflecting severe flooding in the UK in June and July. Net operating income decreased by 3 per cent whilst costs were reduced by 2 per cent.
Net operating income decreased by £16 million, or 3 per cent, as growth in home and loan protection income was more than offset by lower motor insurance
income, increased reinsurance costs and the run-off from the legacy health portfolio. Our continued focus on improving operational efficiency and
improving the effectiveness of our marketing spend has resulted in a £3 million, or 2 per cent, reduction in operating costs, whilst also continuing to improve
processing efficiency.
Overall sales performance has been good with an 8 per cent increase in new business gross written premiums (GWP). Home insurance sales through the
branch network continue to perform well with 14 per cent growth in new business GWP. We have, however, scaled back our participation in the distribution of
home insurance through direct channels, as a result of the increasingly competitive pricing in that area of the market. During the year we continued to invest in
product development, with loan protection and home insurance products both securing industry leading external quality ratings.
Income, net of claims, was £118 million lower, largely as a result of the increased extreme weather related claims, following a benign period in 2006. As a result,
overall claims increased by £102 million, and key underwriting ratios were significantly affected with an increase in the claims ratio to 49 per cent, and an
increase in the combined ratio to 93 per cent. Adjusting for the extreme weather related claims, the claims ratio improved, reflecting both a favourable claims
experience in our home insurance underwriting and the impact of recent investment in improving the efficiency of our claims processing.
The business continues to invest in the development of its Corporate Partnership distribution arrangements and the performance of the Pearl business acquired
in 2006 has exceeded our initial expectations.
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Lloyds TSB Group Annual Report and Accounts 2007 25
Divisional results
Wholesale and International Banking
Our business
Our businesses within the Wholesale and International Banking arena
cover a broad scope, serving thousands of customers, ranging from
start-ups and small enterprises to large organisations and global
corporations. Combining the respective strengths of some 3,000 people
in Corporate Banking and Products & Markets, Corporate Markets
plays an integral role in leveraging and expanding the customer
franchise and building deep, long-lasting relationships with around
17,000 corporate customers and was awarded with ‘Real Finance/CBI
FDs’ Excellence Awards – Corporate Bank of the Year’ for the third year
running. Commercial Banking is a growing business with some 5,500
people serving nearly one million customers across the UK from
one-person start-ups to large, established enterprises. Lloyds TSB
Group has a leading share of the new business start-up market, with
some 120,000 new businesses opening an account in 2007. We also
participate in specialist markets with a range of solutions including
personal and international expatriate and private banking, motor and
leisure finance and auto leasing.
Our strategy
The Wholesale and International Banking strategic vision is to be the best
UK mid-market focused wholesale bank and to compete successfully in
selected, relevant global markets. Our key strategic priorities are to grow
the Corporate Markets business; build on the growth momentum in
Commercial Banking; and maintain strong asset quality.
Making Wholesale and International Banking a great place for our
customers to bank is our number one priority. As a relationship bank,
we place our customers at the forefront of our vision and we strive,
with passion, to meet their needs. The way by which we manage our
customer relationships is the vital ingredient in what differentiates us
from our competition.
We use our strong product capabilities to support our new and existing
customer relationships, with primary current focus being placed on the
UK corporate segment in which energies and resource are directed to
achieve gains in profitable market share thereby creating long term,
sustainable relationships with our customers.
Wholesale and International Banking results
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
Profit before tax*
Cost:income ratio
2007
£m
2,518
1,773
4,291
(2,282)
2,009
(572)
1,437
2006
£m
2,177
2,035
4,212
(2,264)
1,948
(308)
1,640
53.2%
53.8%
Post-tax return on average risk-weighted assets*
1.13%
1.38%
Total assets
Risk-weighted assets
Customer deposits
Profit before tax by business unit*
Corporate Markets
– Before impact of market dislocation
– Impact of market dislocation
Commercial Banking
Asset Finance
International Banking and other businesses
* Excluding profit on sale of businesses.
31 December
2007
£bn
31 December
2006
£bn
163.3
105.1
72.3
2007
£m
1,132
(280)
852
451
60
74
147.8
91.8
61.2
2006
£m
1,030
–
1,030
398
113
99
1,437
1,640
Income and
cost growth
2007
Growth in
cross-selling
income
2.1
+2%
48.299999
+46%
1188
Corporate Markets
profit before tax
£m†
+10%
1,132
1,030
936
Market share of
Commercial Banking
start-ups
23.1
22%
21%
21%
+33%
+29%
+1%
0.0
0.000000
0
0.0
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2
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5
2
0
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6
2
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2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
5
2
0
0
6
2
0
0
7
† Before impact of market dislocation.
26 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
Key highlights
• Overall profits impacted by turbulence in global financial markets. Whilst the division has limited exposure to assets affected by current capital market
uncertainties, the impact of recent market dislocation has been to reduce profit before tax in 2007 by £280 million.
• Continued relationship banking momentum. Excluding the impact of market dislocation, profit before tax increased by 5 per cent.
• Further good progress in expanding our Corporate Markets business, with an 18 per cent increase in Corporate Markets income supporting a 10 per cent
increase in profit before tax, excluding the impact of market dislocation.
• Continued strong franchise growth in Commercial Banking, with an 8 per cent growth in income and a 13 per cent growth in profit before tax. Lloyds TSB
has retained its leading position as the bank of choice for start-up businesses.
• Continued tight credit control in Asset Finance, and a slowdown in demand in the consumer lending portfolio, led to a 47 per cent reduction in profit
before tax.
• Strong risk management and good asset quality, despite a rise of £264 million in impairment losses, largely as a result of the £92 million impact of market
dislocation, a £28 million provision reflecting the impact of the 2007 Finance Act on the division’s leasing business, and a lower level of corporate releases
and recoveries during the year.
In Wholesale and International Banking, the Group has continued to make significant progress in its strategy to develop the Group’s strong corporate and small
to medium business customer franchises and, in doing so, become the best UK mid-market focused wholesale bank. The division has continued to make
substantial progress in its relationship banking businesses. In Commercial Banking, strong growth in business volumes, further customer franchise
improvements and good progress in improving operational efficiency have resulted in continued strong profit growth. In Corporate Markets, further good
progress has been made in developing our relationship banking franchise supported by a strong cross-selling performance.
Overall, the division’s profit before tax decreased by 12 per cent, to £1,437 million, reflecting the £280 million reduction in profits as a result of market dislocation.
Excluding this impact, profit before tax increased by 5 per cent, with a continued strong performance in our relationship banking businesses. This has generated
overall income growth of 6 per cent, driven by strong Corporate Markets and Commercial Banking income growth of 18 per cent and 8 per cent respectively.
This exceeded cost growth of 1 per cent, leading to a reduction in the cost:income ratio to 50.9 per cent, from 53.8 per cent last year. Trading surplus, excluding
the impact of market dislocation, increased by £249 million, or 13 per cent, to £2,197 million.
“In Wholesale and International Banking, the Group has continued to make significant
progress in its strategy to leverage the Group’s strong corporate and small to medium
business customer franchises.”
The charge for impairment losses on loans and advances increased by £264 million to £572 million, largely as a result of the £92 million impact of market
dislocation, a one-off £28 million impairment charge reflecting a reduction in rental income from operating lease activities following the corporation tax rate
change included in the 2007 Finance Act, a lower level of releases and recoveries during the year and the impact of recent strong growth in the corporate
lending portfolio. Overall corporate and SME asset quality remains good although we continue to expect some normalisation in the impairment charge over the
next few years. We do believe, however, that we remain relatively well positioned as a result of our prudent credit management policy.
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Lloyds TSB Group Annual Report and Accounts 2007 27
Divisional results
Corporate Markets
Net interest income
Other income
– Before market dislocation
– Market dislocation
Total income
Operating expenses
Trading surplus
Impairment
– Before market dislocation
– Market dislocation
Profit before tax
2007
£m
1,104
808
(188)
620
1,724
(632)
1,092
(148)
(92)
(240)
852
2006
£m
806
821
–
821
1,627
(615)
1,012
18
–
18
1,030
In Corporate Markets, profit before tax fell by 17 per cent, however, excluding the impact of market dislocation and the 2007 Finance Act, profit before tax
increased by 13 per cent. On this basis, income increased by 18 per cent, supported by continued high levels of cross-selling income, strong growth in corporate
lending and a higher level of income from venture capital investments. The strong growth in lending was supported by an increase of £4.7 billion in Group
lending to property companies, to £17.6 billion. Two-thirds of this lending portfolio is commercial property lending supporting our existing customer franchise
and reflects a well-spread nationwide portfolio. We adopt conservative credit criteria and the indexed loan-to-value of the portfolio is approximately 62 per cent.
One third of the portfolio is residential lending, over half of which is to local authority backed public housing.
“Corporate Markets underlying income increased by 18 per cent, supported by continued
high levels of cross-selling income.”
Operating expenses increased by 3 per cent to £632 million, reflecting further investment in people to support ongoing business growth. The trading surplus,
excluding market dislocation, increased by 26 per cent. The impairment charge of £240 million includes £92 million from the impact of market dislocation and
the £28 million one-off charge relating to the impact of the 2007 Finance Act on the division’s leasing business. Excluding these items, the underlying increase
in the impairment charge reflects lower levels of releases and recoveries, recent strong growth in corporate customer lending and impairments relating to two
special situations.
Commercial Banking
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
Profit before tax
2007
£m
890
429
1,319
(769)
550
(99)
451
2006
£m
821
397
1,218
(727)
491
(93)
398
Profit before tax in Commercial Banking grew by £53 million, or 13 per cent, reflecting strong growth in business volumes, further improvements in growing the
Commercial Banking customer franchise and progress in improving operational efficiency. Income increased by 8 per cent to £1,319 million, reflecting strong
growth in lending and deposit balances, whilst costs were 6 per cent higher, as a result of increased investment to improve the operating platform. Commercial
Banking continued to develop and grow its customer franchise strongly, with customer recruitment of 120,000 during 2007, reflecting its market-leading position
in the start-up market with a market share of 21 per cent. We also made good progress in continuing to attract customers ‘switching’ from other financial services
providers. Lloyds TSB Commercial Finance has continued to improve its strong market position, with a market share of approximately 20 per cent, measured
by client numbers. Asset quality in the Commercial Banking portfolios remains good with impairment charges as a percentage of average lending reducing by
7 basis points to 0.60 per cent, partly reflecting our move to increase levels of secured lending.
“Income increased by 8 per cent to £1,319 million, reflecting strong growth in lending and
deposit balances.”
28 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
Asset Finance
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
Profit before tax
2007
£m
299
472
771
(483)
288
(228)
60
2006
£m
331
529
860
(508)
352
(239)
113
Profit before tax in Asset Finance decreased by 47 per cent to £60 million, largely reflecting continued tight credit criteria and a slowdown in demand in the
consumer lending portfolio which has led to a reduction in the level of new business underwritten. As a result, income decreased by £89 million, or 10 per cent.
Costs were 5 per cent lower and the impairment charge decreased by £11 million to £228 million, reflecting the recent tightening of credit criteria, improved
collections procedures and lower balances outstanding, which offset an increase in arrears. Conditions in the Motor Finance business remain challenging. New
business volumes have reduced, reflecting the marketwide slowdown in consumer demand, and we have sought to avoid the structural contraction in interest
margins. In Personal Finance, new business volumes have risen modestly in a fiercely competitive market. Our Contract Hire business, Autolease, has performed
well by continuing to leverage its strong market position and efficient operation.
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Lloyds TSB Group Annual Report and Accounts 2007 29
Divisional results
Central group items
Lloyds TSB Foundations
Funding cost of acquisitions less earnings on capital
Central costs and other unallocated items
Pension schemes related credit
Loss before tax
2007
£m
(37)
(378)
33
–
(382)
2006
£m
(37)
(378)
(37)
128
(324)
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 a dividend on their shareholdings. In 2007, £37 million was accrued for
payment to registered charities.
Following changes in age discrimination legislation in 2006, the Group ceased to augment the pension entitlement of employees taking early retirement; this
change reduced the Group’s defined benefit pension liability at 31 December 2006 by £129 million (£1 million of which was unrecognised) and resulted in a
one-off credit to the 2006 income statement of £128 million.
Volatility
Banking volatility
Since the introduction of IFRS in 2005, in order to provide a clearer view of the underlying performance of the business, the Group has separately disclosed
within Central group items the effects of marking-to-market derivatives held for risk management purposes. This amount, net of the effect of the Group’s IAS 39
compliant hedge accounting relationships, was previously disclosed as banking volatility.
The use of fair values in financial reporting is now more widespread and there is a better understanding of their effects; consequently, in line with evolving best
practice, the Group no longer considers it appropriate to disclose banking volatility separately. Divisions will continue to transfer, through the Group’s internal
transfer pricing arrangements, to Group Corporate Treasury (included in Central Group Items) the movements in the market value of hedging derivatives where
the impact is not locally managed.
Insurance volatility
The Group’s insurance businesses have liability products that are supported by substantial holdings of investments, including equities, property and fixed
interest investments, all of which have a volatile fair value. The value of the liabilities does not move exactly in line with changes in the fair value of the
investments, yet IFRS requires that the changes in both the value of the liabilities and investments be reflected within the income statement. As these investments
are substantial and movements in their fair value can have a significant impact on the profitability of the Insurance and Investments division, management
believes that it is appropriate to disclose the division’s results on the basis of an expected return in addition to the actual return. The difference between the
actual return on these investments and the expected return based upon economic assumptions made at the beginning of the year is included within
insurance volatility.
Changes in market variables also affect the realistic valuation of the guarantees and options embedded within products written in the Scottish Widows With
Profit Fund, the value of the in-force business and the value of shareholders’ funds. Fluctuations in these values caused by changes in market variables, including
market spreads reflecting credit risk premia, are also included within insurance volatility. These market credit spreads represent the gap between the yield on
corporate bonds and the yield on government bonds, and reflect the market’s assessment of credit risk. Changes in the credit spreads affect the value of the
in-force business asset in respect of the annuity portfolio.
The expected investment returns used to determine the normalised profit of the business, which are based on prevailing market rates and published research
into historic investment return differentials, are set out below:
Gilt yields (gross)
Equity returns (gross)
Dividend yield
Property return (gross)
Corporate bonds (gross)
2008
%
4.55
7.55
3.00
7.55
5.15
2007
%
4.62
7.62
3.00
7.62
5.22
2006
%
4.12
6.72
3.00
6.72
4.72
During 2007, profit before tax included negative insurance volatility of £267 million, being a credit of £7 million to net interest income and a charge of
£274 million to other income (2006: positive volatility of £84 million, being a credit of £2 million to net interest income and a credit of £82 million to other income).
The effect of widening credit risk spreads and falling gilt values more than offset the favourable impact of a modest increase in equity values and changes in
market consistent assumptions. During 2006 increases in equity values were partly offset by lower gilt values.
30 Lloyds TSB Group Annual Report and Accounts 2007
Divisional results
Policyholder interests volatility
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As a result of the requirement under IFRS to consolidate the Group’s life and pensions businesses on a line-by-line basis, the Group’s income statement includes
amounts attributable to policyholders which affect profit before tax; the most significant of these items is policyholder tax.
Under IFRS, tax on policyholder investment returns is required to be included in the Group’s tax charge rather than being offset against the related income, as
it is in actual distributions made to policyholders. The impact is, therefore, to either increase or decrease profit before tax with a corresponding change in the
tax charge. Other items classified within policyholder interests volatility include the effects of investment vehicles which are only majority owned by the long-term
assurance funds. In the case of these vehicles, the Group’s profit for the year includes the minorities’ share of the profits earned. As set out below these amounts
do not accrue to the equity holders, accordingly management believes a clearer representation of the underlying performance of the Group’s life and pensions
businesses is presented by excluding policyholder interests volatility.
Net interest income
Other income
Profit before tax
Taxation – policyholder
Minority interests
Profit attributable to equity shareholders
2007
£m
–
(233)
(233)
243
(10)
–
2006
£m
(33)
359
326
(222)
(104)
–
During 2007, profit before tax included negative policyholder interests volatility of £233 million, being a charge to other income (2006: positive volatility of
£326 million, being a charge of £33 million to net interest income and a credit of £359 million to other income). In 2007, substantial policyholder tax losses have
been generated as a result of a fall in property, gilt and bond values. These losses reduce future policyholder tax liabilities and have led to a policyholder tax
credit during the year. Profits were recognised in 2006 as a result of positive market movements combined with realised gains in the holdings in property
investment vehicles majority owned by the long-term assurance funds.
Regulation
In the UK and elsewhere, there is continuing political and regulatory scrutiny of financial services. On 6 November 2007 the Competition Commission published
its emerging thinking into the Payments Protection Inquiry and is expected to report by December 2008. The OFT is also carrying out a market study into personal
current account pricing alongside its investigation into certain current account charges which are also subject to a legal test case. The OFT is also investigating
interchange fees charged by some card networks in parallel with the European Commission’s own investigation into cross-border interchange fees. At the same
time regulators are considering the review of retail distribution and UK financial stability and depositor protection proposals. It is not presently possible to assess
the cost or income impact of these inquiries or any connected matters on the Group until the outcome is known.
In addition, a number of EU directives, including the Unfair Commercial Practices Directive and Payment Services Directive are currently being implemented in
the UK. The EU is also considering regulatory proposals for, inter alia, a Consumer Credit, Mortgage Credit, Single European Payments Area, Retail Financial
Services Review and capital adequacy requirements for insurance companies (Solvency II). In the US, a major focus of governmental policy relating to financial
institutions in recent years has been combating money laundering and terrorist financing and enforcing compliance with US economic sanctions, with serious
legal and reputational consequences for any failures arising in these areas.
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Lloyds TSB Group Annual Report and Accounts 2007 31
Our people
At Lloyds TSB, people are our most valuable resource. Managing our people
effectively is fundamental to the success of the business and achieving our
vision of being the best financial services organisation in the UK. Creating a
great place to work is a core priority of the people strategy which seeks to
enable Lloyds TSB to be recognised, both within the financial services sector,
but also more generally in the UK employment market, as the best company
to work for.
Reward and recognition
We believe an individual’s reward should reflect their whole contribution to
the Company’s achievements and take account of performance against
individual objectives; contribution in terms of knowledge, competencies and
skills and the level of stretch and challenge presented by objectives.
In addition it will reflect their potential to develop into more senior roles.
In creating a great place to work in this way, we believe we will attract
the highest performing people to join us and secure the motivation and
commitment of those who are the strongest performers and have the
highest potential to stay.
To achieve these goals we aim to create a high commitment, high
performance organisation. We are clear about what we expect from our
people. Our values guide us in all our dealings with colleagues, customers
and the wider community. We have nearly 70,000 people working for the
Company and whilst business units across the Group have developed values
specific to their business needs. They are based on the core Group values of:
• putting customers first;
• acting with integrity and respect;
• taking personal responsibility;
• working as a team.
Talent, recruitment and retention
One of the highest people priorities for our leaders is recruitment, retention
and development of talented people. Top performers are attracted to join
Lloyds TSB because of our reputation, strong brand and values; together
with top class reward and development. Last year, we successfully recruited
over 9,500 people from the external market.
It’s not just about bringing in new people. Developing existing employees
and succession planning are equally important to support our growth
strategy. We have strong succession and development plans for all our
senior leaders across the Group and we are retaining people for an
average tenure across our business of 13 years.
Alongside this we run a wide range of generalist and specialist
development programmes to support career progression into management.
In 2007 we recruited 106 people into our business specialist programmes
(A level entry), 88 people to graduate trainee programmes, offered
32 internships and 111 student placements. We are consistently identified
in The Times Top 100 organisations for graduate recruitment. We also ran
numerous programmes at more senior levels in management and
leadership to develop our pipeline of leaders for the future.
We actively track and manage retention of our highest performers, retaining
approximately 96 per cent of our top performers in 2007. In addition we
have robust systems for differentiating performance and the management
of under performance.
Performance management
The Group uses a balanced scorecard to measure and manage
employee performance. The scorecard takes into account the needs
of customers, employees and shareholders and measures individual
performance against a range of factors, including financial success,
contribution to the long term growth of the business, customer service,
risk management and personal development.
Meeting our customers’ needs is key to our business strategy. Our balanced
scorecard aims to show employees how their actions impact their
colleagues and customers and how this, in turn, translates into our overall
performance. It ensures that people understand how their personal
objectives relate to our strategy, and how their performance contributes
to the Group’s performance.
All employees receive formal reviews and feedback on performance at least
twice a year.
32 Lloyds TSB Group Annual Report and Accounts 2007
Total reward
As well as our competitive salary packages we differentiate our reward
through bonus schemes, and various reward and incentive programmes.
This helps drive a high commitment, high performance culture where
individuals strive for stretching goals.
We also offer an award winning flexible benefits package where eligible
employees receive an additional 4 per cent of their salary each month to
select from a range of benefits. Some 67 per cent of our employees
currently participate in this scheme choosing from a range of non-cash
alternatives including: medical and life assurance, dental plan, additional
pension, holiday trading, education vouchers, childcare vouchers and
matched learning.
In addition all eligible employees are entitled to participate in our various
employee share plans and receive free shares which are awarded annually.
For 2007 this award was 3 per cent of salary. 98 per cent of Lloyds TSB
employees held free shares as at the end of 2007.
Recognition
Recognition and reward schemes are widely used throughout the
organisation to celebrate team and individual achievement. While our
emphasis is on providing recognition through line management, we also
formally recognise those who have exceeded expectations and pushed
boundaries in areas such as colleague support, customer service and
building community profile.
Learning and development
We remain committed to investing in our people through providing efficient
and effective learning and development that helps our people to deliver
great service and achieve great results. Our focus remains on providing our
people with the knowledge and skills they need for their jobs today while
continuing to develop the capabilities we will need to be successful in
the future.
Creating an enabling environment in which our people feel they have the
right tools to develop their capabilities, perform effectively and drive
business performance is key. Our learning framework enables employees to
develop a clear learning plan that reflects their specific learning and future
career needs.
University for Lloyds TSB
The University for Lloyds TSB, (UfLTSB), one of the largest corporate
universities in Europe, delivers learning programmes through a range of
media. This includes on-line knowledge modules and face to face
workshops to support skills development.
as a primary portal for learning across the Group, received over 3 million
visits and hosted almost 300,000 on line assessments.
In 2007 the website, which acts
Overall investment in people development has risen by 10 per cent in 2007,
and we now deliver an average of 2.3 days formal learning per full time
employee (FTE), an increase of 24 per cent on 2006. We continue to provide
our people with a range of opportunities and have seen formal learning
delivery increase during 2007 to 939,000 hours; an increase of 37 per cent
over 2006.
In addition to developing programmes internally the UfLTSB works with
external companies to develop and deliver learning. Some programmes may
be certificated by external organisations providing employees with
performance benchmarks and portable qualifications. We also support a
range of business focused and developmental professional qualifications; for
example over 1,800 people received financial study support during the year.
Lloyds TSB remains committed to the principles of Investors in People, a
standard for ensuring employees have the opportunity to reach their
full potential.
Training days
Number of days formal learning per FTE
2007
2006
2.3
1.8
Our people
Employee engagement
Lloyds TSB has inspirational leaders who provide a clear direction for the
organisation through our strategy and vision and values framework. The
success of our vision is in its simplicity, clarity and re-enforcement in what
our leaders do. We ensure our people are actively engaged through
communication and participation in regular employee engagement surveys.
Communications
To support this, the Group invests in a range of internal media, ensuring our
people are informed and involved. These include a company intranet, print
publications and increasingly e-zines and social networking technology. The
essential communication relationship between managers and their teams is
also supported with bespoke communications training.
Employee engagement survey
Equality and diversity
Equality and diversity is not just about complying with equality legislation.
We believe that it is vital for achieving competitive advantage and in a tight
employment market, we need to attract and retain talented people from all
the UK’s diverse communities. We need to be close to our customers and
provide them with the right products and services. By attracting and
retaining a diverse workforce, we will better understand the needs of all
our customers and be able to build lasting relationships.
Over the last few years we have been working to increase the number
of women and ethnic minority employees in management and senior
management positions across the organisation. At the end of 2007, there
were four women on our group executive committee, one of the highest
numbers for a FTSE 100 company, and 22 per cent of our senior managers
were women.
Every quarter a comprehensive confidential employee survey is undertaken
on-line to gauge employees viewpoints on key engagement issues. Our
group chief executive personally agrees the content of our employee
engagement survey, demonstrating our commitment and investment in
understanding our employee’s view. Over the last three years the overall
employee engagement index has increased to 75.3 per cent and response
rates have been consistently above 70 per cent.
We continue to make significant progress with our disability and sexual
orientation programmes. In 2007 our disability programme was ranked
first out of 116 organisations by the Employers’ Forum on Disability and
we maintained our sixth place ranking in Stonewall’s† Index of the
100 best employers of lesbian, gay and bisexual people.
† Stonewall is a campaigning organisation that works to achieve equality
and justice for lesbians, gay men and bisexual people.
Engagement index
Diversity
Employee engagement index*
2007
75.3
2006
74.5
2005
73.3
* The employee engagement index is based on the results of a survey
conducted quarterly, asking Lloyds TSB employees a series of questions
which reflect both the drivers and outcomes of engagement. The data
captures the percentage of total responses received which were favourable
for each question, combined into a simple average overall score.
Women managers
Women senior managers
Ethnic minority managers††
Ethnic minority senior managers††
Disabled employees††
2007
2006
2005
40.1%
38.5%
38.4%
21.7%
20.9%
20.3%
4.9%
2.5%
2%
4.3%
1.9%
1.5%
0.2%
4.1%
1.8%
1.5%
0.2%
*
Lesbian, gay and bisexual (LGB) employees††
0.8%
†† Shows percentage of whole workforce although not all employees have
supplied information on race, disability or sexual orientation.
Work environment
Lloyds TSB Group is committed to making sure the work place is maintained
to the highest standards of health, safety and fire protection. Our objective is
to provide great facilities and a safe environment for everyone, employees
and customers alike, in all of our business locations.
Flexible working is increasingly important in the competitive workplace and
we have created a balanced environment where we offer a multitude of
flexible working practices including:
• reduced hours;
• variable hours;
• job sharing;
• compressed hours;
• term-time working;
• tele-working.
We believe that by treating our employees as adults and placing value on
their contribution and delivery rather than working hours will create a high
commitment high performance organisation.
Lloyds TSB also has a whistle blowing policy setting out the procedure by
which people can raise, in confidence, any matters of concern. A whistle
blowing line enables employees to raise any concerns and for such matters
to be independently investigated.
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Lloyds TSB Group Annual Report and Accounts 2007 33
Corporate responsibility
Supporting business strategy
In an increasingly competitive market where customers are able to exercise
choice among providers, we believe that shareholder value creation is
closely linked to customer value creation. It is only by meeting our
customers’ needs that we will win the right to a bigger share of their total
financial services spend.
We believe that corporate responsibility, built around the creation of employee
motivation, customer satisfaction and brand loyalty, has a major part to play
in supporting our business strategy. Our commitment to corporate responsibility
helps promote trust in the Lloyds TSB brand and reinforces customer loyalty
and advocacy. This supports our customer-orientated strategy where we look
to develop our business based on deep relationships, as opposed to a
product-led approach favoured by others.
Lloyds TSB is rooted in local communities throughout the UK and we take
our responsibilities to those communities very seriously. By investing in the
communities where we operate we not only create economic value but also
make a positive social contribution. Through the Lloyds TSB Foundations,
one per cent of the Group’s pre-tax profits, averaged over three years, is
distributed to local charities.
Our corporate vision is to make Lloyds TSB the best financial services company
in the UK. Our corporate responsibility strategy is to support our corporate
vision by helping to build a great place for our people to work, a great place
for our customers to do business, and generating great returns for our
shareholders. In so-doing, we create value for all our stakeholders through:
• more effective risk management;
• increased employee engagement;
• increased customer satisfaction;
• delivering competitive advantage through better corporate responsibility
management.
All employees have a balanced scorecard of objectives that takes account
of the needs of customers, employees and shareholders, rather than pure
financial measures.
Managing corporate responsibility
The board reviews overall corporate responsibility performance annually
and the chairman receives a quarterly progress report. Individual issues are
subject to board discussion throughout the year. Our corporate responsibility
steering group is chaired by the deputy group chief executive and
comprises senior executives from all business divisions and relevant group
functions. The steering group meets quarterly to recommend strategy and
provide direction.
We have adopted the European Foundation of Quality Management’s
Corporate Responsibility Framework to help us align corporate responsibility
with business strategy and also with individual balanced scorecard
priorities. As part of the process we have a network of approximately
60 representatives across all business divisions, through whom we conduct
an annual self assessment of our performance with independent oversight
and assurance. This allows us to identify strengths and areas for
improvement and to prioritise actions and objectives. It also provides
a benchmark against which we can compare our performance both
internally and externally.
The board is satisfied that the systems in place to manage corporate
responsibility risks are effective and that the relevant risks have been
assessed during 2007 and managed in compliance with relevant policies
and procedures.
Our approach to corporate responsibility focuses on five areas; our people
(see pages 32-33), our customers, our suppliers, our community and
the environment.
Our customers
We want to build a great organisation, which is recognised for operating to
high standards and is built on strong customer franchises. Our ultimate goal
is to become Britain’s most recommended bank. We have put in place the
essential building blocks; providing excellent customer service from
well-trained staff; appropriate products that meet real needs; treating
customers fairly at all times; and following ethical business practices to
build a sustainable, profitable business.
34 Lloyds TSB Group Annual Report and Accounts 2007
Responsible lending
We are committed to being a responsible lender. It is in our interest to help
customers borrow only those amounts they can manage to repay. We have
a responsible lending programme with internal management reporting and
accountability. Our employees are trained to offer the necessary advice and
support to help customers manage their borrowing. Our Customer Support
Unit provides help for customers who are in financial difficulties to find an
appropriate solution through effective budgeting or rescheduling their
borrowing. We also support independent money advice networks including
the Money Advice Trust and the Consumer Credit Counselling Service.
Payments totalling more than £3.4 million were made in 2007.
Complaints resolved within 8 Weeks
2007
97.0%
2006
94.8%
2005
86.0%
Combating financial crime
We take protecting our customers and their assets extremely seriously and
continue to invest in systems and activities to deter, detect and prevent
fraud. These include transaction monitoring tools to identify suspicious
account activity and the introduction of verification technology on our
counters to secure withdrawals. We also work to ensure customers are
aware of how to protect themselves including dedicating a section of our
website to information on common internet fraud types and an annual
campaign to raise awareness of the threat of identity theft.
Financial inclusion
We continue to develop financial services especially tailored to tackle the
problem of financial exclusion. These include basic bank accounts, support for
community credit unions and other community finance initiatives and, loan
and venture capital funds, which offer loans to individuals and businesses
in some of the most deprived areas in the UK. Lloyds TSB currently has
£14 million invested in the community finance sector in addition to its normal
commercial lending to small businesses in these areas. Our alliance with the
Post Office allows our customers access to the UK network of post offices as
well as over 2,000 of our own branches and over 4,100 free ATMs. At the end
of 2007 we had over 470,000 basic bank accounts.
Lloyds TSB welcomes and fully supports the Financial Services Authority’s
initiatives to increase Financial Capability in the UK. We have seconded a
Senior Executive to develop, launch and manage the financial capability in
the workplace workstream of the FSA Strategy. Since launching 18 months
ago, the team have provided educational material and training to over
1.2 million employees throughout the UK, and are well on track to reach
the target of 4 million, by 2011. Feedback from all parties has been very
encouraging and is improving these employees’ financial capability.
Customer satisfaction
We measure our customers’ satisfaction with the service they receive via
monthly surveys and use the results to calculate our CARE Index which is
based on customer understanding, accessibility, responsibility and expertise.
We seek to address customer complaints as quickly as prudent while
ensuring appropriate standards of investigation and communication
are maintained.
Customer service index
2007
70.5%
2006
69.7%
2005
68.0%
From 2008 we will be introducing a new measure of customer advocacy,
the Net Promoter Score, which measures the likelihood of customers
recommending Lloyds TSB to friends, family and colleagues.
In a poll of finance directors across the UK, Lloyds TSB Corporate was voted
‘Bank of the Year’ for the third year running at the Real Finance/CBI FDs’
Excellence Awards, in recognition of our quality of service and
understanding of our customers’ businesses. Lloyds TSB was also voted the
Reader’s Digest most trusted bank or building society for the seventh
successive year in 2007.
Corporate responsibility
Our suppliers
Each year we buy around £2 billion worth of goods and services. Our
suppliers are important to us and we want to ensure that we treat them
fairly and pay them on time. Our supplier relationships are governed by a
strict Code of Purchasing Ethics that defines the way we do business. We
also have an established supplier review process that allows us to assess
our suppliers’ social, ethical and environmental performance as part of the
tendering process.
We are currently working with a number of other financial services
companies to develop an industry-wide corporate responsibility
questionnaire, which will include new questions on carbon management
and diversity. The new questionnaire will be available on-line in 2008 and
will benefit suppliers who will only have to complete one questionnaire
for all participating financial services companies, as well as benefiting
Lloyds TSB by providing comparable information across different suppliers.
Payment of suppliers
2007
2006
2005
2004
Number of supplier
payments
320,579
344,422
379,613
360,257
Value
£2.20 billion
£2.29 billion
£2.16 billion
£2.20 billion
Average time to pay
28.78 days
29.72 days
27.01 days
28.02 days
Number/amount of
compensation
payments
No payments
for late
settlement
No payments
for late
settlement
No payments
for late
settlement
1 payment
totalling £25 for
late settlement
Our community
Continuing to grow a successful business is the best way for Lloyds TSB to
create value for all its stakeholders and contribute to the wider economy.
We are a major employer with nearly 70,000 employees. In 2007, salaries,
national insurance, pension contributions and other staff costs totalled over
£2.90 billion. £0.86 billion of corporation tax was paid to governments and
£1.96 billion was distributed to shareholders in the form of dividends.
In addition to our financial contribution we recognise that it is in our
long-term interest to help improve the social and commercial fabric of
local communities where we operate. That is why we have one of the
largest community investment programmes in the UK.
Lloyds TSB Foundations
The majority of Lloyds TSB’s charitable giving is channelled through the four
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.
Through their shares in the Lloyds TSB Group, 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. In 2007 we gave
£37 million to support their work and a further £37 million will be donated
in 2008 bringing our total contributions since the Lloyds TSB merger to over
£360 million, making Lloyds TSB one of the largest charitable donors in the UK.
The Foundations recognise that their success as community and local
funders depends on maintaining a presence in and actively engaging with
communities. The England and Wales Foundation, for example, remains
one of the few grant-makers with a significant regional presence and its
regional structure enables the Foundation to respond directly and effectively
to local needs.
Foundation funding supports charities working to meet social and
community needs. The main grants programmes are designed to address
essential community needs and in particular, to support small under-funded
charities. 41 per cent of the charities supported by the England and Wales
Foundation in 2007 had a total income of £100,000 or less and 88 per cent
had an income of £500,000 or less.
Employee volunteering and fundraising
In addition to the Foundations’ support for local community causes,
thousands of our employees volunteer to help in their communities, raise
funds for the Group’s Charity of the Year or make direct donations to charity
using the UK’s Give As You Earn system. In 2007, the Foundations provided
matched funding for over 33,000 hours of time volunteered by Lloyds TSB
employees in the community and also matched over £768,000 funds raised
by employees for charities.
The Charity of the Year is chosen in an open ballot of staff. A team of Charity
Champions across all parts of the Group leads the fundraising, inspiring
and motivating their colleagues to organise and take part in events, sell pin
badges and find new and innovative ways of raising money. In 2006 our
staff raised over £2 million for Breast Cancer Care. Barnardo’s is our current
charity partner and to date almost £1 million has been raised with
fundraising initiatives continuing into 2008.
The environment
Lloyds TSB first introduced a formal environmental policy in 1996 and was
also one of the first UK banks to develop an environmental risk assessment
system for all of our business lending.
Climate change
The UK Government has stated its belief that climate change is the greatest
long-term challenge facing the world today. Measures to tackle climate
change will have potential implications for regulation, taxation and public
policy and will carry both risks and opportunities for companies and
the public.
While our direct carbon intensity is relatively low compared to other industry
sectors, we still need to fully understand the potential financial impact of
climate change on others that we may lend to or invest in, so that we can
manage the risks and identify business opportunities.
During 2007 we consulted with senior management across all Lloyds
TSB Group businesses to identify key climate-related risks and opportunities
and to develop a programme to engage our employees and customers on
the environment. Following the consultation, we published a target to
reduce our CO2 emissions by 30 per cent by 2012, based on 2002 levels.
This is a stretching target and to achieve it we will need to manage our
energy consumption and efficiency together with our business travel.
We have established a carbon reduction committee (reporting to the
corporate responsibility steering group) to measure, monitor and manage
progress against the target. Environmental impacts associated with major
projects are calculated and that has helped us to identify a number of
property and IT related projects that will begin to deliver significant CO2
reductions from 2008. Over time, many of these will also deliver significant
cost savings.
Of course, we cannot eliminate all CO2 emissions so in 2007 we also
committed to become carbon neutral by offsetting those emissions that we
cannot reduce. We can confirm that in 2007 we purchased carbon credits
through our carbon trading desk to achieve carbon neutrality.
Since 2006 we have purchased part of our electricity from combined heat
and power (CHP) sources, which have a lower carbon footprint than
standard grid electricity. Some contracts for green electricity and CHP will
expire before 2012 so progress towards the long-term target may fluctuate.
We will therefore continue to concentrate on reducing our energy
consumption and unnecessary business travel. The CHP figures for 2006
were not included in our 2006 report as we were still awaiting confirmation
of their treatment from DEFRA at the time of reporting.
Our staff have responded enthusiastically to the challenge and are keen to
be involved in environmental initiatives. We are introducing a Group wide
sustainability network in 2008 for employees at all levels to meet, share
experiences and ideas, and to help fulfil our commitment to reducing our
carbon footprint.
Greenhouse gas emissions
Tonnes CO2
Property
2007
2006*
2005
2002
Baseline
180,526
181,086
177,047
198,950
Property renewable
(18,164)
(18,944)
(14,606)
n/a
Travel
Total
30,474
29,705
29,540
26,333
192,836
191,847
191,981
225,283
Combined heat and power
(31,635)
(30,945)
n/a
n/a
Net total
161,201
160,902
191,981
225,283
* 2006 travel figures have been restated to reflect the fact that C&G travel
data is now included and to provide a more accurate comparison between
2006 and 2007.
More information on all the above issues is available in the Group’s corporate
responsibility report and there are details on how to obtain a copy on
page 159.
Lloyds TSB Group Annual Report and Accounts 2007 35
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Risk management
Audited information
Risk as a strategic differentiator
The Group seeks to optimise performance by allowing divisions and business units to operate within capital and risk parameters and the Group’s policy
framework. They must do so in a way which is consistent with realising the Group’s strategy and meets agreed business performance targets. The Group’s
approach to risk management seeks to ensure the business remains accountable for risk whilst also ensuring there is effective independent oversight.
During 2007, we have continued to focus on enhancing our capabilities in providing both qualitative and quantitative data to the board on risks associated with
strategic objectives and facilitating more informed and effective decision making. The Group‘s ability to take risks which are well understood, consistent
with our strategy and plans and appropriately remunerated, is a key driver of shareholder return.
The maintenance of a strong control framework remains a priority and is the foundation for the delivery of effective risk management. Risk analysis and reporting
capabilities support the identification of opportunities as well as risks and it provides an aggregate view of the overall risk portfolio. Responsibilities and
timescales at group and divisional level are clearly assigned for risk mitigation strategies. Risk continues to be a key component of routine management
information reporting and is embedded within staff objectives via balanced scorecards.
Risk governance structures
The Group maintains a risk governance structure that strengthens risk evaluation and management, whilst also positioning the Group to manage the changing
regulatory environment in an efficient and effective manner.
Lloyds TSB Group Board
1st line of Defence
Business Management
2nd line of Defence
Group and Divisional Oversight Functions
3rd line of Defence
Group Audit
Nomination
Committee
Remuneration
Committee
Risk Oversight
Committee
Group Audit
Committee
Group Executive
Committee
Group Chief
Executive
Group Asset and
Liability Committee
Group Business
Risk Committee
Deputy Group
Chief Executive
Group Executive
Director Insurance
and Investments
Group Executive
Director UK Retail
Banking
Group Executive
Director Wholesale
and International
Banking
Director of Group IT
and Operations
Group Finance
Director
Chief Risk
Director
Director of
Group Audit
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Group Risk
BU Risk
BU Risk
BU Risk
BU Risk
BU Risk
Governance
Committees
Oversight
Business
Functions
Functional reporting line to support the committees
Reporting line
Functional reporting line from BU risk officer or function to divisional risk officers
Board and committees
The board, assisted by its committees, the risk oversight committee, the group executive committee, and the group audit committee, approves the Group’s
overall risk management framework. The board also reviews the Group’s aggregate risk exposures and concentrations of risk to seek to ensure that these are
consistent with the board’s appetite for risk. The role of the board, audit committee and risk oversight committee are shown in the corporate governance section
on pages 61 and 62, and further key risk oversight roles are described on the next page.
The group executive committee, assisted by the group business risk committee and the group asset and liability committee, supports the group chief executive
in ensuring the effectiveness of the Group’s risk management framework and the clear articulation of the Group’s risk policies, whilst also reviewing the Group’s
aggregate risk exposures and concentrations of risk. The group executive committee’s duties are described in greater detail on page 62. The group executive
committee members are also members of the group business risk committee which is chaired by the group chief executive. The group asset and liability
committee, which is chaired by the deputy group chief executive, includes members of the group executive committee as well as the heads of products and
markets and group market risk. The group business risk committee is supported by the following:
– Compliance and Operational Risk Committee
– Group Credit Risk Committee
– Group Change Management Committee
36 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Audited information
These committees are further supported by a number of specialist risk committees covering the Group’s risk types in detail.
Group executive directors have primary responsibility for measuring, monitoring and controlling risks within their areas of accountability and are required 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 and group risk. Compliance with policies and parameters is overseen by the risk oversight committee, the group business risk committee,
the group asset and liability committee, group risk and the divisional risk officers.
Reflecting the importance the Group places on risk management, risk is one of the five principal criteria that it includes within 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.
Risk management oversight
The chief risk director, a member of the group executive committee and reporting directly to the group chief executive, oversees and promotes the development
and implementation of a consistent group wide risk management framework. The chief risk director, supported by group risk, provides objective challenge to
the Group’s senior management.
Divisional risk officers provide oversight of risk management activity within each of the Group’s divisions. Reporting directly to the group executive directors
responsible for the divisions and the chief risk director, their day-to-day contact with business management, business operations and risk initiatives seeks to
provide an effective risk oversight mechanism.
The director of group audit provides the required independent assurance to the audit committee and the board that risks within the Group are recognised,
monitored and managed within acceptable parameters. Group audit is fully independent of group risk, seeking to ensure objective challenge to the
effectiveness of the risk governance framework.
Business risk management
Line management are directly accountable for the management of risks arising from the Group’s business. A key objective is to ensure that business decisions
strike an appropriate balance between risk and reward, consistent with the Group’s risk appetite. The senior executive team and board receive regular briefings
and guidance from the chief risk director to ensure awareness of the overarching risk management framework and a clear understanding of their
accountabilities for risk and internal control.
All business units, divisions and group functions complete a control self-assessment annually (described on page 63), reviewing the effectiveness of their internal
controls and putting in place enhancements where appropriate. Managing directors and group executive directors certify the accuracy of their assessment.
Business risk management forms part of a tiered risk management model, as shown on page 36 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.
This approach seeks to provide the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are
aligned with the risks faced by its businesses. It also facilitates effective communication on these matters across the Group.
Risk management framework
The Group uses an enterprise-wide risk management framework for the identification, assessment, measurement and management of risk, designed to meet
its customers’ needs. It seeks to maximise value for shareholders over time by aligning risk management with the corporate strategy, assessing the impact of
emerging risks from legislation, new technologies or the market, and developing risk tolerances and mitigating strategies. The framework strengthens the
Group’s ability to identify and assess risks; aggregate group wide 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. The principal elements of the risk
management framework are shown below:
Lloyds TSB Group business strategy and objectives
Risk
Identification
Policy framework and accountabilities
Risk
Reporting
Control
Activities
Risk & Control
Assessment
Risk
Measurement
Independent
Reviews
Monitoring
Action plans and tracking
People
Systems and tools
The risk management framework above comprises 10 interdependent activities which map to the components of the internal control-integrated framework
issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO).
Lloyds TSB Group business strategy and the desired outcomes for our key stakeholders are used to determine the Group’s high level risk principles and risk
appetite measures and metrics for the primary risk types. A key focus in 2007 has been to develop earnings volatility measures to complement existing capital
measures for risk appetite. Risk appetite is reviewed annually in line with the overall Group’s appetite and the reward potential of the relevant exposures. Risk
appetite is defined, cascaded and monitored.
Group, divisions and business units ensure that there is a process for risk identification of the exposure to each risk type.
Lloyds TSB Group Annual Report and Accounts 2007 37
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Risk management
Audited information
The risk appetite is proposed by the group chief executive and reviewed by various governance bodies including the group executive committee and the risk
oversight committee. Responsibility for the approval of risk appetite rests with the board. The approved high level appetite and limits are delegated to individual
group executive directors by the group chief executive.
The more detailed articulation of the risk principles and distribution of the risk appetite measures amongst the divisions and businesses are subsequently
determined by the group chief executive, through consultation with the group business risk committee.
A key component of the risk management framework is the policy framework and accountabilities. The main policy levels are identified below:
• Principles – high level principles for the six primary risk drivers
• High level group policy – policy for the main risk types aligned to the risk drivers
• Detailed group policy – detailed policy that applies across the Group
• Divisional policy – local policy that specifically applies to a division
• Business unit policy – local policy that specifically applies to a business unit
Lloyds TSB Group – Strategic Vision
Group high level principles and policies
Business
Risk
Credit
Risk
Market
Risk
Insurance
Risk
Operational
Risk
Financial
Soundness
Aggregate appetite by primary driver
Group, divisions and business units
Detailed policy and authorities – including metrics and qualitative measures
Divisional and business unit policy is only produced by exception and is not necessary unless there is a specific area for which a particular division or business
unit requires a greater level of detail than is appropriate for group level policy. The governance arrangements for development of, and compliance with, group,
divisional and business unit policy and the associated accountabilities are clearly outlined. All staff are expected to be aware of the policies and procedures
which apply to them and their work and to observe the relevant policies and procedures. Line management in each business area has primary responsibility
for ensuring that group policies and the relevant local policies and procedures are known and observed by all staff within that area.
Group and divisional risk functions have responsibility for overseeing effective implementation of policy. Group audit provides independent assurance to the
board about the effectiveness of the Group’s control framework and adherence to policy. Policies are reviewed at least annually to seek to ensure they remain
fit for purpose.
Proportionate control activity strategy is put in place to design mitigating controls, to transfer risk where appropriate and to ensure executives are content with
the residual level of risk accepted.
Risk and control assessments are undertaken to assess the effectiveness of current mitigations and whether risks taken are consistent with the Group’s risk
appetite (this includes the annual control self assessment exercise).
The impact of risks and issues (including financial, reputational and regulatory capital) are determined through effective risk measurement including modelling
and stress testing.
The outcomes of independent reviews (including internal and external audit and regulatory reviews) are integrated into risk management activities and
action plans.
Risk reporting is standardised through the use of consistent definitions when reporting, to enable risk aggregation. Divisions monitor their risk levels against
their risk appetite seeking to ensure effective mitigating action has been taken where appropriate. Divisional risk reports are reviewed by divisional executive
committees to ensure that respective senior management are satisfied with the overall risk profile, risk accountabilities and progress on any necessary
mitigating actions. Reporting, including that of performance against relevant limits or policies, is in place at a detailed level appropriate to the exposures
concerned and regular information is provided to group risk for review and aggregate reporting. Any significant issues identified in the monitoring process are
appropriately reported, and an escalation process is in place to report significant losses to appropriate levels of management. Group risk reports on risk
exposures and material issues quarterly to the group asset and liability committee, group business risk committee, group executive committee, risk oversight
committee and the board.
At group level a consolidated risk report is produced which is reviewed and debated by the group business risk committee, group executive committee, risk
oversight committee and the board to ensure senior management and the board are satisfied with the overall risk profile, risk accountabilities and mitigating
actions. During the year the Group’s consolidated risk report was further enhanced to support the ongoing identification, control and effective management
of risk.
38 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Risk drivers
Audited information
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The Group’s risk language is designed to capture the Group’s principal risks referred to as the ‘primary risk drivers’. A description of each risk, including definition,
appetite, control and exposures is included in the detail to this report. These are further broken down into 25 more granular risk types to enable more detailed
review and facilitate appropriate reporting and monitoring, as set out below.
Through the Group’s risk management processes these risks are assessed on an ongoing basis to ensure optimisation of risk and reward and that, where
required, appropriate mitigation is in place. Both quantitative and qualitative factors are considered in assessing the Group’s current and potential future risks.
Primary risk drivers
Business
Risk
Credit
Risk
Market
Risk
Insurance
Risk
Operational
Risk
Financial
Soundness
Detailed risk types
Strategy setting
Execution of
strategy
Retail
Wholesale
Interest rate
Foreign
exchange
Equity
Credit spread
Mortality
Longevity
Morbidity
Persistency
Legal and
regulatory
Customer
treatment
Products and
services
Process and
resource
Theft, fraud
and other
criminal acts
People
Change
Governance
Liquidity
and funding
Capital
Financial and
prudential
regulatory
reporting
Disclosure
Tax
Principal risks
At present the most significant risks faced by the Group are:
• Legal and regulatory risk, reflecting the legal and regulatory environment in which the Group operates and the volume and pace of change from within the
UK and the rest of the world. This impacts the Group, both operationally in terms of cost of compliance with uncertainty about legal and regulatory
expectations, and strategically through pressure on key earnings streams. The latter could potentially result in changes to business and pricing models,
particularly in the UK retail market. Our business planning processes continue to reflect change to the legal and regulatory environment. Major current legal
and regulatory reviews and proceedings are described on page 31. In addition, the Group faces risk where legal proceedings are brought against it.
Regardless of whether such claims have merit, the outcome of legal proceedings is inherently uncertain and could result in financial loss.
• Credit risk, reflecting the risk inherent in our lending businesses. In unsecured retail credit, lending criteria and limits have been tightened further during the
year and collections and recoveries processes enhanced. Wholesale credit markets remain volatile and dislocated. This market dislocation is beginning to
impact the real economy, where fears of a credit crunch persist. This could result in a significant worsening of the business environment.
• Market risk arising in Insurance and Investments division and the Group’s pension schemes, reflecting the exposure to a fall in equity markets and the
consequent effect upon the value of assets held by either the insurance businesses or in the pension schemes. The value of the pension schemes liabilities
is also exposed to changes in real interest rates. Both of these market risks could impact earnings adversely.
• Insurance risk arising in Insurance and Investments division and the Group’s pension schemes reflecting the exposure to increasing longevity of annuitants
and pensioners.
The current dislocation in global capital markets has been the most severe examination of the banking system’s capacity to absorb sudden significant changes
in the funding and liquidity environment in recent history and individual institutions have faced varying degrees of stress. Should the Group be unable to continue
to source a sustainable funding profile which can absorb these sudden shocks, it could impact its ability to fund its financial obligations or could result in securing
them at an excessive cost. Throughout the market dislocation, the Group has maintained a strong liquidity position based on its significant retail and corporate
deposit base.
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Lloyds TSB Group Annual Report and Accounts 2007 39
Risk management
Business risk
Definition
Audited information
Business risk is defined as the risk to economic profit in the Group’s budget and over the medium term plan arising from a sub optimal business strategy, or
the sub optimal implementation of the plan as agreed by the board of directors. In assessing business risk consideration is given to internal and external factors.
Risk appetite
Business risk appetite is encapsulated in the Group’s budget and medium-term plan, which are sanctioned by the board on an annual basis. Divisions and
business units subsequently align their plans to the Group’s overall business risk appetite.
Exposures
The Group’s portfolio of businesses exposes it to a number of internal and external factors:
• internal factors: resource capability and availability, customer treatment, service level agreements, products and funding and the risk appetite of other risk
categories; and
• external factors: economic, technological, political, social and ethical, environmental, legal and regulatory, market expectations, reputation and
competitive behaviour.
Measurement
An annual business planning process is conducted at group and business unit level which includes a quantitative and qualitative assessment of the risks that
could impact the Group’s plans. Within the planning round, the Group conducts both scenario analysis and stress tests to assess risks to future earning streams.
Over the last few years, the Group has made significant progress with embedding stress testing and scenario analysis into its risk management practice with
the dual objectives of adding value to the business whilst also meeting regulatory requirements. The Group assesses a wide array of scenarios including
economic recessions, regulatory action scenarios, pandemics and scenarios specific to the operations of each part of the business.
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 on a consistent basis.
Mitigation
As part of the annual business planning process, the Group develops a set of management actions to prevent or mitigate the impact on earnings in the event
that business risks materialise. Additionally, business risk monitoring, through regular reports and oversight, results in corrective actions to plans and reductions
in exposures where necessary.
Revenue and capital investment decisions require additional formal assessment and approval. Formal risk assessment is conducted as part of the financial
approval process. Significant mergers and acquisitions by business units 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 Group.
Monitoring
The Group’s strategy is 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 seek to ensure that business plans remain consistent with the Group’s strategy.
40 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Credit risk
Definition
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The risk of reductions in earnings and/or value, through financial or reputational loss, as a result of the failure of the party with whom we have contracted to
meet its obligations (both on and off balance sheet).
Risk appetite
Credit risk appetite is expressed both in terms of credit risk economic equity and in terms of the impact of credit risk on earnings volatility.
Credit risk appetite is described and reported through a suite of metrics derived from a combination of accounting and credit portfolio model parameters which
in turn use the various credit risk rating systems as inputs. These metrics are supplemented by a variety of policies, sector caps and limits to manage
concentration risk at an acceptable level.
Exposures
The principal sources of credit risk within the Group arise from loans and advances to retail customers, financial institutions and corporate clients. The credit risk
exposures of the Group are set out in note 47 to the financial statements.
In terms of loans and advances, credit risk arises both from amounts lent and commitments to extend credit to a customer as required. These commitments
can take the form of loans and overdrafts, or credit instruments such as guarantees and standby, documentary and commercial letters of credit. With respect
to commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of
loss is less than the total unused commitments, as most retail commitments to extend credit can be cancelled and the credit-worthiness of customers is
monitored continually. In addition, most wholesale commitments to extend credit are contingent upon customers maintaining specific credit standards.
Credit risk can also arise from debt securities, derivatives and foreign exchange activities. Note 16 to the financial statements shows the total notional principal
amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2007. The notional principal amount does
not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such
amounts are reflected in note 47 on page 136.
Credit risk exposures in the insurance businesses arise primarily from holding investments and from exposure to reinsurers.
Measurement
In measuring the credit risk of loans and advances to customers and to banks at a counterparty level, the Group reflects three components: (i) the ‘probability
of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and their likely future development, from which
the Group derives the ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’).
The Group assesses the probability of default of individual counterparties using internal rating models tailored to the various categories of counterparty. For its
retail lending, exposure at default and loss given default models are also in use. All rating models, which are authorised by executive management, comply
with the Group’s standard methodology. They have been developed internally and use statistical analysis, combined, where appropriate, with external data
and/or credit officer judgement. Each rating model is subject to a rigorous validation process, undertaken by independent risk teams, which includes
benchmarking to externally available data, where possible.
Each probability of default rating model segments counterparties into a number of rating grades, each representing a defined range of default probabilities.
The outputs of different rating approaches are also mapped on to either a retail or a wholesale master scale (Note 47 to the financial statements provides
an analysis of the portfolio). Exposures migrate between classifications if the assessment of the obligor probability of default changes, or, in the case of
mortgages, if the obligor probability of default changes or the assessment of loan-to-value changes.
The rating systems described above assess probability of default, exposure at default and loss given default, in order to derive an expected loss. In contrast,
impairment allowances are recognised for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective
evidence of impairment (see note 19 to the consolidated financial statements on page 104). Due to the different methodologies applied, the amount of incurred
credit losses provided for in the financial statements differs from the amount determined from the expected loss model that is used for internal operational
management and banking regulation purposes.
The Group’s debt securities holdings, which are the subject of external agency ratings, are marked to market and independently checked by the middle office
function within the products and markets business. Similarly, debt security investments within Scottish Widows are independently marked to market.
The Group also employs a statistically-based credit portfolio model, which models portfolio credit risk based on defaults and calculates the economic equity
employed and credit value at risk for each portfolio.
Mitigation
The Group uses a range of approaches to mitigate credit risk.
Internal control
• Credit principles and policy: Group risk sets out the group credit principles and policy according to which credit risk is managed, which in turn is the basis for
divisional and business unit credit policy. Principles and policy are reviewed regularly and any changes are subject to a review and approval process. Business
unit policy includes lending guidelines, which define the responsibilities of lending officers and provide a disciplined and focused benchmark for
credit decisions. Credit policy also specifies maximum holding period limits for the credit trading portfolios.
• Counterparty limits: Credit risk in wholesale portfolios is subject to individual credit assessments, which consider the strengths and weaknesses of individual
transactions and the balance of risk and reward. 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. The Group’s credit approval criteria for counterparty underwriting is the same as
that for assets intended to be held over the period to maturity.
• Credit scoring: In its principal retail portfolios, the Group uses statistically-based decisioning techniques (primarily credit scoring). Divisional risk departments
review scorecard effectiveness and approve changes, with material changes subject to group risk approval.
• 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: Credit risk management includes portfolio controls on certain industries, sectors and product lines that reflect risk appetite. Credit policy is
aligned to our risk appetite and restricts exposure to certain high risk and more vulnerable sectors. Note 18 to the accounts provides an analysis of loans and
advances to customers by industry (for wholesale) and product (for retail). Exposures are monitored to prevent excessive concentration of risk. These
Lloyds TSB Group Annual Report and Accounts 2007 41
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Risk management
Audited information
concentration risk controls are not necessarily in the form of a maximum limit on lending but may instead require new business in concentrated sectors to
fulfil additional hurdle requirements. Amongst these controls is a series of sector caps to manage residual value risk exposure, seeking to ensure an
acceptable distribution of risk. The Group’s large exposures are managed in accordance with regulatory reporting requirements.
• Stress testing and scenario analysis: The credit portfolio is also subjected to stress-testing and scenario analysis, to simulate outcomes and calculate their
associated impact. Events are modelled at a group wide level, at divisional and business unit level and by portfolio, for example, for a specific industry sector.
• Specialist units: Credit quality is maintained by specialist units providing, 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.
• Daily settlement limits: Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding
receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the
Group’s market transactions on any single day.
Collateral
The principal collateral types for loans and advances are:
• Mortgages over residential properties;
• Charges over business assets such as premises, inventory and accounts receivable;
• Charges over financial instruments such as debt securities and equities;
• Guarantees received from third parties.
The Group has implemented guidelines on the acceptability of specific classes of collateral. Collateral held as security for financial assets other than loans and
advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of
asset-backed securities and similar instruments, which are secured by portfolios of financial instruments. Collateral is generally not held against loans and
advances to financial institutions, except where securities are held as part of reverse repurchase or securities borrowing transactions or where a collateral
agreement has been entered into under a master netting agreement.
It is Group policy that collateral should always be realistically valued by an appropriately qualified source, independent of the customer, at the time of borrowing.
Collateral is reviewed on a regular basis in accordance with business unit credit policy, which will vary according to the type of lending and collateral involved.
In order to minimise the credit loss, the Group may seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant
individual loans and advances.
Master netting agreements
Where it is efficient and likely to be effective (generally with counterparties with which it undertakes a significant volume of transactions), the Group enters into
master netting agreements. Although master netting agreements do not generally result in an offset of balance sheet assets and liabilities, as transactions are
usually settled on a gross basis, they do reduce the credit risk to the extent that, if an event of default occurs, all amounts with the counterparty are terminated
and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially
within a short period since it is affected by each transaction subject to the agreement.
Derivatives
Credit risk exposure on individual derivative transactions is managed as part of overall lending limits with customers, together with potential exposures from
market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except where the Group requires margin
deposits from counterparties.
Other credit risk transfers
The Group also undertakes asset sales, securitisations and credit derivative-based transactions as a means of mitigating or reducing credit risk, taking into
account the nature of assets and the prevailing market conditions.
Monitoring
• Portfolio monitoring and reporting: In conjunction with group risk, businesses and divisions 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 senior management. Group risk in turn produces an aggregated review of credit risk
throughout the Group, including reports on significant credit exposures, which are presented to the group business risk committee.
• Risk assurance and oversight: Divisional and group level oversight teams monitor credit performance trends, review and challenge exceptions to planned
outcomes and test the adequacy of credit risk infrastructure and governance processes throughout the Group. This includes tracking portfolio performance
against an agreed set of key risk indicators. Risk assurance teams are engaged where appropriate to conduct further credit reviews if a need for closer scrutiny
is identified.
• Term to maturity: The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit
risk than shorter-term commitments.
42 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Market risk
Definition
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The risk of reductions in earnings and/or value, through financial or reputational loss, arising from unexpected changes in financial prices, including interest
rates, exchange rates and prices for bonds, commodities, equities, property and other instruments. It arises in all areas of the Group’s activities and is managed
by a variety of different techniques.
Risk appetite
Market risk appetite is defined as the quantum and composition of market risk that exists currently in the Group and the direction in which the Group wishes to
manage this.
This statement of the Group’s overall appetite for market risk is reviewed and approved annually by the board. The group chief executive allocates this risk
appetite across the Group. Individual members of the group executive committee ensure that market risk appetite is further delegated to an appropriate level
within their areas of responsibility.
Exposures
The Group’s banking activities expose it to the risk of adverse movements in interest rates, credit spreads, exchange rates and equity prices, with little or no
exposure to commodity risk.
Most of the Group’s trading activity is undertaken to meet the requirements of wholesale and retail customers for foreign exchange and interest rate products.
However, some interest rate and exchange rate positions are taken using derivatives and other on-balance sheet instruments with the objective of earning a
profit from favourable movements in market rates.
Market risk in the Group’s retail portfolios and in the Group’s capital and funding activities arises from the different repricing characteristics of the Group’s
non-trading assets and liabilities. Interest rate risk arises from the mismatch between interest rate insensitive liabilities and interest rate sensitive assets.
Foreign currency risk also arises from the Group’s investment in its overseas operations.
The Group’s insurance activities also expose it to market risk, encompassing interest rate, exchange rate, property and equity risk:
• The management of with-profits funds leads to assets and liabilities that are mismatched with the aim of generating a higher rate of return on assets 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
those assets.
• For other insurance liabilities the aim is to invest in assets such that the cash flows on investments will match those on the projected future liabilities. 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.
• Surplus assets are held primarily in three portfolios: the surplus in the non-profit 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.
The Group’s defined benefit pension schemes are exposed to significant risks from the constituent parts of their assets and from the present value of their
liabilities, primarily equity and real interest rate risk. For further information on pension scheme assets and liabilities please refer to page 116.
Measurement
The primary market risk measure used within the Group is the Value at Risk (VaR) methodology, which incorporates the volatility of relevant market prices and
the correlation of their movements. This is used for determining the Group’s overall market risk appetite and for the high level allocation of risk appetite across
the Group. Although an important measure of risk, VaR has limitations as a result of its use of historical data, assumed distribution, holding periods and
frequency of calculation. The use of confidence levels does not convey any information about potential loss when the confidence level is exceeded. VaR can
also be less well suited to non-linear positions, for example options. The Group recognises these limitations and supplements its use with a variety of other
techniques. These reflect the nature of the business activity, and include interest rate repricing gaps, open exchange positions and sensitivity analysis. Stress
testing and scenario analysis are also used in certain portfolios and at group level, to simulate extreme conditions to supplement these core measures.
Banking – trading and other financial assets at fair value through profit or loss
Based on the commonly used 95 per cent confidence level, assuming positions are held overnight and using observation periods of the preceding 300 business
days, the VaR for the years ended 31 December 2007 and 2006 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). VaR is calculated daily for trading and other fair valued portfolios in the products and markets business.
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 four 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.
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Total VaR
Close
£m
1.63
0.08
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4.21
5.92
31 December 2007
Average
£m
Maximum
£m
Minimum
£m
2.20
0.23
0.29
3.60
6.32
4.66
0.53
3.02
8.30
11.00
1.27
0.04
0.00
2.06
4.28
Close
£m
3.67
0.26
0.00
2.31
6.24
31 December 2006
Average
£m
Maximum
£m
Minimum
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2.47
0.31
0.00
1.52
4.30
4.71
0.72
0.00
2.46
6.30
0.61
0.04
0.00
0.00
0.89
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Lloyds TSB Group Annual Report and Accounts 2007 43
Risk management
Banking – non-trading
Audited information
The estimated impact of an immediate 200 basis point increase in interest rates on economic value for the years ended 31 December 2007 and 2006 is shown
below. Economic value is defined as the present value of the non-trading portfolios concerned. Impacts have only been shown in one direction but can be
assumed to be reasonably symmetrical. No currency breakdown has been provided due to the relatively low overall sensitivity. These calculations are made
monthly using assumptions regarding the maturity of interest rate insensitive assets and liabilities. The portfolio is updated monthly to reflect any changes in
the relationship between customer behaviour and the level of interest rates. This non-trading disclosure is now value based rather than income based (as in 2006)
in line with market risk reporting used internally.
Internal reporting shows this sensitivity as a percentage of the Group’s regulatory capital base, and as at December 2007 the relevant percentage was 0.4 per cent
(2006 2.9 per cent). The sensitivity has fallen as a result of changes to balance sheet management strategy. This is a risk based disclosure and the amounts below
would be amortised in the income statement over the duration of the portfolio.
Reduction in value
Insurance portfolios
31 December
2007
£m
67
31 December
2006
£m
476
The Group’s market risk exposure in respect of insurance activities described above is measured using European Embedded Value (EEV) as a proxy for economic
value. The pre-tax sensitivity of EEV to standardised market stresses is shown below for the years ended 31 December 2007 and 2006. Foreign exchange risk
arises predominantly from overseas equity holdings. Impacts have only been shown in one direction but can be assumed to be reasonably symmetrical.
Opening and closing numbers only have been provided as this data is not volatile or tracked on a daily basis. This disclosure has been amended to reflect
internal reporting for market risk in the insurance portfolio, in accordance with IFRS7.
Equity risk (impact of 10% fall pre-tax)
Interest rate risk (impact of 25bp reduction pre-tax)
Mitigation
31 December
2007
£m
(248)
58
31 December
2006
£m
(277)
85
Various mitigation activities are undertaken across the Group to manage portfolios and ensure they remain within approved limits.
Banking – non-trading activities
Interest rate risk arising from the different repricing characteristics of the Group’s non-trading assets and liabilities, and from the mismatch between interest rate
insensitive liabilities and interest rate sensitive assets, is managed centrally. Matching assets and liabilities are offset against each other and internal interest
rate swaps are also used.
The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange
exposures in the non-trading book are transferred to the trading area where they are monitored and controlled.
Insurance activities
Investment holdings are diversified across markets and, within markets, across sectors. Holdings are diversified to minimise specific risk and the relative size of
large individual exposures is monitored closely. For assets held outside unit-linked funds, investments are only permitted in countries and markets which are
sufficiently regulated and liquid.
Monitoring
The group asset and liability committee regularly reviews high level market risk exposure including, but not limited to, the data described above. It also makes
recommendations to the group chief executive concerning overall market risk appetite and market risk policy. Exposures at lower levels of delegation are
monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios.
Levels of exposures compared to approved limits are monitored locally by independent risk functions and at a high level by group risk. Where appropriate,
escalation procedures are in place.
Banking activities
Trading is restricted to a number of specialist centres, the most important centre being the products and markets business in London. These centres also
manage market risk in the wholesale non-trading portfolios, both in the UK and internationally. The level of exposure is strictly controlled and monitored within
approved limits. Active management of the wholesale portfolios is necessary to meet customer requirements and changing market circumstances.
Market risk in the Group’s retail portfolios and in the Group’s capital and funding activities is managed within limits defined in the detailed group policy for
interest rate risk in the banking book, which is reviewed and approved annually.
Insurance activities
Market risk exposures from the insurance businesses are controlled via approved investment policies and limits set with reference to the Group’s overall risk
appetite and regularly reviewed by the group asset and liability committee:
• With-profits funds are managed in accordance with the relevant fund’s principles and practices of financial management.
• The investment strategy for other insurance liabilities is determined by the term and nature of the underlying liabilities and asset/liability matching positions
are actively monitored. Actuarial tools are used to project and match the cash flows.
• 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.
The Group also agrees strategies for the overall mix of pension assets with the pension scheme trustees.
44 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Insurance risk
Definition
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The risk of reductions in earnings and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of
insured/underwritten events and to fluctuations in the timing and amount of claim settlements. This includes fluctuations in profits due to customer behaviour.
Risk appetite
Insurance risk appetite is defined as the quantum and composition of insurance risk that exists currently in the Group and the direction in which the Group
wishes to manage this.
Exposures
The major sources of insurance risk within the Group are the insurance businesses and the Group’s defined benefit pension schemes. The nature of insurance
business involves the accepting of insurance risks which relate primarily to mortality, morbidity, persistency, expenses, property damage and unemployment.
The prime insurance risk carried by the Group’s pension schemes is related to mortality.
Measurement
Insurance risks are measured using a variety of techniques including stress and scenario testing; and, where appropriate, stochastic modelling.
Current and potential future insurance risk exposures are assessed and aggregated using risk measures based on 1-in-20 year stresses and other supporting
measures where appropriate.
Mitigation
A key element of the control framework is the consideration of insurance risk by a suitable combination of high level committees/boards. For the life assurance
businesses the key control body is the board of Scottish Widows Group Limited with the more significant risks also being subject to approval by the group
executive committee and/or the Lloyds TSB Group board. For the general insurance businesses the key control body is the Lloyds TSB Insurance executive
committee with the more significant risks again being subject to group executive committee and/or Lloyds TSB Group board approval. All group pension
schemes issues are covered by the group asset and liability committee and the group business risk committee.
The overall insurance risk is mitigated through pooling and through diversification across large numbers of uncorrelated individuals, geographical areas, and
different types of risk exposure.
Insurance risk is primarily controlled via the following processes:
• Underwriting (the process to ensure that new insurance proposals are properly assessed)
• Pricing-to-risk (new insurance proposals would usually be priced in accordance with the underwriting assessment)
• Claims management
• Product management
• The use of reinsurance or other risk mitigation techniques.
In addition, limits are used as a control mechanism for insurance risk at policy level.
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 underwriting, 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.
In respect of insurance risks in the staff pension schemes, the Group ensures that effective communication mechanisms are in place for consultation with the
trustees and that risk management is in line with the Group’s risk appetite.
Monitoring
Ongoing monitoring is in place to track the progression of insurance risks. This normally involves monitoring relevant experiences against expectations (for
example claims experience, option take up rates, persistency experience, expenses, non-disclosure at the point of sale), as well as evaluating the effectiveness
of controls put in place to manage insurance risk.
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 of life assurance policies, which relate to the rate of policy termination and the rate at which policies cease to pay regular premiums, are
regularly assessed by reference to appropriate risk factors.
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Lloyds TSB Group Annual Report and Accounts 2007 45
Risk management
Operational risk
Definition
Audited information
The risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people
related or external events. There are a number of categories of operational risk:
Legal and regulatory risk
The risk of reductions in earnings and/or value, through financial or reputational loss, from failing to comply with the laws, regulations or codes applicable.
Customer treatment risk
The risk of reductions in earnings and/or value, through financial or reputational loss, from inappropriate or poor customer treatment.
Product and service risk
The risk of loss, both financial and reputational, from the inherent design, management or distribution of products, or from the failure to meet or exceed
customer expectations, competitor offerings or regulatory requirements.
Process and resource risk
The risk of reductions in earnings and/or value, through financial or reputational loss, resulting from inadequate or failed internal processes and systems,
people-related events, damage to resources (excluding human resources), and deficiencies in the performance of external suppliers/service providers.
Theft, fraud and other criminal acts risk
The risk of reductions in earnings and/or value, through financial or reputational loss, resulting from frauds carried out against the Group, and/or theft of the
Group’s assets, and other criminal acts.
People risk
The risk of reductions in earnings and/or value, through financial or reputational loss, from inappropriate staff behaviour, industrial action or health and safety
issues. Loss can also be incurred through failure to recruit, retain, train, reward and incentivise appropriately skilled staff to achieve business objectives and
through failure to take appropriate action as a result of staff underperformance.
Change risk
The risk of reductions in earnings and/or value, through financial or reputational loss, from change initiatives failing to deliver to requirements, budget or
timescale or failing to implement change effectively or realise the desired benefits.
Governance
The risk of reductions in earnings and/or value, through financial or reputational loss, from poor corporate governance at group, divisional and business unit
level. Corporate governance in this context embraces the structures, systems and processes that provide direction, control and accountability for the enterprise.
Risk appetite
Operational risk appetite is defined as the quantum and composition of operational risk identified in the Group and the direction in which the Group wishes to
manage it.
The Group has developed an impact on earnings approach to operational risk appetite. This involves looking at how much the Group could lose due to
operational risk losses at various levels of certainty. In setting operational risk appetite, the Group looks at both impact on solvency and the Group’s reputation,
including customer service requirements.
For legal and regulatory risk the Group has minimal risk appetite and seeks to operate to high ethical standards. The Group encourages and maintains an
appropriately balanced legal and regulatory compliance culture and promotes policies and procedures to enable businesses and their staff to operate in
accordance with the laws, regulations and voluntary codes which impact on the Group and its activities.
Exposures
The main sources of operational risk within the Group relate to uncertainties created by the changing business, in particular the legal and regulatory
environment in which financial firms operate both in the UK and overseas. As a result the most significant operational risk exposures are legal and regulatory.
Legal and regulatory exposure is driven by the significant volume of current legislation and regulation with which the Group has to comply, along with new
legislation and regulation which needs to be reviewed, assessed and embedded into day to day operational and business practices across the Group as a
whole. Further uncertainties arise where regulations are principles based without supporting minimum standards either for the benefit of the consumer or firms.
This gives rise to both the risk of retrospection from any one regulator combined with the risk of differing interpretation by individual regulators.
For legal and regulatory risks there are significant reputational risks associated with potential censure which drive the Group’s stance on appetites referred to
above. There are clear accountabilities and processes in place for reviewing new and changing requirements. Each business has a nominated individual with
‘compliance oversight’ responsibility under FSA rules. The role of such individuals is to advise and assist management to ensure that each business has 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.
46 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Measurement
Audited information
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Throughout 2007 there has been ongoing development of operational risk appetites and metrics to ensure both current and potential future operational risk
exposures are understood in terms of both risk and reward potential.
The Group has a comprehensive and consistent operational risk management framework for the timely identification, measurement, monitoring and control of
operational risk.
Integral to this operational risk management framework is a hybrid approach to calculating capital to support unexpected losses. The capital model calculations
are driven by internal data which captures past losses, and forward looking scenarios which value potential future risk events. External industry wide data is
collected to help with validating scenarios.
The capital model outputs are used to determine the internal capital charge for the Group which is then allocated to the businesses within the Group. Following
review and approval of the operational risk management framework and capital model the FSA has granted the banking businesses within the Group an
Advanced Measurement Approach (AMA) Waiver which recognises the embedding of the operational risk framework across the Group. The waiver allows the
Group to calculate its own regulatory capital charge for operational risk from its capital model with effect from 1 January 2008.
The intention is to extend the same methodology to the insurance businesses within the Group where regulatory capital is currently determined under the
ICA requirements.
Mitigation
The Group’s operational risk management framework consists of five key components:
• Identification of the key operational risks facing a business area.
• Evaluation of the effectiveness of the control framework covering each of the key risks to which the business area is exposed.
• Evaluation of the non-financial exposures (e.g. reputational risk) for each of the risks to which the business area is exposed.
• For each of the material risks identified, an estimate of the exposure to financial losses that could result within the coming financial year, together with a ‘worst
case’ stressed estimate.
• For each of the material risks identified an estimate of exposure to high impact, low frequency events through a scenario.
The Group purchases insurance to mitigate certain operational risk events.
Monitoring
Business unit risk exposure is aggregated at divisional level and reported to Group risk where a group-wide report is prepared. The report is discussed at the
monthly group compliance and operational risk committee, with an extended report being reviewed once a quarter. This committee can escalate matters to the
chief risk director, or higher committees if appropriate.
The insurance programme is monitored and reviewed regularly, with recommendations being made to the Group’s senior management annually prior to each
renewal. Insurers are monitored on an ongoing basis, to ensure counterparty risk is minimised. A process is in place to manage any insurer rating changes
or insolvencies.
The Group has adopted a formal approach to operational risk event escalation. This involves the identification of an event, an assessment of the materiality of
the event in accordance with a risk event impact matrix and appropriate escalation.
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Lloyds TSB Group Annual Report and Accounts 2007 47
Risk management
Financial soundness
Definition
Audited information
The risk of financial failure, reputational loss, loss of earnings and/or value arising from a lack of liquidity, funding or capital, and/or the inappropriate recording,
reporting and disclosure of financial, taxation and regulatory information.
Liquidity and funding
Liquidity risk is defined as the risk that the Group does not have sufficient financial resources to meet its commitments when they fall due, or can secure them
only at excessive cost. Funding risk is further defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding
structure is inefficient.
Capital
Capital risk is defined as the risk that the group has insufficient capital to provide a stable resource to absorb any losses or that the capital structure is inefficient.
Financial and prudential regulatory reporting, disclosure and tax
The risk of reputational damage, loss of investor confidence and/or financial loss arising from, the adoption of inappropriate accounting policies, ineffective
controls over financial, prudential regulatory and tax reporting and the failure to disclose information on a timely basis about the legal constitution of the Group.
Risk appetite
Financial soundness risk appetite is set and reported through various metrics that enable the Group to manage liquidity and capital constraints and
shareholder expectations. It also includes the avoidance of the need for restatement of published financial and prudential regulatory reporting, disclosure and tax.
Exposure
Liquidity and funding
Liquidity exposure represents the amount of potential outflows in any future period less committed inflows in that period such that the Group is unable to
meet its financial obligations as they fall due, or can only secure them at excessive cost. Liquidity is considered from both an internal and
regulatory perspective.
Capital
Capital exposure arises should the Group have insufficient regulatory capital resources to support its strategic objectives and plans, and meet external
stakeholder requirements and expectations.
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.
Financial and prudential regulatory reporting, disclosure and tax
Exposure represents the sufficiency of our policies and procedures to maintain adequate books and records to support statutory, regulatory and tax reporting,
to present and detect financial reporting fraud and to manage the Group’s tax exposure.
Measurement
Liquidity and funding
A series of measures are used across the Group to monitor both short and long term liquidity including ratios, cash outflow triggers and stress test survival
period triggers.
An analysis of financial instrument liabilities of the Group, excluding those arising from insurance contracts, on an undiscounted future cash flow basis according
to contractual maturity into relevant maturity groupings based on the remaining period at the balance sheet date is shown in note 47 to the accounts. An
analysis of insurance contracts on a behavioural basis is also shown in note 47 to the accounts.
Capital
For the banking businesses 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 as defined by the Basel I framework.
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
General Prudential Sourcebook. Tier 1 comprises mainly shareholders’ equity, tier 1 capital instruments and minority interests, after deducting goodwill and other
intangible assets. Tier 2 comprises collective impairment provisions, and qualifying subordinated loan capital, with restrictions on the amount of collective
impairment 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 its 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 FSA defined
trading book, by taking into account market-related risks.
48 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Audited information
31 December
2007
£m
31 December
2006
£m
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Capital:
Core tier 1
Share capital and reserves
Regulatory post-retirement benefit adjustments
Other items
Perpetual non-cumulative preference shares
Preference share capital and preferred securities
Innovative tier 1
Innovative tier 1 capital instruments*
Adjustments to tier 1
Available-for-sale revaluation reserve and cash flow hedging reserve
Goodwill
Total tier 1 capital
Tier 2
Undated loan capital
Dated loan capital
Collectively assessed provisions
Available-for-sale revaluation reserve in respect of equities
Total tier 2 capital
Supervisory deductions
Life and pensions businesses
Other deductions
Total supervisory deductions
Total capital
Risk-weighted assets (unaudited)
UK Retail Banking
Insurance and Investments
Wholesale and International Banking
Central group items
Total risk-weighted assets
Risk asset ratios (unaudited)
Total tier 1
Total tier 1, excluding innovative capital instruments*
Total capital
12,141
704
–
1,589
1,474
402
(2,358)
13,952
4,457
3,441
2,150
12
10,060
24,012
(4,373)
(762)
(5,135)
18,877
11,155
1,041
39
1,610
1,372
(12)
(2,377)
12,828
4,390
3,624
1,951
–
9,965
22,793
(5,368)
(790)
(6,158)
16,635
31 December
2007
£bn
31 December
2006
£bn
61.7
3.3
105.1
1.9
172.0
8.1%
7.3%
11.0%
59.1
3.1
91.8
2.0
156.0
8.2%
7.3%
10.7%
* A firm is permitted to include innovative tier 1 capital in its tier 1 capital resources for the purposes of GENPRU1.2 (adequacy of financial resources) but is required
to exclude these amounts from tier 1 for the purposes of meeting the main BIPRU firm Pillar 1 rules. Accordingly, the Group has provided its tier 1 capital ratio
both including and excluding these amounts.
There are limits imposed by the FSA as to the proportion of the regulatory capital base that can be made up of subordinated debt and preferred securities.
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.
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 this ratio. Any breaches of the formal buffer must be notified to the FSA, together with proposed remedial action. No such
notifications have been made during 2007.
With effect from 1 January 2008 the Group moved onto the Basel II framework and maintained satisfactory capital ratios throughout the transition as set out in
further detail on page 51.
The life assurance and general insurance businesses are subject to separate regulatory rules. Further disclosure relating to the life assurance business, as
required by FRS 27, is set out in detail on pages 52 to 56.
Financial and prudential regulatory reporting, disclosure and tax
The Group has developed procedures to ensure that compliance with both current and potential future requirements are understood and that policies are
aligned to its risk appetite.
Lloyds TSB Group Annual Report and Accounts 2007 49
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Risk management
Mitigation
Liquidity and funding
Audited information
The Group mitigates the risk of a liquidity mismatch which is outside of its appetite by managing the liquidity profile of the balance sheet through both short-term
liquidity management and long-term strategic funding.
Short-term liquidity management is considered from two perspectives; business as usual and crisis liquidity, both of which relate to funding in the less than one
year time horizon.
Longer term funding is used to manage the Group’s strategic liquidity profile which is determined by the Group’s balance sheet structure. Longer term is defined
as an original maturity of more than one year.
The Group’s funding and liquidity management is fundamentally based on a significant retail deposit base, accompanied by appropriate funding from the
wholesale markets. A substantial proportion of the retail deposit base is made up of customer’s current and savings accounts which, although repayable on
demand, have traditionally in aggregate provided a stable source of funding. Additionally, the Group accesses the short-term wholesale markets to provide
inter-bank deposits and to issue certificates of deposit and commercial paper to meet short-term obligations. The Group’s short-term money market funding is
based on an analysis of the market’s capacity for the Group’s credit, based on quantitative data. The Group has developed strong relationships with certain
wholesale market segments, for example central banks and corporate customers, to supplement its retail deposit base.
During 2007, amounts deposited by customers increased by £17,213 million from £139,342 million at 31 December 2006 to £156,555 million at 31 December
2007. These customer deposits were supplemented by short-term wholesale market operations, the use of sale and repurchase agreements and the issue of
subordinated loan capital and wholesale funding sources in the capital markets; these comprised Euro Medium-Term Note programmes, of which
£7,090 million had been utilised for senior funding at 31 December 2007, and commercial paper programmes, under which £5,051 million had been utilised
at 31 December 2007. The Group also raised wholesale funding via the issuance of Residential Mortgage Backed Securities; £12,403 million was outstanding at
31 December 2007.
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 can be sold to provide additional short term funding should the need arise.
Within the insurance businesses, 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.
Capital
The Group is able to raise funds by issuing subordinated liabilities or equity. As at 31 December 2007, the Group had £11,958 million of subordinated debt
in issuance. The cost and availability of subordinated liability finance are influenced by credit ratings. A reduction in these ratings could increase the cost and
could reduce market access. At 31 December 2007, the credit ratings of Lloyds TSB Bank, the primary issuer in the Group, were as follows:
Moody’s
Standard & Poor’s
Fitch
Senior debt
Aaa
AA
AA+
The ratings outlook from Moody’s, Standard & Poor’s and Fitch for Lloyds TSB Bank is stable. 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.
Financial and prudential regulatory reporting, disclosure and tax
The Group maintains a system of internal controls, consistently applied, providing reasonable assurance that transactions are recorded and undertaken in
accordance with delegated authorities that permit the preparation and disclosure of financial statements, prudential regulatory reporting and tax returns in
accordance with IFRS, statutory and regulatory requirements.
Monitoring
Liquidity and funding
Liquidity is actively monitored at business unit and group level at an appropriate frequency. Routine reporting is in place to senior management and through
the Group’s committee structure, in particular GALCO. In a stress situation the level of monitoring and reporting is increased commensurate with the nature of
the event. Liquidity policies and procedures are subject to independent oversight.
Capital
Capital is actively managed at an appropriate level of frequency and regulatory ratios are a key factor in the Group’s budgeting and planning processes with
updates of expected ratios reviewed regularly during the year by GALCO. Capital raised takes account of expected growth and currency of risk assets. Capital
policies and procedures are subject to independent oversight.
Financial and prudential regulatory reporting, disclosure and tax
The group undertakes a programme of work designed to support an annual assessment of the effectiveness of internal controls over financial reporting, in
accordance with the requirements of s.404 of the US Sarbanes-Oxley Act of 2002; to identify and maintain tax liabilities and to assess emerging regulation
and legislation.
50 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Basel II (unaudited)
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The Group has placed significant focus on the implementation of Basel II. During the year the Group was successful in obtaining the FSA’s approval of both its
credit risk waiver application to use an Internal Ratings Based (IRB) approach for the majority of its credit portfolios (Retail IRB for retail portfolios and Foundation
IRB for non-retail portfolios) and of its application to use the Advanced Measurement Approach (AMA) for operational risk. It also submitted to the FSA its Internal
Capital Adequacy Assessment Process document in April 2007.
For information, a comparison of Basel I to Basel II equivalents, on the Group’s key ratios as at 31 December 2007 is shown below:
Capital:
Tier 1
Tier 2
Supervisory deductions
Total regulatory capital
Total risk-weighted assets equivalent
Risk asset ratios:
Tier 1
Total capital
The principal movements are:
Basel I
31 December
2007
£m
13,952
10,060
24,012
(5,135)
18,877
31 December
2007
£bn
172.0
8.1%
11.0%
Basel II
31 December
2007
£m
13,545
6,994
20,539
(4,864)
15,675
31 December
2007
£bn
142.6
9.5%
11.0%
• a reduction of tier 1 capital resources primarily arising from a deduction of 50 per cent of the difference between expected loss and accounting impairment provisions
partially offset by related notional tax relief.
• a reduction of tier 2 capital resources primarily arising from a deduction of 50 per cent of the difference between expected loss and accounting impairment
provisions, together with the removal of collective impairment provisions which no longer qualify as tier 2 capital under the Basel II rules.
• a reduction in supervisory deduction reflecting derecognition for capital adequacy purposes of mortgage securitisation.
• a reduction in total risk-weighted assets, reflecting the application of the IRB approach to the majority of the Group’s credit portfolios, offset, in part, by the
introduction of a specific charge for operational risk.
The above comparison is set out using the risk asset ratio framework, which, as explained above, remains the international standard for measuring capital
adequacy. The FSA’s approach to such measurement under Basel II is now based primarily on monitoring the relationship of the Capital Resources Requirement
(CRR – broadly equivalent to 8 per cent of risk-weighted assets and thus representing the capital required under Pillar 1 of Basel II) to available capital resources.
Notwithstanding this new approach, the Group will continue to report ratios both internally and externally. The FSA is also setting Individual Capital Guidance
(ICG) for each UK bank, calibrated by reference to its CRR. A key input to the FSA’s ICG setting process (which addresses the requirements of Pillar 2 under Basel II)
is each bank’s Internal Capital Adequacy Assessment Process (ICAAP). The Group submitted its ICAAP document to the FSA in April 2007. The FSA has made it
clear that each ICG remains a confidential matter between each bank and the FSA.
Future changes to regulatory capital rules
The regulatory capital regime is subject to ongoing review and development by the regulator. The Group continues to work with the regulator to assess the
impact on the Group’s regulatory capital requirements and resources.
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Lloyds TSB Group Annual Report and Accounts 2007 51
Risk management
Audited information
Life assurance businesses
The principal subsidiary involved in the Group’s life assurance operations is Scottish Widows plc (‘Scottish Widows’), which holds the only large With Profit Fund
managed by the Lloyds TSB Group. Throughout 2006 and up until the third quarter of 2007, the Group also owned Abbey Life Assurance Company Limited (which
had been closed to new business since March 2000) but this business was sold at the end of September 2007.
Basis of determining regulatory capital of the life assurance businesses
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. 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
management, 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 valuation of with-profits assets in a with-profits fund on a realistic basis differs from the valuation on a statutory basis as, in respect of non-profits business
written in a with-profits fund (a relatively small amount of business in the case of Scottish Widows), 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. Except for Scottish Widows, the regulatory capital requirement is a combination of amounts held in respect of
actuarial reserves, sums at risk and maintenance expenses (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, no amount is required to cover the impact of stress tests on the actuarial reserves. However, a further test is required in respect of the With
Profit Fund, which compares the level of ‘realistic excess capital’ to the ‘statutory excess capital’ of the With Profit Fund. In circumstances where the ‘realistic
excess capital’ position is less than ‘statutory excess capital’, the Company is required to hold additional capital to cover the shortfall, but only to the extent it
exceeds the value, calculated in a prescribed way, of internal transfers from the With Profit Fund. Any additional capital requirement under this test is referred
to as the With-Profits Insurance Capital Component. The ‘realistic excess capital’ is calculated as the difference between realistic assets and realistic liabilities
of the With Profit Fund with a further deduction to cover various stress tests.
The determination of realistic liabilities of the With Profit Fund in respect of Scottish Widows includes the value of internal transfers expected to be made from
the With Profit 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 With-Profits Insurance Capital Component is reduced by the value, calculated in the stress test scenario, of these internal
transfers, but only to the extent that credit has not been taken for the value of these charges in deriving actuarial reserves for the Non-Participating Fund.
Capital statement
The following table provides more detail regarding the sources of capital in the life assurance business. The figures quoted are based on management’s current
expectations pending completion of the annual financial return to the FSA. The figures allow for an anticipated transfer of £300 million from the Long Term Fund
to the Shareholder Fund as at 31 December 2007.
With Profit
Fund
£m
Non-
Participating
Fund
£m
Total
Long Term
Fund
£m
Shareholder
Fund
£m
As at 31 December 2007
Assets attributable to the shareholder held outside the long-term funds
Assets attributable to the shareholder held within the long-term funds
Total shareholders’ funds
Adjustments onto a regulatory basis:
Life assurance business
–
–
–
–
–
2,346
2,346
2,346
2,346
946
–
946
Unallocated surplus within insurance business
569
–
569
–
569
Adjustments to remove differences between IFRS and regulatory valuation of
assets and liabilities
Adjustment to include estimated ‘realistic’ liabilities payable to the shareholder
Adjustment to replace ‘realistic’ liabilities with statutory liabilities
Adjustment to remove the value of future profits recognised in respect of
non-participating contracts written in the With Profit Fund
Qualifying loan capital
Available capital resources
–
(431)
(634)
3,696
(23)
–
–
–
–
–
(431)
(634)
3,696
(23)
–
3,608
1,915
5,523
(600)
–
–
–
541
887
(1,031)
(634)
3,696
(23)
541
6,410
The figures shown above for available capital resources within the insurance business relate to Scottish Widows plc only. The estimated total additional
resources relating to the other life assurance subsidiaries within the Group are £330 million.
52 Lloyds TSB Group Annual Report and Accounts 2007
Total
£m
946
2,346
3,292
Risk management
Audited information
The comparative position as at 31 December 2006 was as follows (again, relating to Scottish Widows plc only):
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As at 31 December 2006
Assets attributable to the shareholder held outside the long-term funds
Assets attributable to the shareholder held within the long-term funds
Total shareholders’ funds
Adjustments onto a regulatory basis:
Life assurance business
Unallocated surplus within insurance business
Adjustments to remove differences between IFRS and regulatory valuation of assets
and liabilities
Adjustment to include estimated ‘realistic’ liabilities payable to the shareholder
Adjustment to replace ‘realistic’ liabilities with statutory liabilities
Adjustment to remove the value of future profits recognised in respect of
non-participating contracts written in the With Profit Fund
Qualifying loan capital
Available capital resources
Formal intra-group capital arrangements
With Profit
Fund
£m
Non-
Participating
Fund
£m
Total
Long Term
Fund
£m
Shareholder
Fund
£m
–
–
–
–
–
2,225
2,225
2,225
2,225
1,947
–
1,947
Total
£m
1,947
2,225
4,172
615
–
(680)
3,783
(32)
–
–
615
–
615
(263)
–
–
–
–
(263)
(680)
3,783
(32)
–
(810)
–
–
–
533
(1,073)
(680)
3,783
(32)
533
3,686
1,962
5,648
1,670
7,318
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 subsidiary Scottish Widows Annuities Limited and its fellow group undertaking Scottish Widows Bank plc.
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 Profit 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.
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 Profit Fund. At 31 December 2007, the estimated value of surplus admissible
assets in the Non-Participating Fund was £1,915 million (31 December 2006: £1,962 million) and the estimated value of the Support Account was £827 million
(31 December 2006: £974 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 2007, the estimated net economic value of the Non-Participating Fund and its
subsidiaries for the purposes of this test was £4,028 million (31 December 2006: £3,962 million) and the estimated combined value of the Support Account and
Further Support Account was £2,834 million (31 December 2006: £2,873 million).
Other restrictions in the Non-Participating Fund: In addition to the policies which existed at the date of demutualisation, the With Profit Fund includes policies
which have been written since that date. As a result of statements made to policyholders that investment policy will usually be the same for both types of
business, there is an implicit requirement to hold additional regulatory assets in respect of the business written after demutualisation. The estimated amount
required to provide such support at 31 December 2007 is £193 million (31 December 2006: £216 million). Scottish Widows has obtained from the FSA permission
to include the value of this support in assessing the realistic value of assets available to the With Profit Fund. There is a further test requiring 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.
Movements in regulatory capital
The movements in Scottish Widows plc’s available capital resources can be analysed as follows:
With Profit
Fund
£m
Non-
Participating
Fund
£m
Total
Long Term
Fund
£m
Shareholder
Fund
£m
As at 31 December 2006
Changes in assumptions used to measure life assurance liabilities
Dividends and capital transfers
Changes in regulatory requirements
New business and other factors
As at 31 December 2007
3,686
(104)
–
–
26
1,962
(40)
(300)
69
224
5,648
(144)
(300)
69
250
3,608
1,915
5,523
Total
£m
7,318
(144)
1,670
–
(1,560)
(1,860)
–
777
887
69
1,027
6,410
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Lloyds TSB Group Annual Report and Accounts 2007 53
Risk management
Audited information
The primary reasons for the movement in total available capital resources during the year are as follows:
With Profit Fund
Available capital in the With Profit Fund has decreased from £3,686 million at 31 December 2006 to an estimated £3,608 million at 31 December 2007. The key
driver is investment market performance, which was broadly neutral over 2007.
Non-Participating Fund
Available capital in the Non-Participating Fund has decreased from £1,962 million at 31 December 2006 to an estimated £1,915 million at 31 December 2007.
This is primarily a result of the anticipated transfer from the Non-Participating Fund to the Shareholder Fund at the year end of £300 million, offset by the return
generated from the business.
Shareholder Fund
During 2007, dividends of £1,860 million were paid. These were partly financed by the sale of Abbey Life Assurance Company Limited.
Financial information calculated on a ‘realistic’ basis
The estimated financial position of the With Profit Fund of Scottish Widows at 31 December 2007, calculated on a ‘realistic’ basis, is given in the following table,
in the form reported to the FSA. As a result of the capital support arrangements, it is considered appropriate to also disclose the estimated ‘realistic’ financial
position of the Long Term Fund of Scottish Widows as a whole, which consists of both the With Profit Fund and the Non-Participating Fund.
31 December 2007
31 December 2006
Realistic value of assets of fund
Support arrangement assets
Realistic value of assets available to the fund
Realistic value of liabilities of fund
Working capital for fund
Working capital ratio for fund
With Profit
Fund
£m
16,781
1,020
17,801
(16,846)
955
5.4%
Long Term
Fund
£m
20,929
–
20,929
(16,901)
4,028
19.2%
With Profit
Fund
£m
18,183
1,190
19,373
(18,248)
1,125
5.8%
The financial information calculated on a ‘realistic’ basis reconciles to the Capital statement as follows:
31 December 2007
31 December 2006
Available regulatory capital
Support arrangement assets
With Profit
Fund
£m
3,608
1,020
Adjustments to replace statutory liabilities with ‘realistic’ liabilities
(3,696)
Adjustments to include the value of future profits recognised
in respect of Non-Participating business written in the With Profit Fund
Recognition of future profits allowable for ‘realistic’ capital purposes
23
–
955
Long Term
Fund
£m
5,523
–
(3,582)
23
2,064
4,028
With Profit
Fund
£m
3,686
1,190
(3,783)
32
–
1,125
Long Term
Fund
£m
22,278
–
22,278
(18,316)
3,962
17.9%
Long Term
Fund
£m
5,648
–
(3,614)
32
1,896
3,962
54 Lloyds TSB Group Annual Report and Accounts 2007
Risk management
Audited information
Analysis of policyholder liabilities in respect of the Group’s life assurance business:
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As at 31 December 2007
With Profit Fund liabilities
Unit-linked business (excluding that accounted for as investment contracts)
Other life assurance business
Insurance and participating investment contract liabilities
Non-participating investment contract liabilities
Total policyholder liabilities
As at 31 December 2006
With Profit Fund liabilities
Unit-linked business (excluding that accounted for as investment contracts)
Other life assurance business
Insurance and participating investment contract liabilities
Non-participating investment contract liabilities
Total policyholder liabilities
Scottish Widows plc
With Profit Fund
(in accordance
with FRS 27)
£m
16,404
–
–
16,404
–
16,404
Scottish Widows plc
With Profit Fund
(in accordance
with FRS 27)
£m
17,827
–
–
17,827
–
17,827
Other long-
term funds
£m
–
14,282
6,714
20,996
18,197
39,193
Other long-
term funds
£m
116
12,734
10,181
23,031
24,370
47,401
Total life
business
£m
16,404
14,282
6,714
37,400
18,197
55,597
Total life
business
£m
17,943
12,734
10,181
40,858
24,370
65,228
The sale of Abbey Life Assurance Company Limited during 2007 reduced total policyholder liabilities by £11,632 million.
Capital sensitivities
Shareholders’ funds
Shareholders’ funds outside the long-term business fund, other than those used to match regulatory requirements, are mainly invested in assets that are less
sensitive to market conditions.
With Profit Fund
The with-profits realistic liabilities and the available capital for the With Profit 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 sensitive to the
level of the stock market, with the position worsening at low stock market levels as a result of the guarantees to policyholders increasing in value. However, the
exposure to guaranteed annuity options increases under rising stock market levels. 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 generally 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 Profit Fund is partly mitigated by the actions that
can be taken by management.
Other long-term funds
Outside the With Profit 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). Reinsurance arrangements are in place to reduce the Group’s exposure to deteriorating mortality rates in respect of life assurance contracts. 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).
Assets held in excess of those backing actuarial reserves are invested across a range of investment categories including fixed interest securities, equities,
properties and cash. The mix of investments is determined in line with the policy of Lloyds TSB Group to minimise the working capital (defined as available capital
less minimum required capital) required to ensure all capital requirements continue to be met under a range of stress tests.
Options and guarantees
The Group has sold insurance products that contain options and guarantees, both within the With Profit Fund and in other funds.
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Lloyds TSB Group Annual Report and Accounts 2007 55
Risk management
Audited information
Options and guarantees within the With Profit Fund
The most significant options and guarantees provided from within the With Profit 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. For those policies written
pre-demutualisation containing potentially valuable options and guarantees, under the terms of the Scheme a separate memorandum account was set up
within the With Profit Fund of Scottish Widows called the Additional Account which is available, inter alia, to meet any additional costs of providing guaranteed
benefits in respect of those policies. The Additional Account had a value at 31 December 2007 of £1.7 billion (2006: £1.8 billion). The eventual cost of providing
benefits on policies written both pre and post demutualisation is dependent upon a large number of variables, including future interest rates and equity values,
demographic factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be known
for many years.
As noted above, under the realistic capital regime of the FSA, the liabilities of the With Profit 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. The risk-free yield is defined as 0.1 per cent higher than spot yields derived from the UK gilt yield curve.
• Investment volatility. The calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical observed volatility
where it is not possible to observe meaningful prices. For example, as at 31 December 2007, the 10 year equity-implied at-the-money assumption was set at
25.5 per cent (31 December 2006: 20 per cent). The assumption for property volatility was 15 per cent (31 December 2006: 15 per cent). The volatility of interest
rates has been calibrated to the implied volatility of swaptions which was broadly 11 per cent (31 December 2006: 13 per cent).
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 include an
adjustment to reflect future uncertainties where the exercise of options by policyholders might increase liabilities), and assumptions regarding mortality (which
are based on recent actual experience and industry tables).
Options and guarantees outside the With Profit Fund of 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 £65 million (31 December 2006: £98 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 £3 million. If yields were 0.5 per cent lower than
assumed, the liability would increase by some £12 million.
56 Lloyds TSB Group Annual Report and Accounts 2007
Five year financial summary
The financial information set out in the table below has been derived from the annual report and accounts of Lloyds TSB Group plc for each of the past five years.
2005 was the first year in which the annual report and accounts were prepared under International Financial Reporting Standards (IFRS). 2004 and earlier years
had been prepared under UK Generally Accepted Accounting Principles (UK GAAP) and earlier years had been adjusted for subsequent changes in accounting
policy and presentation. To bridge the change in framework, 2004 figures have been presented under both IFRS and UK GAAP. Under IFRS, accounting standards
dealing with financial instruments (IAS 32 and IAS 39) and insurance (IFRS 4 and FRS 27) were applied only from 1 January 2005. To aid comparison, IFRS balance
sheet data is presented as at 1 January 2005 rather than 31 December 2004; the 2004 IFRS income statement data is not comparable to the data for 2005 and
2006. The financial statements for each of the years presented have been audited by PricewaterhouseCoopers LLP, independent auditors.
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Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Profit before tax
Profit for the year
Profit for the year attributable to equity shareholders
Total dividend for the year1
Balance sheet data (£m)
Share capital
Shareholders’ equity
Net asset value per ordinary share
Customer accounts
Subordinated liabilities
Loans and advances to customers
Total assets
Share information
Basic earnings per ordinary share
Diluted earnings per ordinary share
Total dividend per ordinary share1
Market price (year end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions)2
Financial ratios (%)3
Dividend payout ratio
Post-tax return on average shareholders’ equity
Post-tax return on average risk-weighted assets
Cost:income ratio4
Capital ratios (%)
Total capital
Tier 1 capital
IFRS
UK GAAP
2007
2006
2005
2004
2004
2003
10,706
(5,567)
5,139
(1,796)
4,000
3,321
3,289
2,026
11,104
(5,301)
5,803
(1,555)
4,248
2,907
2,803
1,927
10,540
(5,471)
5,069
(1,299)
3,820
2,555
2,493
1,915
9,661
(5,297)
4,364
(866)
3,477
2,459
2,392
1,914
9,343
(4,917)
4,426
(866)
3,493
2,489
2,421
1,914
9,672
(5,173)
4,499
(950)
4,348
3,323
3,254
1,911
31 December
2007
31 December
2006
31 December
2005
1 January
2005
31 December
2004
31 December
2003
1,432
12,141
212p
1,429
11,155
195p
156,555
139,342
11,958
12,072
1,420
10,195
180p
131,070
12,402
1,419
9,489
167p
1,419
9,977
176p
126,349
122,062
11,211
10,252
209,814
188,285
174,944
161,162
154,240
353,346
343,598
309,754
292,854
279,843
1,418
9,624
170p
116,496
10,454
135,251
252,012
2007
2006
2005
2004
2004
2003
58.3p
57.9p
35.9p
472.0p
814
5,648
49.9p
49.5p
34.2p
571.5p
870
5,638
44.6p
44.2p
34.2p
488.5p
920
5,603
42.8p
42.5p
34.2p
473p
953
5,596
43.3p
43.0p
34.2p
473p
953
5,596
58.3p
58.1p
34.2p
448p
974
5,594
2007
2006
2005
2004
2004
2003
61.6
28.2
2.03
52.0
68.7
26.6
1.89
47.7
76.8
25.6
1.81
51.9
80.0
22.8
1.99
54.8
79.1
24.3
2.01
51.4
58.7
38.5
2.63
52.2
31 December
2007
31 December
2006
31 December
2005
1 January
2005
31 December
2004
31 December
2003
11.0
8.1
10.7
8.2
10.9
7.9
10.1
8.2
10.0
8.9
11.3
9.5
1 Annual dividends comprise both interim and estimated final dividend payments. Under IFRS, the total dividend for the year represents the interim dividend paid during the
year and the final dividend which will be paid and accounted for during the following year. Under UK GAAP, final dividends are included in the year to which they relate rather
than in the year in which they are paid.
2 This figure excludes 79 million limited voting ordinary shares.
3 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds TSB Group.
4 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims for the IFRS numbers in 2004 and later years).
Lloyds TSB Group Annual Report and Accounts 2007 57
Lloyds TSB Group Annual Report and Accounts 2007 57
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The board
Non-executive directors
* Member of the audit committee
** Chairman of the audit committee
◆ 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
Senior independent director
◆ ††
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, GfK AG and Telekom
Austria. Aged 65.
Ewan Brown CBE FRSE▲ **+
Joined the board and became
chairman of Lloyds TSB Scotland in
1999. Joined Noble Grossart in 1969
and was an executive director of that
company until December 2003.
A non-executive director of Noble
Grossart and Stagecoach Group,
senior governor of the Court of the
University of St Andrews and vice
chairman of the Edinburgh International
Festival. A former chairman of tie and
non-executive director of John Wood
Group. Aged 65.
Jan P du Plessis ✠ *◆
Joined the board in 2005. Chairman
of British American Tobacco. Held
a number of senior and general
management appointments in
Rembrandt Group from 1981, before
joining Compagnie Financière
Richemont as group finance director
in 1988, a position he held until 2004.
A former chairman of RHM from 2005
to 2007 and group finance director of
Rothmans International from 1990 to
1995. Aged 54.
†++
Sir Victor Blank◆
Chairman
Joined the board in 2006 as deputy
chairman and became chairman in
May 2006. Former partner in
Clifford-Turner (now Clifford Chance)
from 1969 to 1981 and chairman and
chief executive of Charterhouse until
1997. Director of The Royal Bank of
Scotland from 1985 to 1993 and of
GUS from 1993 to 2006 (chairman
from 2000). Chairman of Trinity Mirror
from 1999 to 2006. A member of the
Financial Reporting Council from 2002
to 2007 and a member of the Council
of Oxford University from 2000 to
2007. A senior adviser to the Texas
Pacific Group. Chairs two charities,
WellBeing of Women and UJS Hillel,
as well as the Council of University
College School. Aged 65.
Philip N Green ✠ †*
Joined the board in May 2007.
Appointed chief executive of United
Utilities in 2006. Former chief executive
of Royal P&O Nedlloyd from 2003 to
2005. Previously held senior positions
in DHL from 1990 to 1999, becoming
chief operating officer for Europe and
Africa in 1994, and the Reuters Group
from 1999 to 2003, becoming chief
operating officer in 2001. A director of
Business in the Community, a member
of the UK Commission for Employment
and Skills and a trustee of the
Philharmonia Orchestra. Aged 54.
◆ †+
Sir Julian Horn-Smith✠
Joined the board in 2005. Held
a number of senior and general
management appointments in
Vodafone from 1984 to 2006 including
a directorship of that company from
1996 and of deputy chief executive
officer from 2005. Previously held
positions in Rediffusion from 1972
to 1978, Philips from 1978 to 1982
and Mars GB from 1982 to 1984.
A non-executive director of Digicel
Group, a member of the Altimo
International advisory board and a
senior adviser to UBS in relation to
the global telecommunications sector.
A former chairman of The Sage Group.
Aged 59.
Lord Leitch ✠ *◆ +
Joined the board in 2005. Appointed
chairman of Scottish Widows in 2007.
Held a number of senior and general
management appointments in Allied
Dunbar, Eagle Star and Threadneedle
Asset Management before the merger
of Zurich Group and British American
Tobacco’s financial services businesses
in 1998. Subsequently served as
chairman and chief executive officer
of Zurich Financial Services (UK & Asia
Pacific) until his retirement in 2004.
Chairman of the government’s Review
of Skills (published in December 2006)
and deputy chairman of the
Commonwealth Education Fund.
Chairman of BUPA and Intrinsic
Financial Services and a non-executive
director of Paternoster and United
Business Media. Former chairman
of the National Employment Panel.
Aged 60.
Sir David Manning GCMG CVO ✠
Joins the board on 1 May 2008.
Entered the Foreign and
Commonwealth Office in 1972 and
held senior appointments, including
HM ambassador to Israel between
1995 and 1998, foreign policy adviser
to the Prime Minister from 2001 to
2003 and HM ambassador to the USA
from 2003 to 2007. Aged 58.
58 Lloyds TSB Group Annual Report and Accounts 2007
◆
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▲
The board
Executive directors
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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 56.
Michael E Fairey
Deputy Group Chief Executive
(retiring on 30 June 2008)
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. 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. A non-executive director
of The Energy Saving Trust and VTX
Bidco. President of The British Quality
Foundation and chairman of Race for
Opportunity. Aged 59.
Terri A Dial
Group Executive Director,
UK Retail Banking
Joined the board in 2005. Served with
Wells Fargo in the USA from 1973 to
2001 where she held a number of
senior and general management
appointments before becoming
president and chief executive officer
of Wells Fargo Bank in 1998. Chairs the
retail committee of the British Bankers’
Association. A non-executive director
of the LookSmart Corporation and a
member of the advisory board of the
Judge Business School of Cambridge
and the London Skills and Employment
Board. Aged 58.
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.
Chairman of the Association of British
Insurers. Aged 55.
Helen A Weir CBE
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 Royal Mail Holdings. A
member of the Said Business School
Advisory Board and a former member
of the Accounting Standards Board.
Aged 45.
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.
A non-executive director of
BritishAmerican Business Inc. A member
of the fund-raising board of the National
Society for the Prevention of Cruelty
to Children. Aged 57.
Alastair J Michie FCIS FCIBS
Company Secretary
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Directors’ report
Results and dividends
The consolidated income statement on page 77 shows a profit attributable to equity shareholders for the year ended 31 December 2007 of £3,289 million.
An interim dividend of 11.2p per ordinary share was paid on 3 October 2007 and a final dividend of 24.7p per ordinary share will be paid on 7 May 2008. These
dividends will absorb £2,026 million.
Principal activities, business review, future developments and financial risk management objectives and policies
The Company is a holding company and its subsidiary undertakings provide a wide range of banking and financial services through branches and offices in
the UK and overseas. A review of the development and performance of the business during the financial year and an indication of the likely future developments
are given on pages 2 to 56. Key performance indicators are shown on page i. Information regarding the financial risk management objectives and policies of
the Company and its subsidiary undertakings, in relation to the use of financial instruments, is given on pages 36 to 56 and in note 47 on pages 134 to 142.
Directors
Biographical details of directors are shown on pages 58 and 59. Particulars of their emoluments and interests in shares in the Company are given on
pages 64 to 75.
Dr DeAnne S Julius and Mr G J N Gemmell left the board on 9 May 2007 and 30 September 2007, respectively.
Mr P N Green joined the board on 10 May 2007 and Sir David Manning has been appointed a director from 1 May 2008. In accordance with the articles of
association, they offer themselves for election at the annual general meeting.
Mr M E Fairey, Sir Julian Horn-Smith and Mr G T Tate retire at the annual general meeting and offer themselves for re-election. Mr Ewan Brown, whom the board
has asked to remain as a director for a further year, also seeks re-election as stated in the corporate governance report on page 62.
Directors’ indemnities
The directors, including two former directors who left during the year, entered into individual contracts of indemnity with the Company which constituted
‘qualifying third party indemnity provisions’ for the purposes of the Companies Act 1985. These contracts were in force during the whole of the financial year
or from the date of appointment in respect of the director who joined the board on 10 May 2007. Since the end of the year following the introduction of relevant
sections of the Companies Act 2006, revised contracts of indemnity were entered into with the directors which constitute ‘qualifying third party indemnity
provisions’ and ‘qualifying pension scheme indemnity provisions’ and these remain in force and are available for inspection at the Company’s registered office.
Share capital and control
Information about share capital and control is shown in note 39 on pages 122 to 124; in note 6 of the parent company accounts, included within this document,
on page 153; in the corporate governance report on pages 61 to 63; and in the directors’ remuneration report on pages 64 to 75.
Employees
The Lloyds TSB Group is committed to providing employment practices and policies which recognise the diversity of our workforce and ensure equality for
employees regardless of sex, race, disability, age, sexual orientation or religious belief.
In the UK, the Lloyds TSB Group belongs to the major employer groups campaigning for equality for the above groups of staff, including Employers’ Forum on
Disability, Employers’ Forum on Age and Stonewall. The Group is also represented on the Board of Race for Opportunity and the Equal Opportunities
Commission. Our involvement with these organisations enables us to identify and implement best practice for our 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 income statement includes a charge for charitable donations totalling £37,463,000 (2006: £37,335,000), including £37,183,000 (2006: £37,133,000) which
will be paid under deeds of covenant to the four Lloyds TSB Foundations during 2008.
Policy and practice on payment of creditors
The Company follows ‘The Better Payment Practice Code’ published by the Department of Business, Enterprise and Regulatory Reform (BERR), regarding the
making of payments to suppliers. A copy of the code and information about it may be obtained from the BERR as shown on page 159.
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 2007, the number of days required to be shown in this report, to comply with the
provisions of the Companies Act 1985, is nil.
Auditors and audit information
Each person who is a director at the date of approval of this report confirms that, so far as the director is aware, there is no relevant audit information of which
the Company’s auditors are unaware and each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware
of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be
interpreted in accordance with the provisions of section 234ZA of the Companies Act 1985.
Resolutions concerning the re-appointment of PricewaterhouseCoopers LLP as auditors and authorising the audit committee to set their remuneration will be
proposed at the annual general meeting.
On behalf of the board
A J Michie
Company Secretary
21 February 2008
60 Lloyds TSB Group Annual Report and Accounts 2007
Corporate governance
Compliance with the combined code
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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 issued by the Financial Reporting Council.
The Group has complied with the provisions of the code and has done so throughout the year regarding the provisions where the 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. Independent non-executive directors are appointed
for three-year renewable terms, which may, in accordance with the articles of association, 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 their fees; and the appointment of senior executives within the organisation and
related succession planning.
According to the articles of association, the business and affairs of the Company are managed by the directors, who have 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.
During the year, the board conducted a formal evaluation of its performance and that of its committees and individual directors, with advice and assistance
from Dr Tracy Long, of Boardroom Review. Directors were invited to comment, through questionnaires and interviews, and the responses were reviewed and
discussed by the board. Where areas for improvement were identified, action has been agreed.
The chairman’s performance was evaluated by the non-executive directors, taking account of the views of executive directors. This appraisal was discussed at
a meeting of the non-executive directors, led by the senior independent director, without the chairman being present.
The remuneration committee reviewed the performance of the chairman, the group chief executive and the other group executive directors, when considering
their remuneration arrangements. The nomination committee reviewed the performance of all the directors and the independence of non-executive directors.
Like all board committees, the nomination committee and remuneration committee report to the board on their recommendations and decisions, including the
results of the performance and independence 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. Major shareholders are also offered the opportunity to meet new non-executive directors. 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 also attends 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 2007 was decided on a poll. Votes representing some fifty 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 were announced following the meeting and displayed
on our website, www.lloydstsb.com. They are available from the company secretary.
The resolutions to be considered at the annual general meeting in 2008 will also be decided on a poll. Details of the results will be announced following the
meeting and will be displayed on our website, www.lloydstsb.com. They will also be available from the company secretary.
Audit committee
The audit committee comprises Mr Brown (chairman), Mr du Plessis (who will succeed Mr Brown as chairman after the annual general meeting), Mr Green and
Lord Leitch. The committee’s terms of reference are available from the company secretary and are displayed on our website www.lloydstsb.com.
During the year, the audit committee received reports from, and held discussions with, management and the auditors. In discharging its duties, the committee
has approved the auditors’ terms of engagement, including their remuneration and, in discussion with them, has assessed their independence and objectivity
(more information about which is given in note 10 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 audit
department, reports from that department and the adequacy of its resources; the effectiveness of the systems for internal control, risk management and
compliance with financial services legislation and regulations (more information about which is given in the note about internal control on page 63); the results
of the external audit and its cost effectiveness; and reports from the external auditors on audit planning and their findings on accounting and internal control
systems. Procedures for handling complaints regarding accounting, internal accounting controls or auditing matters and for staff to raise concerns in confidence
were established by the committee. The committee also had a meeting with the auditors, without executives present, and a meeting with the director of group
audit alone.
Lloyds TSB Group Annual Report and Accounts 2007 61
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Corporate governance
Chairman’s committee
The chairman’s committee, comprising the chairman, the group chief executive and the deputy group chief executive, meets to assist the chairman in preparing
for board meetings.
The committee exercises specific powers delegated to it by the board from time to time.
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 exercises specific powers delegated to it by the board from time to time. 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 Sir Victor Blank (chairman), Dr Berndt, Mr du Plessis, Sir Julian Horn-Smith and Lord Leitch, reviews the structure, size
and 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 in the company, although the chairman of the company would not chair the committee when it was dealing with the appointment of a successor
to the chairmanship of the company.
During the year, in accordance with the plans for the orderly succession for appointments to the board, the committee recommended the appointment of two
non-executive directors. In that regard, detailed role specifications were drawn up, external search consultants were engaged and candidates were interviewed
by committee members and other directors.
In addition, the directors agreed with the committee’s recommendation that Mr Brown be asked to remain on the board for a further year. This would enable
the group to continue to benefit from his wide experience and maintain an appropriate balance of skills and experience on the board, as part of the plans for
orderly succession for appointments. His continuing membership of the audit committee and understanding of the Group’s activities will be particularly helpful
to the new chairman of that committee. Mr Brown remains the senior independent director and both the nomination committee and the board considered the
matter very carefully and concluded that Mr Brown was independent in character and there were no relationships or circumstances which were likely to affect,
or could appear to affect, the director’s judgement. As stated in the directors’ report, Mr Brown will stand for re-election at the annual general meeting, in
accordance with the provisions of the combined code on corporate governance issued by the Financial Reporting Council which apply to independent
non-executive directors who have served on the board for more than nine years from the date of their first election.
The committee’s terms of reference are available from the company secretary and are displayed on our website www.lloydstsb.com.
Remuneration committee
Information about the remuneration committee’s membership and work is given in the directors’ remuneration report on pages 64 to 75 and its 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 Sir Victor Blank (chairman), Mr Brown, Sir Julian Horn-Smith and Lord Leitch. All non-executive directors are also 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 management framework, and its risk appetite, strategy, principles 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.
62 Lloyds TSB Group Annual Report and Accounts 2007
Corporate governance
Attendance at meetings
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The attendance of directors at board meetings and at meetings of the audit, nomination, remuneration and risk oversight committees during 2007 was as follows:
Board
Audit
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Nomination
committee
Remuneration
committee
Risk oversight
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Number of meetings during the year
Current directors who served during 2007
W C G Berndt
Sir Victor Blank
Ewan Brown
J E Daniels
T A Dial
J P du Plessis
M E Fairey
P N Green1
Sir Julian Horn-Smith
A G Kane
Lord Leitch
G T Tate
H A Weir
Former directors who served during 2007
G J N Gemmell 2
D S Julius 3
4
4
4
3
4
4
4
4
4
4
3
4
4
4
1
3
4
14
14
14
14
14
14
13
14
8
12
14
13
14
14
10
1
6
6
6
6
3
1 Appointed to the board and remuneration committee from 10 May 2007 and the audit committee from 14 December 2007. A member of the risk oversight
committee from 1 July 2007 to 14 December 2007.
2 Left the board on 30 September 2007.
3 Left the board on 9 May 2007.
Statement of directors’ responsibilities
The directors are responsible for preparing the annual report, the directors’ remuneration report and the financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the consolidated and parent
company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial statements
are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. The directors
consider that in preparing the financial statements on pages 77 to 156 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 and the directors’ remuneration report comply
with the Companies Act 1985 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation. 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.
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. A requirement to comply with internal control risk policies is a key
component of individual staff objectives expressed in the balanced scorecard. 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 whereby the key businesses and head office functions review specific controls and attest to the accuracy of their assessments. The
assessment covers all EWRM categories and is in accordance with the principles of the Combined Code. As in previous years, this exercise was completed for
the year ended 31 December 2006. All returns have been satisfactorily completed and appropriately certified.
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 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.
Lloyds TSB Group Annual Report and Accounts 2007 63
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Directors’ remuneration report
This is a report made by the board of Lloyds TSB Group plc, on the recommendation of the remuneration committee. It covers the current and proposed
components of the remuneration policy and details the remuneration for each serving director during 2007.
Statement from Wolfgang Berndt
I am delighted to introduce the report of the board in relation to remuneration policy and practice.
In 2005, we conducted a comprehensive and independent review of remuneration policy for our most senior executives which led to a number of important
policy changes, including the introduction of a new long-term incentive plan. This plan has been used for all long-term awards made since its introduction and
we believe that this plan will continue to underpin our primary objective of attracting, retaining and motivating executives of the highest calibre.
As detailed in last year’s report and given strong endorsement by shareholders who voted on the Directors’ Remuneration Report at our 2006 AGM, we made
some changes to the annual incentive scheme for 2007, with an increase in the maximum bonus opportunity for executive directors to 200 per cent of salary
(225 per cent for Mr Daniels) to ensure that the individual elements and the totality of our reward offering is competitive. We believe that a policy of positioning
basic salaries at the median of the market combined with the substantial proportion of total reward opportunity being at risk through our short and long-term
incentive schemes, underpinned by demanding performance conditions, provides strong levels of alignment with shareholders’ interests as well as engaging
the executive directors in pursuing long-term shareholder value.
Looking forward, Lloyds TSB’s remuneration policy remains unchanged and, following further independent review, we intend to maintain the short and long-term
incentive schemes in their current form. We believe that it is essential for the positioning of our package to be highly competitive against the external market;
and in setting appropriate pay levels we will continue to consider remuneration practice of FTSE 20, and at the same time take close account of our direct
competitors, namely the major UK banks, with whom we typically compete for high calibre talent.
The committee met on four occasions during 2007 and, in addition to its regular business, attention was given to:
• reviewing the appropriateness of comparator groups used for the purpose of benchmarking overall levels of reward opportunity
• considering the level of Group performance and the correlation with outcomes under our previous long-term incentive awards
• examining the linkage between performance and remuneration elsewhere in the business, with a particular focus on annual bonus schemes which apply to
areas of the Group operating in highly specialised pay markets
• monitoring the appropriateness of remuneration arrangements applicable to the wider executive management population across the Group.
In terms of changes to the committee’s membership, Mr Green joined the committee in May, replacing Dr Julius. In addition to welcoming Mr Green, I am
extremely grateful to Dr Julius for her contribution to the work of the committee.
We have made a number of changes to this year’s report which are intended to demonstrate our commitment to the highest levels of clarity and comprehensive
disclosure. Given our stated aim of ensuring a strong level of alignment between overall performance and reward outcomes, I believe that the actual levels of
reward disclosed in the report which follows are entirely consistent with Lloyds TSB’s performance in 2007.
The remuneration committee unanimously recommends that you vote to approve the remuneration report at the 2008 AGM.
Dr Wolfgang Berndt
Chairman, Remuneration Committee
Content of remuneration report
• Role of remuneration committee
• Remuneration committee membership
• Advisers to the committee
• Directors’ remuneration policy
• Dilution limits
• Pensions
• Service agreements
• External appointments
• Performance graphs
• Audited information
Role of remuneration committee
The committee 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 advises on major changes of employee benefits schemes and it also agrees the policy for authorising claims for expenses from the group
chief executive and the chairman. It has delegated power for settling remuneration for the 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 committee’s terms of reference are available from the company secretary and are displayed on the Group’s website www.lloydstsb.com.
Remuneration committee membership
• Dr Berndt (chairman)
• Sir Victor Blank
• Mr Green (from 10 May when he joined the board)
• Sir Julian Horn-Smith
• Dr Julius (until 9 May when she left the board)
64 Lloyds TSB Group Annual Report and Accounts 2007
Directors’ remuneration report
Advisers to the committee
Towers Perrin, New Bridge Street Consultants and Kepler Associates were engaged by the committee to advise on matters relating to executive remuneration.
Over the course of 2007 Towers Perrin also provided market remuneration data as well as other remuneration consulting services to the Group.
In addition, in 2007, Alithos Limited provided information on behalf of the committee for the testing of the total shareholder return (TSR) (calculated by reference
to both dividends and growth in share price) performance conditions for the Group’s long-term incentive schemes.
Mr Daniels, Mr Fairey, Mrs Risley (Group Human Resources Director from 23 May 2007) and Mr Farley (Reward & Employment Policy Director) provided guidance
to the committee (other than for their own remuneration).
Directors’ remuneration policy
The Group’s remuneration policy is to ensure that individual rewards are aligned with the Group’s performance and the interests of its shareholders, and that
cost effective 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, which remain unchanged from last year, are:
• FTSE 20 adopted as the comparator group used to benchmark overall competitiveness of the remuneration package whilst taking particular account of the
remuneration practice of our direct competitors, namely the major UK banks. The FTSE 20 is regarded as providing a realistic and relevant comparison in terms
of company size and sector, as well as being a key market for talent.
• Basic salaries positioned to reflect the relevant market median and total direct compensation (basic salary, annual incentives and the value of long-term
incentives) designed to enable upper quartile performance to be rewarded with upper quartile remuneration levels.
• The majority of total compensation is linked to the achievement of stretching performance targets.
• The long-term rewards are aligned to shareholder interests, which is achieved by taking account of measures that reflect shareholder interests, and by
expecting executive directors to build a shareholding in the Group equivalent to 1.5 times (2 times for the group chief executive) the directors’ base pay.
Executives are expected to retain at least 50 per cent of all net vested equity until the guideline is met.
• The overall package reflects market practice and takes account of the terms and conditions applying to other employees of the Group.
Composition of directors’ remuneration
In 2007 the total compensation of the executive directors consisted of components in the following proportions:
£000
100%
80%
60%
40%
20%
0%
1,210
1,782
778
113
960
756
780
1,475
42
600
788
1,063
125
164
625
693
770
1,286
40
550
756
720
120
48
600
725
891
115
40
575
J E Daniels
Performance
related proportion
62%
M E Fairey
42%
T A Dial
67%
A G Kane
44%
G T Tate
66%
H A Weir
69%
LTIP
Bonus
Pension
Benefits
Salary
Note: Salary and benefits are the actual amounts received during 2007; pension for those directors in the defined benefits scheme (Messrs Daniels, Fairey and
Kane) is the increase in actual transfer value for 2007; pension for those in the defined contribution scheme (Mr Tate and Mrs Weir) is the sum of the employer’s
contribution and any cash pension supplement; pension for Ms Dial is the cash salary supplement she receives for choosing not to join the pension scheme;
performance bonus is that payable in respect of 2007 and includes the value of any award made under the Group’s ‘shareplan’; and the value of the LTIP
awarded in 2007 is the expected value calculated by using a ‘binominal’ model, which is a widely accepted methodology for this purpose.
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Directors’ remuneration report
Chairman’s remuneration
The chairman’s remuneration comprises salary and benefits which are broadly similar to those extended to the executive directors. However, he does not
participate in the annual bonus and long-term incentive arrangements, nor is he entitled to pension benefits.
The chairman’s salary is reviewed annually, usually in December, taking into account performance and market information and then adjusted from 1 January
of the following year. His salary from 1 January 2008 is £640,000.
Independent non-executive directors’ fees
The fees of the independent non-executive directors are agreed by the board within a total amount determined by the shareholders. Directors may also receive
fees, agreed by the board, for membership of board committees. The fees are designed to recognise the various responsibilities of a non-executive director’s
role and to attract 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 from 1 January 2008 are listed below with the figures applicable since the previous review in January 2007
in brackets.
Board
Audit committee chairmanship
Audit committee membership
Nomination committee membership
Remuneration committee chairmanship
Remuneration committee membership
Risk oversight committee membership
£65,000
£50,000
£20,000
£5,000
£30,000
£15,000
£15,000
(£60,000)
(£50,000)
(£15,000)
(£5,000)
(£25,000)
(£15,000)
(£15,000)
Independent non-executive directors who serve on the boards of subsidiary companies may also receive fees from the subsidiaries. The fees paid in 2007 to
the current non-executive directors are shown in the table below:
2007 non-executive directors’ fees
Lloyds TSB Group
Lloyds TSB
Scotland
Scottish
Widows
Board
Audit
committee
Remuneration
committee
Nomination
committee
Risk oversight
committee
Board
Board
W C G Berndt
Ewan Brown
J P du Plessis
P N Green
Sir Julian Horn-Smith
Lord Leitch
60,000
60,000
60,000
38,478
60,000
60,000
50,000
15,000
592
15,000
25,000
5,000
15,000
26,000
9,620
15,000
5,000
5,000
5,000
6,908
15,000
15,000
2007
Total fees
90,000
151,000
80,000
55,598
95,000
34,508
129,508
Executive director basic salaries
Basic salaries are reviewed annually, usually in December, taking into account individual performance and market information (which is provided by Towers
Perrin) and then adjusted from 1 January of the following year. Basic salary increases for other employees across the Group will be generally in the range
of 0-10 per cent. Whilst the salary increases awarded to executive directors are normally consistent with this policy, any variation will be supported by robust
and independent competitive market analysis. The current and previous annual basic salaries for the executive directors are shown in the table below:
Name
As at 1 January 2008
As at 1 January 2007
% increase
J E Daniels
£1,035,000
£960,000
7.8%
M E Fairey
£630,000
£600,000
5.0%
T A Dial
£680,000
£625,000
8.8%
A G Kane
£590,000
£550,000
7.3%
G T Tate
£640,000
£600,000
6.7%
H A Weir
£625,000
£575,000
8.7%
66 Lloyds TSB Group Annual Report and Accounts 2007
Directors’ remuneration report
Annual incentive scheme
The annual incentive scheme for executive directors is designed to reflect specific goals linked to the performance of the business.
Incentive awards for executive directors are based upon individual contribution and overall corporate results. Half of the bonus opportunity is driven by
corporate performance based on the stretching budget relating to profit before tax and economic profit. The lower of profit before tax and economic profit
will determine the extent to which the target has been met. The other half of the bonus opportunity is determined by divisional achievement driven through
individual performance. Individual targets relevant to improving overall business performance are contained in a balanced scorecard and are grouped under
the following headings:
Financial
Franchise Growth
Customer Service
Risk
People Development
These targets are weighted differently for each of the executive directors, reflecting differing strategic priorities. The non-financial measures include key
performance indicators relating to process efficiency, service quality and employee engagement.
The maximum bonus opportunity is 200 per cent (225 per cent for Mr Daniels) of basic salary for the achievement of exceptional performance targets. The
maximum payment under the corporate half of the bonus is only available if exceptional performance is achieved against the stretching corporate budget. An
amount equal to 50 per cent of this element of the bonus is available on the achievement of the stretching corporate budget. Failure to achieve at least
90 per cent of the stretching budget would result in no payment under the corporate half of the bonus.
Awards under the annual incentive scheme are made in cash only.
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 2007, the bonuses awarded to the directors and the relevant percentages are shown in the table below:
Name
Opportunity
Bonus awarded
% awarded
Corporate performance
Individual performance
J E Daniels
225%
£1,782,000
185.6%
90.0%
95.6%
M E Fairey
200%
£780,000
130.0%
80.0%
50.0%
T A Dial
200%
£1,062,500
170.0%
80.0%
90.0%
A G Kane
200%
£770,000
140.0%
80.0%
60.0%
G T Tate
200%
£720,000
120.0%
80.0%
40.0%
H A Weir
200%
£891,250
155.0%
80.0%
75.0%
In 2007, the Group performed strongly against the backdrop of significant turbulence in global financial markets. The 80 per cent of opportunity awarded for
the corporate half of the bonus plan was deemed by the remuneration committee to be the appropriate level to recognise this performance and the marked
progress made by the Group against its key performance indicators. The profit before tax* increased by 6 per cent to £3,919 million and the economic profit
increased by 9 per cent to £1,842 million. Excluding the £280 million charge arising from the market dislocation, the Group grew profits by 13 per cent from
£3,710 million to £4,199 million. While we cannot overlook the impact of the dislocation on our results, these numbers are more reflective of the ongoing
performance of the Group.
Excellent progress has also been made in cost management. Although costs grew by 1 per cent, there has been a significant cost:income ratio improvement
to 49.0 per cent: the groupwide productivity improvement programme exceeded 2007 expectations and remains on track for benefits of approximately
£250 million to be achieved in 2008.
Some of the key non-financial achievements include an increase in the Group customer CARE Index and we again won the award for Britain’s most trusted bank
(for the seventh year in succession) and the CBI Corporate Bank of the year award (for the third year running). We have seen a strengthening of our risk
framework, which has served us well in the current environment. We have also seen a further improvement in our Employee Engagement Index, which on a
comparative basis places us above the financial services norm and in line with the high performing company score. TSR performance, particularly when tracked
against our comparator group, also continues to improve.
Other key achievements within the three commercial divisions of the Group, which impact on the individual balanced score card elements of bonus awards
made to Ms Dial, Mr Tate and Mr Kane, were:
• Profit before tax from UK Retail Banking, excluding settlement of overdraft claims, increased by 17 per cent reflecting strong levels of franchise growth, excellent
cost management and a slightly reduced impairment charge.
• Profit before tax from Wholesale and International Banking decreased by 12 per cent, reflecting the £280 million reduction in profits as a result of market
dislocation. Excluding this impact, profit before tax increased by 5 per cent, and in the relationship banking businesses, good trading momentum
has continued.
• Profit before tax from Insurance and Investments increased by 9 per cent. Strong progress was made in increasing bancassurance sales and the profit before
tax from Scottish Widows Investment Partnership increased by 52 per cent, reflecting higher margins and an improved mix of business. The increased weather
related claims, largely relating to the severe flooding in the UK, contributed to a 47 per cent reduction in profit before tax in the General Insurance business.
*To enable meaningful profit before tax comparisons to be made with 2006, the figures quoted above exclude insurance related volatility, the profit on sale of
businesses, settlement of overdraft claims in 2007 and the pension schemes related credit in 2006.
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Lloyds TSB Group Annual Report and Accounts 2007 67
Directors’ remuneration report
Long-term incentive plan
The aim of the long-term incentive plan is to deliver shareholder value through linking the receipt of shares to an improvement in the performance of the Group
over a three year period.
Awards in any one financial year will not normally exceed three times basic salary at the time of award. In exceptional circumstances this may be increased
up to four times basic salary. Awards will lapse at the end of the performance period to the extent that the performance conditions have not been satisfied.
There will be no retesting.
The award granted to each of the directors in 2007 was set at the maximum level of three times basic salary. This was to ensure that the total compensation
package, including the value of long-term incentives, remains appropriately positioned against the market. Pending a wider review of executive remuneration
and the need to ensure that we continue to provide a fully market competitive remuneration framework, following shareholder consultation the remuneration
committee will be looking to exercise its discretion in 2008 to make enhanced long-term incentive awards for a number of directors. Any such awards will not
exceed the overall limits of the plan as previously approved by shareholders.
Under the plan, awards of shares may be made, with the number of shares received subject to the satisfaction of two distinct pre-determined performance
conditions, measuring performance of the Group.
50 per cent of any award granted (the ‘TSR Award’) will be based on a condition measuring the Company’s TSR against the comparator group listed below. In
order for the TSR Award to vest in full, it will be necessary for the Company’s TSR to exceed the median of the TSR of the comparator group by an average of
7.5 per cent per annum.
17.5 per cent of the TSR Award (8.75 per cent of the total award) will vest where the Company’s TSR is equal to median and vesting will occur on a straight line
basis in between these points. Where the Company’s TSR is below the median of the comparator group, the TSR Award will lapse.
The TSR performance period starts on the date awards are granted, and average the share price over three months before the grant date.
Other companies in the comparator group:
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
From 2008 Northern Rock will be removed from this comparator group following the Government’s decision to take this company into temporary
public ownership.
The other 50 per cent of any award granted (the ‘EPS Award’) will be based on earnings per share (EPS) growth calculated on a compound annualised basis.
In order for the EPS Award to vest in full, the EPS growth over the performance period must be at least equivalent to an average of the Retail Price Index (RPI)
plus 6 per cent per annum. 17.5 per cent of the EPS Award (8.75 per cent of the total award) will vest where EPS growth is an average of the RPI plus 3 per cent
per annum and vesting will occur on a straight line basis in between these points. Where the EPS growth is less than an average of the RPI plus 3 per cent
per annum, the EPS Award will lapse.
EPS is the Group’s normalised earnings per ordinary share as shown in the Group’s report and accounts, adjusted if necessary for consistency. Details of the
Group’s basic earnings per share are shown in the consolidated income statement on page 77.
Details of previous long-term incentive plans are shown on pages 74 and 75.
Other share plans
The executive directors and the chairman are also eligible to participate in the Group’s ‘sharesave’ scheme and the Group’s ‘shareplan’. These are ‘all-employee’
share schemes and performance conditions do not apply.
Dilution limits
The following charts illustrate the shares available for the Group’s share schemes.
All schemes (10% in any consecutive 10 years)
Dilution limits
2007
The following charts illustrate the shares available for the Group’s share schemes.
197.1
367.7
321.6
2006
242.2
Executive schemes (5% in any consecutive 10 years)
2007
2006
20.6
34.7
261.8
247.2
Shares used (million)
Shares available (million)
Pensions
Executive directors are either entitled to participate 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.
68 Lloyds TSB Group Annual Report and Accounts 2007
Directors’ remuneration report
Service agreements
The 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 Group, but would be required to give 6 months’ notice if they wished to leave. Executive directors normally retire at age
60. However, following the implementation of The Employment Equality (Age) Regulations 2006, they may now choose to delay their retirement until age 65.
It is the Group’s policy that where compensation on early termination is due, it should be paid on a phased basis, mitigated in the event that alternative
employment is secured, and that 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.
Any entitlements under the pension scheme or equity plans will be in accordance with the scheme rules on leaving.
Notice to be given by the Company
Date of service agreement/letter of appointment
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Sir Victor Blank
J E Daniels
M E Fairey
T A Dial
A G Kane
G T Tate
H A Weir
6 months
12 months
12 months
12 months
12 months
12 months
12 months
25 January 2006
19 October 2001
28 August 1991
23 May 2005
9 February 2000
29 July 2004
4 March 2004
Independent non-executive directors do not have service agreements and their appointment may be terminated, in accordance with the articles of association,
at any time without compensation.
External appointments
The Group recognises that executive directors may be invited to become non-executive directors of other companies and that these appointments may broaden
their knowledge and experience, to the benefit of the 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 2007, Mr Fairey, Ms Dial and Mrs Weir received fees of £22,333, $38,000 and £42,500 respectively, which were retained by them, for serving as
non-executive directors of other companies. In addition Mrs Weir received and retained £7,500 for serving as a member of the Accounting Standards Board in 2007.
Performance graphs
The first graph compares the Company’s TSR with the median TSR of the comparator group detailed on page 68. This is the comparator group used for the TSR
performance conditions for executive share awards since 2005 (ie executive share options in 2005, performance share plan in 2005/06 and the long-term
incentive plan since 2006).
The second graph illustrates the performance of the Group measured by TSR against a ‘broad equity market index’ over the past five years. The Group has been
a constituent of the FTSE 100 index throughout this five year period.
Comparative TSR
Total shareholder return – Comparator group
Total shareholder return – FTSE 100 Index
160
145
130
115
100
31 Dec
2004
31 Dec
2005
31 Dec
2006
31 Dec
2007
200
175
150
125
100
31 Dec
2002
31 Dec
2003
31 Dec
2004
31 Dec
2005
31 Dec
2006
31 Dec
2007
Lloyds TSB Group plc
Comparator Group median
Source: Alithos Limited
Lloyds TSB Group plc
Rebased to 100 on 31 December 2002
FTSE 100 Index
Source: Datastream
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Lloyds TSB Group Annual Report and Accounts 2007 69
Directors’ remuneration report
Audited information
Directors’ emoluments for 2007
Current directors who served during 2007
Executive directors
J E Daniels
M E Fairey
T A Dial
A G Kane
G T Tate
H A Weir
Non-executive directors
Sir Victor Blank
W C G Berndt
Ewan Brown
J P du Plessis
P N Green
Sir Julian Horn-Smith
Lord Leitch
Former directors who served during 2007
G J N Gemmell
D S Julius
Others
Salaries/
fees
£000
Other benefits
Cash
£000
Non cash
£000
Performance-
related
payments
£000
2007
Total
£000
2006
Total
£000
105
35
285
20
21
83
8
7
4
20
27
19
1,811
798
1,081
787
738
909
20
11
30
960
600
625
550
600
575
600
90
151
80
56
95
130
97
27
2,884
1,440
1,995
1,377
1,386
1,586
661
90
151
80
56
95
130
97
27
2,444
1,885
1,719
1,252
1,303
1,310
405
72
134
67
–
82
80
121
68
315
5,236
569
96
6,154
12,055
11,257
Mr Fairey waived fees payable to him as a director of Lloyds TSB Group Pension Trust (No.1) Limited and Lloyds TSB Group Pension Trust (No.2) Limited, which
totalled £10,750 in 2007 (2006: £10,000 waived).
Mr Brown waived fees payable to him as a director and chairman of Lloyds TSB Group Pension Trust (No.1) Limited and Lloyds TSB Group Pension Trust (No.2) Limited,
which totalled £15,500 in 2007 (2006: £14,750 waived).
Mr Gemmell left the board on 30 September 2007 but remained a director of Scottish Widows Group and received fees of £11,250 from that company for the
period October to December 2007.
The cash column under ‘other benefits’ includes flexible benefits payments (4 per cent of basic salary), the tax planning allowances for Mr Daniels and Ms Dial,
the housing allowance and pension scheme allowance for Ms Dial, payments to certain directors who elect to take cash rather than a company car under the
car scheme and the cash balance of pension allowance for Mrs Weir. Sir Victor Blank has elected to take cash rather than a company car and the payment made
to him includes a backdated payment in respect of the period May–December 2006.
The non cash column includes amounts relating to the use of a company car, use of a company driver and private medical insurance. 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. 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. The payment made to Sir Victor Blank relates to his participation in the shareplan in 2007 and a backdated entitlement in respect of the
period May–December 2006.
70 Lloyds TSB Group Annual Report and Accounts 2007
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. However, following the implementation of The Employment Equality (Age) Regulations 2006, they may now choose
to delay their retirement until age 65. 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.
Ms Dial elected to become a member of a pension scheme for life cover only. She joined the Lloyds TSB Group on 1 June 2005. She receives a salary supplement
of 20 per cent of basic pay as an alternative to an employer contribution to a pension scheme.
Defined contribution scheme members
Mr Tate is a member of a defined contribution scheme. During the year to 31 December 2007, the employer has made contributions to the defined contribution
scheme in respect of him totalling £120,000.
Mrs Weir is a member of a defined contribution scheme. During the year to 31 December 2007, the employer has made contributions to the defined contribution
scheme in respect of her totalling £52,708.
Defined benefit scheme members
J E Daniels
M E Fairey
A G Kane
Accrued
pension at
31 December
2007
£000
(a)
Accrued
pension at
31 December
2006
£000
(b)
Change in
accrued
pension
£000
(a)-(b)
Transfer
value at
31 December
2007
£000
(c)
Transfer
value at
31 December
2006
£000
(d)
147
322
306
120
287
265
27
35
41
2,878
7,499
5,701
2,100
6,024
4,415
Additional
pension
earned to
31 December
2007
£000
(e)
Transfer
value of the
increase
£000
(f)
23
25
31
443
577
573
Change in
transfer
value
£000
(c)-(d)
778
1,475
1,286
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 2007 and 2006,
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 2007 based on factors supplied by the actuary of the relevant
Lloyds TSB Group pension scheme in accordance with actuarial guidance note GN11. The basic method used to arrive at the factors has not changed during the
year, but the underlying basis has been strengthened to allow for mortality improvements and a reduction in the long-term post-retirement investment return.
Column (d) is the equivalent transfer value, but calculated as at 31 December 2006 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.
Major changes to the legislation governing the provision of pensions in the UK (known as pension simplification) came into effect in April 2006. Benefits from
an approved pension scheme will be limited to the Lifetime Allowance, currently £1.6 million which is equivalent to an annual pension of £80,000. Any benefit
in excess of this amount will incur a tax charge for the individual. The Group has agreed that if an executive director has benefits in excess of the Lifetime
Allowance they may cease to accrue benefits in the Scheme and receive a salary supplement as an alternative. This will not cost the Group more than the
current arrangements. The Group will not compensate any individual in respect of any increased tax liability arising from pension simplification. To date, the
executive directors affected have elected to continue to accrue benefits in the approved scheme.
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Lloyds TSB Group Annual Report and Accounts 2007 71
Directors’ remuneration report
Directors’ interests
The interests, all beneficial, of those who were directors at 31 December 2007 in shares in Lloyds TSB Group were:
Shares
Executive directors
J E Daniels
M E Fairey
T A Dial
A G Kane
G T Tate
H A Weir
Non-executive directors
Sir Victor Blank
W C G Berndt
Ewan Brown
J P du Plessis
P N Green
Sir Julian Horn-Smith
Lord Leitch
At 1 January 2007
(or later date of
appointment)
At 31 December
2007
At 21 February
2008*
166,099
83,943
137,076
8,187
165,174
82,864
577
136,078
4,139
6,255
100,000
96,000
4,469
10,000
–
5,000
10,000
166,023
83,914
1,138
137,000
8,112
10,511
200,000
170,000
4,677
10,000
5,000
5,000
10,000
* The changes in beneficial interests between 31 December 2007 and 21 February 2008 related to ‘partnership’ and ‘matching’ shares acquired under the
Lloyds TSB Group shareplan.
72 Lloyds TSB Group Annual Report and Accounts 2007
Directors’ remuneration report
Audited information
Interests in share options
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At
1 January
2007
599,239
305,232
939,177
521,876
2,236
48,000
57,000
85,896
10,931
42,884
663,157
555,992
344,754
1,789
464,134
50,000
27,000
64,786
11,841
34,759
5,783
529,105
523,255
300,474
348,837
268,336
195,409
300,474
3,851
556,208
5,093
300,474
242,825
J E Daniels
M E Fairey
T A Dial
A G Kane
G T Tate
H A Weir
Other share plan
T A Dial
a) Sharesave.
Granted
during
the year
Exercised/
lapsed
during
the year
599,239
305,232
At
31 December
2007
Exercise
price
Exercise periods
From
To
Notes
–
–
939,177
521,876
2,236
48,000
57,000
85,896
10,931
42,884
394.25p
21/2/2006
20/2/2013
430p
14/8/2006
13/8/2013
419.25p
18/3/2007
17/3/2014
474.25p
17/3/2008
16/3/2015
418p
1/6/2009
30/11/2009
859.5p
15/5/2001
14/5/2008
817p
2/8/2002
549.5p
615.5p
6/3/2003
8/8/2003
655p
6/3/2004
1/8/2009
5/3/2010
7/8/2010
5/3/2011
663,157
–
394.25p
21/2/2006
20/2/2013
555,992
344,754
1,789
419.25p
18/3/2007
17/3/2014
474.25p
17/3/2008
16/3/2015
418p
1/6/2009
30/11/2009
464,134
474p
11/8/2008
10/8/2015
50,000
27,000
64,786
11,841
34,759
5,783
880p
4/3/2001
3/3/2008
887.5p
549.5p
615.5p
655p
284p
4/3/2002
3/3/2009
6/3/2003
8/8/2003
6/3/2004
5/3/2010
7/8/2010
5/3/2011
1/6/2008
30/11/2008
529,105
–
394.25p
21/2/2006
20/2/2013
523,255
300,474
419.25p
18/3/2007
17/3/2014
474.25p
17/3/2008
16/3/2015
348,837
–
430p
14/8/2006
13/8/2013
268,336
195,409
300,474
3,851
419.25p
18/3/2007
17/3/2014
403p
12/8/2007
11/8/2014
474.25p
17/3/2008
16/3/2015
418p
1/6/2011
30/11/2011
556,208
424.75p
29/4/2007
28/4/2014
5,093
321p
1/11/2009
30/4/2010
300,474
474.25p
17/3/2008
16/3/2015
d, i
d, i
d, g
e, h
a, h
b, f
b, g
c, g
c, g
c, g
d, i
d, g
e, h
a, h
e, h
b, f
b, g
c, g
c, g
c, g
a, h
d, i
d, g
e, h
d, i
d, g
d, g
e, h
a, h
d, g
a, h
e, h
242,825
(see page 75)
1/6/2008
30/11/2008
h
b) Executive option granted between March 1997 and August 1999.
c) Executive option granted between March 2000 and March 2001.
d) Executive option granted between February 2003 and August 2004.
e) Executive options granted from March 2005.
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) These share options lapsed as the performance condition had not been met.
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Lloyds TSB Group Annual Report and Accounts 2007 73
Directors’ remuneration report
Audited information
The market price for a share in the Company at 1 January 2007 and 31 December 2007 was 577.5p and 472p, respectively. The range of prices between
1 January 2007 and 31 December 2007 was 451.25p to 614p.
None of the other directors at 31 December 2007 had options to acquire shares in Lloyds TSB Group plc or its subsidiaries.
The following table contains information on the performance conditions for executive options granted since 1997. 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
March 1997 – August 1999
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 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.
February 2003 – August 2004
March 2005 – August 2005
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 2007 Lloyds TSB Group was ranked 9th after four years of the performance period for options granted
in 2004.
Options granted in 2003 lapsed as the performance condition had not been met.
That the Company’s ranking based on TSR over the relevant period against a comparator group (15 companies
including Lloyds TSB) must be at least eighth, when 30 per cent of the option will be exercisable. If the Company is
ranked first to fourth position in the group, then 100 per cent of the option will be exercisable and if ranked ninth or
below the performance condition is not met.
At the end of 2007 Lloyds TSB Group was ranked 5th after the three year performance period for options granted
in 2005.
Lloyds TSB performance share plan
Under the plan, executive directors were required to defer 50 per cent of their bonus awards in 2005 and 2006 into shares in the Company, known as bonus
shares. The number of bonus shares awarded was calculated after the deduction of income tax and national insurance from the deferred element of the bonus.
The bonus shares are held on behalf of the executive for a period of three years before release.
Executives received a further award of ’performance shares’ on the basis of two performance shares for each bonus share. The receipt of the performance
shares is dependent on the satisfaction of a TSR performance condition measured over three financial years of the Company.
The following bonus and performance shares relating to the bonus awards for 2004 and 2005 are available under the plan.
J E Daniels
M E Fairey
T A Dial
A G Kane
G T Tate
H A Weir
At
1 January
2007
57,737
50,944
31,901
22,459
16,909
22,171
20,531
22,710
27,358
16,628
20,062
Bonus shares
At
31 December
2007
Performance shares
At
1 January
2007
At
31 December
2007
57,737
50,944
31,901
22,459
16,909
22,171
20,531
22,710
27,358
16,628
20,062
195,720
172,694
108,140
76,134
57,322
75,156
69,598
76,982
92,738
56,366
68,008
195,720
172,694
108,140
76,134
57,322
75,156
69,598
76,982
92,738
56,366
68,008
Bonus shares
release and
performance
share award
date
18/3/2008
20/3/2009
18/3/2008
20/3/2009
20/3/2009
18/3/2008
20/3/2009
18/3/2008
20/3/2009
18/3/2008
20/3/2009
Award
price
479p
566.10p
479p
566.10p
566.10p
479p
566.10p
479p
566.10p
479p
566.10p
The following table contains information on the performance conditions for performance shares. The remuneration committee chose the relevant performance
condition because it was felt to be challenging, aligned to shareholders’ interests and appropriate at the time.
Performance shares awarded
Performance conditions
March 2005 and March 2006
That the Company’s ranking based on TSR over the relevant period against a comparator group (15 companies
including Lloyds TSB) must be at least eighth for any shares to be received. If ranked ninth or below no shares would
be received. The maximum of two performance shares for each bonus share will be awarded only if the Company
is 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. Between first
and fifth positions and fifth and eighth positions a sliding scale will apply.
Whilst income tax was deducted from the deferred bonus before the conversion to bonus shares, where a match of
performance shares is justified, these shares will be awarded as if income tax had not been deducted. This maintains
the original design of the plan prior to the issue of guidance from HM Revenue & Customs in December 2004.
At the end of 2007 Lloyds TSB Group was ranked 5th after the three year performance period for the performance
shares awarded in 2005.
74 Lloyds TSB Group Annual Report and Accounts 2007
Directors’ remuneration report
Audited information
Lloyds TSB long-term incentive plan
The following are conditional share awards available under the plan. The share price for the 2007 award was 539p. Further information regarding this plan can
be found on page 68.
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M E Fairey
T A Dial
A G Kane
G T Tate
H A Weir
At
1 January
2007
507,692
328,846
328,846
288,460
297,114
288,460
Awarded
during the
year
534,322
333,951
347,866
306,122
333,951
320, 037
At
31 December
2007
507,692
534,322
328,846
333,951
328,846
347,866
288,460
306,122
297,114
333,951
288,460
320,037
Year of
vesting
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
The following table contains information on the performance conditions for awards made under the long-term incentive plan. The remuneration committee
chose the relevant performance condition because it was felt to be challenging, aligned to shareholders’ interests and appropriate at the time.
LTIP award
May 2006
March 2007
Performance conditions
For 50 per cent of the award (the ‘EPS Award’) – the percentage increase in earnings per share of the Group (on a
compound annualised basis) over the relevant period must be at least an average of 6 percentage points per annum
greater than the percentage increase (if any) in the retail price index over the same period. If it is less than 3 per cent
per annum the EPS Award will lapse. If the increase is more than 3 but less than 6 per cent per annum then the
proportion of shares released will be on a straight line basis between 17.5 per cent and 100 per cent. The relevant
period commenced on 1 January 2006 and ends on 31 December 2008.
For the other 50 per cent of the award (the ‘TSR Award’) – it will be necessary for the Company’s TSR to exceed the
median of a comparator group (14 companies) over the relevant period by an average of 7.5 per cent per annum
for the TSR Award to vest in full. 17.5 per cent of the TSR Award will vest where the Company’s TSR is equal to median
and vesting will occur on a straight line basis in between these points. Where the Company’s TSR is below the
median of the comparator group, the TSR Award will lapse. The relevant period commenced on 1 January 2006 and
ends on 31 December 2008.
For 50 per cent of the award (the ‘EPS Award’) – the performance condition was as described for May 2006 with the
relevant performance period commencing on 1 January 2007 and ending on 31 December 2009.
For the other 50 per cent of the award (the ‘TSR Award’) – the performance condition was as described for
May 2006 with the relevant performance period commencing on 8 March 2007 (the date of Award) and ending on
7 March 2010.
Alithos Limited provided information for the testing of the TSR performance conditions for the Group’s long-term incentive schemes. EPS is the Group’s normalised
earnings per share as shown in the Group’s report and accounts, subject to such adjustments as the remuneration committee regard as necessary for
consistency.
Other share plan
Lloyds TSB Group executive share plan 2005
Ms Dial is the only participant in this plan and holds an option, granted to her in June 2005, to acquire 242,825 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 her from the USA and is designed to encourage
her to remain with Lloyds TSB Group plc. The option is not, therefore, subject to any performance condition but will normally become exercisable only if she
remains an employee, and has not given notice of resignation, on 31 May 2008. Full details of the plan were set out in the 2005 annual report.
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.
On behalf of the board
A J Michie
Company Secretary
21 February 2008
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Lloyds TSB Group Annual Report and Accounts 2007 75
Report of the independent auditors on the consolidated
financial statements
To the members of Lloyds TSB Group plc
We have audited the consolidated financial statements of Lloyds TSB Group plc for the year ended 31 December 2007 which comprise the consolidated income
statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes. These
consolidated financial statements have been prepared under the accounting policies set out therein.
We have reported separately on the parent company financial statements of Lloyds TSB Group plc for the year ended 31 December 2007 and on the information
in the directors’ remuneration report that is described as having been audited.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the annual report and the consolidated financial statements in accordance with applicable law and International
Financial Reporting Standards (‘IFRSs’) as adopted by the European Union are set out in the statement of directors’ responsibilities on page 63.
Our responsibility is to audit the consolidated financial statements in accordance with relevant legal and regulatory requirements and International Standards
on Auditing (UK and Ireland). 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 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 into 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 consolidated financial statements give a true and fair view and whether the consolidated financial statements
have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether, in our opinion, the
information given in the directors’ report is consistent with the consolidated financial statements. The information given in the directors’ report includes that
specific information presented in the Overview and the Business Review that is cross referred from the principal activities, business review, future developments
and financial risk management objectives and policies section of the directors’ report.
In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by
law regarding directors’ remuneration and other transactions is not disclosed.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the Combined Code (2006) 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 form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control
procedures.
We read other information contained in the annual report and consider whether it is consistent with the audited consolidated financial statements. The other
information comprises only the Overview, the unaudited part of the Business Review, the directors’ report, the corporate governance disclosures, the unaudited
part of the directors’ remuneration report and the shareholder information. We consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the consolidated financial statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the consolidated financial statements. It also includes an assessment of
the significant estimates and judgments made by the directors in the preparation of the consolidated financial statements, and of whether the accounting
policies are appropriate to 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 consolidated financial statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the consolidated financial statements.
Opinion
In our opinion:
• the consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs
as at 31 December 2007 and of its profit and cash flows for the year then ended;
• the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and
• the information given in the directors’ report is consistent with the consolidated financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
Southampton, England
21 February 2008
76 Lloyds TSB Group Annual Report and Accounts 2007
Consolidated income statement
for the year ended 31 December 2007
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Interest and similar income
Interest and similar expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Net trading income
Insurance premium income
Other operating income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Profit on sale of businesses
Profit before tax
Taxation
Profit for the year
Profit attributable to minority interests
Profit attributable to equity shareholders
Profit for the year
Basic earnings per share
Diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
Note
2007
£ million
2006
£ million
16,874
(10,775)
6,099
3,224
(600)
2,624
3,123
5,430
952
12,129
18,228
(7,522)
10,706
(5,567)
5,139
(1,796)
657
4,000
(679)
14,108
(8,779)
5,329
3,116
(638)
2,478
6,341
4,719
806
14,344
19,673
(8,569)
11,104
(5,301)
5,803
(1,555)
–
4,248
(1,341)
3,321
2,907
32
3,289
104
2,803
3,321
2,907
58.3p
49.9p
57.9p
49.5p
4
5
6
7
8
9
10
11
12
13
14
14
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Lloyds TSB Group Annual Report and Accounts 2007 77
Consolidated balance sheet
at 31 December 2007
Assets
Cash and balances at central banks
Items in the course of collection from banks
Trading and other financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Available-for-sale financial assets
Investment property
Goodwill
Value of in-force business
Other intangible assets
Tangible fixed assets
Other assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
The directors approved the consolidated financial statements on 21 February 2008.
Sir Victor Blank
Chairman
J Eric Daniels
Group Chief Executive
Helen A Weir
Group Finance Director
Note
2007
£ million
2006
£ million
15
16
17
18
20
21
22
23
24
25
26
4,330
1,242
57,911
8,659
34,845
1,898
1,431
67,695
5,565
40,638
209,814
188,285
20,196
3,722
2,358
2,218
149
2,839
5,063
19,178
4,739
2,377
2,723
138
4,252
4,679
353,346
343,598
78 Lloyds TSB Group Annual Report and Accounts 2007
Consolidated balance sheet
at 31 December 2007
Equity and liabilities
Liabilities
Deposits from banks
Customer accounts
Items in course of transmission to banks
Trading and other liabilities at fair value through profit or loss
Derivative financial instruments
Debt securities in issue
Liabilities arising from insurance contracts and participating investment contracts
Liabilities arising from non-participating investment contracts
Unallocated surplus within insurance businesses
Other liabilities
Retirement benefit obligations
Current tax liabilities
Deferred tax liabilities
Other provisions
Subordinated liabilities
Total liabilities
Equity
Share capital
Share premium account
Other reserves
Retained profits
Shareholders’ equity
Minority interests
Total equity
Total equity and liabilities
The accompanying notes are an integral part of the consolidated financial statements.
Note
2007
£ million
2006
£ million
27
28
29
16
30
31
32
33
34
35
36
37
38
39
40
41
42
39,091
36,394
156,555
139,342
668
3,206
7,582
51,572
38,063
18,197
554
9,690
2,144
484
948
209
781
1,184
5,763
54,118
41,445
24,370
683
10,985
2,462
817
1,416
259
11,958
12,072
340,921
332,091
1,432
1,298
(60)
9,471
12,141
284
1,429
1,266
336
8,124
11,155
352
12,425
11,507
353,346
343,598
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Lloyds TSB Group Annual Report and Accounts 2007 79
Consolidated statement of changes in equity
Balance at 1 January 2006
2,590
395
7,210
10,195
435
10,630
Attributable to equity shareholders
Share capital
and premium
£ million
Other
reserves
£ million
Retained
profits
£ million
Total
£ million
Minority
interests
£ million
Total
£ million
Movement in available-for-sale financial assets, net of tax:
– change in fair value
– transferred to income statement in respect of disposals
Movement in cash flow hedges, net of tax
Currency translation differences
Net income recognised directly in equity
Profit for the year
Total recognised income for 2006
Dividends
Purchase/sale of treasury shares
Employee share option schemes:
– value of employee services
– proceeds from shares issued
Repayment of capital to minority shareholders
–
–
–
–
–
–
–
–
–
–
105
–
(10)
(21)
1
(29)
(59)
–
(59)
–
–
–
–
–
–
–
–
–
–
(10)
(21)
1
(29)
(59)
2,803
2,803
2,803
(1,919)
(35)
65
–
–
2,744
(1,919)
(35)
65
105
–
–
–
–
(4)
(4)
104
100
(32)
–
–
–
(151)
(10)
(21)
1
(33)
(63)
2,907
2,844
(1,951)
(35)
65
105
(151)
Balance at 31 December 2006
2,695
336
8,124
11,155
352
11,507
Movement in available-for-sale financial assets, net of tax:
– change in fair value
– transferred to income statement in respect of disposals
– transferred to income statement in respect of impairment
– disposal of businesses
Movement in cash flow hedges, net of tax
Currency translation differences
Net income recognised directly in equity
Profit for the year
Total recognised income for 2007
Dividends
Purchase/sale of treasury shares
Employee share option schemes:
– value of employee services
– proceeds from shares issued
Repayment of capital to minority shareholders
–
–
–
–
–
–
–
–
–
–
–
–
35
–
(436)
(5)
49
(6)
(15)
17
(396)
–
–
–
–
–
–
–
–
3,289
(396)
–
–
–
–
–
3,289
(1,957)
(1)
16
–
–
(436)
(5)
49
(6)
(15)
17
(396)
3,289
2,893
(1,957)
(1)
16
35
–
–
–
–
–
–
(1)
(1)
32
31
(19)
–
–
–
(80)
(436)
(5)
49
(6)
(15)
16
(397)
3,321
2,924
(1,976)
(1)
16
35
(80)
Balance at 31 December 2007
2,730
(60)
9,471
12,141
284
12,425
The accompanying notes are an integral part of the consolidated financial statements.
80 Lloyds TSB Group Annual Report and Accounts 2007
Consolidated cash flow statement
for the year ended 31 December 2007
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Adjustments for:
Change in operating assets
Change in operating liabilities
Non-cash and other items
Tax paid
Net cash provided by operating activities
Cash flows from investing activities
Purchase of available-for-sale financial assets
Proceeds from sale and maturity of available-for-sale financial assets
Purchase of fixed assets
Proceeds from sale of fixed assets
Acquisition of businesses, net of cash acquired
Disposal of businesses, net of cash disposed
Net cash used in investing activities
Cash flows from financing activities
Dividends paid to equity shareholders
Dividends paid to minority interests
Interest paid on subordinated liabilities
Proceeds from issue of subordinated liabilities
Proceeds from issue of ordinary shares
Repayment of subordinated liabilities
Repayment of capital to minority shareholders
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of the consolidated financial statements.
Note
2007
£ million
2006
£ million
49(a)
49(b)
49(c)
49(f)
49(g)
49(e)
49(e)
49(e)
49(e)
49(e)
4,000
4,248
(16,982)
21,541
2,784
(859)
(31,995)
33,069
1,555
(798)
10,484
6,079
(21,667)
(23,448)
19,468
(1,334)
982
(8)
1,476
18,106
(1,724)
1,257
(20)
936
(1,083)
(4,893)
(1,957)
(1,919)
(19)
(709)
–
35
(300)
(80)
(32)
(713)
1,116
105
(759)
(151)
(3,030)
(2,353)
82
(148)
6,453
25,438
(1,315)
26,753
49(d)
31,891
25,438
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Lloyds TSB Group Annual Report and Accounts 2007 81
Notes to the group accounts
1 Accounting policies
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European
Union (EU). IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by
the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee and its predecessor body. The
EU endorsed version of IAS 39 ‘Financial Instruments: Recognition and Measurement’ relaxes some of the hedge accounting requirements; the Group has not
taken advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the EU and IFRS as issued by
the IASB.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, available-for-sale
financial assets, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts.
The following IFRS pronouncements relevant to the Group have been adopted in these consolidated financial statements:
(i)
IFRS 7 ‘Financial Instruments: Disclosures’. This standard, which was effective from 1 January 2007, requires more detailed qualitative and quantitative
disclosures about exposure to risks arising from the Group’s financial instruments. As a disclosure standard, the application of this new standard has not
had any impact on amounts recognised in the financial statements. The IFRS 7 disclosures are set out in these financial statements and in the business
review on pages 36 to 51. IFRS 7 supersedes IAS 30 ‘Disclosures in the Financial Statements of Banks and Similar Financial Institutions’ and the disclosure
requirements previously contained in IAS 32 ‘Financial Instruments: Presentation’.
(ii) Amendment to IAS 1 ‘Presentation of Financial Statements – Capital Disclosures’. This standard, which was effective from 1 January 2007, requires additional
disclosures of the objectives, policies and processes for managing capital, quantitative data about what the Group regards as capital, and compliance with
capital requirements. These disclosures are set out in the business review on pages 48 to 56.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2007 and which have not been applied
in preparing these financial statements are given in note 50.
The Group’s accounting policies are set out below.
(a) Consolidation
The assets, liabilities and results of Group undertakings (including special purpose entities) are included in the financial statements on the basis of accounts
made up to the reporting date. Group undertakings include all entities over which the Group has the power to govern the financial and operating policies which
generally accompanies a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether the Group controls another entity. Group undertakings are fully consolidated from the date on which
control is transferred to the Group; they are de-consolidated from the date that control ceases. Open Ended Investment Companies (OEICs) where the Group,
through the Group’s life funds, has a controlling interest are consolidated; the unit holders’ interest is reported in other liabilities. Intra-Group transactions,
balances and unrealised gains and losses on transactions between Group companies are eliminated.
(b) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable net assets and contingent liabilities of the
acquired entity at the date of acquisition. Goodwill is recognised as an asset at cost and is tested at least annually for impairment. If an impairment is identified
the carrying value of the goodwill is written down immediately through the income statement and is not subsequently reversed. At the date of disposal of a
Group undertaking, the carrying value of attributable goodwill is included in the calculation of the profit or loss on disposal except where it has been written off
directly to reserves in the past.
(c) Other intangible assets
Other intangible assets comprise capitalised software enhancements and customer lists. Capitalised software enhancements are amortised over periods not
exceeding five years, being their estimated useful lives, using the straight-line method. Customer lists are amortised over periods not exceeding 15 years, being
their estimated useful lives, in line with the income expected to arise from those customers and are subject to annual reassessment. All other intangible assets
are reviewed for impairment whenever events or any changes in circumstances indicate that the carrying amount may not be recoverable. In the event that an
asset’s carrying amount is determined to be greater than its recoverable amount, it is written down immediately.
(d) Revenue recognition
Interest income and expense are recognised in the income statement for all interest-bearing financial instruments, except for those classified at fair value
through profit or loss, using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or
liability and of allocating the interest income or interest expense. The effective interest rate is the rate that exactly discounts the estimated future cash payments
or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.
The effective interest rate is calculated on initial recognition of the financial asset or liability, estimating the future cash flows after considering all the contractual
terms of the instrument but not future credit losses. The calculation includes all amounts paid or received by the Group including expected early redemptions
and related penalties and premiums and discounts that are an integral part of the overall return as well as direct incremental transaction costs related to the
acquisition, issue or disposal of a financial instrument. Once a financial asset or a group of similar financial assets has been written down as a result of an
impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment
loss (see j).
Fees and commissions which are not an integral part of the effective interest rate are generally recognised when the service has been provided. Loan
commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective
interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retains no part of the loan
package for itself or retains a part at the same effective interest rate for all interest-bearing financial instruments, including loans and advances, as for the
other participants.
Dividend income is recognised when the right to receive payment is established.
Revenue recognition policies specific to life assurance and general insurance business are detailed below (see r).
82 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
1 Accounting policies continued
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(e) Trading securities, other financial assets and liabilities at fair value through profit or loss, and available-for-sale
financial assets
Debt securities and equity shares acquired principally for the purpose of selling in the short term or which are part of a portfolio which is managed for
short-term gains are classified as trading securities and recognised in the balance sheet at their fair value. Gains and losses arising from changes in their fair
value together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur.
Other financial assets and liabilities at fair value through profit or loss are designated as such by management upon initial recognition. Such assets and liabilities
are carried in the balance sheet at their fair value and gains and losses arising from changes in fair value together with interest coupons and dividend income
are recognised in the income statement within net trading income in the period in which they occur.
Financial assets and liabilities are designated as at fair value through profit or loss on acquisition:
• When doing so results in more relevant information because either:
– it eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognising gains or
losses on them on a different basis; or
– the assets and liabilities are part of a group which is managed, and its performance evaluated, on a fair value basis in accordance with a documented risk
management or investment strategy with management information also prepared on this basis, or
• Where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would
otherwise need to be separately accounted for.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group
establishes a fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are
substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.
Debt securities and equity shares, other than those classified as trading securities or at fair value through profit or loss, are classified as available-for-sale and
recognised in the balance sheet at their fair value; available-for-sale investments are those intended to be held for an indeterminate period of time and may
be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Gains and losses arising from changes in the fair value
of investments classified as available-for-sale are recognised directly in equity, until the financial asset is either sold, becomes impaired or matures, at which
time the cumulative gain or loss previously recognised in equity is recognised in the income statement. Interest calculated using the effective interest method is
recognised in the income statement.
Purchases and sales of securities and other financial assets and liabilities are recognised on trade date, being the date that the Group is committed to purchase
or sell an asset. Trading securities and other financial assets and liabilities at fair value through profit or loss are initially recognised at fair value. Available-for-sale
financial assets are initially recognised at fair value inclusive of transaction costs. These financial assets are derecognised when the rights to receive cash flows
from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership.
(f) Loans and advances to banks and customers
Loans and advances to banks and customers are accounted for at amortised cost using the effective interest method, except those which the Group intends to
sell in the near term and which are accounted for at fair value, with the gains and losses arising from changes in their fair value reflected in the income
statement. Loans and advances are initially recognised when cash is advanced to the borrowers at fair value inclusive of transaction costs. Loans and advances
are derecognised when the rights to receive cash flows from them have expired or where the Group has transferred substantially all risks and rewards
of ownership.
The Group has entered into securitisation and similar transactions to finance certain loans and advances to customers. Such financial assets continue to be
recognised by the Group, together with a corresponding liability for the funding except in those cases where substantially all of the risks and rewards associated
with the assets have been transferred or a significant proportion but not all of the risks and rewards have been transferred and the transferee has the ability to
sell the assets when the assets are derecognised in full. If a fully proportional share of all, or of specifically identified, cash flows have been transferred, then
that proportion of the assets is derecognised.
(g) Sale and repurchase agreements
Securities sold subject to repurchase agreements (‘repos’) are recognised on the balance sheet where all of the risks and rewards are retained; the counterparty
liability is included in deposits from banks or customer accounts, as appropriate. Securities purchased under agreements to resell (‘reverse repos’) are recorded
as loans and advances to banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the
life of the agreements using the effective interest method.
Securities lent to counterparties are retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless these are
sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability.
(h) Derivative financial instruments and hedge accounting
All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and
using valuation techniques, including discounted cash flow and options pricing models, as appropriate. Derivatives are carried in the balance sheet as assets
when their fair value is positive and as liabilities when their fair value is negative.
The method of recognising the movements in the fair value of the derivatives depends on whether they are designated as hedging instruments and, if so, the
nature of the item being hedged. Derivatives may only be designated as hedges provided certain strict criteria are met. At the inception of a hedge its terms
must be clearly documented and there must be an expectation that the derivative will be highly effective in offsetting changes in the fair value or cash flow of
the hedged risk. The effectiveness of the hedging relationship must be tested throughout its life and if at any point it is concluded that it is no longer highly
effective in achieving its objective the hedge relationship is terminated.
The Group designates certain derivatives as either: (1) hedges of the fair value of the interest rate risk inherent in recognised assets or liabilities (fair value
hedges); (2) hedges of highly probable future cash flows attributable to recognised assets or liabilities (cash flow hedges); or (3) hedges of net investments in
foreign operations (net investment hedges). These are accounted for as follows:
Lloyds TSB Group Annual Report and Accounts 2007 83
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Notes to the group accounts
1 Accounting policies continued
(1) Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes
in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, changes
in the fair value attributable to the hedged risk are no longer recognised in the income statement; the adjustment that has been made to the carrying amount
of a hedged item is amortised to the income statement over the period to maturity.
(2) Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. The gain or loss
relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled to the income statement in
the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for
hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately
recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is
immediately transferred to the income statement.
(3) Net investment hedges
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the
effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains
and losses accumulated in equity are included in the income statement when the foreign operation is disposed of.
Changes in the fair value of any derivative instrument that is not part of a hedging relationship are recognised immediately in the income statement.
Derivatives embedded in financial instruments and insurance contracts (unless the embedded derivative is itself an insurance contract) are treated as separate
derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value
through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. In accordance
with IFRS 4 a policyholder’s option to surrender an insurance contract for a fixed amount is not treated as an embedded derivative.
(i) Offset
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of set-off and there is an
intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
(j) Impairment of financial assets
(1) Assets accounted for at amortised cost
At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition, there is objective evidence that a
financial asset or group of financial assets has become impaired.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss may include:
• Delinquency in contractual payments of principal and/or interest;
• Indications that the borrower or group of borrowers is experiencing significant financial difficulty;
• Restructuring of debt to reduce the burden on the borrower;
• Breach of loan covenants or conditions; and
• Initiation of bankruptcy proceedings.
The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the periods
used vary between three months and nine months.
If there is objective evidence that an impairment loss has been incurred, an allowance is established which is calculated as the difference between the balance
sheet carrying value of the asset and the present value of estimated future cash flows discounted at that asset’s original effective interest rate. For the Group’s
portfolios of smaller balance homogenous loans, such as the residential mortgage, personal lending and credit card portfolios, allowances are calculated for
groups of assets taking into account historical cash flow experience. For the Group’s other lending portfolios, allowances are established on a case-by-case
basis. If an asset has a variable interest rate, the discount rate used for measuring the impairment loss is the current effective interest rate. The calculation of
the present value of the estimated future cash flows of a collateralised asset or group of assets reflects the cash flows that may result from foreclosure less the
costs of obtaining and selling the collateral, whether or not foreclosure is probable.
If there is no objective evidence of individual impairment the asset is included in a group of financial assets with similar credit risk characteristics and collectively
assessed for impairment. Segmentation takes into account such factors as the type of asset, industry, geographical location, collateral type, past-due status
and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets as they are indicative of the
borrower’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows are estimated on the basis of the
contractual cash flows of the assets in the group and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is
adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience
is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future
cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment
was recognised, such as an improvement in the borrower’s credit rating, the allowance is adjusted and the amount of the reversal is recognised in the
income statement.
A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have
been received or there is no realistic prospect of recovery (as a result of the customer’s insolvency, ceasing to trade or other reason) and the amount of the loss
has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement.
84 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
1 Accounting policies continued
(2) Available-for-sale financial assets
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The Group assesses at each balance sheet date whether there is objective evidence that an available-for-sale financial asset is impaired. In addition to the criteria
for financial assets accounted for at amortised cost set out above, this assessment involves considering whether there has been a significant or prolonged decline
in the fair value of the asset below its cost, reviewing the current financial circumstances (including creditworthiness) and future prospects of the issuer and
assessing the future cash flows expected to be realised. If an impairment loss has been incurred, the cumulative loss measured as the difference between the
acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss on that asset previously recognised, is
removed from equity and recognised in the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale
increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed through
the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.
(3) Renegotiated loans
Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered
to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if further renegotiated.
(k) Investment property
Property held for long-term rental yields and capital appreciation within the long-term assurance funds is classified as investment property. Investment property
comprises freehold and long leasehold land and buildings and is carried in the balance sheet at fair value, being the open market value as determined in
accordance with the guidance published by the Royal Institution of Chartered Surveyors. If this information is not available, the Group uses alternative valuation
methods such as discounted cash flow projections or recent prices on less active markets. These valuations are reviewed at least annually by an independent
valuation expert. Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues
to be measured at fair value. Changes in fair value are recorded in the income statement.
(l) Tangible fixed assets
Tangible fixed assets are included at cost less accumulated depreciation. The value of land (included in premises) is not depreciated. Depreciation on other
assets is calculated using the straight-line method to allocate the difference between the cost and the residual value over their estimated useful lives, as follows:
Premises (excluding land):
• Freehold/long and short leasehold premises: shorter of 50 years or the remaining period of the lease
• Leasehold improvements: shorter of 10 years or the remaining period of the lease
Equipment:
• Fixtures and furnishings: 10-20 years
• Other equipment and motor vehicles: 2-8 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In the event that
an asset’s carrying amount is determined to be greater than its recoverable amount it is written down immediately. The recoverable amount is the higher of the
asset’s fair value less costs to sell and its value in use.
(m) Leases
(1) As lessee
The leases entered into by the Group are primarily operating leases. Operating lease rentals are charged to the income statement on a straight-line basis over
the period of the lease.
When an operating lease is terminated before the end of the lease period, any payment made to the lessor by way of penalty is recognised as an expense in
the period of termination.
(2) As lessor
Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership to the lessee;
all other leases are classified as operating leases. When assets are subject to finance leases, the present value of the lease payments is recognised as a
receivable within loans and advances to banks and customers. Finance lease income is recognised over the term of the lease using the net investment method
(before tax) reflecting a constant periodic rate of return.
Operating lease assets are included within tangible fixed assets at cost and depreciated over the life of the lease after taking into account anticipated residual
values. Operating lease rental income is recognised on a straight line basis over the life of the lease.
The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted
for separately.
(n) Borrowings
Borrowings (which include deposits from banks, customer accounts, debt securities in issue and subordinated liabilities) are recognised initially at fair value,
being their issue proceeds net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method.
Preference shares and other instruments which carry a mandatory coupon or are redeemable on a specific date are classified as financial liabilities. The coupon
on these instruments is recognised in the income statement as interest expense.
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Lloyds TSB Group Annual Report and Accounts 2007 85
Notes to the group accounts
1 Accounting policies continued
(o) Pensions and other post-retirement benefits
The Group operates a number of post-retirement benefit schemes for its employees including both defined benefit and defined contribution pension plans.
A defined benefit scheme is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, dependent on one or more
factors such as age, years of service and salary. A defined contribution plan is a pension plan into which the Group pays fixed contributions; there is no legal
or constructive obligation to pay further contributions.
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 their fair value and scheme liabilities
are measured on an actuarial basis using the projected unit credit method adjusted for unrecognised actuarial gains and losses. The defined benefit scheme
liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality corporate bonds that are denominated in the
currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.
The Group’s income statement includes the current service cost of providing pension benefits, the expected return on the schemes’ assets, net of expected
administration costs, and the interest cost on the schemes’ liabilities. Actuarial gains and losses arising from experience adjustments and changes in actuarial
assumptions are not recognised unless the cumulative unrecognised gain or loss at the end of the previous reporting period exceeds the greater of 10 per cent
of the scheme assets or liabilities (‘the corridor approach’). In these circumstances the excess is charged or credited to the income statement over the employees’
expected average remaining working lives. Past service costs are charged immediately to the income statement, unless the charges are conditional on the
employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over
the vesting period.
The Group’s balance sheet includes the net surplus or deficit, being the fair value of scheme assets less the discounted value of scheme liabilities adjusted for
the corridor. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from
the schemes.
The Group recognises the effect of material changes to the terms of its defined benefit pension plans which reduce future benefits as curtailments; gains and
losses are recognised in the income statement when the curtailments occur.
The costs of the Group’s defined contribution plans are charged to the income statement in the period in which they fall due.
(p) Share-based compensation
The Group operates a number of equity-settled, share-based compensation plans. The value of the employee services received in exchange for equity
instruments granted under these plans is recognised as an expense over the vesting period of the instruments, with a corresponding increase in equity. This
expense is determined by reference to the fair value of the number of equity instruments that are expected to vest. The fair value of equity instruments granted
is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments at the date of grant is estimated
using an appropriate valuation technique, such as a Black-Scholes option pricing model. The determination of fair values excludes the impact of any non-market
vesting conditions, which are included in the assumptions used to estimate the number of options that are expected to vest. At each balance sheet date, this
estimate is reassessed and if necessary revised. Any revision of the original estimate is recognised in the income statement over the remaining vesting period,
together with a corresponding adjustment to equity.
(q) Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
For the Group’s long-term assurance businesses, the tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is
payable on equity holders’ returns. This allocation is based on an assessment of the rates of tax which will be applied to the returns under current UK tax rules.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in
a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is
determined using tax rates that have been enacted or substantially enacted by the balance sheet date which are expected to apply when the related deferred
tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the
temporary difference is controlled by the Group and it is probable that the difference will not reverse in the foreseeable future. Income tax payable on profits is
recognised as an expense in the period in which those profits arise. The tax effects of losses available for carry forward are recognised as an asset when it is
probable that future taxable profits will be available against which these losses can be utilised. Deferred tax related to fair value re-measurement of
available-for-sale investments and cash flow hedges, which are charged or credited directly to equity, is also credited or charged directly to equity and is
subsequently recognised in the income statement together with the deferred gain or loss.
Deferred and current tax assets and liabilities are offset when they arise in the same tax reporting group and where there is both a legal right of offset and the
intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
(r) Insurance
The Group undertakes both life assurance and general insurance business.
For accounting purposes the life assurance business issues three types of contract:
Insurance contracts – these contracts contain significant insurance risk, which the Group defines as the possibility of having to pay benefits on the occurrence
of an insured event which are significantly more than the benefits payable if the insured event were not to occur.
Investment contracts containing a discretionary participation feature – these contracts do not contain significant insurance risk, but contain features which entitle
the holder to receive, in addition to the guaranteed benefits, further amounts that are likely to be a significant proportion of the total benefits and the amount
and timing of which is at the discretion of the Group and based upon the performance of specified assets. Contracts with a discretionary participation feature
are referred to as participating investment contracts.
Non-participating investment contracts – these contracts do not contain significant insurance risk or a discretionary participation feature.
For accounting purposes the general insurance business only issues insurance contracts.
86 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
1 Accounting policies continued
(1) Life assurance business
(i) Accounting for insurance and participating investment contracts
• Premiums and claims
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Premiums received in respect of insurance and participating investment contracts are recognised as revenue when due, except as detailed below in respect of
unit-linked contracts.
Claims are recorded as an expense when they are incurred.
• Liabilities
– insurance or participating investment contracts in the Group’s With Profit Fund
Liabilities of the Group’s With Profit Fund, including guarantees and options embedded within products written by that fund, are stated at their realistic values
in accordance with the Financial Services Authority’s realistic capital regime. Further details on the realistic capital regime are given on page 54.
– insurance or participating investment contracts which are not unit-linked or in the Group’s With Profit Fund
A liability for contractual benefits that are expected to be incurred in the future is recorded when the premiums are recognised. The liability is calculated by
estimating the future cash flows over the duration of in-force policies and discounting them back to the valuation date allowing for probabilities of
occurrence. The liability will vary with movements in interest rates and with the cost of life assurance and annuity benefits where future mortality is uncertain.
Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs.
– insurance or participating investment contracts which are unit-linked
Allocated premiums in respect of unit-linked contracts that are either insurance or participating investment contracts are recognised as liabilities. These
liabilities are increased or reduced by the change in the unit prices and are reduced by policy administration fees, mortality and surrender charges and any
withdrawals. The mortality charges deducted in each period from the policyholders as a group are considered adequate to cover the expected total death
benefit claims in excess of the contract account balances in each period and hence no additional liability is established for these claims. Revenue consists
of fees deducted for mortality, policy administration and surrender charges. Interest or changes in the unit prices credited to the account balances and
excess benefit claims in excess of the account balances incurred in the period are charged as expenses in the income statement.
• Unallocated surplus
Any amounts in the With Profit Fund not yet determined as being due to policyholders are recognised as an unallocated surplus which is shown separately
from other liabilities.
• Value of in-force business
The Group recognises as an asset the value of in-force business in respect of life insurance and participating investment contracts. The asset represents the
present value of the shareholders’ interest in the profits expected to emerge from those contracts written at the balance sheet date. This is determined using
appropriate allowance for economic conditions and appropriate assumptions for future mortality rates and future persistency rates, making allowance for the
realistic value of financial options and guarantees. Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the
capital markets, including an explicit allowance for non-market risk. The asset in the consolidated balance sheet is presented gross of attributable tax and
movements in the asset are reflected within other operating income in the income statement.
(ii) Accounting for non-participating investment contracts
All of the Group’s non-participating investment contracts are unit-linked. These contracts are accounted for as financial liabilities whose value is contractually
linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit-linked financial liabilities is determined using current
unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on
surrender, discounted for the required notice period where applicable.
Deposits and withdrawals are accounted for directly in the balance sheet as adjustments to the liability.
The Group receives investment management fees in respect of services rendered in conjunction with the issue and management of investment contracts where
the Group actively manages the consideration received from its customers to fund a return that is based on the investment profile that the customer selected
on origination of the instrument. These services comprise an indeterminate number of acts over the lives of the individual contracts and, therefore, the Group
defers these fees and recognises them on a straight-line basis over the estimated lives of the contracts.
Directly incremental commissions that vary with and are related to either securing new or renewing existing non-participating investment contracts are deferred;
all other costs are recognised as expenses when incurred. This asset is subsequently amortised over the period of the provision of investment management
services and is reviewed for impairment in circumstances where its carrying amount may not be recoverable. If the asset is greater than its recoverable amount
it is written down immediately.
(2) 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 income
statement when earned. Broking commission is recognised when 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 liabilities are not discounted.
(3) Liability adequacy test
At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract liabilities net of
related deferred tax assets and acquired value of in-force business. In performing these tests current best estimates of discounted future contractual cash flows
and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately
charged to profit or loss by establishing a provision for losses arising from liability adequacy tests.
Lloyds TSB Group Annual Report and Accounts 2007 87
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Notes to the group accounts
1 Accounting policies continued
(4) Reinsurance
Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on one or more contracts issued by the Group and that
meet the classification requirements for insurance contracts are classified as reinsurance contracts held. Insurance contracts entered into by the Group under
which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts.
The benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term
balances due from reinsurers as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured
insurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance
contracts and in accordance with the terms of each reinsurance contract and are regularly reviewed for impairment. Reinsurance liabilities are primarily
premiums payable for reinsurance contracts and are recognised as an expense when due.
(s) Foreign currency translation
(1) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which
the entity operates (‘the functional currency’). The consolidated financial statements are presented in sterling, which is the Company’s functional and
presentation currency.
(2) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow or net investment hedges.
Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Translation
differences on equities and similar non-monetary items measured at fair value are recognised in profit or loss, except for differences on available-for-sale
non-monetary financial assets such as equity shares, which are included in the fair value reserve in equity unless the asset is a hedged item in a fair
value hedge.
(3) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency
different from the presentation currency are translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(ii)
income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
(iii) all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to shareholders’ equity. When a foreign
operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the
closing rate.
(t) Provisions
Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required to settle the
obligations and they can be reliably estimated.
The Group recognises provisions in respect of vacant leasehold property where the unavoidable costs of the present obligations exceed anticipated
rental income.
Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present obligations where the
outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial statements but are disclosed unless
they are remote.
(u) Dividends
Dividends on ordinary shares are recognised in equity in the period in which they are paid.
(v) Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts due
from banks with a maturity of less than three months.
88 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
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2 Critical accounting estimates and judgements
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts
which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the
period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to the Group’s results and financial position,
based upon materiality and significant judgements and estimates, are discussed below.
Impairment of financial assets
Loan impairment allowances
The Group regularly reviews its loan portfolios to assess for impairment. Impairment allowances are established to recognise incurred impairment losses in its
loan portfolios carried at amortised cost. In determining whether an impairment has occurred at the balance sheet date the Group considers whether there is
any observable data indicating that there has been a measurable decrease in the estimated future cash flows or their timings; such observable data includes
whether there has been an adverse change in the payment status of borrowers or changes in economic conditions that correlate with defaults on loan
repayment obligations. Where this is the case, the impairment loss is the difference between the carrying value of the loan and the present value of the
estimated future cash flows discounted at the loan’s original effective interest rate.
At 31 December 2007 gross loans and advances to customers and banks totalled £247,067 million (2006: £231,117 million) against which impairment
allowances of £2,408 million (2006: £2,194 million) had been made.
There are two components of the Group’s loan impairment allowances: individual and collective. All impaired loans which exceed a certain threshold, principally
within the Group’s corporate banking business, are individually assessed for impairment having regard to expected future cash flows including those that could
arise from the realisation of security. The determination of these allowances often requires the exercise of considerable judgement by management involving
matters such as local economic conditions and the resulting trading performance of the customer and the value of the security held, for which there may not
be a readily accessible market. The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes
of determining the impairment allowances and consequently these allowances can be subject to variation as time progresses and the circumstances of the
customer become clearer.
Impairment allowances for portfolios of smaller balance homogenous loans, such as residential mortgages, personal loans and credit card balances that are
below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined
on a collective basis. Collective impairment allowances are calculated on a portfolio basis using formulae which take into account factors such as the length of
time that the customer’s account has been out of order, historical loss rates, the credit quality of the portfolios and the value of any security held. The variables
used in the formulae are kept under regular review to ensure that as far as possible they reflect current economic circumstances; however changes in interest
rates, unemployment levels and bankruptcy trends, particularly in the UK, could result in actual losses differing from reported impairment allowances.
Impairment of available-for-sale financial assets
In determining whether an impairment loss has been incurred in respect of an available-for-sale financial asset, the Group performs an objective review of the
current financial circumstances and future prospects of the issuer and considers whether there has been a significant or prolonged decline in the fair value of
that asset below its cost. This consideration requires management judgement. Among factors considered by the Group is whether the decline in fair value is a
result of a change in the quality of the asset or a downward movement in the market as a whole. An assessment is performed of the expected future cash
flows expected to be realised from the asset, taking into account, where appropriate, the quality of underlying security and credit protection available. The
movement in available-for-sale financial assets is shown in note 20. The reduction in the fair value of available-for-sale financial assets during the year was
£483 million (2006: £10 million). Impairment losses in respect of available-for-sale financial assets transferred from reserves to the income statement
totalled £70 million (2006: £nil).
Pensions
The net liability recognised in the balance sheet at 31 December 2007 in respect of the Group’s retirement benefit obligations was £2,144 million
(2006: £2,462 million) of which £2,033 million (2006: £2,362 million) related to defined benefit pension schemes. This liability excludes actuarial gains of
£1,350 million (2006: £263 million) which the Group is permitted to leave unrecognised. The defined benefit pension schemes’ gross deficit totalled
£683 million (2006: £2,099 million) representing the difference between the schemes’ liabilities and the fair value of the related assets at the balance sheet date.
The schemes’ liabilities are calculated using the projected unit credit method, which takes into account projected earnings increases, using actuarial
assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. The resulting estimated cash flows are discounted
at a rate equivalent to the market yield at the balance sheet date on high quality bonds with a similar duration and currency to the schemes’ liabilities. In order
to estimate the future cash flows, a number of financial and non-financial assumptions are made by management, changes to which could have a material
impact upon the overall deficit or the net cost recognised in the income statement.
Two important assumptions are the rate of inflation and the expected lifetime of the schemes’ members. The assumed rate of inflation affects the rate at which
salaries are projected to grow and therefore the size of the pension that employees receive upon retirement and also the rate at which pensions in payment
increase. Over the longer term rates of inflation can vary significantly; at 31 December 2007 it was assumed that the rate of inflation would be 3.3 per cent
per annum (2006: 2.9 per cent), although if this was increased by 0.2 per cent the overall deficit would increase by approximately £550 million and the annual
cost by approximately £20 million. A reduction of 0.2 per cent would reduce the overall deficit by approximately £500 million and the annual cost by
approximately £40 million.
The cost of the benefits payable by the schemes will also depend upon the longevity of the members. Assumptions are made regarding the expected lifetime
of scheme members based upon recent experience, however given the rate of advance in medical science and increasing levels of obesity, it is uncertain
whether they will ultimately reflect actual experience. An increase of one year in the expected lifetime of scheme members would increase the overall deficit by
approximately £400 million and the annual cost by approximately £30 million; a reduction of one year would reduce the overall deficit by approximately
£400 million and the annual cost by approximately £40 million.
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The size of the overall deficit is also sensitive to changes in the discount rate, which is affected by market conditions and therefore potentially subject to
significant variations. At 31 December 2007 the discount rate used was 5.8 per cent (2006: 5.1 per cent); a reduction of 0.2 per cent would increase the overall
deficit by approximately £550 million and the annual cost by approximately £15 million, while an increase of 0.2 per cent would reduce the net deficit by
approximately £550 million and the annual cost by approximately £40 million.
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Lloyds TSB Group Annual Report and Accounts 2007 89
Notes to the group accounts
2 Critical accounting estimates and judgements continued
Goodwill
At 31 December 2007 the Group carried goodwill on its balance sheet totalling £2,358 million (2006: £2,377 million), substantially all of which relates to
acquisitions made a number of years ago.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken
place. The impairment review is performed by projecting future cash flows, excluding finance and tax, based upon budgets and plans and making appropriate
assumptions about rates of growth and discounting these using a rate that takes into account prevailing market interest rates and the risks inherent in the
business. If the present value of the projected cash flows is less than the carrying value of the underlying net assets and related goodwill an impairment charge
is required in the income statement. This calculation requires the exercise of significant judgement by management; if the estimates made prove to be incorrect
or performance does not meet expectations which affects the amount and timing of future cash flows, goodwill may become impaired in future periods.
Insurance
Life assurance business
The Group carries in its balance sheet an asset representing the value of in-force business in respect of life insurance and participating investment contracts of
£2,218 million at 31 December 2007 (2006: £2,723 million). This asset, which is presented gross of attributable tax, represents the present value of future profits
expected to arise from the portfolio of in-force life insurance and participating investment contracts. This is determined using appropriate allowance for
economic conditions and appropriate assumptions for future mortality rates and future persistency rates, making allowance for the realistic value of financial
options and guarantees. Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets, including an
explicit allowance for non-market risk. These factors are inherently uncertain. If actual experience differs from that assumed this could significantly affect the
value attributed. The process for determining key assumptions that have been made at 31 December 2007 is detailed in note 23.
At 31 December 2007 the Group also carried substantial liabilities to holders of life insurance policies in its balance sheet. The methodology used to value the
liabilities is described in note 1 (r) (1). Liabilities arising from insurance contracts and participating investment contracts were £22,526 million and £14,874 million
respectively (2006: £25,763 million and £15,095 million) and those arising from non-participating investment contracts totalled £18,197 million
(2006: £24,370 million). Elements of the liabilities require assumptions about future investment returns, future mortality rates and future policyholder behaviour.
The process for determining the key assumptions that have been made at 31 December 2007 and the impact on profit before tax of changes in key assumptions
is detailed in note 31.
General insurance business
At 31 December 2007 the Group held a provision of £207 million (2006: £149 million) in respect of 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.
While management believes that the liability carried at year end is adequate, the application of statistical techniques requires significant judgement. An increase
of 10 per cent in the cost of claims would result in the recognition of an additional loss of approximately £20 million. Similarly, an increase of 10 per cent in the
ultimate number of such claims would lead to an additional loss of approximately £20 million; some relief would arise from reinsurance contracts held.
Taxation
Significant judgement is required in determining the Group’s income tax liabilities. In arriving at the current tax liability of £484 million and deferred tax liability
of £948 million at 31 December 2007 (2006: current tax liability of £817 million and deferred tax liability of £1,416 million), the Group has taken account of tax
issues that are subject to ongoing discussions with HM Revenue & Customs and other tax authorities. Calculations of these liabilities have been based on
management’s assessment of legal and professional advice, case law and other relevant guidance. In these situations, the various risks are categorised and
approximate weightings applied in arriving at the assessment of the expected liability. Where the expected tax outcome of these matters is different from the
amounts that were initially recorded, such differences will impact the current and deferred tax amounts in the period in which such determination is made.
Valuation of financial instruments
Trading securities, other financial assets and liabilities at fair value through profit or loss, derivatives and available-for-sale financial assets are stated at fair
value. The fair value of these financial instruments is the amount for which an asset could be exchanged or a liability settled between willing parties in arm’s
length transactions. The fair values of financial instruments are determined by reference to observable market prices where these are available and the market
is active. Where market prices are not available or are unreliable because of poor liquidity, fair values are determined using valuation techniques including cash
flow models which, to the extent possible, use observable market parameters. The process of calculating the fair value using valuation techniques may
necessitate the estimation of certain pricing parameters, assumptions or model characteristics. Changes in assumptions about these factors could affect
reported fair values of financial instruments. The fair value movement on assets and liabilities held at fair value through profit or loss and gains in respect of
instruments held for trading are disclosed in note 6. Movements in respect of available-for-sale financial assets, including those arising from changes in their
fair value, are disclosed in note 20. The fair values of the Group’s financial assets and liabilities are disclosed within note 47 on pages 141 and 142 together with
an indication of the valuation technique used for each major asset or liability category.
90 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
3 Segmental analysis
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Lloyds TSB Group is a leading financial services group, whose businesses provide a wide range of banking and financial services predominantly in the UK.
The Group’s activities are organised into three segments: 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 to personal customers, private banking and mortgages.
Insurance and Investments offers life assurance, pensions and savings products, general insurance and asset 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 in some overseas locations.
Under the Group’s transfer pricing arrangements, inter-segment services are generally recharged at cost, with the exception of the internal commission
arrangements between the UK branch and other distribution networks and the insurance product manufacturing businesses within the Group, where a profit
margin is also charged. Inter-segment lending and deposits are generally entered into at market rates, except that non-interest bearing balances are priced at
a rate that reflects the external yield that could be earned on such funds.
For those derivative contracts entered into by business units for risk management purposes, the business unit retains the amount that would have been
recognised on an accrual accounting basis (an amount equal to the interest element of the next payment on the swap) and transfers the remainder of the fair
value of the swap to the central group segment where the resulting accounting volatility is managed though the establishment of hedge accounting
relationships. Any change in fair value of the hedged instrument attributable to the hedged risk is also recorded within the central group segment. This allocation
of the fair value of the swap and change in fair value of the hedged instrument attributable to the hedged risk avoids accounting asymmetry in segmental
results, records volatility where it is managed and provides a fair presentation of the segments’ operating performance. It is the basis on which the segments
are managed and measured internally and is the basis of the Group’s internal segmental reporting to the board.
Year ended 31 December 2007
Interest and similar income
Interest and similar expense
Net interest income
Other income (net of fee and commission expense)
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus (deficit)
Impairment
Profit on sale of businesses
Profit (loss) before tax
External revenue
Inter-segment revenue
Segment revenue
External assets
Inter-segment assets
Total assets
External liabilities
Inter-segment liabilities
UK Retail
Banking
£m
8,018
(4,235)
3,783
1,797
5,580
–
5,580
(2,624)
2,956
(1,224)
–
1,732
9,132
1,012
General
Life, pensions
and asset
insurance management
£m
£m
Insurance
and
Investments
£m
Wholesale
and
International
Banking
£m
Central
group items
£m
Inter-segment
eliminations
£m
Total
£m
9,834
(7,316)
1,097
(1,835)
(3,138)
3,138
16,874
(10,775)
23
–
23
554
577
(302)
275
(154)
121
–
–
121
1,040
(527)
513
7,643
8,156
(7,220)
936
(501)
435
–
272
707
1,063
(527)
536
8,197
8,733
(7,522)
1,211
(655)
556
–
272
828
2,518
1,773
4,291
–
4,291
(2,282)
(738)
362
(376)
–
(376)
(6)
2,009
(382)
(572)
385
–
–
1,822
(382)
1,235
49
8,854
10,089
181
230
10,082
1,559
300
1,302
–
–
–
–
–
–
–
–
–
–
–
(4,103)
6,099
12,129
18,228
(7,522)
10,706
(5,567)
5,139
(1,796)
657
4,000
29,603
–
10,144
1,284
9,035
10,319
11,641
1,602
(4,103)
29,603
115,012
5,093
1,164
361
72,213
3,777
73,377
163,294
1,663
–
353,346
4,138
91,246
64,654
(165,131)
–
120,105
1,525
75,990
77,515
254,540
66,317
(165,131)
353,346
96,166
20,321
870
12
65,304
5,930
66,174
162,376
5,942
86,159
16,205
52,709
–
340,921
(165,131)
–
Total liabilities
116,487
882
71,234
72,116
248,535
68,914
(165,131)
340,921
Other segment items:
Capital expenditure
Depreciation and amortisation
Defined benefit scheme charges
80
205
114
11
14
3
452
37
26
463
51
29
613
374
92
178
–
(60)
–
–
–
1,334
630
175
Lloyds TSB Group Annual Report and Accounts 2007 91
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3 Segmental analysis continued
Year ended 31 December 2006
Interest and similar income
Interest and similar expense
Net interest income
Other income (net of fee and commission expense)
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus (deficit)
Impairment
Profit (loss) before tax
External revenue
Inter-segment revenue
Segment revenue
External assets
Inter-segment assets
Total assets
External liabilities
Inter-segment liabilities
Total liabilities
Other segment items:
Capital expenditure
Depreciation and amortisation
Defined benefit scheme charges
UK Retail
Banking
£m
6,913
(3,271)
3,642
1,621
5,263
–
5,263
(2,476)
2,787
(1,238)
1,549
8,136
698
General
Life, pensions
and asset
insurance management
£m
£m
Insurance
and
Investments
£m
Wholesale
and
International
Banking
£m
Central
group items
£m
Inter-segment
eliminations
£m
Total
£m
24
–
24
594
618
(200)
418
(157)
261
–
261
820
(741)
79
9,893
9,972
(8,369)
1,603
(481)
1,122
–
1,122
844
(741)
103
10,487
10,590
(8,569)
2,021
(638)
1,383
–
8,598
(6,421)
2,177
2,035
4,212
–
4,212
(2,264)
1,948
(308)
1,383
1,640
1,249
19
10,888
199
12,137
218
8,659
2,276
994
(1,587)
(3,241)
3,241
(593)
201
(392)
–
(392)
77
(315)
(9)
(324)
158
910
–
–
–
–
–
–
–
–
–
–
(4,102)
14,108
(8,779)
5,329
14,344
19,673
(8,569)
11,104
(5,301)
5,803
(1,555)
4,248
29,090
–
8,834
1,268
11,087
12,355
10,935
1,068
(4,102)
29,090
108,381
3,331
1,115
502
84,959
4,050
86,074
4,552
147,836
80,995
1,307
–
343,598
53,588
(142,466)
–
111,712
1,617
89,009
90,626
228,831
54,895
(142,466)
343,598
87,327
20,980
108,307
82
202
121
875
54
929
7
9
4
77,633
5,595
78,508
5,649
150,779
72,793
15,477
43,044
–
332,091
(142,466)
–
83,228
84,157
223,572
58,521
(142,466)
332,091
845
29
24
852
38
28
647
379
100
143
–
(140)
–
–
–
1,724
619
109
As the activities of the Group are predominantly carried out in the UK, no geographical analysis is presented.
92 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
4 Net interest income
Weighted average effective interest rate
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Interest receivable:
Loans and advances to customers
Loans and advances to banks
Lease and hire purchase receivables
Interest receivable on loans and receivables
Available-for-sale financial assets
Total interest receivable
Interest payable:
Deposits from banks
Customer accounts
Debt securities in issue
Subordinated liabilities
Liabilities under sale and repurchase agreements
Interest payable on liabilities held at amortised cost
Other
Total interest payable
Net interest income
2007
%
6.89
5.14
6.34
6.58
4.83
6.44
5.00
3.58
5.08
5.65
4.81
4.24
4.28
4.24
2006
%
6.21
4.72
5.97
5.94
4.39
5.82
4.67
2.91
4.67
5.72
4.35
3.71
9.68
3.82
2007
£m
13,209
2,025
602
15,836
1,038
16,874
(1,919)
(5,085)
(2,680)
(741)
(155)
(10,580)
(195)
(10,775)
6,099
2006
£m
10,853
1,826
622
13,301
807
14,108
(1,680)
(3,738)
(1,983)
(694)
(260)
(8,355)
(424)
(8,779)
5,329
Included within interest receivable is £395 million (2006: £297 million) in respect of impaired financial assets. Net interest income also includes a credit of
£1 million (2006: charge of £1 million) transferred from the cash flow hedging reserve (note 41).
5 Net fee and commission income
Fee and commission income:
Current accounts
Insurance broking
Credit and debit card fees
Trust and other fiduciary fees
Other
Fee and commission expense
Net fee and commission income
2007
£m
693
648
536
362
985
3,224
(600)
2,624
2006
£m
652
629
493
331
1,011
3,116
(638)
2,478
As discussed in note 1(d), fees and commissions which are an integral part of the effective interest rate form part of net interest income shown in note 4. Fees
and commissions relating to instruments that are held at fair value through profit or loss are included within net trading income shown in note 6.
Certain fees payable by the Group’s asset finance business have been reclassified to interest income as part of the effective yield of the related lending; there
is no impact upon profit before tax. Comparative figures have been restated accordingly.
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Lloyds TSB Group Annual Report and Accounts 2007 93
Notes to the group accounts
6 Net trading income
Foreign exchange translation gains
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property (losses) gains (note 21)
Securities and other gains
2007
£m
34
159
193
(321)
3,251
3,123
Securities and other gains comprise net gains arising on assets and liabilities held at fair value through profit or loss and for trading as follows:
Net income arising on assets held at fair value through profit or loss:
Loans and advances to banks and customers
Debt securities
Equity shares
Total net income arising on assets held at fair value through profit or loss
Net (expense) income arising on liabilities held at fair value through
profit or loss – debt securities in issue
Total net gains arising on assets and liabilities held at fair value through profit or loss
Net gains on financial instruments held for trading
Securities and other gains
7 Insurance premium income
Life insurance
Gross premiums
Ceded reinsurance premiums
Net earned premiums
Non-life insurance
Gross premiums written
Ceded reinsurance premiums
Net premiums
Change in provision for unearned premiums
Net earned premiums
Total net earned premiums
Life insurance gross written premiums can be further analysed as follows:
Life
Pensions
Annuities
Other
Gross premiums
2007
£m
23
673
2,422
3,118
(153)
2,965
286
3,251
2007
£m
4,937
(98)
4,839
632
(23)
609
(18)
591
5,430
2007
£m
1,998
2,235
689
15
4,937
94 Lloyds TSB Group Annual Report and Accounts 2007
2006
£m
32
98
130
631
5,580
6,341
2006
£m
29
1,181
4,046
5,256
21
5,277
303
5,580
2006
£m
4,308
(189)
4,119
608
(17)
591
9
600
4,719
2006
£m
1,831
1,780
681
16
4,308
Notes to the group accounts
7 Insurance premium income continued
Non-life insurance gross written premiums can be further analysed as follows:
Credit protection
Home
Health
8 Other operating income
Operating lease rental income
Rental income from investment property (note 21)
Other rents receivable
Gains less losses on disposal of available-for-sale financial assets (note 41)
Movement in value of in-force business (note 23)
Other income
9 Insurance claims
Insurance claims comprise:
Life insurance and participating investment contracts
Claims and surrenders:
Gross
Reinsurers’ share
Change in liabilities:
Gross
Reinsurers’ share
Change in unallocated surplus (note 33)
Total life insurance and participating investment contracts
Non-life insurance
Claims and claims paid:
Gross
Reinsurers’ share
Change in liabilities:
Gross
Reinsurers’ share
Total non-life insurance
Total insurance claims expense
Life insurance gross claims can also be analysed as follows:
Deaths
Maturities
Surrenders
Annuities
Other
A non-life insurance claims development table is included in note 31.
2007
£m
212
412
8
632
2007
£m
393
227
31
5
(93)
389
952
2007
£m
5,432
(73)
5,359
1,955
20
1,975
(114)
7,220
250
–
250
58
(6)
52
302
7,522
296
1,516
2,994
568
58
5,432
2006
£m
203
394
11
608
2006
£m
422
313
28
22
(199)
220
806
2006
£m
5,375
(76)
5,299
2,923
(18)
2,905
165
8,369
198
–
198
2
–
2
200
8,569
286
1,385
3,081
558
65
5,375
Lloyds TSB Group Annual Report and Accounts 2007 95
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a
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Notes to the group accounts
10 Operating expenses
Salaries
Social security costs
Pensions and other post-retirement benefit schemes (note 35)
Other staff costs
Staff costs
Other administrative expenses:
Operating lease rentals
Repairs and maintenance
Communications and data processing
Advertising
Professional fees
Settlement of overdraft claims (see below)
Other
Depreciation of tangible fixed assets (note 25)
Amortisation of other intangible assets (note 24)
Total operating expenses
2007
£m
2,127
167
238
372
2,904
250
154
462
192
279
76
620
2,033
594
36
5,567
2006
£m
2,117
161
165
298
2,741
254
165
499
184
231
–
608
1,941
602
17
5,301
During the year ended 31 December 2007, operating expenses include a charge of £76 million (2006: £nil) relating to the settlement of customer claims for the
repayment of overdraft fees, together with related costs.
The average number of persons on a headcount basis employed by the Group during the year was as follows:
UK
Overseas
During the year the auditors earned the following fees:
Fees payable for the audit of the Company’s current year annual report
Fees payable for other services:
Audit of the Company’s subsidiaries pursuant to legislation
Other services supplied pursuant to legislation
Total audit fees
Other services – audit related fees
Total audit and audit related fees
Services relating to taxation
Other non-audit fees:
Services relating to corporate finance transactions
Other services
Total other non-audit fees
Total fees payable to the Company’s auditors by the Group
2007
67,616
1,937
69,553
2007
£m
6.8
2.5
2.7
12.0
1.1
13.1
0.7
0.7
0.1
0.8
14.6
2006
74,079
2,013
76,092
2006
£m
6.0
2.9
4.7
13.6
1.4
15.0
0.6
1.0
0.4
1.4
17.0
96 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
10 Operating expenses continued
During the year, the auditors also earned fees payable by entities outside the consolidated Lloyds TSB Group in respect of the following:
Audits of Group pension schemes
Audits of the unconsolidated Open Ended Investment Companies managed by the Group
Reviews of the financial position of corporate and other borrowers
Acquisition due diligence and other work performed in respect of potential
venture capital investments
2007
£m
0.2
0.4
2.8
0.6
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2006
£m
0.2
0.4
1.6
1.0
Other services supplied pursuant to legislation relate primarily to the costs associated with the Sarbanes-Oxley Act audit requirements together with the cost of
the audit of the Group’s Form 20-F filing.
The following types of services are included in the categories listed above:
Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with regulatory filings.
Audit related fees: This category includes fees in respect of services for assurance and related services that are reasonably related to the performance of the
audit or review of the financial statements.
Services relating to taxation: This category includes tax compliance and tax advisory services.
Other non-audit fees: This category includes due diligence relating to corporate finance, including venture capital transactions and other assurance and
advisory services.
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 that are designed to ensure auditor independence, including that fees for audit and non-audit services are approved in advance.
This approval can be obtained either on an individual engagement basis or, for certain types of non-audit services, particularly those of a recurring nature,
through the approval of a fee cap covering all engagements of that type provided the fee is below that cap. All statutory audit work as well as non-audit
assignments where the fee is expected to exceed the relevant fee cap must be pre-approved by the audit committee on an individual engagement basis. 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.
11 Impairment
Impairment losses on loans and advances (note 19)
Other credit risk provisions (note 37)
Impairment of available-for-sale financial assets (note 20)
Total impairment charged to the income statement
12 Profit on sale of businesses
Profit on sale of Lloyds TSB Registrars
Profit on sale of Abbey Life
Other, including adjustments in respect of businesses sold in prior years
2007
£m
1,721
5
1,726
70
1,796
2007
£m
407
272
(22)
657
2006
£m
1,560
(5)
1,555
–
1,555
2006
£m
–
–
–
–
During 2007 the Group completed the following transactions:
• The sale, announced on 21 May 2007, of the business and assets of Lloyds TSB Bank plc’s company registration business, Lloyds TSB Registrars.
• The sale, announced on 31 July 2007, of Abbey Life Assurance Company Limited, a UK life operation which has been closed to new business since 2000.
• The sale, announced on 3 October 2007, of The Dutton-Forshaw Group Limited, a medium-size car dealership.
In addition, provision has been made for payments under an indemnity given in relation to a business sold in an earlier year.
The businesses sold in 2007 did not represent separate material lines of business and consequently they have not been treated as discontinued operations.
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Lloyds TSB Group Annual Report and Accounts 2007 97
Notes to the group accounts
13 Taxation
(a) Analysis of charge for the year
UK corporation tax:
Current tax on profit for the year
Adjustments in respect of prior years
Double taxation relief
Foreign tax:
Current tax on profit for the year
Adjustments in respect of prior years
Current tax charge
Deferred tax (note 36)
2007
£m
763
(30)
733
(60)
673
98
(3)
95
768
(89)
679
2006
£m
1,024
(137)
887
(195)
692
83
(8)
75
767
574
1,341
The charge for tax on the profit for the year is based on a UK corporation tax rate of 30 per cent (2006: 30 per cent).
The Group, as a proxy for policyholders in the UK, is required to record taxes on investment income, gains and losses each year. Accordingly, the tax attributable
to UK life insurance policyholder earnings is included in income tax expense. The tax credit attributable to policyholders was £243 million (2006: £222 million
expense), including a prior year tax charge of £5 million (2006: tax charge of £12 million).
In addition to the income statement current tax charge, a total of £131 million of current tax has been credited to equity (2006: a total of £17 million charged to
equity); a credit of £3 million (2006: a credit of £15 million) in respect of share based payments, a credit of £103 million (2006: a charge of £33 million) in respect
of foreign exchange differences and a net credit of £25 million (2006: a net credit of £1 million) in respect of the revaluation of available-for-sale financial assets.
(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 tax charge for the year is
given below:
Profit before tax
Tax charge thereon at UK corporation tax rate of 30%
Factors affecting charge:
Disallowed and non-taxable items
Overseas tax rate differences
Gains exempted or covered by capital losses
Policyholder interests
UK corporation tax rate change
Other items
Tax on profit on ordinary activities
Effective rate
2007
£m
4,000
1,200
2
(4)
(274)
(173)
(110)
38
679
17.0%
2006
£m
4,248
1,274
(8)
(2)
(78)
123
–
32
1,341
31.6%
The effective tax rate of the Group excluding the gross policyholder and Open Ended Investment Company interests from profit before tax and the tax charge
and, in 2007, the profit on disposal of businesses from profit before tax and the impact on the year end deferred tax position of the UK corporation tax rate
change was 28.3 per cent (2006: 28.0 per cent).
98 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
14 Earnings per share
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Basic earnings per share are calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during
the year, which has been calculated after deducting 5 million (2006: 5 million) ordinary shares representing the Group’s holdings of own shares in respect of
employee share schemes.
Profit attributable to equity shareholders
Weighted average number of ordinary shares in issue
Basic earnings per share
2007
£3,289m
5,637m
58.3p
2006
£2,803m
5,616m
49.9p
For the calculation of diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive
potential ordinary shares. The Company has dilutive potential ordinary shares in respect of share options and awards granted to employees. The number of
shares that could have been acquired at market price (determined as the average annual share price of the Company’s shares) based on the monetary value
of the subscription rights attached to outstanding share options and awards is determined; the residual bonus shares are added to the weighted average
number of ordinary shares in issue, but no adjustment is made to the profit attributable to equity shareholders.
Profit attributable to equity shareholders
Weighted average number of ordinary shares in issue
Adjustment for share options and awards
Weighted average number of ordinary shares for diluted earnings per share
Diluted earnings per share
2007
£3,289m
5,637m
46m
5,683m
57.9p
2006
£2,803m
5,616m
51m
5,667m
49.5p
The weighted average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 3 million at
31 December 2007 (2006: 7 million).
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Lloyds TSB Group Annual Report and Accounts 2007 99
Notes to the group accounts
15 Trading and other financial assets at fair value through profit or loss
Trading assets
Other financial assets at fair value through profit or loss
2007
£m
4,663
53,248
57,911
These assets are comprised as follows:
2007
2006
Loans and advances to banks
Loans and advances to customers
Debt securities:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Mortgage backed securities
Other asset backed securities
Corporate and other debt securities
Equity shares:
Listed
Unlisted
Trading
assets
£m
29
756
62
–
–
87
122
3,607
3,878
–
–
–
4,663
Other financial
assets at fair
value through
profit or loss
£m
1
403
4,848
––
811
70
1,805
13,564
21,098
23,598
8,148
31,746
53,248
Trading
assets
£m
34
350
180
4
–
451
595
4,146
5,372
–
–
–
5,756
2006
£m
5,756
61,939
67,695
Other financial
assets at fair
value through
profit or loss
£m
3
448
8,626
4
573
87
861
13,170
23,361
29,275
8,852
38,127
61,939
At 31 December 2007 £55,729 million (2006: £65,122 million) of trading and other financial assets at fair value through profit or loss had a contractual residual
maturity of greater than one year.
Other financial assets at fair value through profit or loss represent the following assets designated into that category:
(i)
financial assets backing insurance contracts and investment contracts which are so designated because the related liabilities either have cash flows that
are contractually based on the performance of the assets or are contracts whose measurement takes account of current market conditions and where
significant measurement inconsistencies would otherwise arise;
(ii) certain loans and advances to customers which are economically hedged by interest rate derivatives which are not in hedge accounting relationships and
where significant measurement inconsistencies would otherwise arise if the related derivatives were treated as trading liabilities and the loans and advances
were carried at amortised cost; and
(iii) certain private equity investments that are managed, and evaluated, on a fair value basis in accordance with a documented risk management or investment
strategy and reported to key management personnel on that basis.
The maximum exposure to credit risk at 31 December 2007 of the loans and advances to banks and customers designated at fair value through profit or loss
was £404 million (31 December 2006: £451 million); the Group does not hold any credit derivatives or other instruments in mitigation of this risk. There was no
significant movement in the fair value of these loans attributable to changes in credit risk; this is determined by reference to the publicly available credit ratings
of the instruments involved.
The carrying value of assets that are subject to stock lending arrangements was £1,450 million at 31 December 2007 (2006: £1,781 million) all of which the
secured party is permitted by contract or custom to sell or repledge.
100 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
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16 Derivative financial instruments
The principal derivatives used by the Group are interest rate and exchange rate contracts; particular attention is paid to the liquidity of the markets and products
in which the Group trades to ensure that there are no undue concentrations of activity and risk.
Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties
to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying principal amounts.
Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate, applied to a notional principal
amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of
interest on a future loan or deposit, for a specified period and commencing on a specified future date.
Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement
to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest
payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option gives the buyer, on payment
of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date.
Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit
default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment
should a negative credit event take place. As discussed in note 18, the Group also uses credit default swaps to synthetically securitise
£1,572 million (2006: £961 million) of commercial banking loans, and, in combination with external funding, to securitise a further £2,753 million (2006: £nil) of
commercial banking loans.
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.
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. Fair values are obtained from quoted market prices in active markets, including recent
market transactions, and using valuation techniques, including discounted cash flow and options pricing models, as appropriate.
Contract/notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
31 December 2007
Trading
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
Credit derivatives
Equity and other contracts
Total derivative assets/liabilities held for trading
Hedging
Derivatives designated as fair value hedges:
Interest rate swaps (including swap options)
Derivatives designated as cash flow hedges:
Interest rate swaps
Derivatives designated as net investment hedges:
Cross currency swaps
Total derivative assets/liabilities held for hedging
Total recognised derivative assets/liabilities
150,450
30,214
7,609
6,988
195,261
332,361
102,274
33,147
22,976
35,571
526,329
63,444
4,439
1,759
803
157
–
2,719
2,765
36
171
–
1
2,973
1,838
865
8,395
50,734
263
630
5,302
1
–
264
8,659
At 31 December 2007 £3,573 million of total recognised derivative assets and £4,112 million of total recognised derivative liabilities (2006: £3,068 million of
assets and £3,412 million of liabilities) had a contractual residual maturity of greater than one year.
Lloyds TSB Group Annual Report and Accounts 2007 101
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a
1,285
680
–
149
2,114
3,250
34
–
171
–
3,455
1,057
156
6,782
460
24
316
800
7,582
t
i
o
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Notes to the group accounts
16 Derivative financial instruments continued
Contract/notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
31 December 2006
Trading
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
Credit derivatives
Equity and other contracts
Total derivative assets/liabilities held for trading
Hedging
Derivatives designated as fair value hedges:
Cross currency interest rate swaps
Interest rate swaps (including swap options)
Derivatives designated as cash flow hedges:
Interest rate swaps
Derivatives designated as net investment hedges:
Cross currency swaps
Total derivative assets/liabilities held for hedging
Total recognised derivative assets/liabilities
17 Loans and advances to banks
Lending to banks
Money market placements with banks
Total loans and advances to banks
Allowance for impairment losses (note 19)
116,255
20,618
3,076
3,822
143,771
331,852
40,876
17,034
12,588
33,066
435,416
13,212
4,026
80
37,298
37,378
569
2,589
2007
£m
5,892
28,953
34,845
–
34,845
794
346
51
–
1,191
2,980
17
68
–
–
3,065
25
797
5,078
10
333
343
5
139
487
5,565
1,432
496
–
32
1,960
3,149
18
–
63
1
3,231
39
67
5,297
–
453
453
13
–
466
5,763
2006
£m
5,966
34,673
40,639
(1)
40,638
At 31 December 2007 £5,773 million (2006: £15,259 million) of loans and advances to banks had a contractual residual maturity of greater than one year.
The Group holds collateral with a fair value of £9,109 million (2006: £6,837 million), which it is permitted to sell or repledge, of which £8,482 million
(2006: £6,209 million) was repledged or sold to third parties for periods not exceeding three months from the transfer.
102 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
18 Loans and advances to customers
Agriculture, forestry and fishing
Energy and water supply
Manufacturing
Construction
Transport, distribution and hotels
Postal and telecommunications
Property companies
Financial, business and other services
Personal:
Mortgages
Other
Lease financing
Hire purchase
Allowance for impairment losses (note 19)
2007
£m
3,226
2,102
8,385
2,871
11,573
946
17,576
29,707
102,739
22,988
4,686
5,423
212,222
(2,408)
209,814
2006
£m
2,905
2,024
7,513
2,332
10,490
831
12,896
22,999
95,601
23,025
4,802
5,060
190,478
(2,193)
188,285
At 31 December 2007 £153,302 million (2006: £141,247 million) of loans and advances to customers had a contractual residual maturity of greater than one year.
The Group holds collateral with a fair value of £1,975 million (2006: £444 million), which it is permitted to sell or repledge, of which £1,818 million
(2006: £238 million) was repledged or sold to third parties for periods not exceeding three months from the transfer.
Loans and advances to customers include finance lease receivables, which may be analysed as follows:
Gross investment in finance leases, receivable:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Unearned future finance income on finance leases
Rentals received in advance
Commitments for expenditure in respect of equipment to be leased
Net investment in finance leases
The net investment in finance leases represents amounts recoverable as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
2007
£m
620
1,917
5,339
7,876
(2,875)
(131)
(184)
4,686
2007
£m
340
1,004
3,342
4,686
2006
£m
637
2,358
5,358
8,353
(2,945)
(163)
(443)
4,802
2006
£m
234
1,232
3,336
4,802
Equipment leased to customers under finance leases primarily relates to structured financing transactions to fund the purchase of aircraft, ships and other large
individual value items. The allowance for uncollectable finance lease receivables included in the allowance for impairment losses is £16 million (2006: £7 million).
The unguaranteed residual values included in finance lease receivables were as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total
2007
£m
–
17
159
176
2006
£m
–
–
168
168
Lloyds TSB Group Annual Report and Accounts 2007 103
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Notes to the group accounts
18 Loans and advances to customers continued
Securitisations
Loans and advances to customers include balances that have been securitised but not derecognised, comprising both residential mortgages and commercial
banking loans, the carrying values of which are set out below together with any related liabilities. Residential mortgages are not derecognised because the
Group remains exposed to the majority of the risk of any default in respect of them; commercial banking loans are not derecognised because the Group has
not transferred the contractual rights to receive the cash flows from those loans nor has it assumed a contractual obligation to pay the cash flows from those
loans to a third party.
Beneficial interests in certain residential mortgages have been transferred to special purpose entities which issue floating rate debt securities. Neither the Group
nor any entities in the Group are obliged to support any losses that may be suffered by the note holders and do not intend to offer such support. The floating
rate note holders only receive payments of interest and principal to the extent that the special purpose entities have received sufficient funds from the transferred
mortgages and after certain expenses have been met. In the event of a deficiency, they have no recourse whatsoever to the Group.
At 31 December 2007 the total amount of residential mortgages subject to securitisation was £46,284 million (2006: £14,927 million) in respect of which external
funding at the year end amounted to £12,403 million (2006: £10,048 million); external funding is shown in debt securities in issue (see note 30). The Group
participates in the securitisation through the provision of administration and other services, the provision of interest rate and currency swaps and in the form of
unsecured loan financing which is subordinate to the interests of the floating rate note holders.
In addition the Group has entered into two securitisations of its commercial banking loans as follows:
– a synthetic securitisation of £1,572 million (2006: £961 million) utilising credit default swaps (CDSs);
– a securitisation of £2,753 million (2006: £nil) utilising a combination of CDSs and £98 million (2006: £nil) of external funding.
The CDSs are accounted for as derivatives and are included in derivative financial instruments (see note 16) and the external funding is shown in debt securities
in issue (see note 30).
19 Allowance for impairment losses on loans and advances
Balance at 1 January 2006
Exchange and other adjustments
Adjustments on disposal of businesses and portfolios
Advances written off
Recoveries of advances written off in previous years
Unwinding of discount
Charge to the income statement
At 31 December 2006
Exchange and other adjustments
Advances written off
Recoveries of advances written off in previous years
Unwinding of discount
Charge to the income statement
At 31 December 2007
Loans and advances to customers
Retail –
mortgages
£m
36
1
–
(9)
2
–
12
42
–
(25)
2
–
18
37
Retail –
other
£m
1,655
–
(27)
(1,338)
170
(100)
1,558
1,918
–
(1,439)
133
(101)
1,518
2,029
Wholesale
£m
381
(14)
–
(142)
18
–
(10)
233
2
(78)
2
(3)
186
342
Total
£m
2,072
(13)
(27)
(1,489)
190
(100)
1,560
2,193
2
(1,542)
137
(104)
1,722
2,408
Loans and
advances to
banks
£m
1
–
–
–
–
–
–
1
–
–
–
–
(1)
–
Total
£m
2,073
(13)
(27)
(1,489)
190
(100)
1,560
2,194
2
(1,542)
137
(104)
1,721
2,408
The analysis of allowances for impairment between retail and wholesale has been prepared based upon the type of exposure and not the business segment
in which the exposure is recorded. Included within retail are exposures to personal customers and small businesses, whilst included within wholesale are
exposures to corporate customers and other large institutions.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 1(j). All impaired loans which exceed
a certain threshold, principally within the Group’s corporate banking business, are individually assessed for impairment having regard to expected future
cash flows including those that could arise from the realisation of security. Included in loans and advances to customers were loans and advances individually
determined to be impaired whose gross amount before impairment allowances was £684 million (2006: £428 million) and in respect of which collateral with
a fair value of £193 million (2006: £186 million) was held.
104 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
20 Available-for-sale financial assets
Debt securities:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Mortgage backed securities
Other asset backed securities
Corporate and other debt securities
Equity shares:
Listed
Unlisted
Treasury bills and other bills:
Treasury bills and similar securities
Other bills
2007
£m
319
5
1,825
6,050
4,071
6,270
18,540
1
28
29
1,608
19
1,627
20,196
2006
£m
393
189
1,615
5,662
4,721
4,817
17,397
1
14
15
1,743
23
1,766
19,178
At 31 December 2007 £15,265 million (2006: £13,779 million) of available-for-sale financial assets had a contractual residual maturity of greater than one year.
All assets have been individually assessed for impairment. The criteria used to determine whether an impairment loss has been incurred are disclosed in
note 1 (j). Included in available-for-sale assets at 31 December 2007 are debt securities individually determined to be impaired whose gross amount before
impairment allowances was £75 million and in respect of which no collateral was held.
The movement in available-for-sale financial assets is summarised as follows:
Carrying value
before allowances
for impairment
£m
Allowances for
impairment
£m
Balance sheet
value
£m
At 1 January 2006
Exchange and other adjustments
Additions
Disposals
Amortisation of premiums and discounts
Changes in fair value (note 41)
At 31 December 2006
Exchange and other adjustments
Additions
Disposals
Amortisation of premiums and discounts
Changes in fair value (note 41)
Impairment transferred from reserves (note 41)
Disposal of businesses
At 31 December 2007
21 Investment property
At 1 January
Exchange and other adjustments
Additions:
Acquisitions of new properties
Additional expenditure on existing properties
Total additions
Disposals
Adjustments on deconsolidation of OEICs
Changes in fair value (note 6)
Disposal of businesses
At 31 December
14,940
(1,116)
23,448
(18,106)
22
(10)
19,178
(715)
21,667
(19,468)
36
(483)
70
(19)
20,266
2007
£m
4,739
5
302
181
483
(271)
(881)
(321)
(32)
3,722
–
–
–
–
–
–
–
–
–
–
–
–
(70)
–
(70)
14,940
(1,116)
23,448
(18,106)
22
(10)
19,178
(715)
21,667
(19,468)
36
(483)
–
(19)
20,196
2006
£m
4,260
–
675
75
750
(902)
–
631
–
4,739
t
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o
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During the year the percentage ownership of certain OEICs changed so that the Group no longer has control; as a consequence these OEICs have been
deconsolidated.
Lloyds TSB Group Annual Report and Accounts 2007 105
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Notes to the group accounts
21 Investment property continued
The investment properties are valued at least annually at open-market value, by independent, professionally qualified valuers, who have recent experience in
the location and categories of the investment properties being valued.
In addition, the following amounts have been recognised in the income statement:
Rental income
Direct operating expenses arising from investment properties that generate rental income
Capital expenditure in respect of investment properties:
Capital expenditure contracted for at the balance sheet date but not recognised in
the financial statements
22 Goodwill
At 1 January
Acquisitions (note 48)
Disposals
At 31 December
Cost*
Accumulated impairment losses
2007
£m
227
24
2007
£m
111
2007
£m
2,377
–
(19)
2,358
2,364
(6)
2,358
2006
£m
313
24
2006
£m
85
2006
£m
2,373
4
–
2,377
2,383
(6)
2,377
* For acquisitions made prior to 1 January 2004, the date of transition to IFRS, cost is included net of amounts amortised up to 31 December 2003.
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to
the appropriate cash generating unit; of the total balance of £2,358 million (2006: £2,377 million), £1,836 million (or 78 per cent of the total) has been allocated
to Scottish Widows and £510 million (or 22 per cent of the total) to Asset Finance.
The recoverable amount of Scottish Widows has been based on a value in use calculation. The calculation uses projections of future cash flows based upon
budgets and plans approved by management covering a five-year period, and a discount rate of 11 per cent (gross of tax). The budgets and plans are based
upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market
conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry information. Cash flows beyond
the five-year period have been extrapolated using a steady 3 per cent growth rate which does not exceed the long-term average growth rate for the life
assurance market. Management believes that any reasonably possible change in the key assumptions would not cause the recoverable amount of Scottish
Widows to fall below its balance sheet carrying value.
The recoverable amount of Asset Finance has also been based on a value in use calculation using cash flow projections based on financial budgets and plans
approved by management covering a five-year period and a discount rate of 12 per cent (gross of tax). The discount rate has been set at a premium over the
Group’s weighted average cost of capital to take into account the specific risk profile of the Asset Finance business. The cash flows for each of the businesses of
Asset Finance beyond the five-year period are extrapolated using steady growth rates, in each case not exceeding 4 per cent nor the long-term average growth
rates for the markets in which the respective businesses of Asset Finance participate.
23 Value of in-force business
The asset in the consolidated balance sheet and movement recognised in the income statement are as follows:
Gross value of in-force insurance and participating investment business
At 1 January
Movement in value of in-force business
Disposal of business
At 31 December
2007
£m
2,723
(93)
(412)
2,218
2006
£m
2,922
(199)
–
2,723
Further information on the Group’s life assurance business, including its available capital resources and regulatory capital requirements, the realistic value of
its assets and liabilities and its capital sensitivities is given in note 31.
106 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
23 Value of in-force business continued
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The principal features of the methodology and process used for determining key assumptions used in the calculation of the value of in-force business are set
out below:
Economic assumptions
Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. In practice, to achieve the same result,
where the cash flows are either independent of or move linearly with market movements, a method has been applied known as the ‘certainty equivalent’
approach whereby it is assumed that all assets earn the risk-free rate and all cash flows are discounted at the risk-free rate.
A market consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated
to be consistent with the market price of relevant options at each valuation date.
The risk-free rate assumed in valuing in-force business is 10 basis points over the 15-year gilt yield. In valuing financial options and guarantees the risk-free rate
is derived from gilt yields plus 10 basis points, in line with Scottish Widows’ FSA realistic balance sheet assumptions. The table below shows the range of resulting
yields and other key assumptions at 31 December:
Risk-free rate (value of in-force)
Risk-free rate (financial options and guarantees)
Retail price inflation
Expense inflation
Non-market risk
2007
%
4.65
4.28 to 4.81
3.28
4.18
2006
%
4.72
3.91 to 5.41
3.23
4.13
An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally will give the mean
expected financial outcome for shareholders and hence no further allowance for non-market risk is required. However, in the case of operational risk and the
with-profits fund there are asymmetries in the range of potential outcomes for which an explicit allowance is made.
Non-economic assumptions
Future maintenance expenses, mortality, morbidity, lapse and paid-up rate assumptions are based on an analysis of past experience and represent
management’s best estimate of likely future experience.
24 Other intangible assets
Customer
lists
£m
Software
enhancements
£m
Cost:
At 1 January 2006
Additions
At 31 December 2006
Additions
Disposals
At 31 December 2007
Accumulated amortisation:
At 1 January 2006
Charge for the year
At 31 December 2006
Charge for the year
Disposals
At 31 December 2007
Balance sheet amount at 31 December 2007
Balance sheet amount at 31 December 2006
–
54
54
3
–
57
–
–
–
5
–
5
52
54
147
51
198
47
(5)
240
97
17
114
31
(2)
143
97
84
Software enhancements principally comprise identifiable and directly associated internal staff and other costs.
Total
£m
147
105
252
50
(5)
297
97
17
114
36
(2)
148
149
138
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Lloyds TSB Group Annual Report and Accounts 2007 107
Notes to the group accounts
25 Tangible fixed assets
Cost:
At 1 January 2006
Exchange and other adjustments
Additions
Disposals
At 31 December 2006
Exchange and other adjustments
Adjustments on disposal of businesses
Adjustments on deconsolidation of subsidiaries
Additions
Disposals
At 31 December 2007
Accumulated depreciation and impairment:
At 1 January 2006
Exchange and other adjustments
Charge for the year
Disposals
At 31 December 2006
Exchange and other adjustments
Adjustments on disposal of businesses
Adjustments on deconsolidation of subsidiaries
Charge for the year
Disposals
At 31 December 2007
Balance sheet amount at 31 December 2007
Balance sheet amount at 31 December 2006
Premises
£m
Equipment
£m
Operating
lease assets
£m
Total tangible
fixed assets
£m
1,421
–
92
(25)
1,488
–
(53)
–
60
(58)
1,437
601
(1)
82
(7)
675
–
(11)
–
83
(29)
718
719
813
2,667
(3)
286
(101)
2,849
2
(89)
–
286
(177)
2,871
1,796
(1)
248
(83)
1,960
2
(35)
–
242
(162)
2,007
864
889
2,961
(96)
552
(551)
2,866
(24)
–
(1,015)
549
(945)
1,431
361
(63)
272
(254)
316
(3)
–
(86)
269
(321)
175
1,256
2,550
7,049
(99)
930
(677)
7,203
(22)
(142)
(1,015)
895
(1,180)
5,739
2,758
(65)
602
(344)
2,951
(1)
(46)
(86)
594
(512)
2,900
2,839
4,252
2006
£m
431
747
30
1,208
At 31 December the future minimum rentals receivable under non-cancellable operating leases were as follows:
Receivable within 1 year
1 to 5 years
Over 5 years
2007
£m
259
271
9
539
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2007 and 2006 no contingent rentals in
respect of operating leases were recognised in the income statement.
In addition, total future minimum sub-lease income of £113 million at 31 December 2007 (£120 million at 31 December 2006) is expected to be received under
non-cancellable sub-leases of the Group’s premises.
During the year the Group entered into an agreement which transferred control over a number of its leasing subsidiaries to third parties. These subsidiaries
have been deconsolidated and, consequently, operating lease assets and related accumulated depreciation in the amounts of £1,015 million and £86 million
respectively have been derecognised.
26 Other assets
Assets arising from reinsurance contracts held
Deferred acquisition costs
Settlement balances
Other assets and prepayments
108 Lloyds TSB Group Annual Report and Accounts 2007
2007
£m
350
212
205
4,296
5,063
2006
£m
451
443
285
3,500
4,679
Notes to the group accounts
26 Other assets continued
At 31 December 2007 £1,781 million (2006: £1,521 million) of other assets had a contractual residual maturity of greater than one year.
Deferred acquisition costs:
At 1 January
Acquisition costs deferred, net of amounts amortised to the income statement
Disposal of businesses and other adjustments
At 31 December
27 Deposits from banks
2007
£m
443
(22)
(209)
212
The breakdown of deposits from 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
2007
£m
101
32,335
32,436
46
6,609
6,655
39,091
2006
£m
429
14
–
443
2006
£m
89
28,405
28,494
31
7,869
7,900
36,394
At 31 December 2007 £25 million (2006: £2,760 million) of deposits from banks had a contractual residual maturity of greater than one year.
Included in deposits from banks were deposits of £1,509 million (2006: £582 million) held as collateral, principally in relation to derivative contracts. The fair
value of those deposits approximates the carrying amount.
28 Customer accounts
Non-interest bearing current accounts
Interest bearing current accounts
Savings and investment accounts
Other customer deposits
2007
£m
3,807
45,726
71,905
35,117
156,555
The breakdown of customer accounts between the domestic and international offices of the Group is set out below:
Domestic:
Non-interest bearing
Interest bearing
International:
Non-interest bearing
Interest bearing
2007
£m
3,407
149,412
152,819
400
3,336
3,736
156,555
2006
£m
4,338
43,064
66,151
25,789
139,342
2006
£m
4,002
131,781
135,783
336
3,223
3,559
139,342
At 31 December £1,949 million (2006: £2,077 million) of customer accounts had a contractual residual maturity of greater than one year.
Included in customer accounts were deposits of £777 million (2006: £462 million) held as collateral, principally in relation to derivative contracts. The fair value
of those deposits approximates the carrying amount.
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Lloyds TSB Group Annual Report and Accounts 2007 109
Notes to the group accounts
29 Trading and other liabilities at fair value through profit or loss
Liabilities held at fair value through profit or loss (debt securities)
Trading liabilities
2007
£m
3,107
99
3,206
2006
£m
1,156
28
1,184
At 31 December 2007 £2,032 million (2006: £1,144 million) of trading and other liabilities at fair value through profit or loss had a contractual residual
maturity of greater than one year.
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2007 was £3,131 million, which
was £24 million higher than the balance sheet carrying value (2006: £1,200 million, which was £44 million higher than the balance sheet carrying value).
There was an £8 million (2006: £nil) decrease in the fair value of these liabilities attributable to changes in credit spread risk; this is determined by reference
to the quoted credit spreads of Lloyds TSB Bank plc, the issuing entity within the Group.
Liabilities held at fair value through profit or loss represent designated debt securities in issue which contain substantive embedded derivatives which would
otherwise need to be recognised and measured at fair value separately from the related debt securities.
30 Debt securities in issue
Euro medium-term note programme
Other bonds and medium-term notes
Certificates of deposit issued
Commercial paper
Total debt securities in issue
2007
£m
4,692
14,497
14,995
17,388
51,572
2006
£m
5,650
10,157
25,244
13,067
54,118
At 31 December 2007 £18,604 million (2006: £15,020 million) of debt securities in issue had a contractual residual maturity of greater than one year.
Debt securities in issue at 31 December 2007 included £12,403 million (2006: £10,048 million) in respect of the securitisation of mortgages and £98 million
(2006: £nil) in respect of the securitisation of commercial banking loans (see note 18).
31 Liabilities arising from insurance contracts and participating investment contracts
Insurance contract liabilities
Participating investment contract liabilities
2007
£m
23,189
14,874
38,063
2006
£m
26,350
15,095
41,445
At 31 December 2007 £35,603 million (2006: £38,297 million) of liabilities arising from insurance contracts and participating investment contracts had a
contractual residual maturity of greater than one year.
Insurance contract liabilities
Insurance contract liabilities, substantially all of which relate to business written in the United Kingdom, are comprised as follows:
Life insurance (see (i) below)
Non-life insurance (see (ii) below):
Unearned premiums
Claims outstanding
* Reinsurance balances receivable are reported within other assets (note 26).
2007
2006
Gross
£m
Reinsurance*
£m
Net
£m
Gross
£m
Reinsurance*
£m
Net
£m
22,526
(340)
22,186
25,763
(425)
25,338
456
207
663
–
(10)
(10)
456
197
653
438
149
587
–
(4)
(4)
438
145
583
23,189
(350)
22,839
26,350
(429)
25,921
110 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
31 Liabilities arising from insurance contracts and participating investment contracts continued
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(i) Life insurance
The movement in life insurance contract liabilities over the year can be analysed as follows:
At 1 January 2006
New business
Changes in existing business
At 31 December 2006
New business
Changes in existing business
Disposal of businesses
At 31 December 2007
Gross
£m
25,888
1,045
(1,170)
25,763
2,428
(1,316)
(4,349)
22,526
Reinsurance*
£m
(511)
(98)
184
(425)
(18)
15
88
(340)
* Reinsurance balances receivable are reported within other assets (note 26).
The movement in liabilities arising from participating investment contracts may be analysed as follows:
At 1 January 2006
New business
Changes in existing business
At 31 December 2006
New business
Changes in existing business
At 31 December 2007
Net
£m
25,377
947
(986)
25,338
2,410
(1,301)
(4,261)
22,186
£m
14,068
1,815
(788)
15,095
491
(712)
14,874
Process for determining key assumptions
The process for determining the key assumptions for insurance contracts and participating investment contracts is set out below.
These policy liabilities can be split into With Profit Fund liabilities, accounted for using the FSA’s realistic capital regime (realistic liabilities) and Non-Profit Fund
liabilities, accounted for using a traditional prospective actuarial discounted cash flow methodology as described in the accounting policies.
With Profit Fund realistic liabilities
The Group’s With Profit Fund contains life insurance contracts and participating investment contracts. The calculation of With Profit Fund realistic liabilities uses
best estimate assumptions for mortality, persistency rates and expenses. These are calculated in a similar manner to those used for the value of in-force
business as discussed in note 23. The persistency rates used for the realistic valuation of the With Profit Fund liabilities make an allowance for potential changes
in future experience as the guarantees and options within with-profits contracts become more valuable under adverse market conditions.
Other key assumptions are:
• Investment returns and discount rates
The realistic capital regime dictates that With Profit Fund liabilities are valued on a market-consistent basis. This is achieved by the use of a valuation model
which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The With Profit Fund financial options and
guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield and all cash flows are
discounted using the risk-free yield. The risk-free yield is defined as 0.1 per cent higher than the spot yields derived from the UK gilt yield curve.
• Guaranteed annuity option take-up rates
The guaranteed annuity option take-up rates are set with regard to the Group’s actual experience and make allowance for potential increases in take-up rates
when the Guaranteed Annuity Options become more valuable to the policyholder.
• Investment volatility
The calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical volatility where it is not possible to
observe meaningful prices. For example, as at 31 December 2007, the 10 year equity-implied at-the-money assumption was set at 25.5 per cent
(31 December 2006: 20 per cent). The assumption for property volatility was 15 per cent (31 December 2006: 15 per cent), with swaption volatility of broadly
11 per cent (31 December 2006: broadly 13 per cent).
• Mortality
The mortality assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s actual experience where this
is significant, and relevant industry data otherwise.
• Lapse rates
Lapse rates refer to the rate of policy termination and the rate at which policyholders stop paying regular premiums. These rates are based on a combination
of historical experience and management’s views on future experience taking into consideration potential changes in future experience that may result from
guarantees and options becoming more valuable under adverse market conditions.
Lloyds TSB Group Annual Report and Accounts 2007 111
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Notes to the group accounts
31 Liabilities arising from insurance contracts and participating investment contracts continued
Non-Profit Fund liabilities
Generally, assumptions used to value Non-Profit Fund liabilities are prudent in nature and therefore contain a margin for adverse deviation. This margin for
adverse deviation is based on management’s judgement and reflects management’s views on the inherent level of uncertainty. The key assumptions used in
the measurement of Non-Profit Fund liabilities are:
• Interest rates
The rates used are derived in accordance with the FSA Rules. These limit the rates of interest that can be used by reference to a number of factors including the
redemption yields on fixed interest assets at the valuation date.
Margins for risk are allowed for in the assumed interest rates. These are derived from the limits in the FSA Rules, including reductions made to the available
yields to allow for default risk based upon the credit rating of each stock.
• Mortality and morbidity
The mortality and morbidity assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s actual
experience where this provides a reliable basis, and relevant industry data otherwise, and include a margin for adverse deviation.
• Lapse rates
Lapse rates, set with regard to the Group’s actual experience and with a margin for adverse deviation, are allowed for on some Non-Profit Fund contracts.
• Maintenance expenses
Allowance is made for future policy costs explicitly. Expenses are determined by reference to an internal analysis of current and expected future costs plus a
margin for adverse deviation. Explicit allowance is made for future expense inflation.
Key changes in assumptions
During 2007, following a detailed review of the Group’s current and expected experience, there has been a change in the key assumption in respect of lapse
rates. The impact of this change has been to decrease profit before tax by £52 million; this amount includes movements in liabilities and value of the in-force
business in respect of insurance contracts and participating investment contracts.
Sensitivity analysis
The following table demonstrates the effect of changes in key assumptions on profit before tax disclosed in these financial statements assuming that the other
assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements
in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one
direction but can be assumed to be reasonably symmetrical.
112 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
31 Liabilities arising from insurance contracts and participating investment contracts continued
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Non-annuitant mortality
Annuitant mortality
Lapse rates
Maintenance expenses
Risk-free rate1
Guaranteed annuity option take up2
Equity investment volatility3
Widening of credit spreads4
Change in
variable
5% reduction
5% reduction
10% reduction
10% reduction
0.25% deduction
5% addition
1% addition
0.1% addition
Increase
(reduction) in
profit before tax
£m
28
(90)
47
79
42
(4)
(5)
(65)
Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases.
For the above sensitivities a 5 per cent reduction means a reduction to 95 per cent of the expected rate.
1 This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the
risk-free rate by 25 basis points.
2 This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.
3 This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.
4 This sensitivity shows the impact of a 10 basis point increase in corporate bond yields and the corresponding reduction in market values. Government bond
yields and the risk-free rate are assumed to be unchanged.
ii) Non-life insurance
Gross non-life insurance contract liabilities are analysed by line of business as follows:
Credit protection
Home
Health
2007
£m
274
385
4
663
2006
£m
268
314
5
587
For non-life insurance contracts, the methodology and assumptions used in relation to determining the bases of the earned premium and claims provisioning
levels are derived for each individual underwritten product. Assumptions are intended to be neutral estimates of the most likely or expected outcome. There
has been no significant change in the assumptions and methodologies used for setting reserves.
The reserving methodology and associated assumptions are set out below:
The unearned premium reserve is determined on a basis that reflects the length of time for which contracts have been in force and the projected incidence of
risk over the term of each contract.
Claims outstanding comprise those claims that have been notified and those that have been incurred but not reported. Claims incurred but not reported are
determined based on the historical emergence of claims and their average cost. The notified claims element represents the best estimate of the cost of claims
reported using projections and estimates based on historical experience.
The movements in non-life insurance contract liabilities and reinsurance assets over the year have been as follows:
Provisions for unearned premiums
At 1 January 2006
Increase in the year
Release in the year
At 31 December 2006
Increase in the year
Release in the year
At 31 December 2007
Gross
£m
447
608
(617)
438
632
(614)
456
Reinsurance*
£m
–
(17)
17
–
(23)
23
–
Net
£m
447
591
(600)
438
609
(591)
456
* Reinsurance balances receivable are reported within other assets (note 26).
These provisions represent the liability for short-term insurance contracts for which the Group’s obligations are not expired at the year end.
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Lloyds TSB Group Annual Report and Accounts 2007 113
Notes to the group accounts
31 Liabilities arising from insurance contracts and participating investment contracts continued
Claims and loss adjustment expenses
Notified claims
Incurred but not reported
At 1 January 2006
Cash paid for claims settled in the year
Increase (decrease) in liabilities:
Arising from current year claims
Arising from prior year claims
At 31 December 2006
Cash paid for claims settled in the year
Increase (decrease) in liabilities:
Arising from current year claims
Arising from prior year claims
At 31 December 2007
Notified claims
Incurred but not reported
At 31 December 2007
Notified claims
Incurred but not reported
At 31 December 2006
Gross
£m
120
27
147
(223)
231
(6)
149
(275)
341
(8)
207
188
19
207
127
22
149
Reinsurance*
£m
(4)
–
(4)
–
–
–
(4)
–
(9)
3
(10)
(10)
–
(10)
(4)
–
(4)
Net
£m
116
27
143
(223)
231
(6)
145
(275)
332
(5)
197
178
19
197
123
22
145
* Reinsurance balances receivable are reported within other assets (note 26).
Non-life insurance claims development table
The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The top half of the table below
illustrates how the Group’s estimate of total claims outstanding for each accident year has changed at successive year ends. The bottom half of the table
reconciles the cumulative claims to the amount appearing in the balance sheet. The accident year basis is considered the most appropriate for the business
written by the Group.
Non-life insurance all risks – gross
Accident year
Estimate of ultimate claims costs:
At end of accident year
One year later
Two years later
Three years later
Four years later
Current estimate of cumulative claims
Cumulative payments to date
Liability recognised in the balance sheet
Liability in respect of earlier years
Total liability included in the balance sheet
2003
£m
234
220
223
221
220
220
(216)
4
2004
£m
227
209
207
206
206
(202)
4
2005
£m
211
207
204
204
(194)
10
2006
£m
208
206
206
(186)
20
2007
£m
Total
£m
317
1,197
317
(164)
153
1,153
(962)
191
6
197
The liability of £197 million shown in the above table excludes £10 million of unallocated claims handling expenses.
114 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
32 Liabilities arising from non-participating investment contracts
The movement in liabilities arising from non-participating investment contracts may be analysed as follows:
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At 1 January 2006
New business
Changes in existing business
At 31 December 2006
New business
Changes in existing business
Disposal of businesses
At 31 December 2007
Gross
£m
21,839
2,316
215
24,370
2,413
(1,303)
(7,283)
18,197
Reinsurance*
£m
(33)
–
11
(22)
–
22
–
–
Net
£m
21,806
2,316
226
24,348
2,413
(1,281)
(7,283)
18,197
* Reinsurance balances receivable are reported within other assets (note 26).
At 31 December 2007 £17,929 million (2006: £23,449 million) of liabilities arising from non-participating investment contracts had a contractual residual maturity
of greater than one year.
33 Unallocated surplus within insurance businesses
The movement in the unallocated surplus within long-term insurance business over the year can be analysed as follows:
At 1 January
Change in unallocated surplus recognised in the income statement (note 9)
Disposal of businesses
At 31 December
34 Other liabilities
Settlement balances
Unitholders’ interest in Open Ended Investment Companies
Other creditors and accruals
2007
£m
683
(114)
(15)
554
2007
£m
445
3,441
5,804
9,690
At 31 December 2007 £4,427 million (2006: £6,398 million) of other liabilities had a contractual residual maturity of greater than one year.
35 Retirement benefit obligations
Charge to the income statement
Defined benefit pension schemes
Other post-retirement benefit schemes
Total defined benefit schemes
Defined contribution pension schemes
Amounts recognised in the balance sheet
Defined benefit pension schemes
Other post-retirement benefit schemes
2007
£m
158
17
175
63
238
2007
£m
2,033
111
2,144
2006
£m
518
165
–
683
2006
£m
475
4,583
5,927
10,985
2006
£m
104
5
109
56
165
2006
£m
2,362
100
2,462
Lloyds TSB Group Annual Report and Accounts 2007 115
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Notes to the group accounts
35 Retirement benefit obligations continued
Pension schemes
Defined benefit schemes
The Group has established a number of defined benefit pension schemes in the UK and overseas. The majority of the Group’s employees are members of the
defined benefit sections of the Lloyds TSB Group Pension Schemes No’s 1 and 2. These schemes provide retirement benefits calculated as a percentage of final
salary depending upon the length of service; the minimum retirement age under the rules of the schemes is 50.
The latest full valuations of the two main schemes were carried out as at 30 June 2005; these have been updated to 31 December 2007 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 2007 by
qualified independent actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.
The Group’s obligations in respect of its defined benefit schemes are funded. The Group expects to pay contributions of some £500 million to its defined benefit
schemes in 2008.
2007
£m
16,795
(16,112)
683
1,350
2,033
2007
£m
17,378
302
866
(971)
(555)
25
–
(262)
12
16,795
2007
£m
15,279
1,035
446
139
(555)
(244)
12
16,112
1,174
2006
£m
17,378
(15,279)
2,099
263
2,362
2006
£m
17,320
325
817
(434)
(555)
32
(129)
–
2
17,378
2006
£m
14,026
942
550
314
(555)
–
2
15,279
1,256
Amount included in the balance sheet
Present value of funded obligations
Fair value of scheme assets
Unrecognised actuarial gains
Liability in the balance sheet
Movements in the defined benefit obligation
At 1 January
Current service cost
Interest cost
Actuarial gains
Benefits paid
Past service cost
Curtailment
Disposal of businesses
Exchange and other adjustments
At 31 December
Changes in the fair value of scheme assets
At 1 January
Expected return
Employer contributions
Actuarial gains
Benefits paid
Disposal of businesses
Exchange and other adjustments
At 31 December
Actual return on scheme assets
116 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
35 Retirement benefit obligations continued
Assumptions
The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows:
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Discount rate
Rate of inflation
Rate of salary increases
Rate of increase for pensions in payment and deferred pensions
Life expectancy for member aged 60, on the valuation date:
Men
Women
Life expectancy for member aged 60, 15 years after the valuation date:
Men
Women
2007
%
5.80
3.30
4.00
3.10
Years
25.9
27.9
27.1
29.0
2006
%
5.10
2.90
3.93
2.70
Years
25.8
27.8
27.0
28.9
The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted
in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 as at 31 December 2007 is assumed to live for, on
average, 25.9 years for a male and 27.9 years for a female. In practice there will be much variation between individual members but these assumptions are
expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the
expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement
assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years time at age 60.
An analysis of the impact of a reasonable change in these assumptions is provided in note 2.
The expected return on scheme assets has been calculated using the following assumptions:
Equities
Fixed interest gilts
Index linked gilts
Non-government bonds
Property
Cash
The expected return on scheme assets in 2008 will be calculated using the following assumptions:
2007
%
8.0
4.6
4.2
5.1
6.5
3.9
Equities and alternative assets
Fixed interest gilts
Index linked gilts
Non-government bonds
Property
Money market instruments and cash
Composition of scheme assets:
Equities
Fixed interest gilts
Index linked gilts
Non-government bonds
Property
Money market instruments and cash
At 31 December
2007
£m
8,537
2,041
1,433
1,990
1,666
445
16,112
The assets of all the funded plans are held independently of the Group’s assets in separate trustee administered funds.
2006
%
8.0
4.1
3.9
4.8
6.4
3.7
2008
%
8.2
4.5
4.4
6.0
6.7
4.8
2006
£m
9,677
1,114
921
1,543
1,333
691
15,279
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The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy.
Expected yields on fixed interest investments are based on gross redemption yields at the balance sheet date at a term and credit rating broadly appropriate
for the bonds held. Expected returns on equity and property investment are long-term rates based on the views of the plan’s independent investment
consultants. The expected return on equities allows for the different expected returns from the private equity, infrastructure and hedge fund investments held
by some of the funded plans. Some of the funded plans also invest in certain money market instruments and the expected return on these investments has
been assumed to be the same as cash.
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Lloyds TSB Group Annual Report and Accounts 2007 117
Notes to the group accounts
35 Retirement benefit obligations continued
Experience adjustments history (since the date of adoption of IAS 19):
Present value of defined benefit obligation
Fair value of scheme assets
Experience losses on scheme liabilities
Experience gains on scheme assets
2007
£m
16,795
(16,112)
683
(185)
139
The expense recognised in the income statement for the year ended 31 December comprises:
Current service cost
Interest cost
Expected return on scheme assets
Curtailment
Past service cost
Total defined benefit pension expense
2005
£m
17,320
(14,026)
3,294
(69)
1,538
2006
£m
17,378
(15,279)
2,099
(50)
314
2007
£m
302
866
(1,035)
–
25
158
2004
£m
14,866
(11,648)
3,218
(126)
361
2006
£m
325
817
(942)
(128)
32
104
Following changes in age discrimination legislation in 2006, the Group ceased to augment the pension entitlement of employees taking early retirement; this
change reduced the Group’s defined benefit pension liability at 31 December 2006 by £129 million (£1 million of which was unrecognised) and resulted in a
one-off credit to the 2006 income statement of £128 million.
Defined contribution schemes
The Group operates a number of defined contribution pension schemes in the UK and overseas, principally the defined contribution sections of the Lloyds TSB
Group Pension Schemes No’s 1 and 2.
During the year ended 31 December 2007 the charge to the income statement in respect of these schemes was £63 million (2006: £56 million), representing
the contributions payable by the employer in accordance with each scheme’s rules.
Other post-retirement benefit schemes
The Group operates a number of schemes which provide post-retirement healthcare benefits to certain employees, retired employees and their dependants.
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 dependants) who retired prior to 1 January 1996. The Group has entered into an insurance contract to provide these
benefits and a provision has been made for the estimated cost of future insurance premiums payable.
For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 30 June 2007; this valuation has been
updated to 31 December 2007 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 7.43 per cent (2006: 7.02 per cent).
Amount included in the balance sheet:
Present value of unfunded obligations
Unrecognised actuarial losses
Liability in the balance sheet
Movements in the other post-retirement benefits obligation:
At 1 January
Actuarial loss (gain)
Insurance premiums paid
Charge for the year
At 31 December
2007
£m
123
(12)
111
2007
£m
110
2
(6)
17
123
2006
£m
110
(10)
100
2006
£m
112
(1)
(6)
5
110
118 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
36 Deferred tax
The movement in the net deferred tax balance is as follows:
At 1 January
Exchange and other adjustments
Disposals
Income statement (credit) charge:
Due to change in UK corporation tax rate
Other
Amount charged (credited) to equity:
Available-for-sale financial assets (note 41)
Cash flow hedges (note 41)
Share based compensation
At 31 December
2007
£m
1,416
–
(389)
(110)
21
(89)
(1)
(6)
17
10
948
2006
£m
1,145
(3)
(281)
–
574
574
–
–
(19)
(19)
1,416
The 2007 Finance Act reduction in corporation tax rate from 30 per cent to 28 per cent resulted in a decrease in the Group’s provision for deferred tax at
31 December 2007 of £110 million.
The deferred tax (credit) charge in the income statement comprises the following temporary differences:
Accelerated capital allowances
Pensions and other post-retirement benefits
Investment reserve
Allowances for impairment losses
Unrealised gains
Tax on value of in-force business
Other temporary differences
Deferred tax assets and liabilities are comprised as follows:
Deferred tax assets:
Pensions and other post-retirement benefits
Allowances for impairment losses
Other provisions
Derivatives
Tax losses carried forward
Other temporary differences
Deferred tax liabilities:
Accelerated capital allowances
Investment reserve
Unrealised gains
Tax on value of in-force business
Other temporary differences
2007
£m
(32)
134
(30)
42
(91)
(108)
(4)
(89)
2007
£m
(600)
(101)
(15)
(178)
(409)
(169)
(1,472)
2007
£m
979
119
342
652
328
2,420
2006
£m
175
134
59
22
162
(59)
81
574
2006
£m
(739)
(143)
(39)
(161)
(326)
(255)
(1,663)
2006
£m
1,252
149
500
875
303
3,079
Lloyds TSB Group Annual Report and Accounts 2007 119
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Notes to the group accounts
36 Deferred tax continued
Deferred tax assets
Deferred tax assets are recognised for tax losses and foreign tax credit carry forwards to the extent that the realisation of the related tax benefit through future
taxable profits is probable.
Deferred tax assets of £33 million (2006: £567 million) have not been recognised in respect of capital losses carried forward as there are no predicted future
capital profits. Capital losses can be carried forward indefinitely.
In addition, deferred tax assets have not been recognised in respect of Eligible Unrelieved Foreign Tax (EUFT) and other foreign tax credits carried forward as at
31 December 2007 of £104 million (2006: £138 million), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can be
utilised. EUFT can be carried forward indefinitely.
Deferred tax liabilities
Deferred tax liabilities have not been recognised for tax that may be payable if earnings of certain subsidiaries were remitted to the UK. Such amounts are either
reinvested for the foreseeable future or can be remitted free of tax. Unremitted earnings totalled £928 million (2006: £689 million).
Future transfers from Scottish Widows plc’s long-term business funds to its Shareholder Fund will be subject to a shareholder tax charge. Under IAS 12,
no provision is required to be made to the extent that the timing of such transfers is under Scottish Widows plc’s control. Accordingly, deferred tax liabilities
of £90 million (2006: £110 million) have not been recognised.
37 Other provisions
At 1 January 2007
Exchange and other adjustments
Provisions applied
Amortisation of discount
Charge for the year
Disposal of businesses
At 31 December 2007
Provisions for
contingent
liabilities and
commitments
£m
Customer
remediation
provisions
£m
27
–
(3)
–
5
–
29
101
–
(54)
–
–
(4)
43
Vacant
leasehold
property
and other
£m
131
6
(13)
3
10
–
137
Total
£m
259
6
(70)
3
15
(4)
209
Provisions for contingent liabilities and commitments
Provisions are held in cases where the Group is irrevocably committed to provide additional funds, but where there is doubt as to the potential borrower’s ability
to meet its repayment obligations.
Customer remediation provisions
In previous years, the Group has established provisions for the estimated cost of making redress payments to customers in respect of past product sales, in
those cases where the original sales processes have been found to be deficient. During 2007 management have reviewed the adequacy of the provisions held
having regard to current complaint volumes and the level of payments being made and are satisfied that no additional charge is required (no charge was made
in 2006). At 31 December 2007 the remaining provisions held relate to past sales of a number of products, including mortgage endowment policies, sold through
the branch networks 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 are made in the assessment of the adequacy of the provision relate to the number of cases that are
likely to require redress, taking into account any time barring, 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 remaining expenditure will be incurred over the next year.
Vacant leasehold property and other
Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub-let income, compared to the head rent, and the possibility
of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on an annual basis and
will normally run off over the period of under-recovery of the leases concerned, currently averaging two years; where a property is disposed of earlier than
anticipated, any remaining balance in the provision relating to that property is released.
The Group also carries provisions in respect of its obligations relating to UIC Insurance Company Limited (UIC), which is in provisional liquidation. The Group has
indemnified a third party against losses in the event that UIC does not honour its obligations under a reinsurance contract, which is subject to asbestosis and
pollution claims in the US. The ultimate cost of settling the Group’s exposure in respect of the insurance business of UIC and the timing remains uncertain.
The provision held represents management’s current best estimate of the cost after having regard to the financial condition of UIC and actuarial estimates of
future claims.
120 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
38 Subordinated liabilities
Preferred securities
6.90% Perpetual Capital Securities (US$1,000 million)
Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2015 (£600 million)
Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2016 (US$1,000 million)
6% Non-cumulative Redeemable Preference Shares
Euro Step-up Non-Voting Non-Cumulative Preferred Securities callable 2012 (e430 million)
6.35% Step-up Perpetual Capital Securities callable 2013 (e500 million)
Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015 (£250 million)
4.385% Step-up Perpetual Capital Securities callable 2017 (e750 million)
Undated subordinated liabilities
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 (£100 million)
55/8% Undated Subordinated Step-up Notes callable 2009 (e1,250 million)
Undated Step-up Floating Rate Notes callable 2009 (e150 million)
65/8% Undated Subordinated Step-up Notes callable 2010 (£410 million)
5.125% Step-up Perpetual Subordinated Notes callable 2015 (£560 million)
5.57% Undated Subordinated Step-up Coupon Notes callable 2015 (¥20,000 million)
5.125% Undated Subordinated Step-up Notes callable 2016 (£500 million)
61/2% Undated Subordinated Step-up Notes callable 2019 (£270 million)
8% Undated Subordinated Step-up Notes callable 2023 (£200 million)
61/2% Undated Subordinated Step-up Notes callable 2029 (£450 million)
6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million)
Dated subordinated liabilities
73/4% Subordinated Bonds 2007 (£300 million)
51/4% Subordinated Notes 2008 (DM 750 million)
105/8% Guaranteed Subordinated Loan Stock 2008 (£100 million)
91/2% Subordinated Bonds 2009 (£100 million)
61/4% Subordinated Notes 2010 (e400 million)
12% Guaranteed Subordinated Bonds 2011 (£100 million)
91/8% Subordinated Bonds 2011 (£150 million)
43/4% Subordinated Notes 2011 (e850 million)
57/8% Subordinated Guaranteed Bonds 2014 (e750 million)
57/8% Subordinated Notes 2014 (£150 million)
65/8% Subordinated Notes 2015 (£350 million)
Subordinated Step-up Floating Rate Notes 2016 callable 2011 (£300 million)
Subordinated Step-up Floating Rate Notes 2016 callable 2011 (e500 million)
Subordinated Floating Rate Notes 2020 (e100 million)
5.75% Subordinated Step-up Notes 2025 callable 2020 (£350 million)
95/8% Subordinated Bonds 2023 (£300 million)
Total subordinated liabilities
Note
d, g
a, b
a, c
o
d, m
d, f, k
d, n
d, f, k
d, e
d, k
d, e
d, j
d, h
d, l
d, j
d, j
d, j
d, j
d, j
i
i
e
e
e
2007
£m
471
593
515
–
335
365
248
504
2006
£m
483
587
504
–
312
345
248
478
3,031
2,957
374
249
299
100
915
110
408
534
111
449
238
188
444
450
383
255
306
100
845
101
408
525
107
475
255
189
447
467
4,869
4,863
–
281
100
100
302
100
149
609
591
149
316
300
371
73
305
312
4,058
11,958
300
260
100
99
283
100
149
562
560
149
330
300
336
67
328
329
4,252
12,072
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. The Group has
not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during the period (2006: nil).
At 31 December 2007 £11,577 million (2006: £11,772 million) of subordinated liabilities had a contractual residual maturity of greater than one year.
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Lloyds TSB Group Annual Report and Accounts 2007 121
Notes to the group accounts
38 Subordinated liabilities continued
a) Any repayment of preference shares would require prior notification to the Financial Services Authority. In certain circumstances, the shares may be
mandatorily exchanged for qualifying non-innovative tier 1 securities. The Company may declare no dividend or a partial dividend on these preference
shares. Dividends may be reduced if the distributable profits of the Company are insufficient to cover the payment in full of the dividends and also the
payment in full of all other dividends on shares issued by the Company.
b) Dividends will accrue at a rate of 6.369 per cent per annum up to 24 August 2015, and, unless redeemed, at a rate reset quarterly equal to 1.28 per cent
per annum above the London interbank offered rate for three-month sterling deposits thereafter. These preference shares can be redeemed at the option
of the Company on 25 August 2015 or quarterly thereafter.
c) Dividends will accrue at a rate of 6.267 per cent per annum up to 13 November 2016 and, unless redeemed, at a rate reset quarterly equal to 1.035 per cent
per annum above the London interbank offered rate for three-month sterling deposits thereafter. These preference shares can be redeemed at the option
of the Company on 14 November 2016 or every 10 years thereafter.
d)
In certain circumstances, these notes, bonds and securities would acquire the characteristics of preference share capital. Any repayments of undated
subordinated liabilities would require prior notification to the Financial Services Authority. They are accounted for as liabilities since coupon payments are
mandatory as a consequence of the terms of the 6% Non-cumulative Redeemable Preference Shares.
e) These notes bear interest at rates fixed periodically in advance based on London Interbank rates.
f)
g)
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.
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. The securities
can be redeemed at par at the option of Lloyds TSB Bank plc on any coupon date.
h)
In certain circumstances the interest payments on these securities can be deferred although in this case Scottish Widows plc cannot declare or pay a
dividend until any deferred payments have been made.
i)
Issued by a group undertaking under the Company’s subordinated guarantee.
j) At the callable date the coupon on these notes will be reset by reference to the applicable five year benchmark gilt rate.
k)
In the event that these notes are not redeemed at the callable date, the coupon will be reset to a floating rate.
l)
In the event that these notes are not redeemed at the callable date, the coupon will be reset to a margin of 1.60 per cent over the five year Yen swap rate.
m) 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 margin of 2.33 per cent over EURIBOR. This issue was 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.
n) 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 margin of 3.50 per cent over a rate based on the yield of specified UK government stock. This issue was
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.
o) Throughout 2007 and 2006, the Company has had in issue 400 6 per cent non-cumulative 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 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.
39 Share capital
Authorised share capital
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 25 cents each
Euro
160 million Preference shares of 25 cents each
Japanese yen
50 million Preference shares of ¥25 each
122 Lloyds TSB Group Annual Report and Accounts 2007
2007
£m
1,728
20
44
1,792
US$m
40
em
40
¥m
1,250
2006
£m
1,728
20
44
1,792
US$m
40
em
40
¥m
1,250
Notes to the group accounts
39 Share capital continued
Issued and fully paid ordinary shares
Ordinary shares of 25p each
At 1 January
Issued under employee share schemes
2007
Number of shares
2006
Number of shares
5,637,964,437
9,739,508
5,602,613,600
35,350,837
At 31 December
5,647,703,945
5,637,964,437
Limited voting ordinary shares of 25p each
At 1 January and 31 December
78,947,368
78,947,368
2007
£m
1,409
3
1,412
20
1,432
2006
£m
1,400
9
1,409
20
1,429
Share capital and control
There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and:
• certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws); and
• pursuant to the UK Listing Authority’s listing rules where directors and certain employees of the Company require the approval of the Company to deal in the
Company’s shares; and
• pursuant to the rules of some of the Company’s employee share plans where certain restrictions may apply while the shares are subject to the plans.
Where, under an employee share plan operated by the Company, participants are the beneficial owners of shares but not the registered owners, the voting
rights are normally exercised by the registered owner at the direction of the participant. All of the Company’s share plans contain provisions relating to a change
of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance
conditions at that time.
In addition, the Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights.
Information regarding significant direct or indirect holdings of shares in the Company can be found on page 159.
The directors have authority to allot and issue ordinary and preference shares and to make market purchases of ordinary shares in accordance with the articles
of association. The authority for the Company to purchase, in the market, 571,750,770 of its shares, representing some 10 per cent of the issued share capital,
expires at the annual general meeting. Shareholders will be asked, at the annual general meeting, to give similar authorities.
Subject to any rights or restrictions attached to any shares, on a show of hands at a general meeting of the Company every holder of shares present in person
or by proxy and entitled to vote has one vote and on a poll every member present and entitled to vote has one vote for every share held. Further details regarding
voting at the annual general meeting can be found in the notes to the notice of the annual general meeting.
Ordinary shares
The holders of ordinary shares (excluding the limited voting ordinary shares), who held 98.60 per cent of the total share capital as at 31 December 2007, are
entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of
ordinary shares (excluding the limited voting ordinary shares) may also receive a dividend (subject to the provisions of the Company’s articles of association)
and on a winding up may share in the assets of the Company.
Limited voting ordinary shares
The limited voting ordinary shares are held by the Lloyds TSB Foundations (‘the Foundations’). The holders of the limited voting ordinary shares, who held
1.38 per cent of the total share capital as at 31 December 2007, are entitled to receive copies of every circular or other document sent out by the Company to
the holders of other ordinary shares. 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. In the event of an offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting ordinary share will convert
into an ordinary share and shall rank equally with the ordinary shares in all respects from the date of conversion. Lloyds TSB Group plc has entered into deeds
of covenant with the 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. This
donation is payable on or before the last day of February in each year (‘the payment date’). In the event of conversion of the limited voting ordinary shares, the
Foundations shall be entitled to receive a donation, on the same basis as set out above, on the payment date following conversion.
Issued and fully paid preference shares
Throughout 2006 and 2007, the Company has had in issue 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. The holders of the 6 per cent non-cumulative redeemable preference shares
held less than 0.1 per cent of the total share capital as at 31 December 2007. In accordance with IFRS, these shares are reported within liabilities.
In addition, during 2006 the Company issued 600,000 Fixed/Floating Rate Non-Cumulative Callable Preference Shares of 25 pence each with a liquidation
preference of £1,000 per share and 1,000,000 Fixed/Floating Rate Non-Cumulative Callable Preference Shares of 25 cents each with a liquidation preference of
US$1,000 per share. Both issues of preference shares are perpetual, although the two issues can be redeemed at the option of the Company on or after
25 August 2015 and 14 November 2016 respectively and carry the right to non-cumulative dividends which are fixed until those first redemption dates. The terms
of these two issues of preference shares are such that the Company cannot declare and pay a dividend on any other junior class of share (including the
mandatory dividend on the 400 6 per cent non-cumulative redeemable preference shares mentioned above) until the coupon has been paid on these
preference shares. As the Company is effectively committed to the payment of a coupon on these shares they are classified as liabilities on the balance sheet
in accordance with IFRS (see note 38). The holders of the fixed/floating rate non-cumulative callable preference shares, who held less than 0.1 per cent of the
total share capital as at 31 December 2007, do not have the right to receive notice of, attend, speak or vote at any general meetings other than on resolutions
relating to the variation or abrogation of any of the rights or restrictions attached to the preference shares or the winding up or dissolution of the Company or
if, at the date of the notice of meeting, the dividend payable at the immediately preceding dividend payment date has failed to be declared and paid in full.
Upon winding up, the fixed/floating rate non-cumulative callable preference shares shall rank equally with the most senior class of preference shares and any
other class of shares which are expressed to rank equally.
Lloyds TSB Group Annual Report and Accounts 2007 123
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39 Share capital continued
Any repayment of the fixed/floating rate non-cumulative callable preference shares would require prior notification to the Financial Services Authority. The
sterling fixed/floating rate non-cumulative callable preference shares can be redeemed at the option of the Company on or after 25 August 2015; at this call
date, dividends will be reset at a margin of 1.28 per cent over 3 month LIBOR. The US dollar fixed/floating rate non-cumulative callable preference shares can
be redeemed at the option of the Company on or after 14 November 2016; at this call date, dividends will be reset at a margin of 1.035 per cent over 3 month
LIBOR. In certain circumstances, the fixed/floating rate non-cumulative callable preference shares may be mandatorily exchanged for qualifying non-innovative
tier 1 securities and in certain circumstances and subject to compliance with certain requirements, the fixed/floating rate non-cumulative callable preference
shares may be redeemed by the Company at certain times in the event that the FSA makes a decision that the preference shares can no longer qualify as
non-innovative tier 1 capital. The Company may declare no dividend or a partial dividend on these preference shares; notwithstanding this discretion, in certain
circumstances, the dividends on the fixed/floating rate non-cumulative callable preference shares will be mandatorily payable if the preference shares cease
to be eligible to qualify as regulatory capital and the Company is in compliance with relevant FSA regulations regarding capital adequacy. Dividends may be
reduced if the distributable profits of the Company are insufficient to cover the payment in full of the dividends and also the payment in full of all other dividends
on shares issued by the Company. These securities were issued during 2006 primarily to finance the development and expansion of the business of the Group.
2007
£m
1,266
32
1,298
2007
£m
343
(399)
(3)
(1)
(60)
2007
£m
343
–
(1)
(483)
1
46
(436)
(5)
70
(21)
44
(6)
(399)
40 Share premium account
At 1 January
Premium arising on issue of shares under share option schemes
At 31 December
41 Other reserves
Other reserves comprise:
Merger reserve
Revaluation reserve in respect of available-for-sale financial assets
Cash flow hedging reserve
Foreign currency translation reserve
Movements in other reserves were as follows:
Merger reserve
At 1 January and 31 December
Revaluation reserve in respect of available-for-sale financial assets
At 1 January
Exchange and other adjustments
Change in fair value of available-for-sale financial assets
Deferred tax
Current tax
Income statement transfer:
Disposals (note 8)
Impairment
Current tax
Disposal of businesses
At 31 December
124 Lloyds TSB Group Annual Report and Accounts 2007
2006
£m
1,170
96
1,266
2006
£m
343
–
12
(19)
336
2006
£m
343
29
2
(10)
–
–
(10)
(22)
–
1
(21)
–
–
Notes to the group accounts
41 Other reserves continued
Cash flow hedging reserve
At 1 January
Change in fair value of hedging derivatives
Deferred tax
Income statement transfer (note 4)
At 31 December
Foreign currency translation reserve
At 1 January
Currency translation differences arising in the year
Foreign currency (losses) gains on net investment hedges
Current tax
At 31 December
42 Retained profits
At 1 January
Profit for the year
Dividends
Purchase/sale of treasury shares
Employee share option schemes – value of employee services
At 31 December
2007
£m
12
(20)
6
(14)
(1)
(3)
2007
£m
(19)
257
(342)
103
(239)
(1)
2007
£m
8,124
3,289
(1,957)
(1)
16
9,471
2006
£m
11
–
–
–
1
12
2006
£m
12
(108)
110
(33)
77
(19)
2006
£m
7,210
2,803
(1,919)
(35)
65
8,124
Retained profits are stated after deducting £75 million (2006: £87 million) representing 15 million (2006: 15 million) treasury shares held.
Value of employee services includes a credit of £30 million (2006: £31 million) reflecting the income statement charge in respect of SAYE and executive options,
together with a related tax charge of £14 million (2006: tax credit £34 million). Purchase/sale of treasury shares includes a credit of £29 million (2006:
£27 million) relating to the cost of other share scheme awards.
43 Ordinary dividends
Final dividend for previous year paid during the current year
Interim dividend
2007
Pence per share
2006
Pence per share
23.5
11.2
34.7
23.5
10.7
34.2
2007
£m
1,325
632
1,957
2006
£m
1,316
603
1,919
The directors have proposed a final dividend of 24.7 pence per share (2006: 23.5 pence per share) representing a total cost of £1,394 million (2006:
£1,325 million) which will be paid on 7 May 2008.
The Bank of New York Nominees have waived the right to all dividends on the Lloyds TSB Group plc shares that they hold (holding at 31 December 2007:
10 shares, at 31 December 2006: 10 shares).
In addition, the trustees of the following holdings of Lloyds TSB Group plc shares in relation to employee share schemes retain the right to receive dividends but
chose to waive their entitlement to the dividends on those shares as indicated: the Lloyds TSB Group Shareplan (holding at 31 December 2007: 931,478 shares,
at 31 December 2006: 898,320 shares, waived right to all dividends), the Lloyds TSB Group Employee Share Ownership Trust (holding at 31 December 2007:
1,935,141 shares, at 31 December 2006: 1,138,311 shares, waived right to all dividends), Lloyds TSB Group Holdings (Jersey) Limited (holding at 31 December 2006
and 31 December 2007: 41,801 shares, waived right to all but a nominal amount of 1 penny in total) and the Lloyds TSB Qualifying Employee Share Ownership
Trust (holding at 31 December 2006 and 31 December 2007: 1,364 shares, waived right to all but a nominal amount of 1 penny in total).
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Lloyds TSB Group Annual Report and Accounts 2007 125
Notes to the group accounts
44 Share based payments
Charge to the income statement
The charge to the income statement is set out below:
Executive and SAYE schemes:
Options granted in the year
Options granted in prior years
Share incentive plan:
Shares granted in the year
Shares granted in prior years
2007
£m
6
24
30
12
17
29
59
2006
£m
6
25
31
12
15
27
58
During the year ended 31 December 2007 the Group operated the following share based payment schemes, all of which are equity settled.
Executive schemes
The executive share option schemes were long-term incentive schemes available to certain senior executives of the Group, with grants usually made annually.
Options were granted within limits set by the rules of the schemes relating to the number of shares under option and the price payable on the exercise of
options. The last grant of executive options was made in August 2005. These options were granted without a performance multiplier and the maximum limit
for the grant of options in normal circumstances was three times annual salary. Between April 2001 and August 2004, the aggregate value of the award based
upon the market price at the date of grant could not exceed four times the executive’s annual remuneration and, normally, the limit for the grant of options to
an executive in any one year would be equal to 1.5 times annual salary with a maximum performance multiplier of 3.5. Prior to 18 April 2001, the normal limit
was equal to one year’s remuneration and no performance multiplier was applied.
Performance conditions for executive options
For options granted up to March 2001
Options granted
Performance conditions
March 1997 – August 1999
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 together with a further condition that Lloyds TSB
Group plc’s ranking based on shareholder return (calculated by reference to both dividends and growth in share
price) over the relevant period should be in the top fifty companies of the FTSE 100.
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.
In respect of options granted between March 1997 and March 2001, the relevant period for the performance conditions begins at the end of the financial year
preceding the date of grant and will continue until the end of the third subsequent year following commencement or, if not met, the end of such later year in
which the conditions are met. Once the conditions have been satisfied the options will remain exercisable without further conditions. If they are not satisfied by
the tenth anniversary of the grant the option will lapse.
For options granted from August 2001 to August 2004
The performance condition is linked to the performance of Lloyds TSB Group plc’s total shareholder return (calculated by reference to both dividends and growth
in share price) against a comparator group of 17 companies including Lloyds TSB Group plc.
The performance condition is measured over a three year period commencing at the end of the financial year preceding the grant of the option and continuing
until the end of the third subsequent year. If the performance condition is not then met, it will be measured at the end of the fourth financial year. If the condition
has not then been met, the options will lapse.
To meet the performance conditions, the Group’s ranking against the comparator group must be at least ninth. The full grant of options will only become
exercisable if the Group is ranked first. A performance multiplier (of between nil and 100 per cent) will be applied below this level to calculate the number of
shares in respect of which options granted to executive directors will become exercisable, and will be calculated on a sliding scale. If Lloyds TSB Group plc is
ranked below median the options will not be exercisable.
Options granted to senior executives other than executive directors are not so highly leveraged and, as a result, different performance multipliers are applied
to their options. For the majority of executives, options are granted with the performance condition but no performance multiplier.
126 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
44 Share based payments continued
For options granted in 2005
The same conditions apply as for grants made up to August 2004, except that:
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– the performance condition is linked to the performance of Lloyds TSB Group plc’s total shareholder return (calculated by reference to both dividends and
growth in share price) against a comparator group of 15 companies including Lloyds TSB Group plc;
– if the performance condition has not been met at the end of the third subsequent year, the options will lapse; and
– the full grant of options becomes exercisable only if the Group is ranked in the top four places of the comparator group. A sliding scale applies between fourth
and eighth positions. If Lloyds TSB Group is ranked below the median (ninth or below) the options will not be exercisable and will lapse.
Movements in the number of share options outstanding under the Executive share option schemes during 2006 and 2007 are set out below:
Outstanding at 1 January
Exercised
Forfeited
Outstanding at 31 December
Exercisable at 31 December
Number of
options
32,459,593
(267,650)
(11,570,169)
20,621,774
423,300
2007
Weighted average
exercise price
(pence)
459.84
509.10
421.76
480.57
876.37
Number of
options
43,977,411
(328,218)
(11,189,600)
32,459,593
819,139
2006
Weighted average
exercise price
(pence)
485.35
437.03
560.77
459.84
744.90
The weighted average share price at the time that the options were exercised during 2007 was 574.39 pence (2006: 552.29 pence). The weighted average
remaining contractual life of options outstanding at the end of the year was 6.2 years (2006: 6.8 years).
Save-As-You-Earn schemes
Eligible employees may enter into contracts through the Save-As-You-Earn (SAYE) schemes to save up to £250 per month and, at the expiry of a fixed term of
three or five years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a price equal to
80 per cent of the market price at the date the options were granted. Grants in periods up to 31 December 2001 also had options exercising after seven years.
Movements in the number of share options outstanding under the SAYE schemes are set out below:
Outstanding at 1 January
Granted
Exercised
Forfeited
Cancelled
Expired
Outstanding at 31 December
Exercisable at 31 December
Number of
options
90,220,144
10,759,688
(9,473,792)
(3,447,524)
(1,822,417)
(562,872)
85,673,227
1,560,472
2007
Weighted average
exercise price
(pence)
335.94
432.00
351.28
363.45
397.98
547.46
342.49
459.01
Number of
options
114,459,474
19,301,716
(35,148,982)
(3,440,257)
(3,984,599)
(967,208)
90,220,144
889,479
2006
Weighted average
exercise price
(pence)
314.17
418.00
294.84
339.47
427.14
503.13
335.94
475.41
The weighted average share price at the time that the options were exercised during 2007 was 552.20 pence (2006: 524.36 pence). The weighted average
remaining contractual life of options outstanding at the end of the year was 1.7 years (2006: 2.2 years).
The weighted average fair value of SAYE options granted during the year was £1.07 (2006: £1.00). The values for the SAYE options have been determined using
a standard Black-Scholes model.
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Lloyds TSB Group Annual Report and Accounts 2007 127
Notes to the group accounts
44 Share based payments continued
Other share option plans
Lloyds TSB Group Executive Share Plan 2003
The plan was adopted in December 2003 and under the plan share options may be granted to senior employees. Options granted to date under this scheme
were granted specifically to facilitate recruitment. Options granted under this plan are not subject to any performance conditions.
Outstanding at 1 January
Granted
Exercised
Forfeited
Outstanding at 31 December
2007
Weighted average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Number of
options
357,123
214,444
(203,170)
(59,679)
308,718
2006
Weighted average
exercise price
(pence)
Nil
Nil
Nil
–
Nil
Number of
options
268,918
165,395
(77,190)
–
357,123
The weighted average fair value of options granted in the year was £5.27 (2006: £4.58). The weighted average share price at the time that the options were
exercised during 2007 was 539.77 pence (2006: 557.25 pence). No options outstanding at 31 December were exercisable. The weighted average remaining
contractual life of options outstanding at the end of the year was 1.8 years (2006: 2.0 years).
Lloyds TSB Group executive share plan 2005
This plan was adopted by the Group in 2005, specifically to facilitate the recruitment of Ms Dial. Ms Dial is the only participant in the plan. Options granted under
this plan are not subject to any performance conditions and will normally become exercisable only if Ms Dial remains as an employee, and has not given notice
of resignation, on 31 May 2008, or if Ms Dial ceases to be an employee before that date in certain circumstances described in her service agreement: in both
cases the options will be exercisable for six months and then lapse.
Outstanding at 1 January and 31 December
2007
Weighted average
exercise price
(pence)
Nil
Number of
options
242,825
2006
Weighted average
exercise price
(pence)
Nil
Number of
options
242,825
No options outstanding at 31 December were exercisable. The weighted average remaining contractual life of options outstanding at the end of the year was
0.9 years (2006: 1.9 years).
Long-Term Incentive Plan
The Long-Term Incentive Plan introduced in 2006 is a long-term incentive scheme aimed at delivering shareholder value by linking the receipt of shares to
an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the plan, with the limits determining
the maximum number of shares that can be awarded equating to three times annual salary, in exceptional circumstances this may increase up to four times
annual salary.
The performance conditions for awards made in May and August 2006 are as follows:
(i) For 50 per cent of the award (the ‘EPS Award’) – the percentage increase in earnings per share of the Group (on a compound annualised basis) over the
relevant period must be at least an average of 6 percentage points per annum greater than the percentage increase (if any) in the Retail Price Index over
the same period. If it is less than 3 per cent per annum the EPS Award will lapse. If the increase is more than 3 per cent but less than 6 per cent per annum
then the proportion of shares released will be on a straight line basis between 17.5 per cent and 100 per cent. The relevant period commenced on 1 January
2006 and ends on 31 December 2008.
(ii) For the other 50 per cent of the award (the ‘TSR Award’) – it will be necessary for the Group’s total shareholder return (calculated by reference to both
dividends and growth in share price) to exceed the median of a comparator group (14 companies) over the relevant period by an average of 7.5 per cent
per annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award will vest where the Group’s total shareholder return is equal to median and vesting
will occur on a straight line basis in between these points. Where the Group’s total shareholder return is below the median of the comparator group, the
TSR Award will lapse. The relevant period commenced on 1 January 2006 and ends on 31 December 2008.
The performance conditions for awards made in March and August 2007 are as follows:
(i) For 50 per cent of the award (the ‘EPS Award’) – the performance condition is as described for May 2006 with the relevant performance period commencing
on 1 January 2007 and ending on 31 December 2009.
(ii) For the other 50 per cent of the award (the ‘TSR Award’) – the performance condition is as described for May 2006 with the relevant performance period
commencing on 8 March 2007 (the date of award) and ending on 7 March 2010.
2007
Number of shares
5,788,108
7,884,787
(463,814)
13,209,081
2006
Number of shares
–
5,852,386
(64,278)
5,788,108
Outstanding at 1 January
Granted
Forfeited
Outstanding at 31 December
The fair value of the share awards granted in 2007 was £3.13 (2006: £2.96).
128 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
44 Share based payments continued
Performance share plan
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Under the performance share plan, introduced during 2005, participating executives will be eligible for an award of free shares, known as performance shares,
to match the bonus shares awarded as part of their 2004 and 2005 bonus. The maximum match will be two performance shares for each bonus share,
awarded at the end of a three year period. The actual number of shares awarded will depend on the Group’s total shareholder return performance measured
over a three year period, compared to other companies in the comparator group. The maximum of two performance shares for each bonus share will be
awarded only if the Group’s total shareholder return performance places it first in the comparator group; one performance share for each bonus share will be
granted if the Group is placed fifth; and one performance share for every two bonus shares if the Group is placed eighth (median). Between first and fifth
position, and fifth and eighth position, sliding scales will apply. If the total shareholder return performance is below median, no performance shares will be
awarded. There will be no retest. Whilst income tax is deducted from the bonus before deferral into the plan, where a match of performance shares is justified,
these shares will be awarded as if income tax had not been deducted.
2007
Number of shares
2006
Number of shares
Outstanding at 1 January
Granted
Forfeited
Outstanding at 31 December
1,849,102
–
(81,508)
1,767,594
826,438
1,035,564
(12,900)
1,849,102
The fair value of the matching element of the performance shares awarded during 2006 was £1.92.
The ranges of exercise prices, weighted average exercise prices, weighted average remaining contractual life and number of options outstanding for the option
schemes were as follows:
Executive schemes
Weighted
average
exercise price
(pence)
Weighted
average
remaining life
(years)
Number of
options
Weighted
average
exercise price
(pence)
SAYE schemes
Weighted
average
remaining life
(years)
Other share option plans
Number of
options
Weighted
average
exercise price
(pence)
Weighted
average
remaining life
(years)
Number of
options
31 December 2007
Exercise price range
£0 to £2
£2 to £3
£3 to £4
£4 to £5
£5 to £6
£6 to £7
£7 to £8
£8 to £9
–
–
–
449.34
551.09
652.47
–
871.54
–
–
–
6.8
2.2
3.1
–
0.7
–
–
–
17,898,897
815,965
1,114,912
–
792,000
–
284.00
353.10
424.23
563.65
–
–
–
–
0.9
1.9
2.9
0.1
–
–
–
–
Nil
1.4
551,543
42,651,925
15,775,539
26,525,262
720,501
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Executive schemes
Weighted
average
exercise price
(pence)
Weighted
average
remaining life
(years)
Number of
options
Weighted
average
exercise price
(pence)
SAYE schemes
Weighted
average
remaining life
(years)
Other share option plans
Number of
options
Weighted
average
exercise price
(pence)
Weighted
average
remaining life
(years)
Number of
options
31 December 2006
Exercise price range
£0 to £2
£2 to £3
£3 to £4
£4 to £5
£5 to £6
£6 to £7
£7 to £8
£8 to £9
–
–
394.25
444.24
541.32
652.98
–
873.12
–
–
6.2
7.7
2.6
4.2
–
1.7
–
–
6,265,105
22,497,465
1,424,507
1,332,177
–
284.00
345.97
422.94
571.24
–
–
718.00
940,339
–
–
1.8
45,234,578
2.3
23,320,638
3.1
0.7
–
0.2
–
20,125,284
1,522,876
–
16,768
–
–
Nil
1.9
599,948
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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Lloyds TSB Group Annual Report and Accounts 2007 129
Notes to the group accounts
44 Share based payments continued
The fair value calculations at 31 December 2007 are based on the following assumptions:
Risk-free interest rate
Expected life
Expected volatility
Expected dividend yield
Weighted average share price
Weighted average exercise price
Expected forfeitures
SAYE
5.35%
3.7 years
21%
6.3%
£5.40
£4.32
6%
Other option
schemes
5.46%
1.4 years
17%
6.0%
£5.73
Nil
4%
Other share
plans
5.19%
3.0 years
17%
6.3%
£5.41
Nil
4%
Expected volatility is a measure of the amount by which the Group’s shares are expected to fluctuate during the life of an option. The expected volatility is
estimated based on the historical volatility of the closing daily share price over the most recent period that is commensurate with the expected life of the option.
The historical volatility is compared to the implied volatility generated from market traded options in the Group’s shares to assess the reasonableness of the
historical volatility and adjustments made where appropriate.
Share incentive plan
Free shares
An award of shares may be made annually to employees based on a percentage of each employee’s salary in the preceding year up to maximum of £3,000.
The percentage is normally announced concurrently with the Group’s annual results and the price of the shares awarded is announced at the time of award.
The shares awarded are held in trust for a mandatory period of three years on the employee’s behalf. The award is subject to a non-market based condition:
if an employee leaves the Group within this three year period for other than a ‘good’ reason, all of the shares awarded will be forfeited (for awards made up
to April 2005, only a portion of the shares would be forfeited: 75 per cent within one year of the award, 50 per cent within two years and 25 per cent within
three years).
The number of shares awarded relating to free shares in 2007 was 6,784,201 (2006: 7,725,195), with an average fair value of £5.82 (2006: £5.28), based on
the market price at the date of award.
Matching shares
The Group undertakes to match shares purchased by employees up to the value of £30 per month; these shares are held in trust for a mandatory period of
three years on the employees’ behalf. The award is subject to a non-market based condition: if an employee leaves within this three year period for other than
a ‘good’ reason or the accompanying partnership shares are sold within that time, 100 per cent of the matching shares are forfeited (or the portion relating to
the shares sold).
The number of shares awarded relating to matching shares in 2007 was 2,073,018 (2006: 2,036,423), with an average fair value of £5.49 (2006: £5.40), based
on market prices at the date of award.
130 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
45 Related party transactions
Key management personnel
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Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the
Group’s key management personnel are the members of the Lloyds TSB Group plc group executive committee together with its non-executive directors.
The table below details, on an aggregated basis, key management personnel compensation:
Compensation
Salaries and other short-term benefits
Post-employment benefits
Termination benefits
Share based payments
Share options
At 1 January
Granted (including options of appointed directors)
Exercised/lapsed (including options of retired directors)
At 31 December
Share incentive plans
At 1 January
Granted (including entitlements of appointees)
Exercised/lapsed (including entitlements of retirees)
At 31 December
2007
£m
15
4
–
4
23
2007
million
11
–
(4)
7
2007
million
4
2
–
6
2006
£m
14
3
–
3
20
2006
million
12
–
(1)
11
2006
million
1
3
–
4
The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information relating to
other transactions between the Group and its key management personnel:
2007
£m
2006
£m
Loans
At 1 January
Advanced
Repayments
At 31 December
2
1
(1)
2
3
–
(1)
2
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 4.95 per cent and
30.0 per cent in 2007 (2006: 5.1 per cent and 19.9 per cent).
No provisions have been recognised in respect of loans given to key management personnel (2006: £nil).
Deposits
At 1 January
Placed
Withdrawn
At 31 December
2007
£m
5
21
(21)
5
2006
£m
5
12
(12)
5
Deposits placed by key management personnel attracted interest rates of up to 8.0 per cent (2006: 5.2 per cent).
At 31 December 2007, the Group provided guarantees totalling £6,154 in respect of one director (2006: £19,744 in respect of one director).
At 31 December 2007, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons
included amounts outstanding in respect of loans and credit card transactions of £2 million with five directors and three connected persons (2006: £2 million
with four directors and four connected persons).
Lloyds TSB Group Annual Report and Accounts 2007 131
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Notes to the group accounts
45 Related party transactions continued
Subsidiaries
Details of the principal subsidiaries are given in note 8 to the parent company financial statements. In accordance with IAS 27, transactions and balances with
subsidiaries have been eliminated on consolidation.
Other related party disclosures
At 31 December 2007, the Group’s pension funds had call deposits with Lloyds TSB Bank plc amounting to £23 million (2006: £19 million).
The Group manages 107 (2006: 89) Open Ended Investment Companies (OEICs), and of these 40 (2006: 38) are consolidated. The Group invested £1,961 million
(2006: £372 million) and redeemed £1,526 million (2006: £237 million) in the unconsolidated OEICs during the year and had investments, at fair value, of
£2,233 million (2006: £1,746 million) at 31 December. The Group earned fees of £200 million from the unconsolidated OEICs (2006: £149 million). The Company
held no investments in OEICs at any time during 2006 or 2007.
The Group has a number of associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2007, these
companies had total assets of approximately £3,184 million (2006: £1,625 million), total liabilities of approximately £3,182 million (2006: £1,609 million) and for
the year ended 31 December 2007 had turnover of £2,136 million (2006: £2,409 million) and made a net profit of approximately £9 million (2006: net loss
of £5 million). In addition, the Group has provided £609 million (2006: £460 million) of financing to these companies on which it received £23 million
(2006: £20 million) of interest income in the year.
46 Contingent liabilities and commitments
Legal proceedings
During the ordinary course of business the Group is subject to threatened or actual legal proceedings. All such material cases are periodically reassessed, with
the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is
concluded that it is more likely than not that a payment will be made, a provision is established to management’s best estimate of the amount required to settle
the obligation at the relevant balance sheet date. In some cases it will not be possible to form a view, either because the facts are unclear or because further
time is needed properly to assess the merits of the case. No provisions are held against such cases; however the Group does not currently expect the final
outcome of these cases to have a material adverse effect on its financial position.
On 27 July 2007, following agreement between the UK Office of Fair Trading (OFT) and a number of UK financial institutions, the OFT issued High Court legal
proceedings against those institutions, including Lloyds TSB Bank plc, to determine the legal status and enforceability of certain of the charges applied to their
personal customers in relation to requests for unplanned overdrafts. A preliminary issues hearing has now taken place and judgement is currently awaited. It is
likely that further hearings will be required and, if appeals are pursued, the proceedings may take a number of years to conclude. Pending resolution, the
Financial Services Authority has agreed, subject to certain conditions, that the handling of customer complaints on this issue can be suspended until the
proceedings are concluded unless in the light of prevailing circumstances this would be inappropriate. The Group intends strongly to defend its position.
Accordingly, no provision in relation to the outcome of this litigation has been made. Depending on the Court’s determinations, a range of outcomes is possible,
some of which could have a significant financial impact on the Group. The ultimate impact of the litigation on the Group can only be known at its conclusion.
There has been increased scrutiny of the financial institutions sector, especially in the US, with respect to combating money laundering and terrorist financing
and enforcing compliance with economic sanctions. The Office of Foreign Assets Control (OFAC) administers US laws and regulations in relation to US economic
sanctions against designated foreign countries, nationals and others and the Group has been conducting a review of its conduct with respect to historic US
dollar payments involving countries, persons or entities subject to those sanctions. The Group has provided information relating to its review of such historic
payments to a number of authorities including OFAC, the US Department of Justice and the New York County District Attorney’s office which, along with other
authorities, have been reported to be conducting a broader review of sanctions compliance by non-US financial institutions. The Group is involved in ongoing
discussions with these authorities with respect to agreeing a resolution of their investigations. No provision has been made in respect of this matter. The Group
does not expect the final outcome to have a material adverse effect on its financial position.
Contingent liabilities and commitments arising from the banking business
Acceptances and endorsements arise where the Lloyds TSB Group agrees to guarantee payment on a negotiable instrument drawn up by a customer.
Other items serving as direct credit substitutes include standby letters of credit, or other irrevocable obligations, 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.
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.
Contingent liabilities
Acceptances and endorsements
Other:
Other items serving as direct credit substitutes
Performance bonds and other transaction-related contingencies
132 Lloyds TSB Group Annual Report and Accounts 2007
2007
£m
40
1,095
2,429
3,524
3,564
2006
£m
63
618
2,096
2,714
2,777
Notes to the group accounts
46 Contingent liabilities and commitments continued
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The contingent liabilities of the Group, as detailed above, arise in the normal course of its banking business and it is not practicable to quantify their future
financial effect.
2007
£m
2006
£m
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 original maturity:
Mortgage offers made
Other commitments
1 year or over original maturity
306
463
4,639
52,791
57,430
32,165
90,364
374
5,764
4,071
49,731
53,802
28,477
88,417
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend £53,036 million (2006: £51,288 million)
was irrevocable.
Operating lease commitments
Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
2007
£m
212
677
764
1,653
2006
£m
212
733
835
1,780
Operating lease payments represent rental payable by the Group for certain of its properties. Some of these operating lease arrangements have renewal
options and rent escalation clauses, although the effect of these is not material. No arrangements have been entered into for contingent rental payments.
Capital commitments
Excluding commitments in respect of investment property (see note 21), capital expenditure contracted but not provided for at 31 December 2007 amounted to
£102 million (2006: £75 million). Of this amount, £96 million (2006: £74 million) related to assets to be leased to customers under operating leases.
The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
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Lloyds TSB Group Annual Report and Accounts 2007 133
Notes to the group accounts
47 Financial risk management
As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments
represent a significant component of the risks faced by the Group.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange
risk; and liquidity risk. Information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and
managing risk and the Group’s management of capital can be found on pages 36 to 56. The following additional disclosures, which provide quantitative
information about the risks within financial instruments held or issued by the Group, should be read in conjunction with that earlier information.
Measurement basis of financial assets and liabilities
The accounting policies in note 1 describe how different classes of financial instruments are measured, and how income and expenses, including fair value
gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance
sheet heading.
At fair value
through profit or loss
Derivatives
designated
as hedging
instruments
£m
Held for
trading
£m
Designated
upon initial
recognition
£m
Available-
for-sale
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
–
–
–
264
–
–
–
–
–
4,663
8,395
–
–
–
–
–
53,248
–
–
–
–
–
–
–
–
–
–
–
–
–
–
34,845
209,814
20,196
–
4,330
1,242
–
–
–
–
–
264
13,058
53,248
20,196
244,659
5,572
–
–
–
–
800
–
–
–
–
–
–
–
–
99
6,782
–
–
–
–
–
–
–
–
3,107
–
–
–
–
–
–
800
6,881
3,107
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
39,091
156,555
668
–
–
51,572
–
–
–
11,958
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,330
1,242
57,911
8,659
34,845
209,814
20,196
336,997
39,091
156,555
668
3,206
7,582
51,572
38,063
38,063
18,197
554
–
18,197
554
11,958
259,844
56,814
327,446
As at 31 December 2007
Financial assets
Cash and balances at central banks
Items in the course of collection from banks
Trading and other financial assets at fair value
through profit or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Available-for-sale financial assets
Total financial assets
Financial liabilities
Deposits from banks
Customer accounts
Items in course of transmission to banks
Trading and other liabilities at fair value through
profit or loss
Derivative financial instruments
Debt securities in issue
Liabilities arising from insurance contracts and
participating investment contracts
Liabilities arising from non-participating investment
contracts
Unallocated surplus within insurance businesses
Subordinated liabilities
Total financial liabilities
134 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
47 Financial risk management continued
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Derivatives
designated
as hedging
instruments
£m
At fair value
through profit or loss
Held for
trading
£m
Designated
upon initial
recognition
£m
Available-
for-sale
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
As at 31 December 2006
Financial assets
Cash and balances at central banks
Items in the course of collection from banks
Trading and other financial assets at fair value
through profit or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Available-for-sale financial assets
Total financial assets
Financial liabilities
Deposits from banks
Customer accounts
Items in course of transmission to banks
Trading and other liabilities at fair value through
profit or loss
Derivative financial instruments
Debt securities in issue
Liabilities arising from insurance contracts and
participating investment contracts
Liabilities arising from non-participating investment
contracts
Unallocated surplus within insurance businesses
Subordinated liabilities
Total financial liabilities
Interest rate risk
–
–
–
487
–
–
–
–
–
5,756
5,078
–
–
–
–
–
61,939
–
–
–
–
–
–
–
–
–
–
19,178
–
–
–
–
40,638
188,285
–
1,898
1,431
–
–
–
–
–
487
10,834
61,939
19,178
228,923
3,329
–
–
–
–
466
–
–
–
–
–
–
–
–
28
5,297
–
–
–
–
–
–
–
–
1,156
–
–
–
–
–
–
466
5,325
1,156
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
36,394
139,342
781
–
–
54,118
–
–
–
12,072
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,898
1,431
67,695
5,565
40,638
188,285
19,178
324,690
36,394
139,342
781
1,184
5,763
54,118
41,445
41,445
24,370
24,370
683
–
683
12,072
242,707
66,498
316,152
In the Group’s retail banking business interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either
insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates
which may be varied at the Group’s discretion and that for competitive reasons generally reflect changes in the Bank of England’s base rate. There are a
relatively small volume of deposits whose rate is contractually fixed for their term to maturity.
Many banking assets are sensitive to interest rate movements; there is a large volume of managed rate assets such as variable rate mortgages which may be
considered as a natural offset to the interest rate risk arising from the managed rate liabilities. However a significant proportion of the Group’s lending assets,
for example personal loans and mortgages, bear interest rates which are contractually fixed for periods of up to five years or longer.
The Group establishes two types of hedge accounting relationships for interest rate risk: fair value hedges and cash flow hedges. The Group is exposed to fair
value interest rate risk on its fixed rate customer loans, its fixed rate customer deposits and the majority of its subordinated debt, and to cash flow interest rate
risk on its variable rate loans and deposits together with its floating rate subordinated debt. The majority of the Group’s hedge accounting relationships are fair
value hedges where interest rate swaps are used to hedge the interest rate risk inherent in the fixed rate mortgage portfolio. At 31 December 2007 the
aggregate notional principal of interest rate swaps designated as fair value hedges was £50,734 million (2006: £37,378 million) with a net fair value liability of
£197 million (2006: £110 million) (see note 16). The gains on the hedging instruments were £94 million (2006: losses of £288 million). The losses on the hedged
items attributable to the hedged risk were £117 million (2006: gains of £266 million).
In addition the Group has a small number of cash flow hedges which are primarily used to hedge the variability in the cost of funding within the wholesale
business. These cash flows are expected to occur over the next six years and the hedge accounting adjustments will be reported in the income statement as
the cash flows arise. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2007 was £630 million
(2006: £569 million) with a net fair value liability of £23 million (2006: £8 million) (see note 16). In 2007, there is no ineffectiveness recognised in the income
statement that arises from cash flow hedges (2006: nil). There were no transactions for which cash flow hedge accounting had to be ceased in 2007 or 2006
as a result of the highly probable cash flows no longer being expected to occur.
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Lloyds TSB Group Annual Report and Accounts 2007 135
Notes to the group accounts
47 Financial risk management continued
Currency risk
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. All non-structural foreign exchange
exposures in the non-trading book are transferred to the trading area where they are monitored and controlled. 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 Wholesale and International Banking Market and
Liquidity Risk. Associated VaR and the closing, average, maximum and minimum for 2006 and 2007 are disclosed on page 43.
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 foreign currency equity and subordinated debt investments in its subsidiaries and branches. Gains or losses on structural foreign currency exposures are
taken to retained earnings.
The Group hedges part of the currency translation risk of the net investment in certain foreign operations using cross currency swaps. At 31 December 2007 the
aggregate notional principal of these cross currency swaps was £5,302 million (2006: £2,589 million) with a net fair value liability of £316 million
(2006: asset of £139 million) (see note 16) and they were designated on an after-tax basis as hedges of net investments in foreign operations. In 2007, there is
no ineffectiveness recognised in the income statement that arises from net investment hedges (2006: nil).
The Group’s main overseas operations are in the Americas and Europe. Details of the Group’s structural foreign currency exposures, after net investment
hedges, are as follows:
Functional currency of Group operations:
Euro
US dollar
Swiss franc
Other non-sterling
Credit risk
95
7
70
208
380
76
97
70
188
431
The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any
collateral held and the maximum exposure to loss is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions
and financial guarantees, their contractual nominal amounts.
2007
£m
2007
£m
2006
£m
2006
£m
Loans and advances to banks
Loans and advances to customers
Deposit amounts available for offset1
Impairment losses
Available-for-sale debt securities and treasury and other bills
Trading and other financial assets at fair value through profit or loss
Derivative assets, before netting
Amounts available for offset under master netting arrangements1
Assets arising from reinsurance contracts held
Financial guarantees
Irrevocable loan commitments and other credit-related contingencies2
Maximum credit risk exposure
Maximum credit risk exposure before offset items
34,845
212,222
(6,206)
(2,408)
238,453
20,167
26,165
8,659
(3,287)
5,372
350
9,753
56,600
356,860
366,353
40,639
190,478
(6,392)
(2,194)
222,531
19,163
29,568
5,565
(2,761)
2,804
451
8,139
54,065
336,721
345,874
1 Deposit amounts available for offset and amounts available for offset under master netting arrangements do not meet the criteria under IAS 32 to enable loans and advances
and derivative assets respectively to be presented net of these balances in the financial statements.
2 See note 46 – Contingent liabilities and commitments for further information.
A general description of collateral held in respect of financial instruments is disclosed on page 42.
Loans and advances to banks – the Group may require collateral before entering into a credit commitment with another bank, depending on the type of
the financial product and the counterparty involved, and netting agreements are obtained whenever possible and to the extent that such agreements are
legally enforceable.
Available-for-sale debt securities, treasury and other bills, and trading and other financial assets at fair value through profit or loss – the credit quality of
the Group’s available-for-sale debt securities, treasury and other bills, and the majority of the Group’s trading and other financial assets at fair value through
profit or loss held is set out below. An analysis of trading and other financial assets at fair value through profit or loss is included in note 15 and a similar analysis
for available-for-sale financial assets is included in note 20. The Group’s non-participating investment contracts are all unit-linked. Movements in the fair values
of trading and other financial assets at fair value through profit or loss which back those investment contracts, including movements arising from credit risk, are
borne by the contract holders.
136 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
47 Financial risk management continued
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Derivative assets – the Group reduces exposure to credit risk by using master netting agreements and by obtaining cash collateral. An analysis of derivative
assets is given in note 16. Of the net derivative assets of £5,372 million (2006: £2,804 million), cash collateral of £2,004 million (2006: £912 million) was held
and a further £1,459 million was due from OECD banks (2006: £1,251 million).
Assets arising from reinsurance contracts held – of the assets arising from reinsurance contracts held of £350 million (2006: £451 million), £341 million
(2006: £447 million) are due from insurers with a credit rating of AA or above.
Financial guarantees – these represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do so.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is
theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be
significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards.
Reverse repo and repo transactions – for reverse repo transactions which are accounted for as collateralised loans, it is the Group’s policy to seek collateral
which is at least equal to the amount loaned. At 31 December 2007, the fair value of collateral accepted under reverse repo transactions that the Group is
permitted by contract or custom to sell or repledge was £10,300 million (2006: £6,446 million). Of this, £10,299 million (2006: £6,445 million) was sold or
repledged as at 31 December 2007, including £768 million (2006: £1,099 million) in respect of repo transactions, accounted for as secured borrowings, where
the secured party is permitted by contract or custom to repledge. The remainder has been held for continuing use within the business.
Loans and advances
31 December 2007
Neither past due nor impaired
Past due but not impaired
Impaired – no provision required
– provision held
Gross
Allowance for impairment losses (note 19)
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Wholesale
£m
Total
£m
99,828
2,153
415
343
29,850
966
100
3,600
73,475
639
293
560
203,153
3,758
808
4,503
102,739
(37)
34,516
(2,029)
74,967
(342)
212,222
(2,408)
Loans and
advances
designated
at fair value
through
profit or loss
£m
1,189
–
–
–
1,189
–
Loans and
advances
to banks
£m
34,845
–
–
–
34,845
–
Net
102,702
32,487
74,625
209,814
1,189
34,845
31 December 2006
Neither past due nor impaired
Past due but not impaired
Impaired – no provision required
– provision held
Gross
Allowance for impairment losses (note 19)
Net
92,873
1,943
658
127
29,364
1,005
92
3,580
60,005
374
158
299
182,242
3,322
908
4,006
95,601
(42)
34,041
(1,918)
60,836
(233)
190,478
(2,193)
95,559
32,123
60,603
188,285
835
–
–
–
835
–
835
40,638
–
–
1
40,639
(1)
40,638
The analysis of lending between retail and wholesale has been prepared based upon the type of exposure and not the business segment in which the exposure
is recorded. Included within retail are exposures to personal customers and small businesses, whilst included within wholesale are exposures to corporate
customers and other large institutions.
Loans and advances which are neither past due nor impaired
31 December 2007
Good quality
Satisfactory quality
Lower quality
Below standard, but not impaired
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Wholesale
£m
Total
£m
99,407
378
1
42
18,157
8,964
665
2,064
46,240
25,013
2,034
188
Loans and
advances
designated
at fair value
through
profit or loss
£m
191
670
327
1
Loans and
advances
to banks
£m
34,647
190
7
1
Total
99,828
29,850
73,475
203,153
1,189
34,845
31 December 2006
Good quality
Satisfactory quality
Lower quality
Below standard, but not impaired
92,472
359
–
42
16,940
9,667
663
2,094
35,659
21,797
2,249
300
513
314
3
5
40,418
201
17
2
Total
92,873
29,364
60,005
182,242
835
40,638
Lloyds TSB Group Annual Report and Accounts 2007 137
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v
e
r
n
a
n
c
e
F
i
n
a
n
c
a
i
l
t
S
t
a
e
m
e
n
t
s
S
h
a
r
e
h
o
d
e
r
l
I
f
n
o
r
m
a
t
i
o
n
Notes to the group accounts
47 Financial risk management continued
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and wholesale are not the same, reflecting
the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Wholesale lending has been
classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower
assessed default probabilities, with other classifications reflecting progressively higher default risk. Classifications of retail lending incorporate expected recovery levels
for mortgages, as well as probabilities of default assessed using internal rating models. Good quality lending includes the lower assessed default probabilities and
all loans with low expected losses in the event of default, with other categories reflecting progressively higher risks and lower expected recoveries.
Loans and advances which are past due but not impaired
31 December 2007
0-30 days
30-60 days
60-90 days
90-180 days
Over 180 days
Total
Fair value of collateral held
31 December 2006
0-30 days
30-60 days
60-90 days
90-180 days
Over 180 days
Total
Fair value of collateral held
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Wholesale
£m
Total
£m
Loans and
advances
designated
at fair value
through
profit or loss
£m
Loans and
advances
to banks
£m
1,123
445
260
325
–
2,153
2,111
1,104
341
216
280
2
781
155
29
1
–
966
n/a
797
182
26
–
–
1,943
1,005
1,907
n/a
266
107
129
67
70
639
n/a
156
60
38
70
50
374
n/a
2,170
707
418
393
70
3,758
n/a
2,057
583
280
350
52
3,322
n/a
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
A financial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.
Collateral held against retail mortgage lending is principally comprised of residential properties; their fair value has been estimated based upon the last actual
valuation, adjusted to take into account subsequent movements in the Halifax House Price Index, after making allowance for indexation error and dilapidations.
The resulting valuation has been limited to the principal amount of the outstanding advance in order to provide a clearer representation of the Group’s
credit exposure.
Lending decisions are based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided.
Collateral values for non-mortgage lending are assessed more rigorously at the time of loan origination or when taking enforcement action and may fluctuate,
as in the case of floating charges, according to the level of assets held by the customer. Whilst collateral is reviewed on a regular basis in accordance with
business unit credit policy, this varies according to the type of lending and collateral involved. It is therefore not practicable to estimate and aggregate current
fair values of collateral for non-mortgage lending.
Renegotiated loans and advances
Loans and advances that were renegotiated during the year and that would otherwise have been past due or impaired at 31 December 2007 totalled
£579 million (2006: £342 million).
Repossessed collateral
Residential property
Other
Total
2007
£m
73
9
82
2006
£m
55
10
65
The Group does not take physical possession of properties or other assets held as collateral and uses external agents to realise the value as soon as practicable,
generally at auction, to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with appropriate
insolvency regulations.
138 Lloyds TSB Group Annual Report and Accounts 2007
O
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BBB
£m
Rated BB
or lower
£m
Not rated
£m
Total
£m
Notes to the group accounts
47 Financial risk management continued
Debt securities, treasury and other bills – analysis by credit rating
As at 31 December 2007
Debt securities held at fair value through profit or loss
Trading assets:
Government securities
Mortgage backed securities
Other asset backed securities
Corporate and other debt securities
Total held as trading assets
Other assets held at fair value through profit or loss:
Government securities
Bank and building society certificates of deposit
Mortgage backed securities
Other asset backed securities
Corporate and other debt securities
AAA
£m
62
–
–
268
330
4,808
42
61
1,367
5,118
AA
£m
–
28
15
A
£m
–
51
61
1,268
1,390
1,311
1,502
6
548
–
214
15
53
–
153
Total held at fair value through profit or loss
11,726
3,685
4,591
2,749
1,606
2,868
2,528
Available-for-sale financial assets
Debt securities:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Mortgage backed securities
Other asset backed securities
Corporate and other debt securities
Total debt securities
Treasury bills and other bills
310
–
–
5,880
3,895
3,822
13,907
31
–
–
1,683
14
37
1,170
2,904
1,596
Total held as available-for-sale assets
13,938
4,500
As at 31 December 2006
Debt securities held at fair value through profit or loss
Trading assets:
Government securities
Mortgage backed securities
Other asset backed securities
Corporate and other debt securities
Total held as trading assets
Other assets held at fair value through profit or loss:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Mortgage backed securities
Other asset backed securities
AAA
£m
148
235
114
345
842
8,558
13
16
56
321
AA
£m
–
57
75
1,773
1,616
1,905
1,902
30
–
345
–
5
32
6
47
–
61
Corporate and other debt securities
5,870
1,598
2,915
Total held at fair value through profit or loss
15,676
3,883
4,963
1,898
–
–
125
10
27
186
348
–
348
A
£m
–
114
172
–
8
38
103
149
1
–
–
71
–
–
–
–
–
–
–
–
–
–
35
176
59
270
1
–
–
–
30
1,597
–
–
3
59
62
–
–
–
–
340
402
–
–
15
–
–
–
15
–
15
–
–
5
519
524
18
168
9
–
1,104
62
87
122
3,607
3,878
4,848
811
70
1,805
13,564
1,823
24,976
9
5
2
146
112
1,092
1,366
–
319
5
1,825
6,050
4,071
6,270
18,540
1,627
1,366
20,167
–
5
13
6
24
–
–
–
–
–
153
177
32
5
45
347
429
5
25
165
31
444
180
451
595
4,146
5,372
8,626
44
573
87
861
1,037
13,170
2,136
28,733
BBB
£m
Rated BB
or lower
£m
Not rated
£m
Total
£m
i
B
u
s
n
e
s
s
R
e
v
e
w
i
G
o
v
e
r
n
a
n
c
e
F
i
n
a
n
c
a
i
l
t
S
t
a
e
m
e
n
t
s
S
h
a
r
e
h
o
d
e
r
l
I
f
n
o
r
m
a
t
i
o
n
Lloyds TSB Group Annual Report and Accounts 2007 139
Notes to the group accounts
47 Financial risk management continued
As at 31 December 2006
Available-for-sale financial assets
Debt securities:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Mortgage backed securities
Other asset backed securities
Corporate and other debt securities
Total debt securities
Treasury bills and other bills
AAA
£m
AA
£m
A
£m
BBB
£m
Rated BB
or lower
£m
Not rated
£m
Total
£m
379
189
6
5,559
4,598
1,971
12,702
46
–
–
1,229
13
80
976
2,298
1,705
–
–
356
–
27
698
1,081
–
1,081
–
–
24
–
6
–
30
–
30
–
–
–
–
5
–
5
15
20
14
–
–
90
5
1,172
1,281
–
393
189
1,615
5,662
4,721
4,817
17,397
1,766
1,281
19,163
Total held as available-for-sale assets
12,748
4,003
There are no material amounts for debt securities, treasury and other bills which are past due but not impaired.
Liquidity risk
The table below analyses financial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts, on an
undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet
date; balances with no fixed maturity are included in the over 5 years category.
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
Total
£m
As at 31 December 2007
Deposits from banks
Customer accounts
Derivative financial instruments, trading and other liabilities at
fair value through profit or loss
Debt securities in issue
Liabilities arising from non-participating investment contracts
Subordinated liabilities
Total
As at 31 December 2006
Deposits from banks
Customer accounts
Derivative financial instruments, trading and other liabilities at
fair value through profit or loss
Debt securities in issue
Liabilities arising from non-participating investment contracts
Subordinated liabilities
Total
35,466
144,213
10,286
20,307
18,197
27
2,218
4,800
2,176
6,047
–
210
1,480
7,578
3,607
9,529
–
1,067
26
2,002
1,589
13,202
–
–
39,190
447
159,040
1,851
6,197
–
19,509
55,282
18,197
21,967
6,371
14,292
228,496
15,451
23,261
23,190
22,787
313,185
28,376
129,381
8,928
28,887
24,370
14
3,707
3,492
2,037
5,231
–
186
1,722
5,560
2,600
6,569
–
922
818
2,355
663
11,030
–
1,942
411
887
7,176
–
4,323
13,619
36,565
141,199
15,115
58,893
24,370
19,064
219,956
14,653
17,373
19,189
24,035
295,206
Derivatives (other than those used in a hedging relationship) and trading liabilities are included in the up to 1 month column at their fair value. Liquidity risk on
these items is not managed on the basis of contractual maturity as they are frequently settled on demand at fair value and therefore this is considered a better
presentation of the Group’s liquidity risk. Derivatives used in a hedging relationship are included according to their contractual maturity.
Cash flows for undated subordinated liabilities whose terms give the Group the option to redeem at a future date are included within the table on the basis that
the Group will exercise its option to redeem.
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately
£223 million per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years.
140 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
47 Financial risk management continued
O
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w
i
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
As at 31 December 2007
As at 31 December 2006
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
Total
£m
238
247
651
716
1,570
9,548
26,056
38,063
1,852
9,682
28,948
41,445
The following tables set out the amounts and residual maturities of Lloyds TSB Group’s off balance sheet contingent liabilities and commitments.
31 December 2007
Acceptances
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Within
1 year
£m
39
1,441
1-3
years
£m
1
1,032
1,480
1,033
3-5
years
£m
–
255
255
Over 5
years
£m
–
796
796
Total
£m
40
3,524
3,564
60,981
13,759
10,634
4,221
89,595
466
78
108
117
769
61,447
13,837
10,742
4,338
90,364
Total contingents and commitments
62,927
14,870
10,997
5,134
93,928
31 December 2006
Acceptances
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Within
1 year
£m
62
953
1,015
1-3
years
£m
1
976
977
3-5
years
£m
–
263
263
56,019
5,945
11,310
109
11,050
23
Over 5
years
£m
–
522
522
3,900
61
Total
£m
63
2,714
2,777
82,279
6,138
61,964
11,419
11,073
3,961
88,417
Total contingents and commitments
62,979
12,396
11,336
4,483
91,194
Fair values of financial assets and liabilities
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. 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 financial statements 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 definition 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.
Trading and other financial assets at fair value through profit or loss
The fair values of financial instruments quoted in active markets are based on quoted prices. The fair values of financial instruments that are not quoted in active
markets are determined using valuation techniques including cash flow models which, to the extent practical, use observable market inputs such as interest
rate yield curves, equities and commodities prices, option volatilities and currency rates that are either directly observable or are implied from instrument prices.
Derivative financial instruments
All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and
using valuation techniques, including discounted cash flow and options pricing models, as appropriate. Derivatives are carried in the balance sheet as assets
when their fair value is positive and as liabilities when their fair value is negative.
Lloyds TSB Group Annual Report and Accounts 2007 141
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n
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c
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F
i
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a
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c
a
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t
S
t
a
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m
e
n
t
s
S
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a
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a
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Notes to the group accounts
47 Financial risk management continued
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 is 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 is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period.
Available-for-sale financial assets
Listed securities are valued at current bid prices. Unlisted securities and other financial assets are valued based on discounted cash flows, market prices of
similar instruments and other appropriate valuation techniques.
Deposits from 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 is
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.
Trading and other liabilities at fair value through profit or loss
The fair values of financial instruments quoted in active markets are based on quoted prices. The fair values of financial instruments that are not quoted in active
markets are determined using valuation techniques including cash flow models which, to the extent practical, use observable market inputs such as interest
rate yield curves, equities and commodities prices, option volatilities and currency rates that are either directly observable or are implied from instrument prices.
Liabilities arising from non-participating investment contracts
The value of the Group’s non-participating investment contracts, all of which are unit-linked, is contractually linked to the fair values of financial assets within
the Group’s unitised investment funds and is determined using current unit prices multiplied by the number of units attributed to the contract holders at the
balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable.
Financial commitments and contingent liabilities
Financial guarantees are valued on the basis of cash premiums receivable. The Group considers that it is not meaningful or practical to provide an estimate of
the fair value of other contingent liabilities and financial commitments, 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. Therefore only financial guarantees are included in the following table.
Carrying value
2007
£m
Carrying value
2006
£m
Financial assets
Trading and other financial assets at fair value through
profit or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Available-for-sale financial assets
Financial liabilities
Deposits from banks
Customer accounts
Trading and other liabilities at fair value through profit or loss
Derivative financial instruments
Debt securities in issue
Liabilities arising from non-participating investment contracts
Financial guarantees
Subordinated liabilities
57,911
8,659
34,845
209,814
20,196
39,091
156,555
3,206
7,582
51,572
18,197
26
11,958
67,695
5,565
40,638
188,285
19,178
36,394
139,342
1,184
5,763
54,118
24,370
49
12,072
Fair value
2007
£m
57,911
8,659
34,832
209,066
20,196
39,063
156,608
3,206
7,582
51,312
18,197
26
12,128
Fair value
2006
£m
67,695
5,565
40,641
187,977
19,178
36,383
139,263
1,184
5,763
54,070
24,370
49
12,767
142 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
48 Acquisitions
O
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i
During 2006, the Group, through its Asset Finance subsidiaries, acquired two businesses engaged in consumer finance for a total consideration of £16 million,
settled in cash in that year. Goodwill of £4 million arose on those acquisitions; no significant fair value adjustments were made.
49 Consolidated cash flow statement
(a) Change in operating assets
Change in loans and advances to banks
Change in loans and advances to customers
Change in derivative financial instruments, trading and other financial assets at
fair value through profit or loss
Change in other operating assets
Change in operating assets
(b) Change in operating liabilities
Change in deposits from banks
Change in customer accounts
Change in debt securities in issue
Change in derivative financial instruments, trading and other liabilities at
fair value through profit or loss
Change in investment contract liabilities
Change in other operating liabilities
Change in operating liabilities
(c) Non-cash and other items
Depreciation and amortisation
Revaluation of investment property
Allowance for loan losses
Write-off of allowance for loan losses
Impairment of available-for-sale securities
Insurance claims
Insurance claims paid
Customer remediation paid
Other provision movements
Net charge in respect of defined benefit schemes
Contributions to defined benefit schemes
Other non-cash items
Total non-cash items
Interest expense on subordinated liabilities
Profit on disposal of businesses
Other
Total other items
Non-cash and other items
2007
£m
8,673
(20,796)
(4,348)
(511)
(16,982)
2007
£m
2,136
17,172
(2,450)
3,840
(58)
901
21,541
2007
£m
630
321
1,721
(1,405)
70
7,522
(6,669)
(54)
2
175
(452)
870
2,731
756
(657)
(46)
53
2,784
2006
£m
(11,063)
(13,910)
(7,072)
50
(31,995)
2006
£m
5,222
8,523
15,068
556
3,795
(95)
33,069
2006
£m
619
(631)
1,560
(1,299)
–
8,569
(7,509)
(93)
(19)
109
(556)
104
854
744
–
(43)
701
1,555
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s
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R
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n
a
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c
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F
i
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a
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c
a
i
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t
S
t
a
e
m
e
n
t
s
S
h
a
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m
a
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i
o
n
Lloyds TSB Group Annual Report and Accounts 2007 143
Notes to the group accounts
49 Consolidated cash flow statement continued
(d) Analysis of cash and cash equivalents as shown in the balance sheet
Cash and balances with central banks
Less: mandatory reserve deposits1
Loans and advances to banks
Less: amounts with a maturity of three months or more
Total cash and cash equivalents
2007
£m
4,330
(338)
3,992
34,845
(6,946)
27,899
31,891
2006
£m
1,898
(300)
1,598
40,638
(16,798)
23,840
25,438
1 Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these deposits are not available to finance the Group’s
day-to-day operations.
Included within cash and cash equivalents at 31 December 2007 is £7,426 million (2006: £9,054 million) held within the Group’s life funds, which is not
immediately available for use in the business.
(e) Analysis of changes in financing during the year
Share capital (including share premium account):
At 1 January
Issue of share capital
At 31 December
Minority interests:
At 1 January
Exchange and other adjustments
Repayment of capital to minority shareholders
Minority share of profit after tax
Dividends to minority shareholders
At 31 December
Subordinated liabilities:
At 1 January
Exchange and other adjustments
Issue of subordinated liabilities
Repayments of subordinated liabilities
At 31 December
2007
£m
2,695
35
2,730
2007
£m
352
(1)
(80)
32
(19)
284
2007
£m
12,072
186
–
(300)
11,958
2006
£m
2,590
105
2,695
2006
£m
435
(4)
(151)
104
(32)
352
2006
£m
12,402
(687)
1,116
(759)
12,072
144 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
49 Consolidated cash flow statement continued
(f ) Acquisition of group undertakings and businesses
Net assets acquired:
Loans and advances to customers
Other assets
Goodwill arising on consolidation
Net cash outflow from acquisitions in the year
Payments to former members of Scottish Widows Fund and Life Assurance Society acquired
during 2000
Net cash outflow from acquisitions
(g) Disposal and closure of group undertakings and businesses
Cash and balances at central banks
Trading and other financial assets at fair value through profit or loss
Loans and advances to banks
Value of in-force business
Liabilities arising from insurance contracts and participating investment contracts
Liabilities arising from non-participating investment contracts
Unallocated surplus within insurance businesses
Other net assets and liabilities
Profit on sale of businesses
Cash and cash equivalents disposed of
Consideration for 2005 disposal settled in cash
Net cash inflow from disposals
2007
£m
–
–
–
–
–
8
8
2007
£m
37
10,999
1,150
412
(4,349)
(7,283)
(15)
(95)
856
657
(37)
–
1,476
2006
£m
11
1
12
4
16
4
20
2006
£m
–
–
–
–
–
–
–
–
–
–
–
936
936
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Lloyds TSB Group Annual Report and Accounts 2007 145
Notes to the group accounts
50 Future developments
The following pronouncements will be relevant to the Group but were not effective at 31 December 2007 and have not been applied in preparing these financial
statements. The full impact of these accounting changes is being assessed by the Group, however, the initial view is that none of these pronouncements are
expected to cause any material adjustments to reported numbers in the financial statements.
Pronouncement
Nature of change
Effective date
IFRIC 11 IFRS 2 – Group and Treasury
Share Transactions
Clarifies the application of IFRS 2 Share-based Payment to certain
share-based payment arrangements involving own equity instruments
and arrangements involving equity instruments of a parent entity.
Annual periods beginning on or
after 1 March 2007.
IFRIC 14 IAS 19 – The Limit on a
Defined Benefit Asset, Minimum
Funding Requirement and their
Interaction 1
Provides guidance on the availability of refunds or reductions in future
contributions for retirement plans and specifies how a minimum
funding requirement might either affect the availability of reductions in
future contributions or give rise to a liability.
Annual periods beginning on or
after 1 January 2008.
IFRIC 13 Customer Loyalty
Programmes 1, 2
Addresses accounting by entities who grant customer loyalty award
credits to customers as part of sales transactions and which can be
redeemed in the future for free or discounted goods or services.
Annual periods beginning on or
after 1 July 2008.
IAS 1 Presentation of Financial
Statements 1, 2
Revises the overall requirements for the presentation of financial
statements, guidance for their structure and minimum content
requirements. The revised standard requires the presentation of all
non-owner changes in equity within a statement of comprehensive
income.
Annual periods beginning on or
after 1 January 2009.
IAS 23 Borrowing Costs 1, 2
Requires interest and other costs incurred in connection with the
borrowing of funds to be recognised as an expense excepting that
those which are directly attributable to the acquisition, construction or
production of assets that take a substantial period of time to get ready
for their intended use or sale must be capitalised as part of the cost of
those assets.
Annual periods beginning on or
after 1 January 2009.
IFRS 8 Operating Segments 2
Replaces IAS 14 Segment Reporting and requires reporting of financial
and descriptive information about operating segments which are
based on how financial information is reported and evaluated
internally.
Annual periods beginning on or
after 1 January 2009.
IFRS 2 Share-based Payment –
Vesting Conditions and
Cancellations 1, 2
The amendment restricts the definition of vesting conditions to include
only service conditions and performance conditions and deals with
the accounting consequences of a failure to meet a condition other
than a vesting condition including how to deal with cancellations by
the counterparty and circumstances where neither the entity nor the
counterparty is in a position to choose whether or not to meet a
vesting condition.
Annual periods beginning on or
after 1 January 2009.
Amendments to IAS 32 Financial
Instruments: Presentation and IAS 1
Presentation of Financial
Statements – Puttable Financial
Instruments and Obligations Arising
on Liquidation1, 2
The amendment requires some puttable financial instruments (being
those which give the holder the right to put the instrument back to the
issuer for cash or another financial asset) and some financial
instruments that impose on the entity an obligation to deliver to another
party a pro rata share of the net assets of the entity only on liquidation
to be classified as equity.
Annual periods beginning on or
after 1 January 2009.
IFRS 3 Business Combinations 1, 2
The revised standard continues to apply the acquisition method to
business combinations, however, all payments to purchase a
business are to be recorded at fair value at the acquisition date,
some contingent payments are subsequently remeasured at fair
value through income, goodwill may be calculated based on the
parent’s share of net assets or it may include goodwill related to the
minority interest, and all transaction costs are expensed.
Annual periods beginning on or
after 1 July 2009.
146 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the group accounts
50 Future developments continued
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IAS 27 Consolidated and Separate
Financial Statements 1, 2
Requires the effects of all transactions with non-controlling interests to
be recorded in equity if there is no change in control; any remaining
interest in an investee is re-measured to fair value in determining the
gain or loss recognised in profit or loss where control over the
investee is lost.
Annual periods beginning on or
after 1 July 2009.
1 At the date of this report, these pronouncements are awaiting EU endorsement.
2 Subject to any EU endorsement, the Group has not yet made a final decision as to whether it will apply these pronouncements in the 2008 financial
statements.
51 Approval of financial statements
The consolidated financial statements were approved by the directors of Lloyds TSB Group plc on 21 February 2008.
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Lloyds TSB Group Annual Report and Accounts 2007 147
Report of the independent auditors on the parent company
financial statements
To the members of Lloyds TSB Group plc
We have audited the parent company financial statements of Lloyds TSB Group plc for the year ended 31 December 2007 which comprise the balance sheet,
the statement of changes in equity, the cash flow statement and the related notes. These parent company financial statements have been prepared under the
accounting policies set out therein. We have also audited the information in the directors’ remuneration report on pages 64 to 75 that is described as having
been audited.
We have reported separately on the consolidated financial statements of Lloyds TSB Group plc for the year ended 31 December 2007.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the annual report, the directors’ remuneration report and the parent company financial statements in accordance
with applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union are set out in the statement of directors’
responsibilities on page 63.
Our responsibility is to audit the parent company financial statements and the part of the directors’ remuneration report to be audited in accordance with
relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). 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 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 into 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 parent company financial statements give a true and fair view and whether the parent company financial
statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We also
report to you whether, in our opinion, the information given in the directors’ report is consistent with the parent company financial statements. The information
given in the directors’ report includes that specific information presented in the Overview and the Business Review that is cross referred from the principal
activities, business review, future developments and financial risk management objectives and policies section of the directors’ report.
In addition we report to you if, in our opinion, 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 other transactions is not disclosed.
We read other information contained in the annual report and consider whether it is consistent with the audited parent company financial statements. The other
information comprises only the chairman’s statement, the group chief executive’s review, the Business Review, the directors’ report, the corporate governance
disclosures, the unaudited part of the directors’ remuneration report and the shareholder information. We consider the implications for our report if we
become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to
any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the directors’
remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of
the parent company financial statements, and of whether the accounting policies are appropriate to the Company’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 parent company financial statements and the part of the directors’ remuneration report to be audited 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 parent company financial statements and the part of the directors’ remuneration report to be audited.
Opinion
In our opinion:
• the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with
the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2007 and cash flows for the year then ended;
• the parent company financial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with
the Companies Act 1985; and
• the information given in the directors’ report is consistent with the parent company financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
Southampton, England
21 February 2008
148 Lloyds TSB Group Annual Report and Accounts 2007
Parent company balance sheet
at 31 December 2007
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Note
2007
£ million
2006
£ million
Assets
Non-current assets:
Investment in subsidiaries
Loans to subsidiaries
Deferred tax assets
Current assets:
Derivative financial instruments
Other assets
Amounts due from subsidiaries
Cash and cash equivalents
Total assets
Equity and liabilities
Capital and reserves:
Share capital
Share premium account
Retained profits
Total equity
Non-current liabilities:
Subordinated liabilities
Debt securities in issue
Current liabilities:
Debt securities in issue
Current tax liabilities
Derivative financial instruments
Amounts owed to subsidiaries
Other liabilities
Total liabilities
Total equity and liabilities
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company financial statements on 21 February 2008.
Sir Victor Blank
Chairman
J Eric Daniels
Group Chief Executive
Helen A Weir
Group Finance Director
8
8
2
3
4
4
5
6
7
7
5,589
2,820
2
5,589
1,723
–
8,411
7,312
169
165
92
58
484
114
146
203
1,213
1,676
8,895
8,988
1,432
1,298
1,935
1,429
1,266
2,026
4,665
4,721
2,345
50
2,297
–
2,395
2,297
1,694
28
29
–
84
1,835
–
43
–
1,850
77
1,970
4,230
4,267
8,895
8,988
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Lloyds TSB Group Annual Report and Accounts 2007 149
Parent company statement of changes in equity
Balance at 1 January 2006
Profit for the year*
Dividends
Purchase/sale of treasury shares
Employee share option schemes:
Value of employee services
Proceeds from shares issued
Balance at 31 December 2006
Profit for the year*
Dividends
Purchase/sale of treasury shares
Employee share option schemes:
Value of employee services
Proceeds from shares issued
Balance at 31 December 2007
Share capital
and premium
£ million
Retained
profits
£ million
Total
£ million
2,590
–
–
–
–
105
2,695
–
–
–
–
35
2,055
1,877
(1,919)
(20)
33
–
2,026
1,855
4,645
1,877
(1,919)
(20)
33
105
4,721
1,855
(1,957)
(1,957)
(19)
30
–
(19)
30
35
2,730
1,935
4,665
* No income statement has been shown for the parent company, as permitted by section 230 of the Companies Act 1985.
150 Lloyds TSB Group Annual Report and Accounts 2007
Parent company cash flow statement
for the year ended 31 December 2007
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Profit before tax
Dividend income
Fair value and exchange adjustments
Change in other assets
Change in other liabilities
Tax (paid) received
Net cash (used in) provided by operating activities
Cash flows from investing activities
Capital lending to subsidiaries
Cash flows from financing activities
Dividends received from subsidiaries
Dividends paid to equity shareholders
Proceeds from issue of debt securities
Proceeds from issue of subordinated liabilities
Proceeds from issue of ordinary shares
Repayment of subordinated liabilities
Repayment of amounts due to subsidiaries
Net cash generated by financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of the parent company financial statements.
2007
£ million
2006
£ million
1,870
(1,957)
1,893
(1,918)
10
103
(128)
(32)
(134)
3
(44)
156
46
136
(1,111)
–
1,957
(1,957)
1,770
–
35
–
(1,715)
90
(1,155)
1,213
58
1,918
(1,919)
–
1,116
105
(250)
–
970
1,106
107
1,213
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Lloyds TSB Group Annual Report and Accounts 2007 151
Notes to the parent company accounts
1 Accounting policies
The parent company has applied International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) in its financial statements for the
year ended 31 December 2007. IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those
prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee and its
predecessor body. The EU endorsed version of IAS 39 ‘Financial Instruments: Recognition and Measurement’ relaxes some of the hedge accounting
requirements; the Company has not taken advantage of this relaxation, and therefore there is no difference in application to the Company between IFRS as
adopted by the EU and IFRS as issued by the IASB.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of all derivative contracts.
The accounting policies of the parent company are the same as those of the Group which are set out in note 1 to the consolidated financial statements, except
that it has no policy in respect of consolidation and investments in subsidiaries are carried at historical cost, less any provisions for impairment.
2 Deferred tax assets
The movement in the net deferred tax asset is as follows:
At 1 January
Income statement credit (charge)
Amount debited to equity in respect of employee share schemes
At 31 December
The deferred tax assets relate to temporary differences.
3 Amounts due from subsidiaries
2007
£m
–
2
–
2
2006
£m
21
(8)
(13)
–
These comprise short-term lending to subsidiaries, repayable on demand. The fair values of amounts owed by subsidiaries are equal to their carrying amounts.
No provisions have been recognised in respect of amounts owed by subsidiaries.
4 Share capital and share premium
Details of the Company’s share capital and share premium account are as set out in notes 39 and 40 to the consolidated financial statements.
5 Retained profits
At 1 January 2006
Profit for the year
Dividends
Purchase/sale of treasury shares
Employee share option schemes: value of employee services
At 31 December 2006
Profit for the year
Dividends
Purchase/sale of treasury shares
Employee share option schemes: value of employee services
At 31 December 2007
Details of the Company’s dividends are as set out in note 43 to the consolidated financial statements.
£m
2,055
1,877
(1,919)
(20)
33
2,026
1,855
(1,957)
(19)
30
1,935
152 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the parent company accounts
6 Subordinated liabilities
Preferred securities
Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2015 (£600 million)†
Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2016 (US$ 1,000 million)†
6% Non-cumulative Redeemable Preference Shares
Undated subordinated liabilities
6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million)*
Dated subordinated liabilities
91/8% Subordinated Bonds 2011 (£150 million)
57/8% Subordinated Guaranteed Bonds 2014 (e750 million)
2007
£m
593
515
–
497
149
591
740
2006
£m
587
504
–
497
149
560
709
Total subordinated liabilities
2,345
2,297
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 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. They are accounted for as liabilities as coupon payments are mandatory as a consequence of the terms of
certain preference shares. At the callable date the coupon on these bonds will be reset by reference to the applicable five year benchmark gilt rate.
† Further information regarding the fixed/floating rate non-cumulative callable preference shares can be found in note 39 to the consolidated
financial statements.
7 Debt securities in issue
These comprise the US$1,400 million Thirteen-Month Extendible Short-Term Notes and the US$1,725 million Thirteen-Month Extendible Short-Term Notes issued by
the Company in May 2007.
8 Related party transactions
Key management personnel
The key management personnel of the Group and parent company are the same. The relevant disclosures are given in note 45 to the consolidated
financial statements.
The Company has no employees (2006: nil).
As discussed in note 44 to the consolidated financial statements, the Group provides share based compensation to employees through a number of schemes;
these are all in relation to shares in the Company and the cost of providing those benefits is recharged to the employing companies in the Group on a
cash basis.
Investment in subsidiaries
The Company’s investment in subsidiaries is carried at cost: there has been no movement in the carrying value during the year and there has been no
impairment of the Company’s investment in subsidiaries.
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Lloyds TSB Group Annual Report and Accounts 2007 153
Notes to the parent company accounts
8 Related party transactions continued
The principal subsidiaries, all of which have prepared accounts to 31 December and whose results are included in the consolidated accounts of Lloyds TSB
Group plc, are:
Lloyds TSB Bank plc
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
Lloyds TSB Insurance Services Limited
Lloyds TSB Asset Finance Division Limited
Black Horse Limited
Scottish Widows plc
Scottish Widows Annuities Limited
† Indirect interest.
Country of
registration/
Incorporation
England
England
England
England
England
Jersey
Scotland
England
England
England
England
England
Scotland
Scotland
Percentage
of equity
share capital
and voting
rights held
100%
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
100%†
Nature of business
Banking and financial services
Credit factoring
Financial leasing
Private banking
Long-term agricultural finance
Banking and financial services
Banking and financial services
General insurance
Investment management
Insurance broking
Consumer credit, leasing and related services
Consumer credit, leasing and related services
Life assurance
Life assurance
The principal area of operation for each of the above subsidiaries is the United Kingdom and the Channel Islands, except as follows:
Lloyds TSB Bank plc operates principally in the UK but also through branches in Belgium, Dubai, Ecuador, France, Gibraltar, Hong Kong, Japan, Luxembourg,
Malaysia, Monaco, Netherlands, Singapore, Spain, Switzerland, Uruguay and the USA, and a representative office in China.
None of the parent company’s subsidiaries has experienced any significant restrictions in paying dividends or repaying loans and advances. All regulated
banking and insurance subsidiaries are required to maintain capital at levels agreed with the regulators; this may impact those subsidiaries’ ability to
make distributions.
Loans to subsidiaries:
At 1 January
Exchange and other adjustments
Amounts advanced
At 31 December
2007
£m
1,723
(14)
1,111
2,820
2006
£m
1,723
–
–
1,723
In addition the parent company carried out all of its banking activities through its subsidiary, Lloyds TSB Bank plc (the ‘Bank’). At 31 December 2007, the parent
company held deposits of £58 million with the Bank (2006: £1,213 million). Given the volume of transactions flowing through the account, it is not meaningful
to provide gross inflow and outflow information. In addition, at 31 December 2007 the parent company had interest rate and currency swaps with the Bank
with an aggregate notional principal amount of £4,032 million and a net positive fair value of £140 million (2006: notional principal amount of £2,228 million
and a positive fair value of £114 million), designated as fair value hedges to manage the Company’s issuance of subordinated liabilities and debt securities
in issue.
Related party information in respect of other related party transactions is given in note 45 to the consolidated financial statements.
154 Lloyds TSB Group Annual Report and Accounts 2007
Notes to the parent company accounts
9 Financial instruments
Measurement basis of financial assets and liabilities
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The accounting policies in note 1 to the consolidated financial statements describe how different classes of financial instruments are measured, and how income
and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by
category and by balance sheet heading.
As at 31 December 2007
Financial assets:
Cash and cash equivalents
Derivative financial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Total financial assets
Financial liabilities:
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
As at 31 December 2006
Financial assets:
Cash and cash equivalents
Derivative financial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Total financial assets
Financial liabilities:
Amounts owed to subsidiaries
Subordinated liabilities
Total financial liabilities
Derivatives designated as
hedging instruments, held
at fair value through
profit or loss
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
–
169
–
–
169
29
–
–
29
–
–
2,820
92
2,912
–
–
–
–
58
–
–
–
58
–
1,744
2,345
4,089
Derivatives designated as
hedging instruments, held
at fair value through
profit or loss
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
–
114
–
–
114
–
–
–
–
–
1,723
203
1,926
–
–
–
1,213
–
–
–
1,213
1,850
2,297
4,147
Total
£m
58
169
2,820
92
3,139
29
1,744
2,345
4,118
Total
£m
1,213
114
1,723
203
3,253
1,850
2,297
4,147
Interest rate risk and currency risk
The Company is exposed to interest rate risk and currency risk on its debt securities in issue and its subordinated debt.
As discussed in note 8, the Company has entered into interest rate and currency swaps with its subsidiary, Lloyds TSB Bank plc, to manage these risks.
Credit risk
The majority of the Company’s credit risk arises from amounts due from its wholly owned subsidiary, Lloyds TSB Bank plc, and subsidiaries of that company.
The credit ratings of Lloyds TSB Bank plc are disclosed on page 50.
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Lloyds TSB Group Annual Report and Accounts 2007 155
Notes to the parent company accounts
9 Financial instruments continued
Liquidity risk
The table below analyses financial instrument liabilities of the Company, on an undiscounted future cash flow basis according to contractual maturity, into
relevant maturity groupings based on the remaining period at the balance sheet date, balances with no fixed maturity are included in the over 5 years category.
As at 31 December 2007
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total
As at 31 December 2006
Amounts owed to subsidiaries
Subordinated liabilities
Total
10
8
11
29
1,850
11
1,861
20
15
21
56
–
21
21
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
–
50
516
Over 5
years
£m
–
–
3,195
Total
£m
1,821
1,813
3,840
1,791
1,740
97
3,628
566
3,195
7,474
–
96
96
–
512
512
–
3,271
3,271
Fair values of financial assets and liabilities
The valuation techniques for the Company’s financial instruments are as discussed in note 47 to the consolidated financial statements.
Financial assets:
Cash and cash equivalents
Derivative financial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Financial liabilities:
Amounts owed to subsidiaries
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Carrying
value
2007
£m
Carrying
value
2006
£m
58
169
2,820
92
–
29
1,744
2,345
1,213
114
1,723
203
1,850
–
–
2,297
Fair
value
2007
£m
58
169
2,856
92
–
29
1,744
2,134
1,850
3,911
5,761
Fair
value
2006
£m
1,213
114
1,825
203
1,850
–
–
2,217
10 Approval of the financial statements and other information
The parent company financial statements were approved by the directors of Lloyds TSB Group plc on 21 February 2008.
Lloyds TSB Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on 21 October 1985 with the
registered number 95000. Lloyds TSB Group plc’s registered office is Henry Duncan House, 120 George Street, Edinburgh EH2 4LH, Scotland, and its principal
executive offices in the UK are located at 25 Gresham Street, London EC2V 7HN.
156 Lloyds TSB Group Annual Report and Accounts 2007
Index to annual report
Accounting
Critical estimates and judgements
Future developments
Policies
Acquisitions
Approval
Consolidated financial statements
Parent company financial statements
Auditors
Report on the consolidated financial statements
Report on the parent company financial statements
Fees
89
146
82
143
147
156
76
148
96
Available-for-sale financial assets
105, 124
Balance sheet
Consolidated
Parent company
Capital adequacy
Basel I
Basel II
Cash flow statement
Consolidated
Parent company
Notes to the group accounts
Chairman’s statement
Charitable donations
Contingent liabilities and commitments
Corporate responsibility
78
149
49
51
81
151
143
2
35
132
34
Debt securities in issue
110, 153
Deposits
Customer accounts
From banks
Derivative financial instruments
Accounting policy
Notes to the group accounts
Directors
Attendance at board and committee meetings
Biographies
Directors’ report
Emoluments
Interests
Remuneration policy
Service agreements
Disposals
Dividends
Earnings per share
Employees
Equality and diversity
Our people
109
109
83
101
63
58
60
70
72
65
69
97, 145
125
99
33
32
Financial risk management
Credit risk
Currency risk
Fair values of financial assets and liabilities
Insurance risk
Interest rate risk
Liquidity risk
Market risk
Measurement basis
41, 136, 155
136, 155
141, 156
45
43, 135, 155
48, 140, 156
43
134, 155
Five year financial summary
Forward looking statements
Goodwill
Accounting policy
Critical accounting estimates and judgements
Notes to the group accounts
Governance
Compliance with the combined code
Risk governance structures
The board and its committees
Group chief executive’s review
Held at fair value through profit or loss
Accounting policy
Notes to the group accounts
Impairment
Accounting policy
Critical accounting estimates and judgements
Notes to the group accounts
Income statement
Consolidated
Information for shareholders
Analysis of shareholders
Financial calendar 2008
Shareholder enquiries
Insurance premium income
Insurance claims
Investment property
Accounting policy
Notes to the group accounts
Key performance indicators
Life assurance businesses
Accounting policy
Basis of determining regulatory capital
Capital sensitivities
Capital statement
Critical accounting estimates and judgements
Financial information calculated on a ‘realistic’ basis
Options and guarantees
Liabilities
Arising from insurance contracts and
participating investment contracts
Arising from non-participating investment contracts
Other
Loans and advances
To banks
To customers
Net fee and commission income
Net interest income
Operating expenses
Other operating income
Pensions
Accounting policy
Critical accounting estimates and judgements
Directors’
Notes to the group accounts
Principal subsidiaries
57
ii
82
90
106
61
36
61
6
83
100, 110
84
89
97, 104
77
159
160
159
94
95
85
105
i
87
52
55
52
90
54
55
110
115
115
102
103
93
93
96
95
86
89
71
115
154
Lloyds TSB Group Annual Report and Accounts 2007 157
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Index to annual report
Presentation of information
Provisions
Accounting policy
Notes to the group accounts
Regulation
ii
88
120
31
Related party transactions
131, 153
Risk management framework
Business risk
Credit risk
Financial soundness
Insurance risk
Market risk
Principal risks
Operational risk
Risk drivers
Risk governance structures
Risk-weighted assets
Basel I
Basel II
Securitisations
Segmental reporting
Central group items
Insurance and Investments
Notes to the group accounts
Summarised segmental analysis
UK Retail Banking
Wholesale and International Banking
Share-based payments
Accounting policy
Notes to the group accounts
Share capital
Statement of changes in equity
Consolidated
Parent company
40
41
48
45
43
39
46
39
36
49
51
104
30
18
91
14
15
26
86
126
122
80
150
Subordinated liabilities
121, 153
Summary of Group results
Tangible fixed assets
Accounting policy
Notes to the group accounts
Taxation
Accounting policy
Critical accounting estimates and judgements
Analysis of charge for the year
Deferred tax
Value of in-force business
Accounting policy
Notes to the group accounts
Value at Risk (VaR)
Volatility
Banking
Insurance
Policyholder interests
10
85
108
86
90
98
119
87
106
43
30
30
31
158 Lloyds TSB Group Annual Report and Accounts 2007
Information for shareholders
Analysis of shareholders
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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
61,157
321,403
254,040
141,656
20,099
13,404
688
959
482
%
7.52
39.49
31.21
17.40
2.47
1.65
0.08
0.12
0.06
813,888
100.00
Millions
2.1
106.3
170.9
275.9
136.4
240.9
46.2
329.9
4,339.1
5,647.7*
%
0.04
1.88
3.03
4.88
2.41
4.27
0.82
5.84
76.83
100.00
* Includes 887 million shares (15.7%) registered in the names of some 783,000 individuals. 274 million shares (4.8%) are held by over 61,000 staff and Group pensioners, or on their behalf by the
trustee of the staff shareplan scheme.
Substantial shareholdings
At the date of this report, notifications had been received that Legal & General Investment Management Limited had a direct interest of 4.11% and Barclays PLC
and The Capital Group Companies, Inc had interests of 3.84% and 4.86% respectively, in the issued share capital with rights to vote in all circumstances at
general meetings. No other notification has been received that anyone has an interest of 3% or more in the issued share capital.
Share price information
In addition to listings in the financial pages of the press, the latest price of Lloyds TSB shares on the London Stock Exchange can be obtained by telephoning
09058 890 190. Visit www.londonstockexchange.com for details.
Share dealing facilities
A full range of dealing services is available through Lloyds TSB.
• Internet dealing. Log on to www.lloydstsbsharedealing.com
• Telephone dealing. Call 0845 6060560
Internet and telephone dealing services are available between 8.00am and 4.30pm, Monday to Friday.
Details of any dealing costs are available when you log on to the share dealing website or when you call the above number.
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 contact: The Bank of New York, Investor Services, PO Box 11258, Church Street Station, New York, NY 10286-1258.
Telephone: 888 BNY ADRS (US toll free), international callers: +1 212 815 3700. Alternatively 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 contact: Retail Investor Operations, Equiniti Limited,
Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. Telephone 0871 384 2244.
Corporate responsibility
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 BERR Publications Orderline 0845 0150010, quoting ref URN 04/606.
Alternatively, visit www.payontime.co.uk for details.
Shareholder enquiries
The Company’s share register is maintained by Equiniti Limited.
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
• obtaining 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)
• obtaining details of the dividend reinvestment plan which enables you to use your cash dividends to buy Lloyds TSB shares in the market
Equiniti operates a web based enquiry and portfolio management service for you to receive shareholder communications electronically. In addition, you can
change your address or bank details and register proxy appointments and voting instructions on your shareholding online.
Visit www.shareview.co.uk for details.
Calls to 09058, 0871 and 0845 numbers are charged at 55p, 8p and 5p per minute, respectively, from a BT landline. Charges for calls from mobiles and other
networks may vary.
Lloyds TSB Group Annual Report and Accounts 2007 159
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Financial calendar 2008
22 February
Results for 2007 announced
5 March
Ex-dividend date for 2007 final dividend
7 March
Record date for final dividend
9 April
Final date for joining or leaving the dividend
reinvestment plan for the final dividend
7 May
Final dividend paid
8 May
Annual general meeting in Glasgow
30 July
Results for half-year to 30 June 2008 announced
6 August
Ex-dividend date for 2008 interim dividend
8 August
Record date for interim dividend
3 September
Final date for joining or leaving the dividend
reinvestment plan for the interim dividend
1 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
Internet
www.lloydstsb.com
Registrar
Equiniti Limited
Aspect House, Spencer Road, Lancing
West Sussex BN99 6DA
Telephone 0871 384 2990
Textphone 0871 384 2255
Overseas +44 (0)121 415 7066
www.equiniti.com
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160 Lloyds TSB Group Annual Report and Accounts 2007
Annual Report
and Accounts 2007
Building long-term relationships
Our vision
To be the best financial services organisation in the UK
We will achieve this by:
Building strong customer franchises, that are based on deep customer relationships
• that give value to the customer
• that give sustainable earnings growth to the shareholder
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Executing brilliantly
• flawlessly for the customer
• doing what we say we are going to do
Managing our most valuable resource, our people
Our strategy
Build customer franchises
• extending reach and depth of customer relationships
• enhancing product capabilities to build competitive advantage
• improving processing efficiency
• working capital harder
Expand from strength
• look to leverage our financial strength and enhanced capabilities
• new product, customer and geographical markets
Our business priorities
UK Retail Banking
• grow income from existing customer base
• grow income from new customers
• improve productivity
Insurance and Investments
• maximise bancassurance success
• profitably grow the IFA distribution channel
• optimise capital management
Wholesale and International Banking
• grow the Corporate Markets business
• build on the growth momentum in Commercial Banking
• maintain strong asset quality
• continue to improve operational efficiency and cost management